Lower Probability of Rate Hikes, What Are the Conditions for a September Market Rebound?

Han Sang-hee, Senior Research Fellow at Hanwha Investment & Securities, explained, "Looking at the weekly chart, the Dow Jones was almost flat, the S&P rose very slightly, and the Nasdaq gained about 2%, no, not even 2%, but less than 1%."

Predictions suggest that the U.S. stock market will continue its strong performance until the Federal Open Market Committee (FOMC) meeting. With current major U.S. stock indices not far from their peaks, investors are likely to continue buying stocks, reflecting expectations for the FOMC meeting's outcome. There is also cautious speculation about the Nasdaq index potentially reaching new highs. Han Sang-hee, Senior Research Fellow, conveyed the market sentiment, stating, "Currently, I somewhat think people will try to push stocks higher until the FOMC."

The S&P 500 index had a relatively smaller decline at -1% from its peak. In contrast, the Nasdaq index recorded -2% from its peak, showing the largest decline among the three indices. Han Sang-hee, Senior Research Fellow, explained, "The Dow Jones is currently -1.7% from its peak. The S&P is -1%, and the Nasdaq seems to have moved a lot, but it's -2% from its peak."

The current market shows a conflict between two factors: macro variables and corporate earnings. Recently, rising bond yields and oil prices have increased pressure for interest rate hikes, but stock market participants are prioritizing corporate earnings over inflation concerns in their investments. This trend is expected to continue until the FOMC meeting. Han Sang-hee, Senior Research Fellow, said, "Currently, stock market participants are playing more on earnings than on interest rates or macro factors, and that seems to be continuing until the FOMC. And today, bond yields have actually risen again."

Stock market participants argue that long-term interest rates are rising because the U.S. economy is strong and, specifically, because a lot of investment is taking place, leading to an increase in equilibrium interest rates. This difference in interpretation highlights the fundamental divergence in how the two markets perceive inflation. Investors are paying close attention to how this discrepancy between the two perspectives will affect the market going forward.

These differing perceptions directly influence the investment strategies and trends of each market.

Currently, FedWatch shows a 60% probability of an interest rate hike. If future inflation data causes this probability to fall further, it is expected to act as a strong rebound momentum for the stock market. Han Sang-hee, Senior Research Fellow, emphasized, "The drop in the high interest rate hike probability on FedWatch is what drives stock prices to rebound."

The U.S. Treasury buyback amount is relatively small compared to the overall Treasury market size, which is approximately $40 trillion. However, market participants attach greater significance to the potential for further buyback expansion in the future rather than the current buyback size itself. This reflects the expectation that the current buyback is just the beginning and that its scale could more than double if necessary. Han Sang-hee, Senior Research Fellow, explained, "The amount isn't much, actually. But people interpret it this way because they doubled it. If that doesn't work, they can double it again, right? So, this is just the beginning."

Powell has already indicated that he believes the economy can be managed using sufficiently high interest rates, preferring adjustment through interest rate decisions rather than asset purchases. Therefore, a sudden decision to expand short-term bond purchases would break the logic presented in his past several policy announcements. Han Sang-hee, Senior Research Fellow, commented, "He said he would decide with interest rates, and interest rates are already high enough to move up and down, so making a decision to increase short-term bond purchases, ignoring interest rates, would completely break the logic of the past few times, wouldn't it?"

Among these, in 1986, stock prices fell in September and October. Analysis suggests that the decline in the Reagan administration's popularity and the Democratic Party's victory in the midterm elections influenced the stock price drop at that time.

The upcoming September and October U.S. stock market is expected to see increased volatility, coinciding with President Trump's low approval ratings in current polls. The effectiveness of liquidity supply policies after the FOMC meeting will be a key factor. Especially with the possibility of losing both the House and the Senate, the market anticipates a trend similar to 1986 rather than the rebound seen in May-June. Han Sang-hee, Senior Research Fellow, stated, "After the FOMC, there are various liquidity supply measures President Trump might pursue, whether it's the Clarity Act, deregulation of banks, or even buybacks. Since it's unlikely that asset purchases will be increased at this FOMC, I personally think comparing September and October to 1986 is more appropriate."

Analysis suggests that the recent rise in semiconductor stocks is less due to the launch effect of 'Astra' and more because market skepticism about semiconductors has been resolved. Astra's successful launch proved its potential to trigger AI demand, creating expectations that increased competition in semiconductors would further boost overall demand. This can be interpreted as a sign that the semiconductor industry has passed a critical threshold in the era of artificial intelligence. Han Sang-hee, Senior Research Fellow, explained, "Ultimately, Astra proved that it greatly triggered demand, and now there's growing talk that as competition intensifies, semiconductor demand will continue to increase... It's not so much because of Astra, but rather, as you said, has the truly accumulated demand now crossed a critical threshold? That could be it."

However, there is skepticism regarding the idea that Astra's short-term effect is the absolute trigger for the rise in semiconductor stock prices. Analysis suggests that sustained growth in semiconductor stock prices will only occur if there is prior confidence in the earnings growth of major semiconductor companies such as Broadcom and TSMC. Han Sang-hee, Senior Research Fellow, posed a cautious question, "In the long term, I deeply trust AI, so I don't think it will lose its leading position, but first, I don't think it's because of Astra. I don't believe Broadcom's earnings will double, nor do I believe Jensen Huang's 70% revenue increase, nor TSMC's 50% annual growth, so why would I believe a few influencers who tried Astra say it's excellent?"

Han Sang-hee, Senior Research Fellow, acknowledged the market change, stating, "It's true that the level of interest in semiconductors has definitely decreased. Compared to the past, the level of interest has certainly fallen."

With approval ratings hovering in the low 30s, President Trump is desperately in need of a rebound strategy ahead of the midterm elections. Considering current international conflicts, a large-scale tariff policy to threaten major countries seems ill-timed and likely to have limited effectiveness. Instead, President Trump is likely to focus on domestic economic revitalization policies such as expanding liquidity supply, easing banking regulations, and encouraging share buybacks. This is based on the judgment that approval ratings are most likely to rise if inflation is stabilized at 2% and asset prices appear to be increasing. Han Sang-hee, Senior Research Fellow, analyzed, "I don't think it's easy to threaten major countries with tariffs when the war with the U.S. isn't ending well and picking fights with others. Instead, President Trump's actions will likely remain focused on liquidity supply. He will have no choice but to find ways to ease bank regulations to increase lending. It's highly probable that approval ratings will only rise if inflation is brought down to 2% and asset prices feel like they are increasing."

This is because if the U.S. largely accepts Chinese products, the competitiveness of South Korean companies could weaken. Experts believe that a U.S.-China agreement would effectively mean the end of the trade war, and that mutually complementary cards, such as resolving energy consumption issues within China, are likely to be at the core of the agreement. Han Sang-hee, Senior Research Fellow, stated, "An agreement of that magnitude between the U.S. and China means that this war is practically over," indicating that it could be a significant turning point in U.S.-China relations.

The view emerged that an IPO postponement decision might not be due to fundamental problems or poor performance of the company itself. If there had been internal performance deterioration or significant issues after IPO underwriters had already been selected, it is highly likely that the IPO itself would have been canceled. Therefore, an IPO postponement can be interpreted as a proactive judgment by the underwriters based on market conditions or other external factors. Han Sang-hee, Senior Research Fellow, explained, "If it was serious, perhaps it would have been postponed altogether? If there were internal performance issues or major problems, the IPO underwriters would have already been selected."

Bond market participants are closely watching how interest rates will react once the U.S. Treasury buyback actually begins. It is difficult to predict whether interest rates will show volatility at the start of the buyback or if the market will react insensitively. Han Sang-hee, Senior Research Fellow, mentioned, "I am also very curious to see how interest rates will react on the day this buyback begins," indicating that the market's attention is focused on this event.