September Rate Freeze… Post-FOMC is Key

In August, the market showed a favorable trend with the S&P 500 index rising approximately 3%. The domestic market also saw the KOSPI increase by about 3.5%, and with the won-dollar exchange rate falling 4%, foreign investors reportedly achieved over 7% profit in the KOSPI.

After a sharp decline at the end of July and a quick rebound in early August, expectations for a V-shaped recovery formed in the market. However, these expectations were excessive, and from a long-term perspective, August can be assessed as a natural period of adjustment following a sharp decline. Senior Research Fellow Han Sang-hee rated the August market at 70-80 points, explaining that it was a natural phase of adjustment in historical trends.

The September market is expected to follow an 'early strength, late weakness' pattern. Particularly, with the FOMC scheduled for mid-September, the market sentiment could shift. Currently, the bond market and stock market hold different views, but before the FOMC, the bond market may follow the stock market, increasing expectations for a rate freeze. However, an analysis suggests that after the FOMC freezes rates, the Fed is not expected to pursue additional asset purchase policies, potentially leading to a 'sell-on' phenomenon until the end of September.

Following the Jackson Hole meeting, numerous articles interpreted the Fed's remarks as hawkish. However, a direct review of the full speech reveals that Fed Governor Wash's comments are largely consistent with the Fed's stance articulated in previous hearings and congressional testimonies. It is assessed as a reiteration of the existing position emphasizing the importance of inflation and maintaining the interest rate policy stance.

In the past era of 'saving glut,' money flowed into savings due to a lack of investment opportunities, leading to low equilibrium interest rates. However, the current environment is changing, with investment opportunities significantly expanding due to technological innovation and supply chain reorganization, leading to rising equilibrium interest rates. This signifies structural changes that could lead to higher inflationary pressures compared to the past. These changes could be important factors in monetary policy decisions.

If recently released economic indicators do not show a sustained upward trend or align with expectations, the judgment that the downward trend in inflation is valid can be maintained. This supports the existing market perception that inflation is gradually stabilizing from its peak.

Shelter costs, which account for over 40% of the Consumer Price Index (CPI), have characteristics that make them unlikely to change rapidly in the short term. Last month, shelter costs rose only 0.1% month-over-month, and due to factors like contract periods, month-to-month volatility is low. Therefore, shelter costs are not expected to drive the overall upward trend of the CPI.

In August, West Texas Intermediate (WTI) closed at $83, a decrease from $86 in July. However, considering that oil prices were in the $70s in July and $60s in August last year, there is a possibility of a temporary increase in oil prices due to year-over-year base effects. Nevertheless, the impact of these base effects on inflation through the end of the year remains uncertain.

It is argued that there is insufficient logical justification for a September rate hike given the current situation where no data clearly indicates a significant worsening of inflation. For the Fed to maintain its rate-hiking stance, more definitively negative economic indicators than previously seen would need to be presented, and currently, such evidence is insufficient.

The Fed Chair is wary that providing forward guidance could lead to 'circular referencing,' where the market prices based on data, and the Fed then references those prices for policy decisions. Therefore, the Fed has stated that it will no longer provide that form of guidance.

The Fed Chair has explicitly stated that formal forward guidance will not be provided. However, the market tends to interpret the Fed's dot plots and other remarks subjectively as guidance. Experts emphasize the importance of taking the Fed Chair's statements literally and recognizing that the Fed is not intentionally trying to steer the market.

While Chair Powell portrays himself as a strong inflation fighter, a discrepancy between his words and actual policy actions is evident. He emphasizes being an inflation fighter yet freezes rates, or claims to dislike asset purchases while maintaining short-term bond purchases. It is pointed out that if Powell had aligned his words and actions, he would have ceased short-term bond purchases in December of last year.

The impact of recent war-related news on oil prices has gradually weakened compared to the past. While oil prices soared to $120 at the beginning of the Russia-Ukraine war, they now remain around $85. The reliability of information, such as the US Central Command's rebuttal to Iran's claims of tanker attacks, plays a crucial role in oil price fluctuations.

The Fed is unlikely to engage in short-term bond purchases. Since the Fed maintains its existing stance of not favoring asset purchases, restarting them would further exacerbate the discrepancy between its words and actions. For this reason, the Fed is likely to hesitate on short-term bond purchases to maintain policy credibility.

It is not logically consistent for Treasury Secretary Janet Yellen to directly decide and increase asset purchase policies. The Treasury Secretary has maintained a stance centered on interest rate policy, so direct intervention in asset purchases would contradict her existing position. Therefore, excessive expectations for the Fed's policy might be a timid approach.

Specialized investors holding over 5 billion won in individual stocks are proactively selling to avoid capital gains tax burdens. Historically, this selling pressure concentrated at year-end, but recently it tends to start earlier than usual. This could temporarily destabilize market supply and demand.

Share buybacks by major domestic semiconductor companies like Samsung Electronics and SK Hynix are providing a solid demand base for semiconductor stock prices. While share buybacks have traditionally been known to merely defend prices, they are currently acting as an important supply-demand factor supporting the downside of semiconductor stock prices.

In the recent market, the security software sector continues to hit new highs, showing strong performance. In contrast, semiconductors, especially memory semiconductors, are undergoing an adjustment, falling about 30% from their peak after significant past surges. Big tech companies have shown relatively smaller declines from their peaks.