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News summary on the way home from work, Subsletter Evening.
Statistics show that US inflation is worse than expected.
The U.S. consumer price index for August was well above market expectations.
As investor sentiment froze, the US stock market panicked, and our stock market faltered.
Yesterday (13th) I returned most of the twinkling gains.
The 'King Dollar' (Ultra-strong dollar) continues as the US is expected to tighten tightening.
Exchange rate approaching 1,400 won, stock market that returned yesterday's gains
In the foreign exchange market, the won-to-dollar exchange rate finished trading at 1,390.9 won per dollar, up 17.3 won from yesterday's closing price.
At one point during the day, it soared to 1,395.5 won and even approached 1,400 won.
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The US Federal Reserve (Fed) is holding the Federal Open Market Committee (FOMC) in September from the 20th.
A strong dollar is inevitable as interest rates are expected to rise significantly.
Also, since the US Federal Reserve is likely to show hawkish tendencies after the FOMC (preferring monetary tightening), there is also a possibility that it may soar to 1,450 won at the end of the year.
The general mid- to long-term exchange rate forecast is that the 'king dollar' (the dollar's strength) will continue for the time being.
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The stock market was also bruised, and the KOSPI fell to 2,381.50 and then closed at 2,411.42.
It was down 1.56% from yesterday, mostly returning yesterday's gains.
The problem is that it's more likely to go down.
Stock market experts are pessimistic about the possibility that the KOSPI may reach a new low in the near future due to the market shock caused by US inflation.
The lowest KOSPI index this year is 2,276.63 on July 4th, so you have to keep in mind that it will fall below that.
Many observers predict that the downtrend due to the sharp rise in prices will continue until at least the first quarter of next year.
US inflation 'shock'... Investor sentiment plummets
Let's take a look at what caused the domestic financial market to panic.
You can think of it as an inflation shock in the US.
The U.S. Department of Labor released the Consumer Price Index (CPI) for August, up 8.3% from August last year.
Although the CPI growth rate is on a downward trend from 9.1% (June) → 8.5% (July) → 8.3% (August), it greatly exceeded the market's forecast of 8.0%, which shows that it is far from catching up with inflation.
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The release of the Consumer Price Index (CPI) has swept the financial markets.
The Standard & Poor's (S&P) 500 index fell 4.32%, while the tech-focused Nasdaq index plunged 5.16%.
It is said that the rate of decline in all three indexes is the highest since June 11, 2020, when they plunged 5-6% due to concerns about the coronavirus.
This is because it is certain that the central bank, the Federal Reserve, will continue its hawkish monetary policy (preferring monetary tightening).
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The Fed will hold a regular meeting of the Federal Open Market Committee (FOMC) from the 20th to discuss whether to raise interest rates. This was the view of the majority of market participants.
However, after the release of the US CPI, it can be summarized that 'giant step or more and ultra step (1.0% point rate hike at a time) are possible', but the outlook is changing to pessimism.
The two 'Giant Steps' are also unusual, and even the unfamiliar 'Ultra Step' is being talked about.
There is a Chicago Mercantile Exchange (CME) FedWatch, a system that predicts how much interest rates will rise at the next FOMC and reports the results of a survey.
Here, the possibility of 'ultra-step' was close to 0% until yesterday, but after the results of the CPI survey, it jumped significantly and reached 40%.
The 'ultra-step' (1 percentage point rate hike) has not been attempted since the 1990s, when the Fed adopted the Federal Funds Rate (FFR) as a monetary policy tool.
That's why it's a prescription drug.
Talking about 'Ultra Step' on US flights... South Korea?
Korea (2.50%) and the US (2.25-2.50%) have the same upper base rate as of now.
However, if the US Federal Reserve decides on a giant step soon, the upper end of the US interest rate (3.00-3.25%) will be 0.75 percentage points higher than that of Korea.
If the ultra-step, that is, if the interest rate rises by 1 percentage point, the interest rate gap between the US and Korea widens by 1 percentage point.
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We have two meetings in October and November to decide whether to raise the interest rate or not, and it is highly likely that both will raise the base rate.
If this happens, the record of 6 consecutive rate hikes will be recorded, and the 6 consecutive rate hikes are said to be the first in history.
If the interest rate is lower than that of the US, foreign investment funds flow out of the country and the financial markets including the securities and foreign exchange markets, as well as the overall domestic economy, may be in turmoil.
The interest rate dilemma... Long-term measures need to be taken
A hike in our base rate is inevitable, but the extent and speed of the hike are key.
After the Bank of Korea Governor Lee Chang-yong decided to raise the rate by 0.25 percentage points on the 25th of last month, he said, “As the current economic situation is not much different from the domestic price and growth trends expected in July, we decided that a gradual increase of 0.25 percentage points was appropriate. The basic idea is to raise the points one by one.”
However, if there are variables such as a 1.0% point increase by the US Federal Reserve or a rise in domestic inflation, we will have no choice but to consider the Big Step (0.5% point increase in interest rate) card.
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The problem is that if interest rates are raised too quickly, the burden of interest on loans can increase the suffering of the working class and the middle class.
As inflation is a global problem and cannot be resolved in a short period of time, the government's measures such as fiscal policy along with the monetary policy of the Bank of Korea must work together like a gear.
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The Ukrainian army recently reclaimed dozens of Russian-occupied villages in Kharkiv and Kherson Oblast, and successfully counterattacked.
This is the scene where residents of the reclaimed Ukrainian village of Kharkiv Baraklia gathered around a relief vehicle.
(Photo = Yonhap News)