Hyundai Motor Securities analysts predict that the Federal Reserve’s September interest rate hike is all but certain, given the renewed inflationary pressures in the U.S. However, they suggest that if future rate increases are gradual, the impact on the stock market should be limited. The firm recommends viewing any market adjustments around the Federal Open Market Committee (FOMC) meeting as buying opportunities for a potential year-end rally.
On Monday, Hyundai Motor Securities researcher Kim Jae-seung noted that following August’s Producer Price Index (PPI) increase, the core Consumer Price Index (CPI) is also showing heightened upward pressure compared to the previous month. This environment, Kim argues, leaves Fed Chair Jerome Powell with little choice but to implement a rate hike.
Kim further explained that as uncertainty surrounding the Fed’s September rate decision has diminished, long-term U.S. Treasury yields have stabilized downward and the stock market has rebounded. This market response suggests that the possibility of rapid consecutive rate hikes has decreased due to a more measured approach to inflation, which is being interpreted as a resolution of uncertainty.
The market’s focus has now shifted from whether there will be a rate hike to the pace of future increases.
Given the U.S. economy’s continued robust growth, a gradual increase in interest rates by the Fed in response to inflationary pressures may not significantly impact the stock market. However, if the Fed underestimates inflation’s persistence, as it did in 2022, and subsequently implements a series of rapid rate hikes, it could put considerable pressure on equities.
Kim emphasized that the key focus of the September FOMC meeting will be whether the Fed signals further consecutive hikes and the expected duration between rate increases, rather than just the decision to hike rates.
He added that if expectations grow for the September rate hike to be either a one-time event or part of a gradual series, post-FOMC concerns about monetary tightening may actually ease, potentially leading to a bullish stock market trend after October. Conversely, if the Fed expresses serious inflation concerns and hints at the possibility of consecutive hikes, U.S. stock market valuations could face renewed pressure, possibly resulting in a continued market correction.
Hyundai Motor Securities advises investors to view any increased market volatility around the FOMC meeting as a buying opportunity in preparation for a potential year-end rally.
Kim concluded by stating that the current rise in interest rates reflects the strong performance of the U.S. economy, indicating sufficient resilience to withstand higher rates. Considering the stock market’s typical September weakness and upcoming events such as the Anthropic initial public offering (IPO) in October and U.S. midterm elections in November, investors can anticipate a possible year-end rally following these key events in November.