[Edaily Reporter Kim Kyung-eun ] Ahead of the U.S. Federal Open Market Committee (FOMC) meeting, analysts in the securities industry are predicting that a benchmark interest rate hike could actually trigger a stock market rebound. The analysis suggests that since the market has already largely priced in the possibility of a rate hike, long-term interest rates—which have recently surged—could stabilize if the Federal Reserve (Fed) reaffirms its commitment to price stability.

According to the financial investment industry on the 14th, the market views the likelihood of a benchmark interest rate hike as high ahead of the September FOMC meeting scheduled for the 15th and 16th (local time). According to the CME FedWatch tool, the probability of a 0.25% benchmark rate hike at this FOMC meeting stands at 86.5%. The number of rate hikes priced in by the U.S. interest rate futures market through the end of next year has also increased from two at the end of last month to four currently.

Typically, a benchmark interest rate hike is viewed as negative news for the stock market. This is because higher interest rates increase companies’ financing costs and raise the discount rate, which lowers the present value of future profits. However, analysts are increasingly suggesting that, in the case of this FOMC meeting, the rate hike itself could actually reduce market uncertainty.

Currently, the yield on the 10-year U.S. Treasury note is approaching the 5% mark. This is due to a combination of factors, including a widening budget deficit, pressure from Treasury supply, and inflation concerns stemming from rising international oil prices. In this context, analysts explain that if the Fed raises rates to demonstrate its commitment to price stability, concerns about future inflation could subside, potentially putting the brakes on the upward trend in long-term interest rates. Conversely, keeping rates unchanged might alleviate the burden of monetary tightening in the short term, but persistent inflationary pressures could lead to further increases in long-term interest rates.

Kang Hye-seong, an analyst at Sangsangin Securities, explained, “A rate hike could dampen investor sentiment toward risky assets in the short term,” but added, “Amid the U.S. administration’s expansionary fiscal policy and growing instability in the Treasury market, the Fed’s independence and commitment to price stability can help defend confidence in U.S. financial markets.”

Last month’s U.S. inflation data also supports expectations of a rate hike. The August Consumer Price Index (CPI) rose 0.4% month-over-month, in line with market expectations. Core CPI rose 0.3%, exceeding the forecast of 0.2%, but this was largely driven by a 5.9% month-over-month surge in wireless service fees. Analysts note that this is largely a one-time effect resulting from rate plan adjustments by specific telecom providers, and it is unlikely that the Fed would use this as a basis to hold the policy rate steady.

Heo Jin-wook, a senior researcher at Samsung Securities, analyzed, “Given that the probability of a September rate hike—as reflected in the futures market following the August CPI release—has risen to about 90%, a decision to keep rates unchanged carries a very high risk of eroding confidence in the Fed’s monetary policy and exacerbating turmoil in the U.S. Treasury market.” He added, “It has become more likely that the Fed will judge a rate hike necessary to strengthen confidence in its monetary policy,” predicting that “a ‘confidence-restoring rate hike’ will occur at the September FOMC meeting.”

In the past, stock markets have shown weakness immediately after interest rate hikes, but subsequently rebounded as long-term interest rates fell. Hana Securities analyzed cases from March 1997 and December 2015, when rates remained frozen for more than three months following the Fed’s first rate hike. The results showed that while the U.S. 10-year Treasury yield rose by an average of 20.7 basis points (1 bp = 0.01 percentage point) in the month of the hike compared to the previous month, it fell by 26.7 basis points one month later. The U.S. 2-year Treasury yield also rose by 22.6 basis points in the month of the hike before falling by 21.0 basis points the following month.

As long-term interest rates turned downward, the stock market also rebounded. The KOSPI fell an average of 1.6% in the month prior to the rate hike and dropped another 0.7% in the month of the hike. However, it rose 0.7% one month later and 3.9% two months later, resulting in an average cumulative rebound of 4.6% over the two months following the rate hike. During the same period, the S&P 500 index also rose 3.1%.

The focus of this FOMC meeting is expected to be less on whether a rate hike will occur and more on the path of future hikes and the direction of U.S. long-term interest rates. Analysts suggest that if the Fed characterizes this hike as a limited adjustment and long-term rates peak around 5%, the valuation pressure on the KOSPI—particularly on growth stocks and semiconductors, which had been weighed down by high discount rates—could ease.

Lee Jae-man, an analyst at Hana Securities, said, “The U.S. interest rate futures market is currently pricing in the possibility of four Fed rate hikes between September of this year and December of next year,” adding, “If a hike occurs in September, the perception may take hold that the burden of the hike has already been partially factored in.” He continued, “In this scenario, market interest rates will likely peak in the short term and then decline somewhat,” adding, “Sectors where stock discount rates have widened amid the rise in market interest rates since the beginning of the year may see their valuations rise.”

In South Korea, he identified semiconductors, rechargeable batteries, shipbuilding, pharmaceuticals and biotechnology, and transportation as sectors poised for a valuation rebound. Among individual stocks, he mentioned SK Hynix, HD Hyundai Heavy Industries, Samsung SDI, Korean Air, Isu Petasis, SK Biopharm, Hanwha Engine, and Huseong.