As inflationary pressure grows with the prolonged Middle East war, signals of "rate hikes" are strengthening in major countries around the world. On the 11th, the European Union (EU), on the 16th, Japan, and on the 18th, the Central Banks of the United States will announce their policy rates in turn.
If major countries raise policy rates and tighten liquidity, there are concerns that stock and bond prices could fall together. A similar situation actually unfolded during the Ukraine war in 2022.
◇ June: "shift to currency tightening" likely in the United States, Europe, and Japan
The U.S. Federal Reserve (Fed) will hold the Federal Open Market Committee (FOMC) on the 18th Korea time to set rates. In this meeting, it is highly likely the rate will be kept on hold at 3.75% annually.
But markets are focusing more on the message from new Fed Chair Kevin Warsh than the decision itself. If Warsh hints at the need to raise rates, it could be a starting gun signaling a U.S. turn to tightening. Experts say U.S. rates have no choice but to rise given inflation. U.S. consumer prices in April jumped 3.8% from a year earlier, hitting a record high since May 2023.
Similar views are emerging within the FOMC. The "April FOMC minutes" released in late May said, "Many Commissioners emphasized that if inflation consistently exceeds 2%, policy tightening (rate hikes) is likely to become appropriate." There was also a call to delete from the statement any wording that could be interpreted as tilting toward easing (rate cuts).
A European Central Bank rate hike has become a foregone conclusion. That is because eurozone consumer prices in May rose 3.2% from a year earlier, the highest since September 2023. Japan has also signaled liquidity reduction. On the 3rd, Bank of Japan Governor Kazuo Ueda said there needs to be a discussion on "whether it is appropriate to raise rates."
If major economies turn hawkish (favoring currency tightening), the Bank of Korea's rate hike decision could come as early as July. Theoretically, four hikes within the year would be possible. After his first meeting of the the Bank of Korea's monetary policy committee since taking office, Bank of Korea Governor Shin Hyun-song repeatedly emphasized that timing matters in currency policy under current conditions.
◇ Fears of a Ukraine war deja vu with stocks and bonds plunging together
Analysts say that once market currency supply starts being absorbed, both stocks and bonds could weaken. High oil prices burden corporations and weigh on the stock market. At the same time, they push up prices and send bond yields higher (bond prices lower). When the Central Bank raises rates to tame inflation, corporations' investment expense rises, again hurting stock prices.
When prices surged in 2022, the United States raised rates seven times, from 1.7% in March to 4.5% by year-end. Then the yield on the U.S. 10-year Treasury, a bellwether for the Government Bonds market, broke above 4% in November from 1.7% in March. At the same time, the S&P 500 and Nasdaq fell 21% and 26.6% over the same period.
Stocks and bonds move together when external factors such as war stoke inflation. That differs from the past, when the Central Bank raised rates as stock prices climbed and the economy overheated. During war, global oil prices determine the direction of stocks and bonds, analysts say.
The Economist said in April that "the two asset move up and down together," noting, "slower growth hurts stocks, inflation is negative for bonds, and a shortage of oil poses both threats at once."