Rates, Bonds & Macroeconomy Terms

The central bank of the United States. It sets the policy interest rate and manages the money supply to keep prices and employment in check. A single remark from the Fed can move not only U.S. stocks but Korean stocks too.

The Fed meeting that sets the U.S. policy rate. It meets 8 times a year, and global markets react strongly to the chair's remarks alongside each rate decision. The March, June, September and December meetings also publish the rate outlook (the dot plot).

The benchmark interest rate set by a central bank. In the U.S. the FOMC sets it, and in Korea the Bank of Korea's Monetary Policy Board does. When rates rise, the present value of future earnings falls, which weighs especially on growth stocks.

A unit for describing interest-rate changes: 1 bp is 0.01 percentage point. Even small rate moves affect stocks, so changes are expressed in finer bp units rather than percent.

e.g. A 25 bp cut in the policy rate = a 0.25 percentage point cut

Hawks favor keeping rates high to fight inflation, and doves favor lower rates to support the economy. Hawkish remarks from Fed officials are often taken as negative for stocks and dovish remarks as positive.

A chart in which each FOMC member marks with a dot where they think the policy rate should be in the future. The market looks at the median to guess how many cuts or hikes to expect this year and next.

e.g. If the median dot moves higher than before, it is read as 'rate cuts are being delayed'

A central bank changing direction, from hiking to cutting rates or the reverse. When expectations build for a pivot that ends tightening, stocks, and growth stocks in particular, often rise first.

The main inflation gauge, showing price changes for goods and services consumers buy. A reading higher than expected lowers hopes for rate cuts and weighs on stocks.

An inflation measure that leaves out the volatile food and energy prices. It shows the underlying trend in prices, so central banks pay more attention to it than to headline inflation.

e.g. If oil falls and headline CPI drops but core CPI comes in high, hopes for rate cuts can fade

The personal consumption expenditures price index published by the U.S. Commerce Department. It is the gauge the Fed relies on most when judging its 2% inflation target, so the market watches it along with CPI.

Shows price changes for goods and services at the production stage, between businesses. Rising production costs can feed into consumer prices over time, so PPI is seen as a leading signal for CPI.

A jobs report released by the U.S. Labor Department, usually on the first Friday of each month. The number of jobs added and the unemployment rate show how hot the economy is.

The share of people willing to work who cannot find a job. A fast rise is read as a sign of economic slowing, which raises hopes for rate cuts but also worries about corporate earnings.

The number of people who filed for unemployment benefits for the first time in the U.S. in a week. Released every Thursday, it is used as the quickest read on changes in the job market.

The total value of all goods and services produced in a country over a period, showing the size and growth rate of its economy. Strong growth is good for corporate earnings, but growth that is too hot can raise fears of rate hikes.

e.g. U.S. GDP is usually reported as the quarter-over-quarter growth rate converted to an annual pace

A measure of changes in the total amount sold at stores and online. Because consumption is a large part of the U.S. economy, it is used to gauge the economic trend and the earnings of retail and consumer companies.

An economic indicator built by asking company purchasing managers whether orders, production, employment and so on have improved. Above 50 means expansion and below 50 contraction, and it affects cyclical stocks such as semiconductors and industrials.

e.g. An ISM manufacturing index of 48 means manufacturing is contracting

An index that combines indicators that tend to show the economy's direction a few months ahead. Stocks tend to move ahead of the economy, so the point where the leading index changes direction gets attention.

Monthly statistics on Korea's exports and imports. Korea relies heavily on exports, so changes in semiconductor exports in particular move the KOSPI and related stocks right away.

e.g. If semiconductor exports, released early in the month, jump sharply from a year earlier, it is taken as good news for chip stocks

A broad and sustained decline in economic activity. Two straight quarters of falling GDP is the common rule of thumb, but in the U.S. a separate body makes the official call by weighing many indicators. As recession fears grow, earnings forecasts drop and stocks tend to weaken.

A soft landing is when raising rates to tame inflation cools the economy gently without a sharp downturn; a hard landing is when it leads to a sudden recession. Which one the market expects greatly changes the mood in stocks.

A situation where the economy is stagnant while prices keep rising (inflation). Central banks find it hard to either cut or raise rates, so it is considered one of the worst environments for stocks.

The amount of money circulating in the market, or how easily an asset can be turned into cash. When rates are low and money is plentiful, funds flow into risk assets like stocks and prices tend to rise.

QE is a central bank buying government bonds and other assets to put money into the market, and QT is shrinking its bond holdings to pull money back out. QE adds liquidity and tends to support stocks, while QT can weigh on them.

An economic symposium held each year in late August in Jackson Hole, Wyoming. The Fed chair often hints at the future direction of monetary policy in a speech there, so the market watches closely.

A report on economic conditions across U.S. regions that the Fed publishes 8 times a year, about 2 weeks before each FOMC meeting. It gathers input from businesses and residents in each region to give a vivid picture of the economic mood, and it serves as a hint for rate decisions.

Bond prices and yields move in opposite directions. An existing bond's interest is fixed, so when yields on new bonds rise, the older bond becomes less attractive and its price falls.

e.g. When rates rise, bond prices fall; when rates fall, bond prices rise

Government bonds are issued by a government to borrow money, and corporate bonds by a company. Corporate bonds carry a higher risk of default than government bonds, so they pay more interest, and the better the credit rating, the lower the yield.

The rate the U.S. government pays to borrow for 10 years, which serves as a benchmark for asset prices worldwide. When this yield rises, stocks, and especially growth stocks, look relatively less attractive.

The rate the U.S. government pays to borrow for 2 years. Its short maturity makes it most sensitive to expectations for the policy rate, so it is used to read market hopes for cuts or hikes.

Usually the long-term yield, such as the 10-year, minus the short-term yield, such as the 2-year. Normally long-term yields are higher, but an inversion, when short-term yields exceed long-term ones, has often appeared ahead of past recessions.

e.g. 10-year at 4.0% and 2-year at 4.5% gives a spread of -0.5 percentage points (inverted)

The interest rate you see (the nominal rate) minus inflation. When real rates rise, the actual burden of borrowing grows, which works against growth stocks and assets like gold.

e.g. 5% nominal rate - 3% inflation = 2% real rate

The inflation rate the market expects going forward. In the U.S. it is calculated as the gap between regular Treasury yields and inflation-protected Treasury (TIPS) yields. When breakeven inflation rises, worries grow that rate cuts may be delayed.

The average time it takes to get your money back from a bond through interest and principal. The longer the duration, the more the price moves when rates change. Growth stocks, whose value rests heavily on distant future earnings, are sometimes called 'long-duration assets.'

e.g. A bond with a 10-year duration falls about 10% in price if rates rise 1 percentage point

The gap between a corporate bond yield and the Treasury yield of the same maturity. It shows how risky the market thinks it is that companies will fail to repay, so a sudden widening is read as a sign of financial market stress.

A corporate bond with a low credit rating that pays high interest, also called a 'junk bond.' It is sensitive to the economy, so when high-yield bond prices fall and spreads widen, it is taken as a risk warning for stocks too.

The shortfall that arises when a government spends more than it collects in taxes. If it issues many government bonds to cover the gap, Treasury yields can rise, which can in turn weigh on stocks.