East Asia Econ

June's core inflation of 2.3% isn't high in an absolute sense. But outside LNY, it is the highest since the 1990s, and, remarkably, above both the policy rate and 10-year yields. Energy inflation will ease, but with wage growth of 2.7% and rising, and equity prices strong, rates really look too low.

Today's May consumption activity data were stronger again. That rise can be explained by three factors: a temporary boost as purchases of household appliances are brought forward, decent – though in May, not necessarily stronger – wage growth, and perhaps, a wealth effect as asset prices rise.

China's cycle looks more mixed rather than bad. In Japan, there are clear signs of an acceleration in both activity and inflation. For Korea and Taiwan, the theme is a broadening of activity as the semiconductor export boom feeds into domestic economies.

A slide pack laying out themes for the region overall, and for each individual economy.

The detailed release of the Tankan confirms the message of yesterday's summary: price pressures are rising again, and momentum in the corporate sector is strong. There is some sluggishness in autos, but as in export data, that is being offset by AI demand for electronics.

The sharp rise in inflation since March slowed in June, and the BOK expects a drop in July. But cost-push from the surge in semi prices is feeding into CPI, and the BOK also expects "expanding demand pressures" from the economic recovery to drive inflation from here.

The detailed version of the Tankan won't be released until tomorrow. But the headlines today show a clear story: business sentiment remains strong, and inflation pressures have risen yet again. The BOJ needs to become more hawkish.

There are signs of a broadening of the cycle, with construction past the worst, capex rising, and the labour market bottoming. However, while services activity has been strong recently, retail sales are still sluggish, and industrial production is going sideways.

Today's official PMIs ticked up, but not by enough to clear market concern about the strength of the cycle caused by the weak IP, retail sales and FAI data of the last couple of months.

Two of the big questions for markets in the region are 1) the implications for monetary policy as oil prices fall, and 2) what is happening with China's cycle, and what does that – and the strengthening of the USD – mean for the USD.

Earlier this week, I published a longer note delving into the macro and market implications of the semiconductor boom. You prefer pictures to text, so this is the accompanying chart pack.

Business sentiment is middling, and the gap between large and small firms looks K-shaped. However, consumer confidence is quite strong, and the BOK has argued that sector disparities aren't an issue for monetary policy. Falling oil prices do lessen inflation risk, but also boost GDP growth.