There were a number of releases in Japan today, so today's note includes a review of those. In China, exports dipped in October, and while that is probably noise, auto exports have flattened out since June. In Taiwan, October was another strong month for TSMC.
I think the curve should flatten, as the BOJ continues to hike because of decent growth and strong inflation, while the longer-end is dampened by medium-term headwinds for inflation and a repatriation flow. These I think remain the themes, though the message from today's releases is mixed.
Today's PPI inflation data in China were strong. Taiwan's export data for October were even stronger. In Japan, the BOJ's proxy for PCE weakened in Q3, but the underlying trend, particularly in per capita terms, remains firm.
October export growth was the strongest in 20 years. That doesn't tell us what happens next. If 2025 is any guide, even the slowdown suggested by equities might not happen. What the data do say is that AI tech demand remained extremely strong in October, leaving Taiwan with an enormous trade surplus
PPI inflation accelerated again in October, a rise that is supporting nominal GDP and would usually lift corporate profits too. But this is all externally-driven. Downstream prices in PPI and the overall CPI remain weak, and outside of food, leading indicators point to slower inflation in 2027.
The key issue in the region is the outlook for AI tech demand. However, other dynamics are important. In the big economies, property matters in China and consumption in Japan. In Korea, the tech spillover to domestic demand hasn't happened yet. It has in Taiwan, but the boom hasn't lifted the TWD.
The outlook for macro markets in the region remains closely tied with the fortunes of the AI cycle. While uncertainty remains, rates, currencies and equities will likely trade together. Currencies might end up looking different, depending on how the dollar reacts to any shift in semi demand.
A longer note on the prospects for the TWD in the light of the equity sell-off and doubts over the future of the AI cycle. As has been the case for a few months, today's wage data in Japan were mixed. In addition, some charts on today's market moves.
The surge in the Taiex of recent years means potential for big foreigner selling of TWD. But, inflows haven't been big, equities won't all be sold, and CBC has ability to fight back. The bear case is Taiwan recession versus US resilience, though even then, "fundamentals" for TWD would be strong.
Highlights of my monthly slide pack covering the region, and a note on October's 2%-ish inflation print in Taiwan. If the market is right, we might now have seen the best of the AI cycle, but Korea's September CA data show just how big that cycle was. The S&P services PMI for China was soft.
CPI is being affected by cross-currents including very high upstream price inflation, government subsidies and holidays. The underlying picture is inflation of around 2%, which by Taiwan standards is high. I think an economic slowdown is needed to prevent it moving higher.
Monthly (-ish) regional update of cycles and market themes.
The implication of the midterms on the AI trade is the big issue in the markets: equities sold off, but recovered some losses towards the end of the day. In terms of the data flow, in China there were more partials for PPI inflation last month, and in Japan, the monetary base and tax revenue.
The PBC injected liquidity for a second consecutive month in October. CPI inflation in Korea remains near 3%, more because of the cost-push factors than demand-pull. Cost-push includes the semi surge pushing up computer prices, a trend that caused some softness in Taiwan's PMI yesterday.
Cost-push – both energy and the spillover from higher chip costs into prices of downstream devices – is keeping inflation near 3%. The BOK expects demand-pull factors to become more obvious. So inflation will likely stay elevated, through for BOK policy, it is overall semi cycle that matters more.
Taiwan's overall PMIs look fine. The details are shakier, but so far, it looks like the weakness is coming from softer demand for consumer tech as semi prices boost the cost of electronics devices. The data don't (yet) show obvious deterioration in the data centre component of the AI boom.
China's official PMI continues to point to little growth in the economy. It is difficult to find reasons in the BOJ's official outlook report for the bank not to continue hiking. Korean exports dipped in October, but not because of chips. Taiwan's PMIs fell from September, but the details are mixed.
The unusually long section of analytical boxes in the BOJ's main outlook report shows that the bank has a lot on its mind. That inevitably brings nuance. However, the overall tone is clear: nominal growth remains strong, and financial conditions loose. There's no clear reason not to hike further
China is so far the only economy showing signs of being hurt by weakening confidence in the AI trade. Data in Korea and Taiwan remain extremely strong, and the BOJ remains worried about upside risks to inflation. That said, markets are more nervous, needing clarity on energy and data centre buildout
China's nominal cycle looks to be slowing again. The rest of the region remains strong, but confidence that this strength can be retained is fraying, and will likely remain under pressure, especially if concerns over the data centre build-out and energy prices worsen again after the mid-terms.
Headline official PMIs continue to closely hug the 50 threshold. I am not sure that tells us much about the economy. But two components of the PMI are useful. The ongoing slump in construction indicates no property revival. Price indicators show PPI still strong, but warn of some weakening in CPI.
The BOJ said today that risks for overall inflation are still on the upside. Korea's month-end data releases were strong for activity and capex, weaker for consumption. Taiwan's economy re-accelerated in Q3. It is plausible that the export contribution to GDP in China rose in Q3.
Rather than slowing as the government had forecast just a couple of months ago, GDP growth re-accelerated in Q3 to 14.4% YoY. That was because of domestic demand rather than net exports, and while that was mostly capex, consumption is growing more than 5%, and the positive output gap widened.
The BOJ argues today not just that "underlying inflation" has reached 2%, but that it is expected to stay there. However, it seems clear that stability won't be achieved without some help, as its analysis also says that all the risks to prices are to the upside.
Earnings releases and September macro data show the cycle has strong momentum. Growth is dominated by semis, and so dependent on the global cycle. However, the doubling in tax revenue in September shows one way in which the benefits of the semi cycle can start to broaden out.
