A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
After the deflation of much of 2024, core sequential inflation has now been positive for six months. But it is now still only +0.2% annualised, and doesn't look to be going higher. Indicators for PPI suggest even more deflation ahead, with the one exception being the decline in the USD.
With the slowdown in official wage growth in the last couple of months being so sharp, and so at odds with other labour market developments, I would assume it is due to technical factors. I'd be more concerned if the new shunto isn't reflected in this month's SPPI print, and wages next month.
Data released yesterday showed April as being another boom month for Taiwan exports. TSMC's sales today suggest exports might be stronger still, with TSMC's revenue rising even more quickly than in the 2020-21 post-covid recovery. That's remarkable, even allowing for front-loading.
The expected fall in exports to the US did happen in April, but that was offset by stronger shipments to ROW. I wouldn't expect that to continue, but it is worth noting that today's data showed an increase in imports of components, which would usually indicate stronger exports in the next 3M.
A lot of market discussion in recent days has centred on hedging by the lifers. The central bank, however, has argued that the move in the TWD was driven by exporters. That is believable: exports grew remarkably strongly in 2020-22, and have done so again through April this year.
My framework for Taiwan and the TWD is a structural economic recovery driving a normalisation of inflation after the near deflation of the 20 years before 2020. That remains the theme, but there is now a clear cyclical slowing of CPI. That will intensify if tariffs trigger an export recession.
The exact timing of monetary easing can vary, but today's interest rate and RRR cuts are not a surprise. Today's moves are consistent with the PBC's usual reaction function, and with inflation so weak, further loosening should be expected.
Politically, China might well be prepared for the trade war. But I remain sceptical that is true economically. The headline of today's Caixin services PMI was soft, and the commentary noted confidence falling "to the second-lowest level recorded since data collection began in November 2005".
I can't claim to have expected the 10% surge in the TWD in the last couple of days. But I have been arguing for a while that the risks of a structural appreciation of the currency were real and rising. This is a brief presentation from March that highlights the issues.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
The tariff threat has clearly changed the BOJ's growth outlook. That has implications for inflation. However, in today's detailed outlook, the bank reiterated confidence in wage-price dynamics. While it feels even less urgency than before, the bank isn't yet calling the end of this rate hike cycle.
Given the global uncertainty, the headline manufacturing PMIs released in the last couple of days for China and Japan didn't look too bad. The tariff impact is much more visible in today's Korea and Taiwan PMIs, both of which declined sharply.
Yesterday's export data for April were sluggish, and today's PMI fell to 47.5, the lowest since September 2022. Ongoing political uncertainty won't help a recovery. The BOK expects this weakness to reduce inflation, but that feed through isn't obvious yet, with April core CPI remaining over 2%.
Today's BOJ's GDP downgrades were all about tariffs affecting corporates. The bank didn't sound worried about consumption. But in today's data releases, the manufacturing PMI ticked up, while consumer confidence fell sharply to a level that's only been lower three times in the survey's history.
The gap in GDP growth that has opened up between Korea and Taiwan since 2020 reflects exports, but also consumption. Data today show Korean retail sales did perk up in March. But even after that, sales are still barely above the level of late 2019, while in Taiwan they've grown almost 15%.
GDP growth in Q125 reached almost 10% saar. That is all about exports, and so is vulnerable to tariffs. But it also furthers the step-change in growth evident since 2020. Before then, Taiwan was growing at a similar pace to Korea. Now, the two economies couldn't look more different.
Goods consumption in Japan continues to struggle, with real etail sales dropping in March back to the lowest level in two years. Services consumption has been stronger, but the renewed deterioration coincides with a rebound in inflation, which is once again squeezing real incomes.
Export orders fell sharply in April, but the PMIs overall weren't so bad. One reason is a bottoming of the construction cycle. That, however, isn't improving, and with prices and the business outlook falling again, the economy still isn't on a stable footing to get through the tariff shock.
Like most other observers, I think it unlikely that the BOJ changes policy this week. But given domestic price developments, there isn't much room for dovishness. And if the US really wants to tackle global imbalances, it has an interest in creating the conditions that allow the BOJ to hike further.
Profits did rise YoY in March, but because of the base effect. Relative to GDP, earnings remain sluggish. Unsurprisingly, given the collapse of real estate, heavy industry is weakest. But in manufacturing, aggregate earnings aren't strong either, and around one-third of all firms are losing money.
Korea was weak even before tariffs, contrasting with more resilience in Taiwan and Japan. In Taiwan, that's been because exports have offset weakening domestic demand, a pattern that hasn't yet changed: consumer confidence declined again in April, but the monitoring index through March held up.
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A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Tokyo CPI in April was boosted by changes in official subsidies. But inflation remains broad-based. Food prices were up, and rental inflation jumped – important, given the near 25% weighting. Services inflation didn't shift much, but the trend will be clearer with April national CPI and SPPI.