After a better Q2, consumption looks to have basically flat-lined again in July-August, capping any upside in GDP. Consumption isn't falling again, and last week's consumer confidence survey suggests no new deterioration in September. But there is downside risk if the JPY continues to weaken.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
I had an op-ed piece in today's Nikkei Asia. The headline argument is that monetary policy isn't sufficient to boost growth. On its own, that isn't much of a differentiated view. The nuance is the reasoning: China has monetary policy independence, so Fed cuts in themselves don't change anything.
Overall, data are falling into place for a BOK cut. Exports were firm in September, but the PMI was terrible. Headline CPI dropped under 2% for the first time since 2021, and property prices might be decelerating. The one counter-trend is services CPI, which has rebounded to 3%.
It wasn't just in Taiwan. Korea's PMI also fell sharply last month. The deterioration is puzzling, not being seen in other surveys, nor in Korea's September exports. So probably, it is noise. But data patchiness has been a theme of recent months, suggesting underlying cycles are rather so-so.
The detailed Q3 BOJ Tankan shows both labour market tightness and corporate output price expectations remaining as elevated as any time since the 1980s. Clearly, the economy hasn't been derailed by the market volatility of early August, and without a new shock, the BOJ seems likely to hike again.
Data today show headline inflation fell below the BOK's 2% target in September for the first time since April 2021. But core inflation isn't continuing to drop. Sequential core looks to be bottoming around 1.8%, and the rebound in personal services inflation is continuing, from 2% in Q1 to 3% now.
Taiwan manufacturing should be on a big upswing, driven by recovery from the 2022-23 recession, and AI demand for semis. And yet, even before now, data have been patchy, and the PMIs suggest that mfg started to contract again in September. If that's the end of the upturn, it didn't last long.
The equities move has been extreme. To argue that this heralds broader economic recovery relies on: 1) the YC moving next as savings get mobilised; 2) the YC mattering less as an indicator than equities. Both are possible, but while the YC has issues as a leading indicator, so does the stockmarket.
Ueda's caution and now politics are the big near-term policy dynamics. Politics might affect monetary policy longer-term, if Ishiba's as PM is as hawkish as his reputation. But the cycle hasn't been derailed yet, with the Q3 Tankan showing sentiment, the labour market and pricing all remaining firm.
To think the equity recovery is lifting overall growth, things to watch include: the yield curve; real estate debt; PBC base money; and household deposits. Since Friday, the YC and real estate debt have moved, but not significantly yet. Base money and HH time deposit data are lagging.
Equities say that data are now dated, with PBC policy meaning a decent recovery is in the works. But in assessing whether that's right, the data are important, showing how much work policy needs to do. The PMIs were weaker again in September, with the construction PMI, especially, rarely worse.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
I've already posed the question of why the PBC only cut 20 bp. Today, I've got a follow-up: why wasn't fiscal announced at the same time? Reports suggest that is in the works, but China is best-placed of anywhere to do coordinated monetary-fiscal. It feels significant that this didn't happen.
Underlying core inflation in Tokyo in September continued to run at around a 2% annualised rate. The trimmed mean has stabilised at a bit below that, and the proportion of rising items has ticked up. Inflation isn't accelerating, but there's no sign of a slowdown either.
The 17% YoY fall in profits in August is exaggerated by comparison with the spike 12M previously. But the details are sluggish. Corporate revenues haven't yet regained the level of November 2023, and except for early 2023, the profit share of GDP is lower than any time since 2009.
Today's survey from the BOK doesn't show much change in business sentiment, which remains weak. But it does point to a real softening in pricing in manufacturing. With the domestic macro data now largely in place for a cut, the remaining issues for the BOK are housing, and external developments.
That data in the last few months show export volumes growing faster than pre-covid rates is remarkable. But equally significant for China and the world is the total stalling of imports. Before 2020 they were growing with exports, but since then, they haven't risen at all.
If the US-led global trend is a sort of reversion to mean, then Asia has two very differentiated dynamics. On the one hand, there's Japan and Taiwan, which look like breaking structurally to the upside. On the other, there's China, which is more sluggish than at any time in the last 30 years.
After a sluggish Q2, we'd started to think the best of Taiwan's recovery was over. But IP data today, as well as export volumes, are consistent with the big bounce seen in August export values. Retail sales were weaker, but still suggest much more resilience than consumption in Korea.
This to me is the interesting question about yesterday: given weak prices, and now CNY appreciation, why wasn't the rate cut bigger?
Services PPI inflation eased back in August, but that was partly base effect. The BOJ's new high-labour content measure isn't that different, and remains near 3%. Sequentially, SPPI is running around 2%, but all the volatility since 2022 makes it difficult to discern the underlying trend.
Confidence and overall inflation expectations fell in September's consumer confidence survey. But property price expectations ticked up. The change wasn't big, but is enough to cloud the outlook for a BOK that in recent months has explicitly associated its monetary stance with the property market.
August export order data don't signal any change in direction in the modest export upturn of recent months. The more interesting shifts are structural. China orders are flat, and are now only 60% of US levels. The overseas production ratio is the lowest since 2009.
The BOJ's stance now has two clear dimensions. One, as before, is its constructive view of the domestic economy. But now there's also an explicit concern about US growth. As long as one offsets the other, the BOJ has time. However, if the US soft lands, then the BOJ will have ground to make up.