The 6.6% YoY fall in M1 in July is unprecedented. The drop is partly because of regulatory changes, but those don't explain the continued rapid decline in M1 relative to M2, a change that strongly suggests no let-up in the deflationary pressure the economy is facing.
Currency weakness boosting inflation has been a regional theme. But currency strength wouldn't automatically mean a CB policy pivot. That's true in Japan, where other factors have been driving prices, and in China, where currency weakness hasn't yet been an obvious obstacle to policy loosening.
Like Japan, underlying wage and price dynamics in Taiwan really seem to be shifting. Data have already shown that the post-covid acceleration in wage growth is sticking. Today's numbers for June show that in Q2 as a whole, sequential growth in mfg wages was the strongest since 2012.
The link between property sentiment in the PBC's depositor survey and interest rates isn't as close as for other real estate indicators. But the takeaway is still the same: property isn't reacting to rate cuts in the way it used to, even with mortgage rates in Q2 falling to new record lows.
The PBC's Q2 survey shows consumption not especially weak, with the real post-20 changes in household behaviour being a shift from spending on goods to services, and from saving as property and riskier investments back to banks. The corporate survey wasn't bad either, but loan demand fell sharply.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
TSMC's sales rose to another record high in July. Set against that, Taiwan's July export data look rather soft. I still haven't found a good explanation for the gap. I wouldn't have thought it can be the fabs in Japan?
The July price data offer more evidence that the food price cycle has turned. With less PPI deflation too, it is likely that headline CPI gets a bit of a lift. But core CPI inflation in July was once again very weak, which is enough of a reason to assume that the PBC will continue to cut rates.
Asia data is showing an industrial recovery that remains sluggish. Today's data for Taiwan, similar to Korea's earlier in July, shows export growth struggling to get into double digits. That's modest, when both economies should be the biggest beneficiaries of AI-related demand for tech hardware.
The Economy Watchers survey for July has the same message as the PMI: at least before the market volatility of the last few days, Japan's cycle was in pretty good shape.
July exports fell, but it is premature to call the start of a downturn. That's partly because of market share gains. These are solid, though not impressive enough to validate over-capacity. In terms of structure, the much bigger shift is in imports, which have completely over-turned pre-20 trends.
It doesn't make sense to read too much into a single monthly indicator, but the MoM fall in exports in July does follow weakness in the (presumed) exporter-heavy Caixin PMI. As exports have been the one bright spot in the economy, these shifts increase the sense of growing downside risks.
In the BOJ's first comments since last week, Uchida says that policy is dependent on the economic outlook, which could be affected by market moves, particularly the JPY. However, he also reiterates confidence in the underlying changes that the BOJ has been talking about throughout this year.
Today's July data show the moderation of core inflation in Q2 has been sustained. If there's now a global slowdown, the central bank will likely stop worrying about prices. But if the export cycle proves to still have legs, more work likely needs to be done to cap the post-2020 step-up in inflation.
The June jump in earnings was almost all about bonuses. But the details were solid: for full-timers, wage growth didn't slow much, and it accelerated for part-timers. There's also now a greater likelihood of a trend rise in real wags as the less-weak JPY dampens import prices.
The better tone of the headline Caixin services PMI in July wasn't reflected in the commentary: "Instances of service providers raising selling prices.....were offset by others lowering selling prices to support sales.". The level of business confidence was "the second-lowest since March 2020".
The huge moves in markets may well have an impact on the extent and pace of further BOJ policy normalisation. But when markets settle down, developments in the real economy will also matter. It will be particularly important to track SME wages, service prices, and consumption.
Whatever else might be true, the BOJ isn't changing policy at a time of cycle weakness. The full PMI confirmed the strength of the flash, with firm employment, "marked" inflation and robust business confidence. That was all true even though foreign demand contracted.
It really is striking that while policymakers have been trying to stabilise the property market for months, construction price data show no let up in the pain. Indeed, if anything, through late July it looks to be getting worse.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Particularly if US policy action reflects a weaker economy, the BOK will likely cut if the Fed does. However, with the rebound in home price inflation that has been a focus for the BOK, and tentative signs of an upturn in services prices that so far hasn't, the BOK likely won't be in a rush.
Services inflation had already bottomed at above 2%, and now it looks to be trending up again. As a big component of domestically-generated inflation, a rise in services inflation will make it much more difficult for core and thus overall inflation to stay at the BOK's 2% target.
The industrial cycle still lacks some of the momentum that we have been expecting, with the manufacturing PMIs easing back in July. However, the services PMI continues to hold up, suggesting overall activity in Taiwan remains strong.
In its full outlook report, the BOJ sounds confident on services prices and wages at larger firms. It is less certain about wage rises at SMEs. Developments at smaller firms, and service price hikes in the traditional (but long-forgotten) price setting month of October, will be important to monitor.
It looks increasingly likely that Korean export growth has stalled. Exports grew by around 10% a year each month in the first half of 2024, and equities are pricing a similar rate of expansion in the second. That's not much when the domestic cycle remains weak.