After the August PMIs, there's less room to think the economy is continuing to muddle through. Until now, the weakness of the official mfg PMI has been offset by strength in the Caixin version. Today's fall closes that gap, suggesting that even sectoral bright spots are now dimming.
Although mainly as capex, exports are feeding into domestic demand in Taiwan in a way that isn't yet visible in Korea. Data today show three-quarters of the 5.1% YoY rise in GDP in Q2 coming from investment, with the remainder being consumption. The contribution from net exports turned negative.
The weakness of retail sales in China and Japan is well-known. Less appreciated is the same theme is true in Korea too, with today's June volume data dropping back to 2019 levels. Only in Taiwan do retail sales show any strength, which is important when Taiwan's export story is the strongest too.
Apart from the changes in actual policy, three things stood out today: changes to the outlook for prices, a shift in the language used to describe policy, and separate from the BOJ meeting, the latest consumption data, which remain weak.
Our China cycle framework is that the muddle through of the last 18M is running out of road. The July PMIs look consistent with that, with weakness in pricing, jobs and confidence. The one remaining contrary indicator is the S&P mfg PMI, which has been strong, and for July will be released tomorrow.
The government's monthly Monitoring Indicator shows economic momentum is about as strong as it gets. That suggests another robust print for GDP when Q2 data are released tomorrow. It also keeps pressure on the central bank.
As has been the case for months, hard data show no big change in the labour market: UE is low, and employment high. But the BOJ seems to think the labour market is tighter than these data suggest, placing more weight on the bigger change shown by the Tankan.
At least through July, softening inflation has been making consumers feel happier. Likely, the recent typhoon damage will at least cause a pause. And while the price slowdown in theory helps the CBC, there's also the risk of aggregate demand remaining stronger for longer.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
The BOJ became more positive in 1H24, and labour market and price data since should have increased confidence further. So we think the bank hikes next week, with a probability of 60%. That our conviction isn't stronger still is because of the implications of the June non-decision on JGB purchases.
The CPB data do show that China's export price cycle is somewhat weaker than ROW. But the gap isn't that big, and the trend is similar. Particularly in the context of all the talk of over-capacity, the differences really don't look that big.
I don't think the BOJ is particularly data-dependent when it comes to headline monthly releases, which tend to be noisy. To the extent that today's July Tokyo CPI does matter, it suggests the underlying story remains unchanged.
Recent data suggest an unchanged macro story: a slow moderation in inflation and a weak domestic economy, but export and property recoveries. The first two dynamics point to an interest rate cut, but the second two suggest that still isn't imminent.
The BOK business sentiment survey continues to point to two very different dynamics: an export recovery that looks increasingly solid, and a downturn in the domestic economy that shows no sign of bottoming.
Core services PPI inflation in June rose 3% YoY for the first time since the early 1990s. This offers evidence of the BOJ's hoped-for virtual wage-price dynamic, with the annual rise in services PPI being led by high labour cost sectors.
The collapse in property market activity is showing up in sharply lower prices for building materials: they've now fallen by 50% from the peak. But overall industrial prices haven't fallen in the same way, and continue to point to PPI inflation of around 0%.
Some lessening of confidence in June made sense given the fall in the JPY, but last month's sharp drop in the services PMI still seemed overdone. In July, it rebounded back to a strong level, with the commentary highlighting rising employment and capacity pressures.
Overall price expectations in today's July consumer confidence survey fell. But overall sentiment and property price expectations rose. That gives the BOK continued justification for pushing back on expectations for an immediate rate cut.
A reminder of our roadmap for China's cycle over the next few months, which we summarised in an opinion piece in today's Nikkei Asia.
Korea's data today completes the PPI picture for the region for June. It shows two things: that the inflation cycle has modestly picked up, and that most of China's PPI deflation reflects this bigger global cycle rather than local factors specific to China.
The recovery in export orders has lost some momentum in the 3M to June. Perhaps there is another leg-up to come, but today's data for Korean exports through the first 20D of July were also more solid than spectacular.
Headline export growth in the first 20D of July picked up, but that was because of an extra working day. Adjusting for that and exports grew 11.4%. That's decent, but not showing signs of acceleration.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Today's settlement data again suggest the currency has been coming under more pressure. That is also the implication of $CNY being at the top of the band, though strangely, none of this pressure is being seen in fx reserve data.
The relationship between TSMC sales and Taiwan's macro data isn't precise, but this week's further upgrading of the company's guidance continues to suggest 2024 will be a very strong year for exports, and thus also the economy.