Headline inflation ticked up in March, but our measures of underlying inflation have now closed in on 2%. The central bank will be able to give more attention to the weakness of the domestic economy.
Headline inflation ticked up in March, but underlying measures slowed. Prices are still rising by over the BOK's 2% target, but the trend slowdown will allow the central bank to give more attention to the weak economy.
The PMIs show no change in the trends: manufacturing is weak, while non-manufacturing is relatively strong. But equally, it remains likely that there will be a transition to manufacturing-led growth during the remainder of 2024.
Taiwan's mfg PMI improved in March, but remained below 50. That means mfg in a mfg-led economy has now been contracting for almost two years, and yet unemployment is at 20-year lows, and core inflation at 20-year highs.
There has been a recovery in Korean manufacturing activity, but it remains sluggish, with export growth stalling at around 10% YoY, and the PMI dipping back below 50 in March.
The headlines from the Tankan look pretty positive for the BOJ, with sentiment solid, the labour market tightening further, output prices easing only slightly, and capex plans holding up.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Our view has been that China's cycle has bottomed, and that market sentiment has been too pessimistic. The official PMIs for March support that idea, but the details aren't convincing enough to think the cycle has real momentum.
The upside risk for Japan and the Bank of Japan is a fall in headline wages and a long-awaited recovery in consumption that lifts aggregate demand. There are some signs of that process falling into place, but they remain tentative.
Business sentiment in Korea still isn't recovering. Exporter confidence has lifted, but continues to be offset by weakness among domestic firms. Price expectations in the consumer survey yesterday were probably still too high for the BOK's liking, but the probability of a BOK rate cut is growing
Consumer confidence remains around the historical average, which is not strong enough to remove BOJ concern about the sluggishness of the domestic economy. However, the March survey doesn't give the bank the all-clear to act, with price expectations picking up for the second consecutive month.
China's rising competitiveness in more capital-intensive manufacturing sectors is an important theme that we still buy into. However, relative to this belief, and the current global concern about China's EV export peril, recent export performance has been a little underwhelming.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Former BOJ governor Shirakawa continues to argue Japan's problems are about demographics, not deflation. His thesis is worth studying, even if it is not shared by the current leadership in the bank.
We aren't convinced that falling PPI shows China is stuck in a deflationary trap. China's PPI cycle isn't out of whack with global trends, and unlike Japan in the 1990s, monetary policy isn't reinforcing the drop. There's potential for nominal growth to look better this year.
Jan-Feb data validate the idea that the cycle has bottomed. The driver, however, is industry, which doesn't feel consistent with the continued weakness in property. Another leg-up in macro confidence likely still needs a real bottoming of real estate, and a strengthening of consumption.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Our impression from the data released so far for January and February is the underlying economy is going sideways. The credit impulse is soft, but not especially weak; mortgage growth has slumped, but isn't worsening; and both M1 and excavator sales look a bit stronger so far this year.
Not just in Japan but Taiwan too, there are signs of a structural break from persistently low wage inflation. The implication is that the gap between nominal monetary settings between both and the US is likely to be narrower in the future than it has been in the past.
The main takeaway from the BOK minutes for February was concern about the weakness of consumption. Inflation being above target means that policymakers don't feel able to react to that yet, but the bank is sounding more doveish, and will turn further in that direction if exports disappoint.
Two recent surveys from the Cabinet Office highlight Japan's labour market tightness. In its annual survey released at the end of February, hiring intentions are the highest since the 1990s. And today's quarterly survey shows worker shortages rose again from Q4.
It was no surprise that capex was revised up in the second release of Q4 data, but consumption was revised down. We would expect consumption to recover from here, as imported inflation eases and nominal wage growth accelerates.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
It wasn't surprising that core CPI picked up in February. But the rise took average core in the last three months to 2% annualised, a rise big enough to challenge the idea that there's been a structural shift down in core since covid. That reinforces our view that underlying inflation has bottomed.
Exports and manufacturing remain sluggish, but the leading indicators look strong. At the same time, services activity remains firm, unemployment is at 20 year lows, and inflation at 20 year highs. If exports do kick in as the leads suggest, it is easy to imagine the central bank having to hike.