Inflation data in August Taiwan fit with the broader regional picture of a re-acceleration in price pressures. The difference in Taiwan is that this doesn't follow a period where core inflation has decelerated.
CPI and tightening probability in our model of the BOK's reaction function both rose in August. The one factor weighing on rates is the weakness of activity, particularly exports. If before its October meeting the BOK gains confidence the export slump is reversing, another hike is very possible.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
The BOK was hawkish in August, and weekly price data suggest that the fall in CPI since July 2022 is bottoming out. If that is accompanied by a rebound in exports, it will make the BOK quite interesting the next 6M.
Early data for August don't paint a convincing picture of a cycle that is about to turn up strongly. However, there is evidence that nominal activity has stopped worsening, and given current sentiment around China, even a second-derivative improvement is important.
The manufacturing sector has stopped getting worse, and with pricing improving, we are mildly optimistic that this firming can continue. This is more of a second-derivative improvement than a fundamental turn, but any tick up is important when market sentiment is so poor.
The desynchronisation between weak exports and resilient domestic activity is continuing. Despite a couple of warning signs, we'd expect that remains the theme for the next 3M. For an upside surprise, however, export demand needs to recover.
Japan's labour market recovery remains sluggish. That doesn't seem to worry the BOJ, and consumer confidence is suggesting some improvement in nominal earnings. We'd have more confidence that this could continue if published nominal wage growth was also picking up.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Headline inflation in Tokyo did fall in August, suggesting feed through from the sharp fall in goods PPI of recent months. But core inflation was stable at around 2.5%, and services PPI in July was also firm.
There was no change from the BOK today, with the bank remaining quite hawkish. It seems the bank might be able to break out of its wait-and-see stance of the last few months at its next meeting in October, with the governor saying that by then he expects to have a better grasp on the outlook.
The PMIs for August were solid, though concern was expressed about a renewed rise in energy prices. That could impact consumer confidence, as even part-time wage growth remains below inflation. However, the BOJ continues to think the labour market is tightening.
Korean activity data are a bit sluggish, with signs that the domestic economy is losing some momentum, while exports aren't picking up. At the same time, inflation is coming down. This probably allows the BOK to become a bit less hawkish tomorrow, but real direction will depend on exports in Q4.
Export data are mixed, falling between our two leading indicators: a sentiment-based one, which suggests continued weakness, and one using FCI, which points to a big upturn. If the latter is right, we should see start to see improvements in the BSI for Korea and the PMI in Taiwan.
Earlier, we looked at the role of demographics in Japan's post-80s malaise. Today we study corporates, with Taiwan as a counterpoint. We conclude, again, that Japan's experience is more unique than generic. Even so, the impact of bubbles bursting – as in China's construction now – is long-lasting.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Our monthly slide pack, going through the main themes for each economy, as well as a structural section focusing on demographics.
While headline inflation and exports are falling in Korea and Taiwan, CPI and external shipments are holding up in Japan. Weaker import prices should still mean some downwards pressure on CPI through to year-end, but there will be an offset if the labour market tightens and rentals rise.
Property prices weakened in July, and are highly likely to fall further in August. However, overall economy-wide inflation ticked up in July, boosted by the rebound in PPI. We are cautiously optimistic that can continue.
This speech from Liu Shijin is well worth a read, both because it outlines a comprehensive policy approach that could address China's current cyclical and structural challenges, and also because it acknowledges that there is no consensus in Beijing yet on the way forward.
NGDP growth in Q2 surged, but RGDP growth was less impressive, and driven all by exports. Last week's EW survey suggests the recovery still has room to run. Missing so far is private consumption, which needs inflation to fall and wage growth to rise. There's more sign of the former than the latter.
As expected, China's July activity release was weak, and also as expected, the PBC cut rates. The one new negative development was the NBS's decision to stop publishing the youth unemployment rate. That decision won't improve confidence in China's macro situation.
For the first time in a few months, Korea's labour did soften a bit in June. The decline was led by private services, rasiing the risk that domestic momentum is stating to fade. That will become an important issue for the BOK into Q4 if by then exports haven't started to revive.
Desynchronisation remains the theme, with services supporting inflation and wages even as exports remain in recession. This theme probably gets the economy through Q3, but into Q4 and the trajectory of activity and inflation will likely be determined once more by what is happening to exports.
Fundamentals in China remain poor, with no turnaround in sight. But there are some indicators suggesting that inflation and exports are close to bottoming. If the government can find a new way to alleviate the financial squeeze in the property sector, market sentiment towards China should improve.