Headline CPI inflation is now coming down quickly, and could drop below the BOK's 2% target by the end of Q3. But core inflation continues to hold up, and the BOK is unlikely to shift policy before that changes.
Consumer confidence improved again in May. That offsets the significance of the fall in April retail sales. But while employment sentiment in the consumer confidence survey also improved, it is still noteworthy that official labour market data through April continues to feel soft.
The optimistic interpretation for the weak May PMIs is this is a soft patch that was inevitable after the strong Q1 bounce. But for manufacturing at least, that isn't especially persuasive, and the broad-based weakness of output prices is a warning of more more fundamental challenges.
If Japan's economic problems were about debt and deflation, then China is facing similar challenges. The one difference is the competitiveness of China's exporters. As a result, China is likely to see falling rates, but currency strength could be more of an issue for China than it was for Japan.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
It has been a quiet few days for China data. What has emerged continues to look bearish, with the move of money into time deposits continuing, industrial prices falling more quickly, and corporate profits weakening.
It was no surprise to anyone that the BOK didn't change rates today. As things currently stand, we doubt it moves soon. It downgraded GDP forecasts today, but also revised up the outlook for core CPI. The combination obviously makes it difficult to hike, and hard to cut.
A slidepack summarising our cyclical and market views
Taiwan continues to have a desynchronised story, with exports in recession, but domestic demand and the labour market holding up. This will keep the CBC on hold for now, with next steps being determined by whether the long-awaited DM recession materialises in 2H.
The BOK will likely remain on hold tomorrow. Falling headline inflation will create some space for the bank from here, but we think the labour market and core inflation need to soften to get rate cuts on the agenda. If the recent stabilisation of activity persists, that becomes less likely.
The flash Markit PMIs in May were strong, showing the strong rise in economic momentum of the last couple of months is sustaining. According to the press release from Markit, price indicators were also firm, albiet not quite as heady as sentiment around activity.
CPI expectations are falling, but consumer confidence and house price sentiment are rebounding. The easing of CPI expectations is another indication that further rate hikes are less likely. But it is unlikely the BOK will cut if the recent improvement in sentiment shows that the cycle is rebounding.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
In his first speech as governor, Ueda Kazuo reiterated the BOJ's view that the current strength of inflation will prove transitory, and that the bank will be patient. To us, the case for this time being different is strengthening, but as yet has a missing component: labour market tightening.
Data inconsistencies are commonplace in economic analysis, and not just in China. Even so, that it is possible to claim that in the same month Chinese retail sales grew by 1%, 5% or 60% is problematic. We remain sceptical that the economy has recovered as much as official data suggest.
That property price inflation eased in April is no surprise, given the softening of all other real estate indicators this month. But it is still worth noting, especially given other data showing mortgage rates falling to new record lows. If policy can't turn the market around, then what can?
China's official activity data for April were soft, with IP, FAI and property construction contracting MoM, and retail sales slowing. Early indicators for May don't suggest a turnround, with the fall in industrial prices accelerating so far this month.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
A summary of our latest thematic piece on services and inflation.
Taiwan's data continue to show that the manufacturing sector remains in recession, but that hasn't yet defused the deflationary pressure of the last few months. Indeed, wage growth in manufacturing continues to run at 3-4% annualised, which by Taiwan's standards is quite high.
A chart pack summarising our current views
After a strong start to the year, April credit growth was weak. The apparently short-lived credit cycle is reminiscent of 2020, but three years ago and the economy was boosted by exports and property. Real estate is much weaker this time, with mortgage lending collapsing again in April.
That China is in deflation – both PPI and CPI fell MoM in April – while the rest of the world struggles with inflation really is a remarkable outcome. Underlying inflation isn't quite that weak: core CPI inflation remains around 0.7% YoY. But still, there really isn't upwards pressure on prices.
The labour market went sideways in April, keeping the unemployment rate at 2.6%, the lowest since the 1990s. Non-manufacturing business sentiment suggests employment will remain around current levels for the next 6M. That doesn't seem likely, on its own, to bring down core inflation.
China's exports weakened a bit in April from the heady level of March, but remained strong relative to usual indicators of export demand. Imports remain weak, a reminder of the softness of the domestic industrial cycle. The trade surplus continues to widen.