With inflation expectations remaining high in today's November consumer confidence report, the BOK will likely hike this week. But from today's survey, and the cycle more generally, a case is emerging for a BOK pivot.
It is no surprise that today's October data show Taiwan's export orders continuing to weaken. More interesting was that the data also showed weakness in orders from the US. That is what should be being seen, though it is a trend has yet to show up consistently in data across the region.
Korean exports are falling. Our model suggests there is still worse to come. From a market perspective, the next shoe to fall looks likely to be DM demand, which has remained surprisingly resilient in recent months.
Japan's exports are being helped by some normalisation of auto sales. But our regional leading indicator continues to point firmly down.
Data released this week show the central bank's balance sheet continues to hardly grow, and depositors continue to move money into time deposits. That is happening even though real economy interest rates are at or near record lows.
Property prices continue to fall, even though mortgage rates are likely at record lows. All the policy loosening of recent days should start to make a difference, but it is as yet difficult to imagine a big upswing in the property market.
In Q3, the economy contracted. Leading indicators suggests that this is noise, and that a mild rate of growth should resume. But corporate sentiment remains unstable, and consumers continue to feel the pressure of rising prices.
October data confirm the message of the PMIs that the cycle remains weak. There continue to some tentative signs of a floor, which has a bigger chance of holding given the policy moves of the last few days. But the softness of property sales suggest the foundations for any recovery remain weak.
The authorities have relaxed covid and property restrictions. It feels very unlikely that the economic disruption caused by efforts to contain the pandemic is yet over. But taken together, the policy shifts do further rebalance what previously were overwhelmingly downwards risks for the economy.
The monetary data aren't bullish, but are more constructive than the headlines suggest. That's because credit growth outside of government borrowing is rising. This keeps alive the possibility that China is through the worst, though such an interpretation is a stretch as long as M1 growth is weak.
In October, headline PPI fell back into deflation, and CPI inflation eased quite sharply too. But there are signs that China is nearer the end of this deflation shock than the beginning.
It isn't enough yet, but there are signs that the labour market is starting to cool. The unemployment rate remains low, but employment was more or less unchanged in October for the fifth consecutive month. The risks for the BOK are shifting.
Exports are starting to contract YoY, and inflation remains stable. Core CPI bears some monitoring, but it is unlikely the CBC will hike again.
Underlying dynamics in both the labour market and consumption suggest the economy remains on a recovery path. But the positive impact of these trends continues to be offset by inflation.
The two big recent catalysts have been 1) that the new leadership ends China's growth story; and 2) zero covid is about to end. All told, this chatter hasn't taken the market far. For the industrial cycle, there remain tentative signs of a bottom.
YoY export growth fell to zero in October. More downside is ahead, though surging car shipments suggest autos might buck this trend. Import demand is also slowing. It should contract aggressively in the next 6M, though that looks pessimistic given commodity prices and imports in the PMI.
The 1997 double play isn't yet at work, and the HKD doesn't look as over-valued as then. But Hong Kong does now face a double whammy of Fed tightening and zero covid. With maintenance of the peg ultimately being a political decision, the question is how much economic pain the authorities can take.
Early data show some deterioration in China's financial account in Q3. The shift though isn't as significant as might be expected, and the current account improved. The data won't do much to boost the CNY. But at face value, they aren't a reason for a sharper sell-off.
The tick-up in headline CPI shouldn't persist. Core CPI inflation will likely prove more stubborn, but rather than prices spiralling up, the bigger risk right now is a sharp slowdown in economic activity in 1H23. This should provide justification for a BOK pivot, as long as the Fed does the same.
The official manufacturing PMI ticked up in October, but only to 45.4. The Markit version fell to a new post-2009 low of just 41.5. The economy is likely contracting, and with inflation pressure already not particularly strong, it seems unlikely the central bank will feel a need to hike rates again.
Korean exports are now falling in YoY terms, and there is more downside ahead. This is another sign that activity will soon be in cutting territory for the BOK. The fall in exports is meanwhile keeping the trade balance in deficit, meaning flows remain a negative factor for the KRW.
Japan's economy is warm, not hot. That will change if the positive consequences of JPY weakness (corporate competitiveness) start to outweigh the negative (lower real incomes). At that point, some of the nonlinear upwards pressures on prices identified by the BOJ will start to become important.
The PMIs remain weak, with the only bright spots being construction, and prices. The cycle may have found a floor, but only a weak one.
Taiwan's IP data are another sign of a sharp downturn in the region's industrial cycle. IP fell more than 5% MoM in September for only the fifth time since 2008. This weakness hasn't yet started to affect the domestic economy, with the labour market and retail sales stable in September.
Some slides from a brief presentation I gave yesterday. It was in three parts: the deflation problem; the short-term outlook; and the Congress contradiction.