East Asia Econ

A critical part of the BOJ's positive narrative is the labour market tightness shown by the Tankan. That survey will be released next in early October, but early signs are positive, with today's BSI survey from the MOF, also quarterly, showing tightening over all three of its measurement periods.

Just looking at the headline labour market data, and it would be difficult to know that the BOK is moving steadily towards a rate cut. Data released today show that in August, the unemployment rate fell to a new multi-decade low of just 2.4%!

TSMC's sales were softer in August (especially after adjusting for seasonality), and with sentiment towards the sector starting to weaken, it seems possible that the best of the cycle is now in the past. That will limit further improvement in Taiwan's overall exports.

In today's second release, Q2 GDP growth was revised down, from 3.1% QoQ annualised to 2.9%. The driver was weaker capex, which, like consumption, has yet to rise back above pre-covid levels.

The recovery in Q2 GDP was driven by consumption, and the BOJ's monthly proxy for PCE suggests growth has continued into Q3. Today's data show consumption grew in both June and July, the first two consecutive months of growth in almost a year.

It can be seen in the PMI and 10-D upstream prices: the mild firming of PPI of 1H24 is now rolling over. It is also evident in global commodity prices, so this isn't a China-specific phenomenon. But when inflation is already so low, it matters more for macro in China. Click to see the other charts.

There's probably some noise in today's data showing a big fall in August, but the general decline in core inflation in the last few months will be allowing the CBC, like the BOK, to become more relaxed about the outlook for prices.

That consumer confidence has bounced while inflation expectations stay high is constructive, suggesting price hikes don't immediately impinge on sentiment in the way they used to. However, the recovery in consumer confidence remains modest: outside of crises, it has rarely been lower than August.

In recent weeks there hasn't been much change in the overall macro narrative of "muddle through". But that masks some important shifts in the details, with three standing out: the surge in export volumes; the rebound in food prices; and the continued rapid shift of money into time deposits.

There's nothing obvious in July SPPI to shift BOJ thinking. Core fell back YoY from June's multi-decade high of 3.1% to 2.7%, but rose sequentially from 1.5% to 1.9%. That's softer than recent months, but doesn't warn of a break in the gradual upwards trend. A few more charts are in the note.

I had been thinking China's export performance was solid more than spectacular. But data for June really challenge that idea.

While the monthly change in UE is small, the direction is clear, with the rate falling in July to a new 25-year low. That is happening even though participation is rising. This labour market tightness is supporting wages and means that unlike Korea, rate cuts are unlikely to be imminent in Taiwan.

The Aug flash services PMI ticked up, and more than the Reuters Tankan, points to a strong cycle. But the anecdotes were mixed, with optimism easing "amid concerns over labour constraints" and rising costs. Selling prices rose at the softest pace in 9M, even as input cost inflation rose.

The BOK's BSI survey ticked down in August, but not in a way that changes the picture. The cycle has been weak enough to justify rate cuts for a while, with the hold-ups being CPI, the Fed and, occasionally, domestic housing prices. Currently, it is only housing that is flashing red.

In today's full Q2 release, officials kept the 24 GDP f'cast at 3.9%, saying “Exports are not bad, but just weaker than expected”. That characterisation is exactly right. But while cyclical momentum has been a bit disappointing, few other economies have a post-covid profile quite like Taiwan's.

These days, there doesn't seem to be any one indicator that can be used to summarise capital flows in and out of China. But the settlement data at least has been suggesting a rise in outflows, and today's numbers for July show that trend is intensifying.

The 6.6% YoY fall in M1 in July is unprecedented. The drop is partly because of regulatory changes, but those don't explain the continued rapid decline in M1 relative to M2, a change that strongly suggests no let-up in the deflationary pressure the economy is facing.

Like Japan, underlying wage and price dynamics in Taiwan really seem to be shifting. Data have already shown that the post-covid acceleration in wage growth is sticking. Today's numbers for June show that in Q2 as a whole, sequential growth in mfg wages was the strongest since 2012.

The link between property sentiment in the PBC's depositor survey and interest rates isn't as close as for other real estate indicators. But the takeaway is still the same: property isn't reacting to rate cuts in the way it used to, even with mortgage rates in Q2 falling to new record lows.

TSMC's sales rose to another record high in July. Set against that, Taiwan's July export data look rather soft. I still haven't found a good explanation for the gap. I wouldn't have thought it can be the fabs in Japan?

Asia data is showing an industrial recovery that remains sluggish. Today's data for Taiwan, similar to Korea's earlier in July, shows export growth struggling to get into double digits. That's modest, when both economies should be the biggest beneficiaries of AI-related demand for tech hardware.

The Economy Watchers survey for July has the same message as the PMI: at least before the market volatility of the last few days, Japan's cycle was in pretty good shape.

Today's July data show the moderation of core inflation in Q2 has been sustained. If there's now a global slowdown, the central bank will likely stop worrying about prices. But if the export cycle proves to still have legs, more work likely needs to be done to cap the post-2020 step-up in inflation.

The better tone of the headline Caixin services PMI in July wasn't reflected in the commentary: "Instances of service providers raising selling prices.....were offset by others lowering selling prices to support sales.". The level of business confidence was "the second-lowest since March 2020".

Whatever else might be true, the BOJ isn't changing policy at a time of cycle weakness. The full PMI confirmed the strength of the flash, with firm employment, "marked" inflation and robust business confidence. That was all true even though foreign demand contracted.