East Asia Econ

Services PPI inflation eased back in August, but that was partly base effect. The BOJ's new high-labour content measure isn't that different, and remains near 3%. Sequentially, SPPI is running around 2%, but all the volatility since 2022 makes it difficult to discern the underlying trend.

August export order data don't signal any change in direction in the modest export upturn of recent months. The more interesting shifts are structural. China orders are flat, and are now only 60% of US levels. The overseas production ratio is the lowest since 2009.

Against the backdrop of today's flurry of policy announcements, a reminder of how much policy need to do. Industrial prices so far through September have continued to drop with building material prices now the lowest since 2016.

There's still little sign of economic damage from the market volatility of July and early August. Like other surveys, today's flash services PMI was strong. Input prices eased, but output prices didn't as "firms looked to pass higher cost burdens in to clients".

After adjusting for working days, the pick-up in YoY export growth seen in the 10-day data was repeated in today's 20-day update. But that is largely base effect. Sequential growth has ticked up, but isn't repeating the upswing of 1H24.

While data for the corporate sector are distorted by regulatory changes, this is still one of the most important charts for China macro. As long as companies and especially households are locking up their money in time deposits, it is highly unlikely that inflation and nominal growth rebound.

Core machine orders are one of the BOJ's standard leading indicators, always getting a mention in the bank's economic outlook reports. The data are, however, volatile, and today's numbers for July don't show any new direction being established.

Japan's exporters haven't reacted in standard fashion to JPY weakness, not cutting prices to increase volumes. Indeed, volumes fell YoY in August. That contrasts with the clear recovery in the rest of the region. It means higher JPY earnings for exporters, but less incentive for domestic capex.

Exports feel a bit peaky, and CPI inflation has eased. But property price inflation isn't cooling. Perhaps an export slowdown changes that – the fastest price gains are in Hsinchu, home of TSMC. But unless and until that happens, it is very difficult for the central bank to turn doveish.

This week's announced rise in the retirement age is economically welcome. But the rise of 3-5 years, implemented over 15 years, is modest. In that time longevity is likely to rise almost as much, meaning by the time this week's changes are completed, China will still be at square one.

The shift in $JPY is clearly having an impact, with JPY import price inflation dropping from July's +10.8% YoY to just 2.6% in August. But BOJ officials suggest they remain confident in the underlying outlook, which isn't unreasonable given the resilience of survey data such as today's BSI.

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.