The platform for tracking and understanding East Asia macro
My latest video, discussing why inflation risks won't end even if the Iran War eventually does. The reasons: both cost-push and demand-pull from the semiconductor boom, dynamics that are being reinforced by the cheapness of currencies.
Average CPI and PPI inflation remained relatively elevated in June. However, most of the rise has been because of external factors, and leading indicators show that for now, the peak has likely been seen.
The flow story behind KRW weakness has transitioned from overseas buying by domestic retail to domestic selling by foreigners. Two other factors help inform the exchange rate: correlation with the JPY and, perhaps, a BOK that is late in hiking given the huge acceleration in NGDP growth.
June's core inflation of 2.3% isn't high in an absolute sense. But outside LNY, it is the highest since the 1990s, and, remarkably, above both the policy rate and 10-year yields. Energy inflation will ease, but with wage growth of 2.7% and rising, and equity prices strong, rates really look too low.
Today's May consumption activity data were stronger again. That rise can be explained by three factors: a temporary boost as purchases of household appliances are brought forward, decent – though in May, not necessarily stronger – wage growth, and perhaps, a wealth effect as asset prices rise.
China's cycle looks more mixed rather than bad. In Japan, there are clear signs of an acceleration in both activity and inflation. For Korea and Taiwan, the theme is a broadening of activity as the semiconductor export boom feeds into domestic economies.
A slide pack laying out themes for the region overall, and for each individual economy.
The detailed release of the Tankan confirms the message of yesterday's summary: price pressures are rising again, and momentum in the corporate sector is strong. There is some sluggishness in autos, but as in export data, that is being offset by AI demand for electronics.
The sharp rise in inflation since March slowed in June, and the BOK expects a drop in July. But cost-push from the surge in semi prices is feeding into CPI, and the BOK also expects "expanding demand pressures" from the economic recovery to drive inflation from here.
The detailed version of the Tankan won't be released until tomorrow. But the headlines today show a clear story: business sentiment remains strong, and inflation pressures have risen yet again. The BOJ needs to become more hawkish.
There are signs of a broadening of the cycle, with construction past the worst, capex rising, and the labour market bottoming. However, while services activity has been strong recently, retail sales are still sluggish, and industrial production is going sideways.
Today's official PMIs ticked up, but not by enough to clear market concern about the strength of the cycle caused by the weak IP, retail sales and FAI data of the last couple of months.
Two of the big questions for markets in the region are 1) the implications for monetary policy as oil prices fall, and 2) what is happening with China's cycle, and what does that – and the strengthening of the USD – mean for the USD.
Earlier this week, I published a longer note delving into the macro and market implications of the semiconductor boom. You prefer pictures to text, so this is the accompanying chart pack.
Business sentiment is middling, and the gap between large and small firms looks K-shaped. However, consumer confidence is quite strong, and the BOK has argued that sector disparities aren't an issue for monetary policy. Falling oil prices do lessen inflation risk, but also boost GDP growth.
A longer note putting the chip supercycle in the context of commodity price surges, dismissing concerns about the narrowness of growth, and exploring the different macro dynamics in Korea versus Taiwan. One is a commodity boom, the other is indeed BS, but both suggest real exchange rate appreciation
China's cycle is weak, but I'm not yet convinced it is getting worse. Japan's cycle will now be improving, but the BOJ needs to show that it can keep up. The BOK's hawkish turn can go further still if the KRW remains so weak. I think inflation risks in Taiwan are broader than judged by the CBC.
My latest video, making the case for a bottoming of China's economy. In light of this week's poor official data, the argument might look off-base, which means it should at least be interesting. I do think the logic holds up, but as discussed here, there are reasons I could be wrong.
The CBC didn't change policy today. It increased its growth forecast, but didn't sound excited about the outlook. It warned about excesses related to equities, but didn't announce any remedial policies. Inflation is expected to remain below 2%.
Core inflation has rarely been higher, the export economy is booming, and signs are emerging of stronger domestic demand. Core inflation is still only 2%, but yields are even lower (!), and there's plenty of asset price inflation in stocks. Hence the question: why wouldn't the CBC hike tomorrow?
Before the war, Japan's manufacturing cycle was gaining momentum. If the war is now over, then today's releases of machine orders, exports and business sentiment suggest that strengthening momentum can now become an important theme for Japan macro.
The sharp rise in import and export prices of recent months eased in May. But that leaves export prices at the highest level since the brief spike in 2008. That brings inflation for ROW and an income boost for Korea. With spot semiconductor prices still rising, neither trend is yet exhausted.
I have been arguing that the underlying economy has been stabilising, with prices bottoming out before the Iran war. But stabilisation is external-led, and today's data show the domestic cycle remains a mess. That will likely become a policy issue if IP doesn't stay at an annualised run-rate of 5%
BOK governor Shin Hyun Song gave a speech on Friday to mark the 76th anniversary of the bank's founding. It was short, but worth highlighting, because he sounded more confident about the outlook, and downplayed the significance of uneven growth as a factor for monetary policy.
Three themes: whether the weakness in the activity data releases of a month ago in China was noise; Japan, where one hike is unlikely to be enough to really change market conditions; and the semi super cycle, which should be having more impact on fx and rates (in Taiwan) than has yet been evident.