With some trepidation, I am releasing my first....rap. Perhaps not the vibe you would expect from me, or from a rap, given both it and the accompanying video are another attempt to argue against the idea of Japanification.
I think the curve should flatten, as the BOJ continues to hike because of decent growth and strong inflation, while the longer-end is dampened by medium-term headwinds for inflation and a repatriation flow. These I think remain the themes, though the message from today's releases is mixed.
October export growth was the strongest in 20 years. That doesn't tell us what happens next. If 2025 is any guide, even the slowdown suggested by equities might not happen. What the data do say is that AI tech demand remained extremely strong in October, leaving Taiwan with an enormous trade surplus
PPI inflation accelerated again in October, a rise that is supporting nominal GDP and would usually lift corporate profits too. But this is all externally-driven. Downstream prices in PPI and the overall CPI remain weak, and outside of food, leading indicators point to slower inflation in 2027.
The outlook for macro markets in the region remains closely tied with the fortunes of the AI cycle. While uncertainty remains, rates, currencies and equities will likely trade together. Currencies might end up looking different, depending on how the dollar reacts to any shift in semi demand.
The surge in the Taiex of recent years means potential for big foreigner selling of TWD. But, inflows haven't been big, equities won't all be sold, and CBC has ability to fight back. The bear case is Taiwan recession versus US resilience, though even then, "fundamentals" for TWD would be strong.
CPI is being affected by cross-currents including very high upstream price inflation, government subsidies and holidays. The underlying picture is inflation of around 2%, which by Taiwan standards is high. I think an economic slowdown is needed to prevent it moving higher.
Monthly (-ish) regional update of cycles and market themes.
Cost-push – both energy and the spillover from higher chip costs into prices of downstream devices – is keeping inflation near 3%. The BOK expects demand-pull factors to become more obvious. So inflation will likely stay elevated, through for BOK policy, it is overall semi cycle that matters more.
Taiwan's overall PMIs look fine. The details are shakier, but so far, it looks like the weakness is coming from softer demand for consumer tech as semi prices boost the cost of electronics devices. The data don't (yet) show obvious deterioration in the data centre component of the AI boom.
The unusually long section of analytical boxes in the BOJ's main outlook report shows that the bank has a lot on its mind. That inevitably brings nuance. However, the overall tone is clear: nominal growth remains strong, and financial conditions loose. There's no clear reason not to hike further
China's nominal cycle looks to be slowing again. The rest of the region remains strong, but confidence that this strength can be retained is fraying, and will likely remain under pressure, especially if concerns over the data centre build-out and energy prices worsen again after the mid-terms.
Headline official PMIs continue to closely hug the 50 threshold. I am not sure that tells us much about the economy. But two components of the PMI are useful. The ongoing slump in construction indicates no property revival. Price indicators show PPI still strong, but warn of some weakening in CPI.
Rather than slowing as the government had forecast just a couple of months ago, GDP growth re-accelerated in Q3 to 14.4% YoY. That was because of domestic demand rather than net exports, and while that was mostly capex, consumption is growing more than 5%, and the positive output gap widened.
The BOJ argues today not just that "underlying inflation" has reached 2%, but that it is expected to stay there. However, it seems clear that stability won't be achieved without some help, as its analysis also says that all the risks to prices are to the upside.
Earnings releases and September macro data show the cycle has strong momentum. Growth is dominated by semis, and so dependent on the global cycle. However, the doubling in tax revenue in September shows one way in which the benefits of the semi cycle can start to broaden out.
With both growth and inflation strengthening, it will be tough for the BOJ not to hike faster – whatever Takaichi thinks. However, back-to-back or 50bp moves are unlikely. Moreover, the peaking of property prices and sluggishness in some wage indicators point to MT headwinds.
September money and credit data for September are like other indicators for Taiwan: quite strong, but not high enough on their own to think that they suddenly break the CBC's apparently strong desire not to change policy.
Today's Q3 GDP data continue the same story: real growth is solid, but more importantly, the huge windfall income gain from the surge in semiconductor prices remains a major tailwind for growth in 2027. The question remains how much of that income windfall will be spent.
The sustainability of the AI cycle is critical for the region. If it ends, rates will likely be lower, but currencies not necessarily weaker. Otherwise, my themes are: China – tougher 2027; Japan – flatter curve; Korea – macro spillover; Taiwan – market spillover.
Like so much else in Taiwan, labour market dynamics will be determined by the fortunes of the AI cycle. If that turns down, it will be hugely important. A sharp downturn hasn't, however, been the CBC's expectation, but existing wage trends seem inconsistent with the bank's view that inflation slows.
There was no change from the BOK today, and the decision to stay on hold was unanimous. That wasn't a surprise. However, the meeting was informative, with the clear takeaway being BOK confidence that this cycle will run through 2027.
The BOK is unlikely to move tomorrow when it hiked twice recently, the KRW has finally firmed, and there is nervousness about the AI cycle. However, if those worries are just a wobble, then there's still much room for the semi surge to feed into domestic demand, and tomorrow will just be a pause.
From the perspective of a government that wants to meet a 2026 growth target without having to shift policy, the September data are encouraging. But the 2027 outlook for the domestic economy is looking more challenging. That will become more visible if global demand and price trends change.
With regional macro dependent on continuation of the US AI build-out, the equity sell-off last week matters. That said, there are still complications: TSMC still sounds very bullish, and while for bad economies, it isn't clear that an end of the AI cycle would be so negative for currencies.
