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Two of the cycle themes in the region are the strength of the AI trade, and macro stability in China. These in turn form the context for the third: the impact of the Iran war. If that conflict, finally, is near some kind of resolution, market confidence around rate hikes could actually increase.
Tuition as well as energy subsidies make inflation look particularly low relative to the likely upside from the Iran war. The conflict will also slow growth. However, both export data for April and Koeda's speech yesterday indicate that growth downside will be limited if global tech demand sustains.
A discussion with IRF about my views on the region
My initial interpretation of the Xi-Trump meeting looks wrong. While in the official talks neither side gave much, in a subsequent interview with Fox news, President Trump softened US support for Taiwan. Over the medium-term, that could be significant for politics in Taiwan, and currency valuations.
Most of the headline activity data in April weakened, with goods retail sales being particularly bad. So, clearly no macro recovery. But services retail sales picked up, and the stability in home sales and household liquidity preference, and firmer pricing, continue to suggest broad stabilisation.
The main regional themes weren't challenged by events last week: macro stabilisation in China; upside risks to inflation, particularly in Japan; and upside risks to growth, a theme for both Taiwan and Korea as long as the energy crisis in the Middle East doesn't derail the semiconductor super cycle.
Data today for Japan and Korea show the inflationary impact of the War, with import prices in both economies rising at double-digit rates. However, such rises have been seen before. By contrast, export price inflation is setting records, offsetting the hit from energy prices to domestic growth.
The big trade story this year is the sudden rise in imports. There are some signs of firmer domestic demand. But 80% of the increase is from two categories alone: precious metals and semiconductors. And most of the semi strength is volumes, which is puzzling when global IC prices are rising so much.
The Iran War will push up inflation. But for growth, transmission is via the terms of trade, and higher import prices are being offset by historical rises in export prices, increases that are unlikely to be just cyclical. That supports growth in Asia, at the expense of even more inflation for ROW.
PPI inflation accelerated again in April, and with CPI inflation firm, the GDP deflator is on track to rise in Q2 for the first time in 2022. The turn is being led by energy and commodity prices. There are some signs of a stabilisation in underlying prices too, but so far, they are tentative.
Stabilisation in China seems to be becoming a more popular view. Hope is building for a BOJ hike in June, but one won't be enough. KRW should be strengthening, but likey needs more Middle East certainty. The big event for the region this week is the Xi-Trump meeting.
After doing nothing for 3 years, imports are suddenly growing 20%. Chips are one component, but while I thought that related to prices, official data show the bigger diver of overall imports is volumes. I am not sure that's because of domestic demand, but it is starting to reduce the trade surplus.
April trade data show little damage from the Iran war. If the crisis remains limited to energy prices, Taiwan should be somewhat insulated. Energy imports are small relative to chip exports, and while import prices will rise, export prices are now also increasing for the first time in a generation.
Latest video, discussing one of my main themes: that Taiwan macro is more relevant for global investors than it has been for a long time.
March data offer more evidence that the KRW just can't get a break. Finally, retail outflows into foreign assets eased, only to be replaced by huge domestic selling by overseas investors. That has normalised in April, so perhaps investors are realising that a CA surplus of 20%+ of GDP should matter
The BOK's current forecast assumes no GDP growth in the rest of the year, and contracting exports. But export growth still looks to be picking up, capex indicators are improving, and there is a tailwind from growth in real Gross Domestic Income in Q1 being faster than any time since the 1990s.
With the full consequences of the Iran War yet to be felt, the outlook remains uncertain. But so far, upside risks to inflation in the region are dominating the downside risks to growth. The big driver is the semiconductor cycle. The pack starts with regional themes, then 15 charts for each economy.
Dearer oil boosted pump prices and so headline CPI in April, but also airline fares and so services inflation. That is another reason to think that personal services inflation of near 4% YoY isn't a true reflection of underlying prices. But it will still matter for the BOK if the chip cycle holds up
With the Iran War meaning both uncertainty and a negative terms of trade shock, the BOJ can justify some caution in moving rates. But the bank's detailed analysis last week was heavy on upside risks to inflation. Not addressing that means underlying upwards pressure on $JPY likely persists.
As usual, a recap of research over the last week but today, no refresh of market themes. I am now away for a few days, so updates will re-commence when I am back on May 4th.
The BOJ seems to be messaging that it will stay on hold next week. That seems risky to me, given that while the Iran War might dent growth, it is highly likely to raise inflation. A BOJ that is further perceived as too slow will put pressure on the $JPY to pass through the artificial barrier of 160.
Whether the AI cycle sustains will be as important for East Asia markets as the Iran War. That's because the region is facing a negative energy supply shock, but also a positive semiconductor demand shock. Semiconductor trade trends are now critical for macro, as shown by these 12 charts.
My latest video, discussing two of the issues that puzzle me about Korea: the weakness of the KRW despite surging export growth, and the strength of inflation despite GDP growth – until today – being well below potential.
Today's consumer confidence survey warns of higher inflation but slower growth. That is the BOK's base case, and if growth does slow, then there is a reason to look through inflation. But today's Q1 GDP data show much higher growth, boosted by a semi cycle that isn't yet ending.
Yesterday's loan officer survey and today's PPI print both warn about inflation risks. However, in PPI, it is only goods prices that offer clarity. Services PPI has risen too, but seems to suffer from the sort of distortions that are making trends in CPI services inflation difficult to interpret.