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As expected, the BOK's cut on Friday was hawkish. However, while I thought the bank would express some concern about services inflation, its only worry seems to be that lower rates will give a new boost to real estate. If housing is calm, the consensus will thus expect rates to fall further.
There was a decent bounce in per capita household incomes through Q2. But the rise in consumption was smaller, with better incomes fuelling stronger savings rather than much more spending. The Q2 BOJ consumer survey shows the big worry at the household level remains the high level of prices.
The MOF presser today was underwhelming, in both quantity and quality. The one real, positive change is allowing fiscal funds to be used to address the supply overhang in property, but only at the local government level (and, it seems, using existing funds). Markets are unlikely to be impressed.
There is a broad consensus that the BOK will cut this Friday. I wouldn't push back strongly against that expectation. But I don't think the bank can be too doveish when private services inflation – a proxy for domestically generated inflation – has been rebounding back above 2%.
Data continue to show little change in the constructive economic assessment that the BOJ was talking about in 1H24. The Economy Watchers survey for September ticked down, but is well above the LT average, and the outlook score is higher still. Growth in underlying wages remains firm.
My base case - that the economy won't turnaround without fiscal – isn't especially differentiated. But the reports of stronger real estate sales in the holiday highlight a risk case: that the equity rally mobilises household savings and boosts price expectations, lifting the economy without fiscal.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
I had an op-ed piece in today's Nikkei Asia. The headline argument is that monetary policy isn't sufficient to boost growth. On its own, that isn't much of a differentiated view. The nuance is the reasoning: China has monetary policy independence, so Fed cuts in themselves don't change anything.
Overall, data are falling into place for a BOK cut. Exports were firm in September, but the PMI was terrible. Headline CPI dropped under 2% for the first time since 2021, and property prices might be decelerating. The one counter-trend is services CPI, which has rebounded to 3%.
The detailed Q3 BOJ Tankan shows both labour market tightness and corporate output price expectations remaining as elevated as any time since the 1980s. Clearly, the economy hasn't been derailed by the market volatility of early August, and without a new shock, the BOJ seems likely to hike again.
Ueda's caution and now politics are the big near-term policy dynamics. Politics might affect monetary policy longer-term, if Ishiba's as PM is as hawkish as his reputation. But the cycle hasn't been derailed yet, with the Q3 Tankan showing sentiment, the labour market and pricing all remaining firm.
To think the equity recovery is lifting overall growth, things to watch include: the yield curve; real estate debt; PBC base money; and household deposits. Since Friday, the YC and real estate debt have moved, but not significantly yet. Base money and HH time deposit data are lagging.
Equities say that data are now dated, with PBC policy meaning a decent recovery is in the works. But in assessing whether that's right, the data are important, showing how much work policy needs to do. The PMIs were weaker again in September, with the construction PMI, especially, rarely worse.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
I've already posed the question of why the PBC only cut 20 bp. Today, I've got a follow-up: why wasn't fiscal announced at the same time? Reports suggest that is in the works, but China is best-placed of anywhere to do coordinated monetary-fiscal. It feels significant that this didn't happen.
Today's survey from the BOK doesn't show much change in business sentiment, which remains weak. But it does point to a real softening in pricing in manufacturing. With the domestic macro data now largely in place for a cut, the remaining issues for the BOK are housing, and external developments.
If the US-led global trend is a sort of reversion to mean, then Asia has two very differentiated dynamics. On the one hand, there's Japan and Taiwan, which look like breaking structurally to the upside. On the other, there's China, which is more sluggish than at any time in the last 30 years.
This to me is the interesting question about yesterday: given weak prices, and now CNY appreciation, why wasn't the rate cut bigger?
Confidence and overall inflation expectations fell in September's consumer confidence survey. But property price expectations ticked up. The change wasn't big, but is enough to cloud the outlook for a BOK that in recent months has explicitly associated its monetary stance with the property market.
The BOJ's stance now has two clear dimensions. One, as before, is its constructive view of the domestic economy. But now there's also an explicit concern about US growth. As long as one offsets the other, the BOJ has time. However, if the US soft lands, then the BOJ will have ground to make up.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
So, no surprise from the BOJ today. But the bank's statement remained constructive, revising up consumption. Today's separate services inflation data for August was also firm. Import prices have receded on the rising JPY, but we'd think the BOJ should be hiking again with a strong Q3 Tankan.
Taiwan's CBC kept rates on hold yesterday, but hiked the RRR to control housing. More interesting was the bank's very benign outlook: growth neither fast nor slow, and inflation falling to just within its target range. Particularly regarding inflation, that doesn't allow much room for error.
China's imports are two-speed. That's like the economy, but with a big difference: whereas for macro it is property that is weak while mfg is strong, for imports it is commodities that are more resilient than capital goods. Like the overall macro muddle through, that resilience likely can't last.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.