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The BOK today sounded confident that core is coming down, but argued that headline is more uncertain. Of course, these two measures are different, but the distinction still feels disingenuous, and gives the impression that the bank is just trying to buy a bit more time.
We take a detailed look at services prices, which account for 50% of the CPI basket, and need to continue to rise if inflation is to be sustained.
Price trends in China remain range bound, with PPI falling at a 2.5%-3% YoY rate, and CPI fluctuating around 0.7%. Narrow leading indicators for inflation suggest some strengthening from here, but a real change in inflation dynamics needs a change in China's overall macro dynamics.
With headline CPI still above target and the US-Korean yield gap widening, we don't think the BOK is ready to cut yet. However, the weakness of economic activity and the softening of core inflation raise the likelihood of a dissenting vote.
The export cycle is recovering, but more in volume than value terms, and in Taiwan and China than Korea. This won't remove worries about weak consumption in Korea and China. But it likely is sufficient to keep Taiwan's economy tight, and the CBC will likely be hiking again if exports rise more.
Consumer confidence for March gives reasons to think that stronger consumption will drive continued economic recovery in 2024.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
We are getting near a test of our thesis that PPI deflation in China is mainly cyclical, with global commodity prices suggesting a PPI recovery.
The details of the Tankan survey reinforce the message of the headlines: the labour market is tightening further, and price pressures are rebounding.
Headline inflation ticked up in March, but our measures of underlying inflation have now closed in on 2%. The central bank will be able to give more attention to the weakness of the domestic economy.
The PMIs show no change in the trends: manufacturing is weak, while non-manufacturing is relatively strong. But equally, it remains likely that there will be a transition to manufacturing-led growth during the remainder of 2024.
There has been a recovery in Korean manufacturing activity, but it remains sluggish, with export growth stalling at around 10% YoY, and the PMI dipping back below 50 in March.
The headlines from the Tankan look pretty positive for the BOJ, with sentiment solid, the labour market tightening further, output prices easing only slightly, and capex plans holding up.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Our view has been that China's cycle has bottomed, and that market sentiment has been too pessimistic. The official PMIs for March support that idea, but the details aren't convincing enough to think the cycle has real momentum.
The upside risk for Japan and the Bank of Japan is a fall in headline wages and a long-awaited recovery in consumption that lifts aggregate demand. There are some signs of that process falling into place, but they remain tentative.
Business sentiment in Korea still isn't recovering. Exporter confidence has lifted, but continues to be offset by weakness among domestic firms. Price expectations in the consumer survey yesterday were probably still too high for the BOK's liking, but the probability of a BOK rate cut is growing
Consumer confidence remains around the historical average, which is not strong enough to remove BOJ concern about the sluggishness of the domestic economy. However, the March survey doesn't give the bank the all-clear to act, with price expectations picking up for the second consecutive month.
China's rising competitiveness in more capital-intensive manufacturing sectors is an important theme that we still buy into. However, relative to this belief, and the current global concern about China's EV export peril, recent export performance has been a little underwhelming.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Former BOJ governor Shirakawa continues to argue Japan's problems are about demographics, not deflation. His thesis is worth studying, even if it is not shared by the current leadership in the bank.
We aren't convinced that falling PPI shows China is stuck in a deflationary trap. China's PPI cycle isn't out of whack with global trends, and unlike Japan in the 1990s, monetary policy isn't reinforcing the drop. There's potential for nominal growth to look better this year.
Jan-Feb data validate the idea that the cycle has bottomed. The driver, however, is industry, which doesn't feel consistent with the continued weakness in property. Another leg-up in macro confidence likely still needs a real bottoming of real estate, and a strengthening of consumption.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Our impression from the data released so far for January and February is the underlying economy is going sideways. The credit impulse is soft, but not especially weak; mortgage growth has slumped, but isn't worsening; and both M1 and excavator sales look a bit stronger so far this year.