The platform for tracking and understanding East Asia macro
Consumer confidence rose again in February, despite inflation expectations in the survey staying high. That hints at rising real wages. This makes a recovery in domestic consumption more likely, and if that occurs, the economy this year will be stronger this year than the BOJ expects.
The mfg PMIs continue to tell different stories, with the official survey below 50, and the Markit version above. The gap probably reflects seasonality and the strength of exports versus property. However, there has been policy easing too, so remain mildly optimistic about a floor for the cycle.
Our opinion piece today from Nikkei Asia.
Headline CPI dropped in January to the lowest in a year. Sequential core also continues to ease. That, however, remains above 2%, and our calculations of the BOJ's measures of underlying CPI ticked up in January. Overall, inflation looks stable, but with the one caveat of the drop in services PPI.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
We can't find much evidence of Chinese export price deflation. That's because: price deflation is common across economies when exports weaken; aggregate data don't do well in capturing lower prices in individual products; and China's exporters, being private firms, aren't likely to be so irrational.
The BOK's official stance didn't change in February. However, the tone today still became incrementally more doveish, with the governor revealing one member being open to a rate cut in the next few months.
A chart pack presenting a framework for regional currencies. We use secular JPY and TWD depreciation to lay out the framework; apply that to the CNY today; and finally, argue that there are reasons to think the structural weakening of the TWD and JPY is likely ending.
Our view has been that the BOK would remain on hold, and that the extent to which improving manufacturing took over from services as the driver of activity in Q1 would determine the next step. That recovery in exports has been soft, which in turn increases the downside risks to rates.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Employment rose in January, and unemployment remains low. Recent BOK research focuses on supply-side changes that mean the labour market isn't as tight as these headline data suggest, with the participation rate high and big increases in part-time jobs. However, wage growth has also been quite firm.
GDP contracted again in Q4. One driver is JPY weakness, which is boosting services exports, but cutting into consumer purchasing power and consumption. With nominal wage growth looking firm, this backdrop makes it more likely the BOJ moves on policy, with one aim being to stabilise the JPY.
The BOK has issued another research report looking a labour market dynamics after the pandemic. The report focuses on: the rise in female and hospitality employment, which have reduced wage pressure; and labour market tightness, that is reducing labour reallocation and so dampening productivity.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Deputy Governor Uchida's speech this week reiterated the BOJ's confidence that the economy is nearing a virtuous cycle between wages and prices. He added interesting detail on four specific areas: consumption, wages, policy, and the outlook for potential growth.
The PBC's monetary policy report included a box arguing that monetary conditions shouldn't be assessed solely via the quantity of credit, and that the big falls in interest rates matter too. That would be an easily-accepted argument in another economy, but in China remains a hard sell.
Credit data are at a level that is awkward for officials, and investors: too strong to be consistent with deleveraging, but not strong enough to think the cycle is about to get a good lift. The one positive surprise in January was a lift in M1, though that might be related to the stockmarket rescue.
Both the Economy Watchers and PMI surveys were strong in January, led by non-manufacturing and services. Commentary in the PMI suggests this stronger momentum isn't about to be lost. The upside risk is this reflects the long-awaited recovery of domestic consumption.
CPI and PPI continued to fall YoY in January, while core CPI rose. CPI will be firmer in February due to the holiday, and there are also some indications that PPI won't weaken further. However, there aren't any signs of a real pick-up in either, so investor worries about deflation will persist.
Korea's trade surplus with China has collapsed, taking with it Korea's overall surplus. This offers a clear illustration of China's competitiveness, and argues for CNY strength, not weakness. But it also indicates that the relative fundamentals for the KRW are also deteriorating.
Underlying wage growth accelerated in Q4. That is consistent with the confidence being expressed by the BOJ in recent weeks. But headline wages – including overtime and bonuses – continue to fall in real terms, which in turn weighs on consumption and so overall aggregate demand.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
January CPI inflation fell, but that was probably related to LNY, and will partly reverse in February. Beyond that, inflation will ease further. That will matter for policy if it isn't offset by stronger activity. Yesterday's PMI showed a pick-up, but other indicators haven't been so strong.
With the Markit PMI holding up and PSL funding rising, China doesn't look as bad as market sentiment. Exports in Korea and PMIs in Korea, Taiwan and Japan show the industrial cycle improving, but not quickly. For Japan and Korea, that can still be important given elevated non-manufacturing PMIs.
A slide pack summarising our recent research and views on the region