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The BOK hasn't sounded concerned about inflation for a while, and the July CPI data is unlikely to change that, with headline and core remaining close to 2%. Food prices will rise in August following the recent bad weather, but energy prices should fall. Core is also now starting to look softer.
Deflation looks like 1990s Japan. But China's exchange rate doesn't. Real CNY depreciation helps exports substitute for the weakness of domestic demand in a way that didn't happen in Japan. It also postpones the sort of stimulus that would ease deflation and provide more direction for markets.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Two things. First, my latest video, discussing what's not surprising about the trade surplus (the rise in capital goods), and what is (that for exports China's global market share gains have accelerated, while for imports, they've fallen). Second, an interactive dashboard on China's auto exports.
The PMIs haven't been great lead indicators this year: they've been mainly below 50 in Q2, and yet export data have been absurdly strong. Some of that is because the export story has become so concentrated in semiconductors. Still, it is likely that the real economy will be quite a lot weaker in 2H.
Unusually, the BOJ's quarterly outlook report doesn't focus on wages and inflation. Instead, it looks at this year's two shocks – tariffs, and food prices. The bank argues that the rise in the part rate, seen again in today's June labour market data, has helped offset the impact of food prices.
The lift in exports in June was sustained in July. But I'd be sceptical that marks the start of an upcycle. The strength is all about semis, and today's PMI, like last week's BOK business sentiment survey, was sluggish. If there are upside risks for Korea, they are likely domestic, not external.
It isn't news, but the strength of exports in today's GDP release is still eye-catching. It keeps Taiwan on the much higher post-2020 plane of growth. But with consumption weakening, GDP is now almost all about exports. If there's been lots of tariff front-loading, 2H25 will look very different.
The BOJ today was a bit less worried about tariffs, and a bit surer on inflation. That keeps a rate hike as a probability for later this year. But macro remains messy, with considerable disagreement about the contents of the US-Japan "deal", and consumer inflation expectations ticking up in July.
June data continue to suggest retail sales have bottomed. There was also a decent bounce in construction last month. Industrial and services output are creeping up. However, production overall remains in the range of the last 23M. So, while a bit less vulnerable, the cycle hasn't yet lifted.
The weakness was true even for pricing, which is the focus of the most recent policy push: input prices did improve MoM, but not to over 50, and output prices fell further. That Beijing has turned its attention to oversupply should help equities, but I am doubtful that alone produces macro recovery.
Today's release of local JOLTS data shows the labour market remained soft in June. Vacancy and quit rates continued to fall, hiring of temp workers eased, and filling rates are trending up The fall in the vacancy rate in particular is a sign that wage growth remains under pressure.
Yesterday's minutes showed the clear tension for monetary policy between weak growth and financial excess. The BOK seems confident that the latest macro-pru measures will work. That sets the stage for more easing, though the committee in July wasn't quite as concerned about growth as it had been.
Does anti-involution produce macro turnaround when the September combination of stock market and local government bail-out failed? The markets are hopeful. I am more cautious, given China's macro problems are weak demand as well as strong supply. I'd be wrong if household savings behaviour shifts.
The government is increasingly focused on the supply-side issue of corporate involution as the driver of unwanted deflation and weak corporate earnings. However, the decline in profits has been led by heavy industry, showing the importance of the weakness of property and aggregate demand.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Markets have perked up on hopes that officials will tackle over-supply. But belated publication yesterday at 8pm (!) of the PBC's quarterly opinion surveys is a reminder that business involution isn't the only challenge. Household price, income and employment expectations all continue to fall.
Based on official data, tariffs have as yet to cause any real reversal in the surge of export volumes that's now been underway for two years. That's even though export prices have, for the first time since 2003, started to rise YoY. It isn't obvious that China is absorbing the cost of the tariffs.
Services prices in Tokyo CPI for July and nationwide services PPI for June, is firm but stable. I am starting to think that the upside risks for inflation I talked about earlier in the year might have played out, though the fall-out from the Upper House election might change that again.
The underlying dynamic for the KRW has been a fall in corporate borrowing driving a structural increase in Korea's current account a surplus, which has been recycled overseas by a reallocation into foreign assets by the NPS. With that reallocation running out of steam, the KRW has room to strengthen
Q2 GDP was boosted by government spending and doesn't indicate a real turn in the cycle, as today's weak business sentiment survey through July showed. However, while Korea still has to get through the tariff shock, it does at least look like the cycle is no longer worsening,
The trade deal sets the stage – again – for a strengthening of the JPY. That's because the BOJ should be hiking rates further, according to the framework set out by Uchida in his speech today: uncertainty this year has been elevated, but the cycle has remained intact, and inflation has been high.
For the further rise in consumer confidence in today's survey to matter, it needs to lift business confidence too. Without that, more important is the dip in property price expectations which, with the SLO survey showing tighter lending standards, should ease BOK concerns about housing overheating.
PPI ticked up in June, but only to 0.5% YoY, and overall trends suggest continued moderation of price pressures. That's true for goods, given the further fall in import prices, but is even more relevant for services in light of the widening gap between PPI v CPI services price inflation.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.