China's cycle is weak, but I'm not yet convinced it is getting worse. Japan's cycle will now be improving, but the BOJ needs to show that it can keep up. The BOK's hawkish turn can go further still if the KRW remains so weak. I think inflation risks in Taiwan are broader than judged by the CBC.
My latest video, making the case for a bottoming of China's economy. In light of this week's poor official data, the argument might look off-base, which means it should at least be interesting. I do think the logic holds up, but as discussed here, there are reasons I could be wrong.
The CBC didn't change policy today. It increased its growth forecast, but didn't sound excited about the outlook. It warned about excesses related to equities, but didn't announce any remedial policies. Inflation is expected to remain below 2%.
Core inflation has rarely been higher, the export economy is booming, and signs are emerging of stronger domestic demand. Core inflation is still only 2%, but yields are even lower (!), and there's plenty of asset price inflation in stocks. Hence the question: why wouldn't the CBC hike tomorrow?
Before the war, Japan's manufacturing cycle was gaining momentum. If the war is now over, then today's releases of machine orders, exports and business sentiment suggest that strengthening momentum can now become an important theme for Japan macro.
The sharp rise in import and export prices of recent months eased in May. But that leaves export prices at the highest level since the brief spike in 2008. That brings inflation for ROW and an income boost for Korea. With spot semiconductor prices still rising, neither trend is yet exhausted.
I have been arguing that the underlying economy has been stabilising, with prices bottoming out before the Iran war. But stabilisation is external-led, and today's data show the domestic cycle remains a mess. That will likely become a policy issue if IP doesn't stay at an annualised run-rate of 5%
BOK governor Shin Hyun Song gave a speech on Friday to mark the 76th anniversary of the bank's founding. It was short, but worth highlighting, because he sounded more confident about the outlook, and downplayed the significance of uneven growth as a factor for monetary policy.
Three themes: whether the weakness in the activity data releases of a month ago in China was noise; Japan, where one hike is unlikely to be enough to really change market conditions; and the semi super cycle, which should be having more impact on fx and rates (in Taiwan) than has yet been evident.
Korea is experiencing a large positive terms of trade. As that isn't being accompanied by any KRW appreciation, the result is enormous growth in KRW nominal indicators. Not all sectors are benefiting. But for monetary policy, the strength of nominal growth is impossible to ignore.
The corporate surplus is surging, and at first glance, that supports the idea that the semi-led cycle won't trickle down. However, while the labour share is falling, the rise in national incomes has been so strong that growth in labour compensation is accelerating. That should support spending.
The renewed rise in import prices is certainly inflationary, especially when the level of prices remains elevated after the hikes of 2021-22. However, this time export prices are rising too, and while that isn't enough to prevent the ToT from falling, it does limit the damage to the domestic economy
The rise in PPI that continued in May is of macro significance: it is pushing up industrial sector earnings, and the GDP deflator will likely turn positive in Q2. But it is difficult to find signs of domestically generated inflation that would suggest a real upturn in the economy.
Chips rather than energy have been the bigger driver of trade patterns this year. That's true for exports and imports, though there are other drivers of both reaching record highs in May: autos for exports, ores and likely gold for imports. Despite the rise in imports, the trade surplus remains big.
The narrowing budget deficit and widening BOP surplus likely won't move market opinion on either rates or fx. What is needed remains a more hawkish BOJ. Accelerating credit and wage growth push in that direction, though the wage data aren't great quality, and sentiment surveys are still weak.
Events in Japan in the next couple of weeks will likely be critical for the region. If a combination of a strong US jobs report and equivocal BOJ meeting push $JPY through 160, KRW and TWD will likely be dragged higher too. The implication would be higher inflation, and more pressure for rate hikes.
Services inflation averaged 0.7% in the 20 years before 2020. In the last five years it has been 2.3%, and is now rising again. Some of that reflects energy prices, with air fares rising 10% YoY in May. But there is also the backdrop of a strong economy, rising stockmarket and rising wage growth.
KRW weakness was blamed on USD strength, then CNY weakness, then JPY weakness. Flows have gone from NPS, to domestic retail, to foreigner institutional. These rationalisations feel a bit like moving the goalposts. But weak KRW does have implications, one likely being a more hawkish BOK.
China's auto export surge has been less painful for Asia than for the EU. Japan's domestic market is more protected, and Korean exporters have little dependence on the China market. In third markets, exports have also held up, with tentative signs that China's exports are creating new demand.
Some highlights from governor's speech today: his remarks about strong bank lending, higher prices being a bigger burden to firms than rising rates, the link between low policy rates and the rise in market yields, and the upside risks to prices now that the "deflationary mindset has been dispelled".
My latest video, a discussion of everything you need to understand the macro implications of the huge chip cycle – what's driving it, why prices and volumes matter, the role of China, the growth and inflation consequences, and what it all means for markets.
The rise in inflation is mainly about energy. But that headline inflation is now above 3% YoY – and private services over 4% – also reflects two other drivers: a high starting point, and the rise in chip prices that via cost-push is showing up in the CPI in higher prices for electronic devices.
Four themes: broader inflation risks, for the region and world; feedthrough from exports to domestic demand; semi cycle rather than energy as the dominant dynamic; likelihood of monetary tigtening.
In today's official data, headline PMIs for both manufacturing and services remain around 50. The details of the manufacturing PMI don't suggest much Middle East disruption. The run-up in prices that pre-dated Iran is, however, sustaining. On the other hand, employment remains weak.
Today's Q1 GDP data show the economy growing more quickly than any time in over 40 years. The government thinks that continues: in the forecast, downside risk from Iran isn't mentioned, but trickle down from semi to the real economy is. CPI was also revised up, even if it remains (just) below 2%.
