Today's official PMIs ticked up, but not by enough to clear market concern about the strength of the cycle caused by the weak IP, retail sales and FAI data of the last couple of months.
Two of the big questions for markets in the region are 1) the implications for monetary policy as oil prices fall, and 2) what is happening with China's cycle, and what does that – and the strengthening of the USD – mean for the USD.
Earlier this week, I published a longer note delving into the macro and market implications of the semiconductor boom. You might prefer pictures to text, so this is the accompanying chart pack.
Business sentiment is middling, and the gap between large and small firms looks K-shaped. However, consumer confidence is quite strong, and the BOK has argued that sector disparities aren't an issue for monetary policy. Falling oil prices do lessen inflation risk, but also boost GDP growth.
A longer note putting the chip supercycle in the context of commodity price surges, dismissing concerns about the narrowness of growth, and exploring the different macro dynamics in Korea versus Taiwan. One is a commodity boom, the other is indeed BS, but both suggest real exchange rate appreciation
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".
