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With September's monetary data suggesting a further fall in liquidity preference and M1 growth, it still doesn't look like the economy is poised for a turnaround. But it is starting to feel like the risks around the cycle are less to the downside than they have been for the last few months.
Korea is starting to look a bit less inflationary, with import price inflation easing, and the labour market no longer tightening. But the BOK remains hawkish, worrying that the weakness in the KRW will drive inflation higher.
While the rest of the world is in inflation, China, at least on a sequential basis, has sunk into deflation. Apart from food and property prices, there's no sign of inflation coming back.
Exports fell in August for the second consecutive month. This fall is warning of a sharp downturn in external demand, a development that has regional implications. For Taiwan itself, with inflation low, the CBC likely won't be hiking, meaning more cyclical pressure for TWD depreciation.
Headline inflation is easing, which should start to impact expectations of how much more the BOK will hike from here. But core inflation on a MoM basis remains elevated, supported by rising services prices. That suggests cuts from the central bank aren't a near-term prospect.
The Tankan suggests that growth should be just about strong enough to produce a further closing of the output gap. In this sense, while they aren't particularly solid, some of the foundations are falling into place for a broadening of inflation away from just import costs and goods prices.
Taiwan's manufacturing PMI fell again in September to 44.9. The manufacturing recession means inflation is unlikely to rise further, taking pressure off the CBC to hike. The sharp fall in Taiwan's PMI also continues to signal downside risks for the regional export cycle.
Policymakers have blinked, announcing a raft of measures to support property. On their own, these aren't sufficient to have conviction that the economy will turn. But with improvement in the construction PMI, they do suggest that for the first time in a while, not all the cyclical risks are down.
Regional exports remain on track to fall by about 10% YoY by the end of 2022. That deterioration will continue to put downwards pressure on currencies, particularly the TWD and KRW, but the pace of depreciation should begin to lessen.
Headline growth in Korean exports slowed to 2.8% YoY in September. Our model points to a further decline in the next few months to around -10% YoY.
Neither consumer confidence nor the labour market were as strong as the previous month. But it does still look like the labour market is starting to tighten, which in turn should help firm up the tentative bottoming out of consumer confidence.
The overall tone of today's PMIs suggests that China's cycle remains weak. However, the construction PMI rose again, and with the official headline manufacturing PMI and input prices creeping up, for the first time in a few months, there is some risk that the domestic industrial cycle is bottoming.
The business sentiment survey for October shows confidence continuing to fall, particularly in manufacturing. It is likely by the end of this year that, for the first time in this cycle, the strength of activity starts to become a concern for policymakers.
Inflation expectations are falling, but remain high in absolute terms. The pace of BOK tightening should slow, but inflation expectations need to be lower, with evidence of actual services price inflation falling, before the BOK goes on hold.
The currency is on the move again. Interest rate differentials suggest fair value for $CNY of 7.3; the weakness of the domestic economy and the over-shooting that normally happens with $CNY moves suggests more upside still. This move increases risks for China's economy, and for global markets.
YoY upstream price inflation is fading. Sequentially, however, there's some stabilisation. That's consistent with policy, but isn't yet likely to be reflecting a fundamental turn. Activity usually improves after the summer, and leading indicators like liquidity preference continue to fall.
Industrial output was stable in August, remaining below the peak of March, and leads suggest a further slowdown in the next few months. It is unlikely consumption will be robust enough to compensate for this industrial slowdown, even though retail sales ticked up in August.
With the labour market not particularly hot, and the CBC forecasting inflation of less than 2% next year, it isn't surprising that tightening remains slow. That creates depreciation pressure on the TWD, but for the time being, that's not a trend the CBC will feel a need to fight very hard against.
BOJ trimmed mean inflation continues to rise, but the BOJ is keeping policy unchanged. With rates remaining anchored, the JPY continues to sell off. The MOF has been talking about "stealth intervention", but it is unclear if that includes pressure on the GPIF to unwind some of its foreign holdings.
At a headline level, export growth fell again in the first 20 days of September. The details were stronger, but that is likely noise, with more downside for exports ahead.
Inflation rose again in August, and there should be further upside before the end of the year. Headline CPI should be easing in 2023, but whether core does too depends on inflation expectations, the labour market, and the transition from goods to services prices.
Taiwan's export orders to China continued to drop sharply in August. That is an indication of just how weak Chinese growth is, but is also a warning that a big change may be coming in overall world demand.
Since the pandemic began, productivity has probably increased more quickly in Taiwan than any other major economy. As a result, Taiwan isn't facing the higher inflation and rates being experienced elsewhere. Taiwan's competitiveness instead reinforces structural trends for a stronger TWD.
The headline data were a bit stronger in August, but the details remain weak. It doesn't feel that the government is yet doing enough to really turn the economy around.
Exports continue to go sideways, which at a headline level is because weaker tech shipments are being offset by stronger car sales. Imports in JPY terms are still rising, so the trade deficit continues to widen.