The platform for tracking and understanding East Asia macro
This discrepancy in the PMIs – S&P versions better, official PMIs still weak – is puzzling. Probably, the overall message is that China is back to a period of muddling through, with the cycle not robust, but getting some support from the better equity market and rise in the credit impulse.
Japan inflation indicators are mixed, so this week's Tankan survey and Ueda speech will be important. Korea's cycle is still weak, but this week's CPI data matter less when house prices have re-accelerated. Elsewhere, China's PMI will show whether nominal growth is softening again.
Inflation measures have become more mixed in recent weeks. But the drop in core measures of CPI inflation in the capital in September don't add to downside risks, being more the function of government subsidies. In other news, exports were firm in the first ten days of September.
The renewed drop in business sentiment in today's survey is probably overdone, but confidence does remain weak, particularly in domestic industries. Price intentions also softened, so the macro case for easier policy remain strong, though for now, the BOK also has to worry about housing prices.
Minutes of the July MPC meeting show a long but rather inconclusive discussion of the concept of "underlying" inflation. Recent data don't bring clarity: services PPI inflation has slowed, but not in labour-intensive industries, while the rice price has rebounded further.
Despite softening in September, consumer confidence remains high. I doubt that it will be sustained, however, if business confidence remains so weak. Consumer property price expectations also remain firm, which matters for policy when household debt has again become such a big issue for the BOK.
Wage growth, household savings and income levels are huge issues across the region. This slidepack shows how these are linked with exchange rates to lay out the outlook for currencies in China, Japan, Korea and Taiwan.
Last week's BOJ meeting reinforced my expectation for an October hike, as did the firmness of August CPI. The next inflation update will be the SPPI release on Thursday. However, the focus the next few days will be Korea, with the September consumer and business confidence surveys.
My latest video, discussing the important question posed in a report of a few weeks ago. Japan's population peaked in 2010, and aggregate consumption stopped growing shortly after. With the number of people continuing to shrink, can consumption – and thus the broader economy – ever grow again?
While the BOJ remained on hold today, the two dissenting votes to hike are important signals in the direction of travel. The context is inflation that remains firm, with today's August national CPI data showing some signs of underlying inflation starting to creep higher again.
Macro volatility – in inflation, growth, property prices and the TWD – eased in Q3, and it was no surprise that the CBC was on hold today. That won't change if AI demand growth slows. But the AI cycle has proven tough to forecast, and I'd expect the CBC will also be faced with more TWD strength.
China's trade data are published over the course of four releases each month. We are now onto the second, with three main takeaways: auto exports are accelerating again, import demand is up, and the trade surplus continues to broaden.
Manufacturing sentiment in the EW (Aug) and Reuters Tankan (Sep) surveys is back above the long-term average. Export volumes have softened the last couple of months, but are still above end-2024 levels. This is probably a lesser impact from tariffs than the BOJ had expected.
The major themes: the ending of the first stage of China's post-2020 forced structural adjustment; in Japan, peaking of inflation but BOJ still to hike; BOK cuts but inflation higher than I would have expected; expecting renewed TWD strength. I am now away for a few days, back on September 16th.
A long-ish slide pack summarising themes and views for China, Japan, Korea and Taiwan.
August data today show the impact of the weaker TWD since July: fx reserves fell, import prices ticked up MoM, and CPI inflation rose. The lesson is that without currency strength, the step-change in economic growth since 2020 is more likely to show up in domestic prices.
Headline full-timer wages data were strong in July. But the details of the overall wage release were softer, and warn of some lessening of labour market tightness. In other data today, consumption was soft in July, and exports in the first 20 days of August also weakened.
July BOP data show that KRW appreciation continues to be restrained by substantial buying of overseas assets by the NPS. But the tone of capital flows has started to change as foreigners buy onshore equities, and should shift more later this year with Korea's entry into the FTSE Russell's WGBI.
The breakdown of income in the detailed Q2 GDP data shows the labour share falling, but remaining well above the pre-covid level. That implies wage growth has slowed to a bit over 2%. Bottom-up wage data for June look similar. A floor is probably close, but there's no sign of a re-acceleration yet.
The content of deputy governor Himino's speech today was thoughtful and so interesting, covering both tariffs and the outlook for prices. But consistent with the ponderous tone, the conclusions weren't particularly forceful.
Two shocks affected CPI in August: bad weather that pushed food prices up, and big cuts in mobile phone bills. The latter impact was bigger. Excluding all that and core remains around 2%, and the BOK expects that to continue. I would have expected more downside risk, but there's no sign of that yet.
My latest video discussing the inflation outlook. Apart from the anti-involution drive, the stabilisation of demand deposits and property do ease the downwards pressure on prices. But the weakness of aggregate demand remains, and as yesterday's PMI suggested, the outlook for prices remains subdued.
Full-month exports in August were firm, but that still leaves growth in single digits, and neither data nor commentary from the business sentiment surveys suggest that is about to change. Indeed, today's August PMI remained well below 50, and reported a "sharp decrease in incoming business inflows".
The Q2 rise in the labour share promises support for consumption, but without yet depressing profits. Manufacturing earnings did drop in Q2, and that questions the sustainability of capex. But IT investment was also strong, and the PMI suggests that overall, manufacturing is coping with tariffs.
China's structural downturn since 2021 has likely bottomed. But I think real recovery is needed for a further rally in equities. Japan's growth and inflation have survived the tariff hit, putting the BOJ back in play. For Korea, I am questioning the BOK's outlook for inflation and thus rates.