The big macro dynamic is the sharp rise in chip prices that is boosting the terms of trade, and thereby lifting nominal GDP and national income. Today's July export and import price data show that these trends remain in place. Rates have priced at least the first stage of this. The KRW still hasn't.
The BOK this week published a nice report on spillovers from the terms of trade boom. It wouldn't be fair to say that this pays only lip service to the usual concerns on why spillovers might be limited. But the report's central expectation is that the impact will be "both sizable and persistent"
The BOK expects core inflation to be pushed up by the chip boom, via both cost-push for electronic devices and demand-pull from the big boost to national incomes. In today's July data, the cost-push element is more obvious, though there are some tentative signs of demand-pull appearing.
But output growth and capex were strong in June. Output was lifted by both goods and services, while the tech sector gave a boost to capex. Retail sales and construction orders were weak, but overall, the data signal a bit of upside risk for the next release of Q2 GDP data in September.
In manufacturing, sentiment is rising for both exporters and domestic firms, and capex intentions are strengthening too. That suggests support for the cycle not apparent in recent equity market moves. However, non-manufacturing sentiment is weak, and the labour market still isn't recovering.
Korea's real GDP growth in Q1 was solid, but nominal continues to be spectacular, rising almost 20% YoY for the first time in 30 years. Stronger nominal growth is typical of a commodity boom, and suggests more upside for rates than implied by inflation and real GDP alone.
In the Q3 loan officer survey, lower mortgage demand was offset by higher demand for other household loans. That points to the continuing risk of lending to finance stock purchases. The impact of the surge in equity market activity can also be seen in today's June PPI report.
As expected, the BOK hiked rates by 25bp today. The bank expects 2026 GDP growth to be "considerably" higher than the previous forecast of 2.6%, partly because it expects the cycle to broaden into domestic demand. That will in turn support inflation. Relative to market pricing, that feels hawkish.
The BOK discussion tomorrow should have two levels, the usual analysis of growth, CPI, housing, and the KRW, but also analysis of how the huge semi terms of trade shock affects medium-term economic prospects. The first justifies rate hikes. I think the second argues for more hawkishness still.
The flow story behind KRW weakness has transitioned from overseas buying by domestic retail to domestic selling by foreigners. Two other factors help inform the exchange rate: correlation with the JPY and, perhaps, a BOK that is late in hiking given the huge acceleration in NGDP growth.
The sharp rise in inflation since March slowed in June, and the BOK expects a drop in July. But cost-push from the surge in semi prices is feeding into CPI, and the BOK also expects "expanding demand pressures" from the economic recovery to drive inflation from here.
There are signs of a broadening of the cycle, with construction past the worst, capex rising, and the labour market bottoming. However, while services activity has been strong recently, retail sales are still sluggish, and industrial production is going sideways.
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.
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.
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.
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.
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.
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.
Two of the key issues for the economy are whether the chip boom trickles down, and what damage the Iran war will cause. April data show a bit of both. ICT capex rose for the third month, and there were more signs of a floor in the labour market. Overall output fell, but remained above the Q1 average
The BOK didn't change rates today, but signalled that despite continued uncertainty, higher rates are coming. The pace will depend on dynamics in the energy and chip markets. I would also be watching for how core CPI performs against the BOK's modest forecast of 2.4%
The BOK's main considerations for policy are growth, inflation, KRW and housing. Three were already pointing to hikes, and tomorrow the bank is likely to raise expected growth above potential too. That makes a rate hike likely. The risk is it still just a bit too early.
Data today for Japan and Korea show the inflationary impact of the War, with import prices in both economies rising at double-digit rates. However, such rises have been seen before. By contrast, export price inflation is setting records, offsetting the hit from energy prices to domestic growth.
March data offer more evidence that the KRW just can't get a break. Finally, retail outflows into foreign assets eased, only to be replaced by huge domestic selling by overseas investors. That has normalised in April, so perhaps investors are realising that a CA surplus of 20%+ of GDP should matter
The BOK's current forecast assumes no GDP growth in the rest of the year, and contracting exports. But export growth still looks to be picking up, capex indicators are improving, and there is a tailwind from growth in real Gross Domestic Income in Q1 being faster than any time since the 1990s.
