There wasn't much change in either exports or CPI in January. At -14.6% YoY, the change in exports was the weakest in the current cycle. Headline CPI ticked up, but that was because of an expected change in utility prices. Core and personal services inflation fell, though only slightly.
Business sentiment continues to fall, taking the BOK into what would usually be loosening territory. However, there is now some risk of second derivative improvement, with exporter sentiment and the diffusion both ticking up through February.
Inflation expectations ticked up in January. That probably reflects a stabilisation of headline CPI on the back of higher utility prices. It would be more significant if improving market sentiment towards the global cycle starts to show up in a real strengthening of Korean industrial data.
Exports remain weak, and should deteriorate further in Q1. However, shipments in January weren't as bad as they might have been, and with our regional leading indicator showing early signs of bottoming out, there is now a risk of second-derivative improvement in Korean exports through Q2.
Korea's property market is reversing sharply. That turn will help control CPI inflation, but also increases the downside risks to growth. That in turn makes BOK rate cuts more likely.
The BOK hiked again today, but the meeting gave strong hints that this is the last in the current cycle. The probability of a cut will likely start to grow in Q1, though for the BOK to actually do that, the bank will need more confidence that inflation is going to decline.
Unemployment rose and employment fell in December. This deterioration in the labour market is part and parcel of the BOK's attempts to control inflation, and weaker data for one month won't start the bank loosening. But the December data do make further hikes less likely.
Our model suggests the BOK doesn't hike this week, and the inputs point to the bank being pulled into loosening territory during the year. The risks are that domestic factors, rather than exports and the industrial cycle, prove to be bigger drivers of inflation than they have been in the past.
Activity has been weakening for a while, and there are now signs that inflation – for services as well as goods – is starting to turn down too. Rate cuts should be a possibility through Q2. A pre-condition is a more obvious weakening of the labour market.
Exports and the property market are turning down sharply. Employment growth has stalled, but the number of jobs hasn't yet fallen much, being held up by the services sector. That should be the next shoe to drop, and if it does, will open up a possible path for BOK rate cuts.
Core inflation remains elevated, but the BOK is signalling it is near done with hiking. That's because of the deterioration in activity. That slowing of growth is sharp enough to make cutting a possibility, though the BOK likely needs to first see a fall in employment.
Korean exports fell again in November, and leading indicators suggest there is still more downside to come. The deterioration will test the BOK's ability to continue to hike rates.
The BOK wasn't quite as hawkish as it has been, but is still some way from becoming dovish.
The business sentiment survey is suggesting a deterioration in activity, and a fall in inflation. The survey hasn't yet fallen into cutting territory for the BOK, but likely will in Q123. That will become a more important message for the central bank if the labour market also starts to slacken.
With inflation expectations remaining high in today's November consumer confidence report, the BOK will likely hike this week. But from today's survey, and the cycle more generally, a case is emerging for a BOK pivot.