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.
Korean exports are falling. Our model suggests there is still worse to come. From a market perspective, the next shoe to fall looks likely to be DM demand, which has remained surprisingly resilient in recent months.
It isn't enough yet, but there are signs that the labour market is starting to cool. The unemployment rate remains low, but employment was more or less unchanged in October for the fifth consecutive month. The risks for the BOK are shifting.
The tick-up in headline CPI shouldn't persist. Core CPI inflation will likely prove more stubborn, but rather than prices spiralling up, the bigger risk right now is a sharp slowdown in economic activity in 1H23. This should provide justification for a BOK pivot, as long as the Fed does the same.
Korean exports are now falling in YoY terms, and there is more downside ahead. This is another sign that activity will soon be in cutting territory for the BOK. The fall in exports is meanwhile keeping the trade balance in deficit, meaning flows remain a negative factor for the KRW.
It didn't quite there yet in November, but in the next couple of months business sentiment will most likely be back at levels where, far rather than hiking 50bp, the BOK has historically been cutting.
Inflation expectations rose in October. That will keep the BOK hawkish, even though falling property price expectations add to downside risks for growth into 2023.
Exports fell again in October, and excluding ships, are now down almost 20% from the peak. So far, the weakness is concentrated in shipments to Asia. The real risk is sales to DM will be the next shoe to fall.
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.
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.
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.
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.
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.
The labour market remains tight, making it difficult for the BOK to relax, even as import price inflation starts to recede.
Headline inflation slowed in August, but core remained strong. It is easy to assume the BOK remains hawkish in the short term. But with growth now slowing, pricing around the BOK into 2023 is starting to look more interesting.
Exports fell in August at the sharpest rate since early 2020. The data are following our leading indicator, which points to exports falling 10% YoY in the next 3M.
The BOK remains hawkish, continuing to stress that containing inflation is its number one goal. It will probably be at least another couple of month before the growth picture starts to challenge this stance.
The business sentiment survey shows activity remains reasonably firm, while inflation momentum is fading. At a minimum, the pace of BOK tightening should be slowing.
The recent sharp rise in inflation expectations stalled in August. That takes some pressure off the BOK, but for the central bank to relax, services inflation and growth need to slow more.
Today's labour market report isn't of much consequence for the BOK. The pace of the recovery since 2021 has started to fade, but the labour market still remains very tight.
Korean July trade data were consistent with three themes for the regional export cycle: momentum is slowing; so far, it is a slowdown, not a recession; but leading indicators point to exports starting to contract before year-end.
Korean inflation is probably close to peaking as the rise in goods prices starts to decelerate. But services price inflation remains firm, and while that continues, there isn't much room for the central bank to be able to relax.
Business sentiment and price indicators remain at high levels. That justifies more BOK tightening in the short term. But there are some signs of change ahead, with exporter sentiment clearly down from the peaks, and inflation leads also falling.
While consumer confidence fell in July., the bigger story is the very sharp rise in inflation expectations.
