Paid Members Public The East Asia Economist A couple of weeks ago, we outlined a policy reaction function for the Korean central bank. Today we do the same for the Taiwan. The model strongly suggests that the tightening cycle is over, but isn't yet indicating that loosening is about to begin. Paid Members Public Taiwan – contracting Taiwan's GDP contracted in Q4. The labour market was stable at a headline level in December, but employment in manufacturing did fall. We continue to think Taiwan will be the first to cut, with the risk being any lift that results from China's re-opening. Paid Members Public Taiwan – industrial recession Taiwan's manufacturing sector remains in recession, with signs of a floor tentative at best. So, right now, it looks like growth and inflation will slow further in Q1. The upside risk is what happens to regional demand as the current covid wave recedes in China through Q1 Paid Members Public Taiwan – doveish hike The CBC raised policy rates again this quarter. But the bank's statement wasn't hawkish, and data this week showed the labour market continuing to slacken, with overtime hours falling back. Loosening rather than tightening is more likely in 2023. Paid Members Public Taiwan – hitting a wall The last time exports dropped as quickly as they have recently was in the global financial crisis in 2008-09. This time around, the fall does come after a particularly large increase. Even so, with exports falling and inflation low, further rate hikes are unlikely, and cuts are possible. Paid Members Public Taiwan – first to cut? The industrial cycle is slowing, consumer confidence is weak, and a modest rise in inflation has likely peaked. Given all that, Taiwan is well-placed to be the first regional economy to cut rates. The risks are yet more aggressive Fed hikes, or a powerful economic turnaround in China. Paid Members Public Taiwan - US orders fall It is no surprise that today's October data show Taiwan's export orders continuing to weaken. More interesting was that the data also showed weakness in orders from the US. That is what should be being seen, though it is a trend has yet to show up consistently in data across the region. Paid Members Public Taiwan – cycle slowing, CPI stable Exports are starting to contract YoY, and inflation remains stable. Core CPI bears some monitoring, but it is unlikely the CBC will hike again. Paid Members Public Taiwan – weak The official manufacturing PMI ticked up in October, but only to 45.4. The Markit version fell to a new post-2009 low of just 41.5. The economy is likely contracting, and with inflation pressure already not particularly strong, it seems unlikely the central bank will feel a need to hike rates again. Paid Members Public Taiwan - industrial cycle downturn Taiwan's IP data are another sign of a sharp downturn in the region's industrial cycle. IP fell more than 5% MoM in September for only the fifth time since 2008. This weakness hasn't yet started to affect the domestic economy, with the labour market and retail sales stable in September. Paid Members Public Taiwan - DM demand holding up Unsurprisingly, export orders fell YoY in September. The weakness remains concentrated in demand from China. Orders from the US and EU have so far remained elevated. The risk is that this demand from DM will be the next shoe to drop. Paid Members Public Taiwan – exports falling sharply 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. Paid Members Public Taiwan - weakest since pandemic 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. Paid Members Public Taiwan - August IP and retail sales 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. Paid Members Public Taiwan - not much tightening 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. Paid Members Public Taiwan - China orders dropping sharply 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. Paid Members Public The East Asia Economist 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. Paid Members Public Taiwan - August foreign trade Taiwan's exports fell sharply MoM in August, matching the deterioration seen in the Korean export data that were released last week. Leading indicators continue to point to more downside ahead. Paid Members Public Taiwan – August CPI Inflation has likely peaked, and should decline in the coming months. The two risks round that are first, rising food prices, and second, cost inflation in services. There are reasons to think that services price might rise further from here, but for now, that seems like a tail risk. Paid Members Public Taiwan – August PMI The PMI suggests there's a big industrial cycle slowdown in the works. That is important for Taiwan and the TWD. Because it suggests more downside risk for the regional export cycle, the weaker PMI also has implications for Korea and China. Paid Members Public Taiwan – July foreign trade Taiwan exports look to have peaked. Shipments haven't started to fall yet, but the stalling in upwards momentum should still continue to weigh on the TWD. Paid Members Public Taiwan – July CPI Inflation in Taiwan looks quite well contained, particularly as the manufacturing sector looks to be rolling over. That said, given the disruption caused by the recent Covid-19 outbreak, there's probably more upside risk from services prices than there usually would be at this point in the cycle. Paid Members Public Taiwan – July PMI The sharp fall in the PMI highlights downside risks for the export cycle. That matters for Taiwan and the TWD, but also for the macro picture in Korea and China. Paid Members Public Taiwan – June export orders Incoming data remain mixed. However, the picture seems to be that exports have peaked, but remain somewhat resilient. Paid Members Public Taiwan - June CPI Headline inflation rose again in June to the highest since 2008. That was mainly food and goods prices. There are some signs of inflation broadening out, but for now, they remain tentative, and core is stable at around 2% YoY.