The moderation in core CPI inflation in June likely won't be enough to keep the central bank on hold if exports rise anywhere near the extent that equities are signalling is possible.
The PMIs suggest that the regional export cycle is gaining momentum. The lift is strongest in Taiwan, where the non-mfg PMI also lifted in June.
Given the confidence the bank has been expressing, the BOJ meeting this week was disappointing. By raising the RRR, Taiwan's CBC, by contrast, was somewhat hawkish.
There's obviously noise from month to month, but the step-change in wage growth since the pandemic – following an earlier acceleration in 2017 – looks to be holding.
Far from gaining momentum, Taiwan's exports fell in May. That is at odds with some other indicators for the mfg cycle, but as long as exports are soft, the overall cycle will be too.
Services inflation will likely ease, but there's upside risk for inflation overall, because of a potentially big rise in exports when import prices are recovering, and unemployment is low.
In slides laying out a comparison with Korea, we argue that Taiwan's macroeconomy is close to a structural break to the upside. An export recovery that is as strong as has been priced in by equities would likely be the tipping point.
It has taken a long time, and still isn't powerful, but recovery is finally being seen in the manufacturing PMIs. At the same time, non-manufacturing isn't slowing down much, and price pressures are picking up again. Taiwan doesn't look like an economy where policy is too tight.
The PMIs show no change in the trends: manufacturing is weak, while non-manufacturing is relatively strong. But equally, it remains likely that there will be a transition to manufacturing-led growth during the remainder of 2024.
Not just in Japan but Taiwan too, there are signs of a structural break from persistently low wage inflation. The implication is that the gap between nominal monetary settings between both and the US is likely to be narrower in the future than it has been in the past.
Exports and manufacturing remain sluggish, but the leading indicators look strong. At the same time, services activity remains firm, unemployment is at 20 year lows, and inflation at 20 year highs. If exports do kick in as the leads suggest, it is easy to imagine the central bank having to hike.
This note is a bit different to our usual offering. It is still relevant to investors, but it is more of a guide to the economic issues that I would be thinking about if I were a voter in Taiwan. That includes one observation, and five questions that politicians should be answering.
We would have thought Taiwan would now be at the stage where exports were more clearly taking over from the domestic sector as a driver of growth. Instead, recent industrial data have been sluggish, while domestic momentum is holding up. Unemployment continues to fall.
The CBC kept rates on hold at its quarterly meeting today, and doesn't look in a rush to make a move either up or down any time soon. It expects modestly stronger GDP growth in 2024. It forecasts inflation to fall, but the expected core rate of 1.8% would still be high relative to Taiwan's history.
Wage growth has slowed, but the three-year trend remains the highest in 20 years. The same is true of core CPI, and both make sense with unemployment being the lowest since the early 2000s. The labour market isn't yet pointing to a significant deceleration in inflation.
Exports look to be picking up, and if that continues, there isn't a convincing case for rate cuts. There are signs that the recovery is stronger in Taiwan, which makes sense given structural competitiveness. With ultra-robust external finances too, that makes prospects for the TWD look better.
Sequential inflation dropped back to zero in November, but average core over the last three months remains elevated. With the domestic economy holding up, and exports starting to rebound, there isn't a strong case for rate cuts. That will matter for the TWD if exports really do rebound from here.
Desynchronisation is still the theme, but the components are changing. Momentum in consumption and services, which drove growth in the last 12M, is now fading, but the export recession is easing. The direction for CPI and the CBC will depend on how far exports now recover.
The tone of the releases this week was a little softer, but neither price nor wage growth look especially weak, especially versus the doveish stance of the CBC in September. That gap probably won't matter if exports don't get going, but there are signs that the tech cycle is now starting to improve.
A chart pack summarising Taiwan macro
The CBC kept policy rates unchanged yesterday, seeming confident that inflation will fall below 2% next year. That might be right, but the bank's forecast that export growth will rebound to 10% YoY in Q423 isn't the most obvious environment for a fading of inflation to occur.
With exports still weak, our CBC model suggests very little probability of a hike this week. But that model doesn't capture the rise in inflation, which until 2020 was so low that it didn't seem to matter. At the least, the CBC should sound more hawkish, and that has relevance for Korea and Japan.
Taiwan's exports have bottomed, but haven't improved much. Likely, they continue to go sideways for the next couple of months. Beyond that, there are now some upside risks, and so we'd been looking for the soft data to improve from here.
Inflation data in August Taiwan fit with the broader regional picture of a re-acceleration in price pressures. The difference in Taiwan is that this doesn't follow a period where core inflation has decelerated.
The desynchronisation between weak exports and resilient domestic activity is continuing. Despite a couple of warning signs, we'd expect that remains the theme for the next 3M. For an upside surprise, however, export demand needs to recover.
