East Asia Econ

With the full consequences of the Iran War yet to be felt, the outlook remains uncertain. But so far, upside risks to inflation in the region are dominating the downside risks to growth. The big driver is the semiconductor cycle. The pack starts with regional themes, then 15 charts for each economy.

Dearer oil boosted pump prices and so headline CPI in April, but also airline fares and so services inflation. That is another reason to think that personal services inflation of near 4% YoY isn't a true reflection of underlying prices. But it will still matter for the BOK if the chip cycle holds up

With the Iran War meaning both uncertainty and a negative terms of trade shock, the BOJ can justify some caution in moving rates. But the bank's detailed analysis last week was heavy on upside risks to inflation. Not addressing that means underlying upwards pressure on $JPY likely persists.

As usual, a recap of research over the last week but today, no refresh of market themes. I am now away for a few days, so updates will re-commence when I am back on May 4th.

The BOJ seems to be messaging that it will stay on hold next week. That seems risky to me, given that while the Iran War might dent growth, it is highly likely to raise inflation. A BOJ that is further perceived as too slow will put pressure on the $JPY to pass through the artificial barrier of 160.

Whether the AI cycle sustains will be as important for East Asia markets as the Iran War. That's because the region is facing a negative energy supply shock, but also a positive semiconductor demand shock. Semiconductor trade trends are now critical for macro, as shown by these 12 charts.

My latest video, discussing two of the issues that puzzle me about Korea: the weakness of the KRW despite surging export growth, and the strength of inflation despite GDP growth – until today – being well below potential.

Today's consumer confidence survey warns of higher inflation but slower growth. That is the BOK's base case, and if growth does slow, then there is a reason to look through inflation. But today's Q1 GDP data show much higher growth, boosted by a semi cycle that isn't yet ending.

Yesterday's loan officer survey and today's PPI print both warn about inflation risks. However, in PPI, it is only goods prices that offer clarity. Services PPI has risen too, but seems to suffer from the sort of distortions that are making trends in CPI services inflation difficult to interpret.

The three red lines and covid delivered a huge, multi-year blow to the economy. Multiple signs have started to emerge that this hit has been absorbed, and that China macro is stabilising. This suggests that the recent lessening of deflation might prove durable, with broad implications across markets

Two themes stand out. First, macro in China is stabilising following the multi-year decline triggered by the twin shocks of the three red lines and zero covid. Second, the chip supercycle has yet to be derailed by the Iran War.

The broad theme is macro is stabilisation, shown by three indicators that are bottoming after multi-year declines: property starts, household demand deposits, and producer prices. The implications, as are already being seen, are slower rate cuts, stabilising yields, and a stronger currency.