East Asia Econ

The CBC didn't change policy today. It increased its growth forecast, but didn't sound excited about the outlook. It warned about excesses related to equities, but didn't announce any remedial policies. Inflation is expected to remain below 2%.

Core inflation has rarely been higher, the export economy is booming, and signs are emerging of stronger domestic demand. Core inflation is still only 2%, but yields are even lower (!), and there's plenty of asset price inflation in stocks. Hence the question: why wouldn't the CBC hike tomorrow?

Before the war, Japan's manufacturing cycle was gaining momentum. If the war is now over, then today's releases of machine orders, exports and business sentiment suggest that strengthening momentum can now become an important theme for Japan macro.

The sharp rise in import and export prices of recent months eased in May. But that leaves export prices at the highest level since the brief spike in 2008. That brings inflation for ROW and an income boost for Korea. With spot semiconductor prices still rising, neither trend is yet exhausted.

I have been arguing that the underlying economy has been stabilising, with prices bottoming out before the Iran war. But stabilisation is external-led, and today's data show the domestic cycle remains a mess. That will likely become a policy issue if IP doesn't stay at an annualised run-rate of 5%

BOK governor Shin Hyun Song gave a speech on Friday to mark the 76th anniversary of the bank's founding. It was short, but worth highlighting, because he sounded more confident about the outlook, and downplayed the significance of uneven growth as a factor for monetary policy.

Three themes: whether the weakness in the activity data releases of a month ago in China was noise; Japan, where one hike is unlikely to be enough to really change market conditions; and the semi super cycle, which should be having more impact on fx and rates (in Taiwan) than has yet been evident.

Korea is experiencing a large positive terms of trade. As that isn't being accompanied by any KRW appreciation, the result is enormous growth in KRW nominal indicators. Not all sectors are benefiting. But for monetary policy, the strength of nominal growth is impossible to ignore.

The corporate surplus is surging, and at first glance, that supports the idea that the semi-led cycle won't trickle down. However, while the labour share is falling, the rise in national incomes has been so strong that growth in labour compensation is accelerating. That should support spending.

The renewed rise in import prices is certainly inflationary, especially when the level of prices remains elevated after the hikes of 2021-22. However, this time export prices are rising too, and while that isn't enough to prevent the ToT from falling, it does limit the damage to the domestic economy

The rise in PPI that continued in May is of macro significance: it is pushing up industrial sector earnings, and the GDP deflator will likely turn positive in Q2. But it is difficult to find signs of domestically generated inflation that would suggest a real upturn in the economy.

Chips rather than energy have been the bigger driver of trade patterns this year. That's true for exports and imports, though there are other drivers of both reaching record highs in May: autos for exports, ores and likely gold for imports. Despite the rise in imports, the trade surplus remains big.