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.
Three longer pieces today: on the regional chip cycle, Japan in the run-up to next week's BOJ meeting, and a video discussing two macro puzzles in Korea. Also, charts summarising today's three data releases: upstream prices in China, and in Japan, CPI and services PPI.
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.
Taiwan's export orders and IP in March were strong. Exports in Korea's Q1 GDP likewise show the continued strength of the semiconductor cycle, and Japan's April manufacturing PMI also rose. By contrast, domestic demand and consumer indicators across the region are weaker.
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.
Japan's trade data for March show some of the trends seen elsewhere in the region: strong semiconductor sales, and as yet, no big rise in energy imports. In Korea, goods PPI signals further rises in goods CPI, and the BOK's loan officer survey warns of a rebound in lending to the household sector.
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.
A longer note today on whether the recent lessening of deflation in China is sustainable. I think it might be. Also, data for the first 20 days of April in Korea showing continued chip export strength, and the SLO survey for Japan indicating stable lending standards.
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
China's detailed data show chip exports and imports well up in March and imports from the Middle East sharply down. EV exports weren't strong, but shipments of solar panels were. Elsewhere, Japan services activity remains strong. Consumers are happy about incomes, but still worried about prices.
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.
China's detailed Q1 GDP data aren't obviously consistent. By expenditure, net exports were down while investment were up. But by industry, manufacturing rose while construction contracted. Across the region, the decline in oil prices will be welcome, but government energy subsidies remain large.
Two things today. First, China's big data releases, which show broad macro stabilisation. Second, TSMC's quarterly earnings. Management comments were positive again, forecasting revenue growth of over 30% this year. That has read through for total exports and Taiwan's overall economy.
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.
Lots of data today – fx settlement for China, machine orders and the Reuters Tankan in Japan, import and export prices and labour market data in Korea, and wages in Taiwan.
Energy import prices surged 50% in March, and that will undoubtedly raise inflation. However, Korea's terms of trade actually continued to rise (just about), helped by the continued sharp rise in chip export prices. For Korean growth, there is an offset to this energy crisis.
Today's focus is China, with the release of headline trade data for March, and upstream price data through the first 10 days of April to give an early sense of PPI inflation this month. Also, my latest video, discussing the impact of the Iran war on the outlook for the region.
Today's trade data for March don't get us so far: only headline data have been released, and underlying trends are still obscured by Chinese New Year distortions. Overall, however, exports look firm, with auto sales rising again. Imports are very strong, but that is more about chips than energy.
My latest video, discussing the impact of the Iran war on the outlook for the region
China's PBC is increasing liquidity injections, with only limited feedthrough to broader monetary conditions. In Japan, by contrast, the BOJ is tapering, but bank lending growth remains strong. Korea's exports for the first 10 days of April increased sharply, pushing up the trade surplus.
The lessening of deflation has largely been driven by external factors. But domestic monetary developments have helped: the increase in PBC liquidity injections, and as shown again by today's March monetary release, the stabilisation of M1 growth and the M1:M2 ratio.
Trade data for the first 10 days are volatile. But the April data are still worth highlighting. They show strong exports and a rising trade surplus, which offers a contrast with the BOK's concerns about the cycle, and the market's worries about the KRW.
Four developments stand out: the return of inflation in China; cycle nervousness in Japan and Korea; that's despite a continued strong AI cycle that is boosting exports in Korea and Taiwan; and the visit of the KMT chair to China, the importance of which depends on Trump's meeting with Xi.