Paul Cavey - East Asia Econ (Page 18)

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East Asia Econ

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Paul Cavey

China – little relief from deflation

Data through July show upstream industrial prices have stopped falling. That should mean PPI deflation doesn't worsen further. However, underlying demand remains weak, with building material prices continuing to fall. And soft wholesale food prices suggest there's no pick-up in CPI either.

Japan – services still strong

Japan's post-covid cycle has had two clear features. First, the strength of services and non-manufacturing. Second, inflation. Today's flash PMI shows both those trends persisting. Sentiment fell in manufacturing, but improved in services, while input price inflation remained "sharp".

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Korea – signs of a floor

Q2 GDP was boosted by government spending and doesn't indicate a real turn in the cycle, as today's weak business sentiment survey through July showed. However, while Korea still has to get through the tariff shock, it does at least look like the cycle is no longer worsening,

Taiwan – IP and exports outweigh everything

IP dipped in June, but is still 40% above the trough of 2023, 100% higher than 6M ago, and dwarfs the cycle in Korea. The surge in IP/exports has supported the domestic economy when consumption has been weakening. The cycle thus remains unusually desynchronised, as it has been since the pandemic.

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Japan – trade deal and Uchida

The trade deal sets the stage – again – for a strengthening of the JPY. That's because the BOJ should be hiking rates further, according to the framework set out by Uchida in his speech today: uncertainty this year has been elevated, but the cycle has remained intact, and inflation has been high.

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Korea – property price expectations dip

For the further rise in consumer confidence in today's survey to matter, it needs to lift business confidence too. Without that, more important is the dip in property price expectations which, with the SLO survey showing tighter lending standards, should ease BOK concerns about housing overheating.

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Korea – upstream price pressures weakening

PPI ticked up in June, but only to 0.5% YoY, and overall trends suggest continued moderation of price pressures. That's true for goods, given the further fall in import prices, but is even more relevant for services in light of the widening gap between PPI v CPI services price inflation.

Korea – exports ok in July

While easing in the first 20 days of July, exports didn't fully reverse the June bump. In the circumstances, that's not bad, though only semi shows any real momentum, and it seems unlikely anything else turns up given tariffs. Exporter sentiment in this week's business survey will tell us more.

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Last week, next week

A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.

China – auto exports regain momentum

The rise in exports and the trade surplus clearly isn't just about autos: there's now a large surplus in all major mfg categories. Auto exports in fact went sideways in 2023-24 as the initial rise driven by ICE shipments lost momentum. But there are now signs of a second wind, due to EVs and hybrids

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Taiwan – TSMC bullish in words, less so in numbers

Three things stood out in TSMC's earnings call yesterday: the lack of talk of "tariffs", the bullishness on demand, and confidence on margins despite TWD strength. The message has macro significance, with one risk that while TSMC and the government expects a much slower 2H, that is too pessimistic.

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Japan – lots of action in CPI, but few implications

In June, headline fell, BOJ core rose, and international core was flat at 1.6%. So, not a clear message...and then there's the uncertainty about tariffs and politics. Some tariff deal – like a TRQ – I think gets the BOJ engaged again. But I don't expect much dovishness without a US recession.

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Japan – car export prices down again

The Q1 tick-up in overall export volumes has ended, but hasn't reversed. That's partly because of the willingness of the auto firms to cut USD prices. However, prices fell less quickly in June than May, and reports suggest the car firms are now starting to raise prices.

China – property weakness still dragging down prices

Overall, the big recent drop in upstream prices has stabilised. But for building material prices, there's no respite, now being lower than any time since 2016. That shows the ongoing weakness in the property sector, which none of the policies of the last few years have managed to turn around.

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Korea – the underlying slack in the labour market

The labour market loosening that is one of the big themes for Korean macro isn't visible in headline data, which show employment high and UE low. It is clearer in a nice box in the BOK's economic outlook report, that discusses in detail why the employment situation is in fact "subdued".

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Japan – Reuters Tankan remains firm

While there's been jitters around tariffs and inflation, business sentiment overall continues to hold up remarkably well, as shown by today's Reuters Tankan. For mfg, weakness in autos is being offset by an improvement in tech. That theme is visible in equities, but not yet in actual export data.

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China – economy still shifting towards services

Today's release of more details of Q2 GDP are interesting, if puzzling. GDP was held up by a larger contribution from investment, even though construction contracted for the first time since early 2022. The weakness of construction does, however, further the economy's steady shift towards services.

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Korea – continued labour market slack

The labour market remains slack, with employment dropping in June. Wage growth is also declining, and other data released today show import prices dropping 6% in June. This all suggests inflation will remain constrained, giving room for the BOK to continue to cut rates.

Japan – three scenarios for the JPY

My latest video, discussing the JPY outlook in the context of this year's two shocks: tariffs, obviously, but also the rebound in inflation that caused a new sharp fall in consumer confidence. The risk from US policy is still growing, but, importantly, the rebound in prices is losing momentum.

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China – nominal momentum still weak

Two things stand out in today's big macro release. First, more signs of property bottoming. But there's no indication of a pick-up, which matters given the second takeaway: the weakness of nominal GDP. On my numbers, that grew just 2.4% QoQ annualised, with the fall in the deflator accelerating.

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China – property prices weaker again

Property price deflation intensified in June, albeit only mildly. Leading indicators suggest there shouldn't be a new step-down, but only interest rates point to real upside – and interest rates stopped being a reliable lead for the property market some time ago.

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China – not just government boosting the credit impulse

Continuing recent trends, credit and money data were stronger in June. That helps put a floor under the cycle. The details were softer, with credit growth dependent on government borrowing and mortgage lending still slow. But there are some signs of an upturn in lending to the non-state sector.

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Japan – tariffs a bigger concern than prices and consumption

The drop in sentiment in today's BOJ consumer survey is somewhat backward-looking; more recent consumer surveys point to some improvement as rice prices fall. The tone of Friday's broader regional report from the BOJ was also positive, but with one big caveat: clear anecdotal concern about tariffs.

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China – exports up again

There aren't signs – yet – of China's export juggernaut hitting a wall. The big fall in US exports eased in June, allowing overall exports to continue to creep up, reaching a new post-2022 high. Imports, meanwhile, continue to flat-line, so the trade surplus remains large.

Japan – machine order lower in May

Core machine orders dropped in May. It would be easy to think that was tariff related, but it really is too early to tell. The data are volatile, April was particularly strong, and May is still above the pre-April level. Still, the data do feel soft, though more because of softer domestic orders.