I think the equity market – as of now SHCOMP is up 0.4% – has it about right. There are signs of a bottoming in the underlying cycle, but not the rebound suggested by the pick-up in GDP from 4.6% YoY in Q3 to 5.4% in Q4.
Already Taiwan's dominant firm, strong 2024 results mean TSMC has now doubled in size just since 2021. The firm remaining bullish for 2025 is this a reason to be optimistic about Taiwan's exports, but also to think the domestic cycle can warm up further. The contrast with Korea is huge.
Contrary to my thinking, the bank didn't cut today. The reasoning – KRW weakness and political uncertainty – wasn't a shock. However, the tone of the meeting was very doveish, with the bank talking about "intensified" downside risks to growth. Korea really looks very different to Japan and Taiwan.
The rebound in import prices is obviously bigger in Korea where the currency has weakened more. Even there, though, the 7% rise is modest compared with the double-digit increases in 2021-22. And the YoY comparison will be dampened in the next few months by the rise in import price inflation in 1H24.
I've revised my model for the BOK's reaction function. That suggests the probability of loosening tomorrow is about the same as the Q4 meetings when rates were cut. Considerations for later in the year are yesterday's SLO survey warning of a rebound in housing, and firm services CPI.
After a dip in 2H24, the non-manufacturing survey is now back to cycle highs. One retailer was quoted as saying: "With high domestic consumer confidence, the number of customer visits....is growing steadily". That's interesting: official surveys don't show consumer confidence is that strong.
December employment fell sharply, and while that can be explained by the ending of some government jobs projects, it fits with the sharper downturn in the cycle in Q424. That will likely be the focus for the BOK tomorrow, despite other data today showing KRW weakness pushing up import prices.
There are signs of a turn in the monetary data. It is tentative, but the rise in M1 relative to M2 is particularly important. If that continues, there would a real reason to feel less negative about the economic cycle.
The recent up-tick in the monthly Economy Watchers survey persisted in December. The outlook is a bit weaker, but still comfortably above the survey's long-term average. While the cycle isn't booming, it does look solid.
Deputy governor Himino today downplayed the risks from the US that were the BOJ's focus in 2H24. He mentioned plenty of caveats too, not least being that speeches shouldn't be read as telegraphing any MPC outcome. But it feels like the BOJ is getting closer to hiking again.
China's exports rose strongly into year-end, while imports remained flat, sending the trade surplus surging. Maybe there's front-loading to beat Trump II tariffs, but it is notable how resilient China's exports have remained when the Trump I tariffs remain firmly in place.
$CNY has started to move this year, but it isn't clear that the currency is yet pricing in tariffs. The sharp fall in onshore rates has further widened the spread with US yields, and that gap alone points to $CNY rising towards 7.7.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Taiwan has the strongest cyclical picture in the region. It isn't gaining further momentum, so rate hikes aren't likely, but nor are cuts. The other big factor is Trump. He won't like either Taiwan's massive trade surplus, or its modest military spending.
Data today show consumption still weak. But I don't think this is critical. Ueda recently was talking about better spending, which is clear in per capita terms. The aggregate is held down by the falling population, but that decline is also behind the increasingly clear trend of wage growth.
The export cycle in Korea has hit a wall, but in Taiwan, there's still no slowdown. That's important, but the highlight of the December trade report was the strength of capital goods imports, which points to a strong domestic capex cycle.
Today's labour market indicators – official wage data for November, and the Q1 regional report from the BOJ – don't suggest that momentum is picking up sharply. But they do indicate that the labour market is tight, and wage growth continuing to trend up.
East Asia stands in 2025 for offering two dynamics that are distinct from the global cycle (reflation in Taiwan and Japan, deflation in China) and because the region is central to tariffs and talk of Plaza II.
After being -ve for most of 2024, core CPI saar rose in Q4. That seems unlikely to sustain, given the 2024 policy boost is fading. However, that core has picked up is at odds with the consensus interpretation of today's data, while being in line with the relative stability of PMI output prices.
Base pay for full-time workers has plateaued at a bit below 3% since Q324. That loss of momentum isn't especially worrying: in 2023/24 there was a similar pause before real-acceleration. Part-time wage growth continues to trend up, reaching 4.7% YoY in November.
There are other things that explain Korea's economic underperformance relative to Taiwan since 2020, with consumption being one of them. But the stumbles at Samsung are still particularly important, happening while TSMC goes from strength to strength.
Given the relationship is far from perfect, it would be wrong to read too much into this first chart. However, it is still notable that the rebound in consumer confidence hasn't relapsed despite the continued strength of inflation expectations. That at least gives a hint of substantive change.
Recent data and the minutes of the November BOK meeting offer a good opportunity to look at Korea in light of the latest bout of political turmoil. The conclusion: a weak cycle is getting weaker, and so exchange rate depreciation is unlikely to stop the BOK cutting further.
While full-time worker pay clearly matters, it is also important to watch wage inflation for part-timers. That this is already running at 4% illustrates the real tightness in the labour market. There's more upside ahead, with reports that the big retailer Aeon is planning another 7% hike in 2025.
Headline inflation ticked up in December to back above 2%, but core continued to ease. With property cooling too, the likelihood of further monetary tightening is receding. At the same time, the strength of semi equities and the services PMI mean no urgency to cut either.