Rather than thinking a weaker USD will be a catalyst for a stronger Chinese cycle, we worry more that a stronger CNY means even more downside risk, being another reason to conclude that the muddle through of the last 18M is running out of road.
Our most out-of-consensus view is that Fed cuts are likely bad news for China's cycle. For Japan, we think the market needs to price in a bigger likelihood of another BOJ hike. The CBC in Taiwan likely stays on hold in the next few months, while the BOK looks set to cut soon.
At a headline level, wages were firm in August, with the details, if anything, a bit stronger still. In particular, full-timer pay in the constant sample data rose 3% YoY, and part-time hourly wages rose 4% YoY. The wage-price cycle that was the basis for the July rate hike still looks on track.
There's a lot of concern about weak profits in China. In Japan, profitability by contrast continues to get stronger, boosted in Q2 by sales and a further rise in margins. After a sharp fall in 2023, the labour share has stabilised, but with capex modest, cash holdings remain large.
Inflation is now at the BOK's 2% target for the first time in 3 years. The BOK has been comfortable about inflation for a while already, but still, the latest drop will make it more difficult for the bank to further delay rate cuts. The wild card is if housing doesn't slow with the latest DSR rules.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
The PMI for mfg fell further in August, and while for non-mfg it ticked up, the details across the surveys were soft. The drops in input prices and jobs were particularly noticeable. Maybe the Caixin PMI sends a different message, but today's data show a cycle that is starting to deteriorate again.
The BOJ's Himino emphasised this week that the policy path isn't set in stone. But the bank does seem to have quite a strong view on the path the economy is taking. This week's inflation data were consistent with that, but labour market data were a bit softer, and there's no consumer pick-up yet.
That consumer confidence has bounced while inflation expectations stay high is constructive, suggesting price hikes don't immediately impinge on sentiment in the way they used to. However, the recovery in consumer confidence remains modest: outside of crises, it has rarely been lower than August.
In recent weeks there hasn't been much change in the overall macro narrative of "muddle through". But that masks some important shifts in the details, with three standing out: the surge in export volumes; the rebound in food prices; and the continued rapid shift of money into time deposits.
Yesterday, officials claimed high-tech industry contributed 60% of the aggregate rise in industrial earnings through July. That's partly because profitability in heavy industry is so poor. Even then, overall profits still only rose 4%. New sectors still aren't strong enough to really lift the whole.
Often, export slowdowns mean weaker currencies. But this time, currencies are already weak, and for Japan and now China, it isn't clear the export cycle is dominant. For CNY, there are structural reasons for currency strength. Cyclically, Korea will find it easier to fight appreciation than Taiwan.
There's nothing obvious in July SPPI to shift BOJ thinking. Core fell back YoY from June's multi-decade high of 3.1% to 2.7%, but rose sequentially from 1.5% to 1.9%. That's softer than recent months, but doesn't warn of a break in the gradual upwards trend. A few more charts are in the note.
I had been thinking China's export performance was solid more than spectacular. But data for June really challenge that idea.
Just as inflation concerns ease elsewhere, there's an acceleration in China. Food prices have risen 7% YoY in August, the biggest rise in more than 2 years. However, while that complicates the deflation narrative, it isn't enough to change it, given a renewed fallback in PPI and weak M1.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
A chart-heavy note looking at some of the broader trends in China's foreign trade. Exports have been reasonably strong, but no more robust than they were before covid. The bigger change is in imports, which are weak, a trend that protectionism elsewhere will do nothing to resolve.
Headline measures of inflation were generally weaker in July, and JPY appreciation and energy subsidies will cause more falls in the next couple of months. To get a sense of underlying inflation, we are watching core services CPI – stable in July – services PPI, wages and the Tankan.
While the monthly change in UE is small, the direction is clear, with the rate falling in July to a new 25-year low. That is happening even though participation is rising. This labour market tightness is supporting wages and means that unlike Korea, rate cuts are unlikely to be imminent in Taiwan.
The BOK's slow journey to rate cuts continued today, with further shifts evident in both the statement and the governor's remarks. That makes a rate cut highly likely in Q4. But there are still risk scenarios, with the obvious one being that property doesn't slow in the way the BOK seems to expect.
The Aug flash services PMI ticked up, and more than the Reuters Tankan, points to a strong cycle. But the anecdotes were mixed, with optimism easing "amid concerns over labour constraints" and rising costs. Selling prices rose at the softest pace in 9M, even as input cost inflation rose.
In today's data releases, business sentiment remained low, export growth stable, and prices soft. Overall, the macro data is giving the BOK more room to cut. The one obvious exception is the housing market, though we are also interested to see if the BOK mentions the resilience of service inflation.
The BOK's BSI survey ticked down in August, but not in a way that changes the picture. The cycle has been weak enough to justify rate cuts for a while, with the hold-ups being CPI, the Fed and, occasionally, domestic housing prices. Currently, it is only housing that is flashing red.
This year, the BOK has gradually put rate cuts on the agenda. That makes a near-term change in policy a risk, and the recent strengthening of the KRW gives the bank some justification. But in July, the BOK played up worries about a property rebound, and data show that has continued through August.
Rather than industrial policy, the better explanation for weak corporate finances is deficient domestic demand. Related to that, the biggest shifts since covid haven't been in export growth or PPI, but in imports and core CPI. Macro policy doesn't suggest this weakness is set to change.