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Korea - Not much room for doves
In the run-up to the BOK meeting later this week, a summary of the macrocycle in Korea and our thinking on the central bank.
Paul Cavey
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China – living without the world
Today we look at the rest of the world's falling market share in China, which is the flip side to China's share gains overseas. With China making most progress in capital goods, this is a big challenge for DM and industrialised Asia. In this, Taiwan looks like a relative winner, and Korea a loser.
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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.
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Japan – the BOJ's key problem
Trends shown by the two data releases on Friday are related: first, wage growth below inflation, and second, weak consumption. If the labour market doesn't tighten and wage growth lift, the BOJ will be pressured to raise rates to stop JPY depreciation, and so hold back imported inflation.
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Korea – inflation up again
Inflation in Korea rose again in September, picking up to 3.7% YoY. Core inflation was flat YoY, but picked up sequentially. With US rates still so high, our model points to a high risk of further BOK tightening.
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Japan – labour tightest since 1989
The BOJ Tankan indicates activity is decent, inflation not likely to subside much, and that the labour market should tighten a lot more. This is all likely to make the BOJ more hawkish than not, but we'd still prefer to see the labour market tightening getting reflected in actual unemployment.
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Region – tentative improvement
We have been hopeful that the export cycle would start to lift. But recent indicators don't look convincing. It still looks like the cycle is bottoming rather than really starting to improve.
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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.
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China – PMIs lifted by prices
The PMIs improved in September. That was led by a further strengthening of pricing, with input prices in the PMI reaching almost 60, the highest level since April 2022. We'd guess this reflects a nominal tailwind from the modest weakening of the USD over the last 12M.
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Japan – a hint of rising real wages
Headline inflation in Tokyo eased in September, but while inflation expectations remained firm, consumer confidence didn't fall much. That could be important, but we would be more confident about the implication of rising real wages if the labour market was also tightening.
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China – living without the US
China's market share in the US has fallen sharply, but its market share globally has risen. This disconnect represents some temporary factors, but is also the result of change in China's industrial sector, a factor that differentiates China from 1990s Japan.
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Korea – still no export rebound
Equity markets have been pricing in a decent improvement in exports, but the September business survey didn't show any recovery in export sentiment. However, both the business and sentiment surveys suggest stickiness in inflation.
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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.
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Taiwan – CBC on hold
The CBC kept policy rates unchanged yesterday, seeming confident that inflation will fall below 2% next year. That might be right, but the bank's forecast that export growth will rebound to 10% YoY in Q423 isn't the most obvious environment for a fading of inflation to occur.
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Japan – services slowing
The BOJ today left policy unchanged, and inflation in August also didn't move much. The first cut of part-time wages for August was sluggish. That's important when the flash PMI for September suggests the services recovery is now fading.
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Region – monthly chart pack
An update of our cyclical views, and summary of our recent structural work.
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Region – still no upturn in exports
There's still no sign of a rebound in the export cycle. With headline inflation picking up and labour markets tight in the region ex-China, further rate hikes are still possible. But tightening would be even more likely if exports were rebounding, as some of the leads have suggested is likely.
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Taiwan – the relevance of this week's CBC meeting
With exports still weak, our CBC model suggests very little probability of a hike this week. But that model doesn't capture the rise in inflation, which until 2020 was so low that it didn't seem to matter. At the least, the CBC should sound more hawkish, and that has relevance for Korea and Japan.
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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.
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China – stability, but not in property
The activity data for August were a bit better. That's consistent with the stabilisation of prices that, we think, is the most important economic development recently. We doubt that a real upcycle is beginning, but the economy can start to look better relative to beaten-up expectations.
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Region – cycle themes
Recent regional data have two clear themes: stronger inflation, and tight labour markets. The reversal in inflation is positive for macro sentiment in China. It has policy implications elsewhere, with a higher tightening risk. However, exports aren't yet rebounding.
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Japan – renewed labour market tightening?
Today's BSI survey suggests growth momentum remains strong. It is also indicating the labour market is about to tighten quite a lot more. For us (though less so for the BOJ) that has been the missing ingredient in Japan's recovery, and so it would be important if that is now changing.
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Korea – unemployment down again
Korea's labour market isn't quite as tight as suggested by the renewed fall in the unemployment rate in August. Equally, though, there isn't real slack appearing. With headline inflation rebounding in August, this will matter for the BOK if exports now start to rebound.
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China – credit less bad
At a headline level, credit growth was a bit stronger in August, and with PPI up too, that will likely help market sentiment. But the details remain weak, with all the recovery in August coming from government bonds. M1 growth continues to slow, and savings continuing to flow into time deposits.
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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.