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Taiwan's CBC kept rates on hold yesterday, but hiked the RRR to control housing. More interesting was the bank's very benign outlook: growth neither fast nor slow, and inflation falling to just within its target range. Particularly regarding inflation, that doesn't allow much room for error.
China's imports are two-speed. That's like the economy, but with a big difference: whereas for macro it is property that is weak while mfg is strong, for imports it is commodities that are more resilient than capital goods. Like the overall macro muddle through, that resilience likely can't last.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
August data suggest GDP is now only growing by around 4% YoY. The headwinds remain property activity, which dropped again in August to new lows, and retail sales, which has now contracted MoM in five of the first eight months of 2024. Sustaining muddle through is getting much more difficult.
Today's industrial price data for the first 10 days of September and property prices for August show intensified deflationary pressure. Yesterday's monetary data were weak. The PBC said yesterday that it will focus on price stability, but it also said it has plenty of other things to do as well.
More than 12M ago, we argued yields should fall. In that respect, today's drop to record lows isn't a surprise. We don't see anything fundamental yet to cause a change in direction. That's based on four factors: the PBC's reaction function, inflation, household savings, and the CNY.
It is clear that the market moves that accompanied the BOJ's July policy changes are impacting prices. But it isn't obvious that they have derailed the underlying path for the economy. It seems to us the door remains open for an October hike, with the obvious risk being events in the US.
Data today show exports still growing, and UE still low. The BOK hasn't been ignoring exports, but the bank has been more focused on weak domestic demand. The labour market data don't suggest that weakness is disappearing, with strength in employment concentrated in state and part-time positions.
It seems increasingly unlikely that exports can offset the weakness of domestic demand. Today's export data for August weren't strong. Volumes might be better, but the regional export cycle is likely peaking, and that at a time when China's domestic demand seems to be weakening further.
While exports jumped in August, with signs that the semi upswing is losing steam, it still seems likely that the export peak is near. Pretty much all the growth is coming from the US, which is propelling a surge in the bilateral trade surplus. That makes Taiwan vulnerable if Trump wins re-election.
The Economy Watchers survey improved in August. That matters, as if the market vol around the BOJ meeting in July had caused damage to the cycle, it should be showing up by now. The rise in the household score is particularly important, given the previous weakness of consumption.
MoM core CPI fell again in August, and while perhaps a bit too early to pronounce that China is definitively in core deflation, it is getting close. PPI deflation also worsened, and the leads suggest that will continue. Despite stronger food prices, it is likely interest rates continue to fall.
Last week I gave a short conference presentation updating the framework I've been using to think about China today versus Japan in the 1990s. The slides focus on deflation, manufacturing, currencies, and household consumption.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
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.
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.
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.