The platform for tracking and understanding East Asia macro
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.
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.
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.
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.
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.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
We can't see anything in today's data to shift market sentiment. Property remains in a deep slump, and retail sales are weak. But that's not new, and with some of the pressure coming off the CNY, Beijing will probably think its muddle through approach of incremental easing will continue to work.
Today's property prices were very weak again, and that is important. But in the real economy, the deflator might still turn positive this quarter, because of the recent stabilisation of PPI, and the weather- and pork-propelled rise in food prices.
GDP grew in Q2 for the first time in a year. The driver was domestic demand, and with nominal wage growth rising, and a greater probability that the high in $JPY has been seen, it is becoming more likely that this recovery in spending can now continue.
The labour market isn't as tight as the July fall in unemployment suggests. Employment didn't rise last month, with the only change being lower participation. That drop is unlikely to signal a reversal in the structural rise in the part rate, a trend that can be expected to restrain wage growth.
Currency weakness boosting inflation has been a regional theme. But currency strength wouldn't automatically mean a CB policy pivot. That's true in Japan, where other factors have been driving prices, and in China, where currency weakness hasn't yet been an obvious obstacle to policy loosening.
The PBC's Q2 survey shows consumption not especially weak, with the real post-20 changes in household behaviour being a shift from spending on goods to services, and from saving as property and riskier investments back to banks. The corporate survey wasn't bad either, but loan demand fell sharply.