Some analysis of the weakness of consumption in Asia. As the opening chart suggests, the big underperformer isn't either China or Japan, but rather Korea. The clear outperformer is Taiwan.
No surprises from the BOJ (yet): the July forecast for underlying inflation to remain around 2% was maintained, as was the policy caution since August that stresses uncertainty in outlook for the US. There's still the press conference and full outlook report to come.
Likely driven by the sentiment-driven rise in prices, the manufacturing PMI bounced back above 50 in October. But there was barely any change in either the services or construction, PMIs, and both will need to improve to think that the economy really is turning around.
The government yesterday published its monthly series for the profits of the industrial sector. I am always a bit sceptical of the quality of these data. But if you want a trigger for the recent macro policy push, then the sharp fall in profits in September fits the bill.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
With the BOJ emphasising the twice-yearly patten of service prices hikes, with the second round falling in October, today's Tokyo CPI data are important. They do show services prices rising, and although the details are messy, core sequential inflation in Tokyo is also continuing to run near 2%.
If the BOK was only looking at growth, then data today would give it plenty of room to cut faster, with both Q3 GDP and October business sentiment weak. However, the rise in US rates and consequent weakening of $KRW will be starting to constrain the bank once again.
The slump in confidence and retail sales don't indicate a major cyclical weakening of consumption. That's partly because households have been running down excess savings from covid. But with savings now normalising, consumption is becoming more vulnerable to the deterioration in the labour market.
There's a possibility that TSMC's success is pushing Taiwan into unchartered waters, where the CBC needs to sound hawkish, when the external imbalance is as big as it has ever been. If Taiwan's period of zero inflation has passed, there's a good chance TWD undervaluation will be challenged too.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Inflation was softer in September, but the economy still looks on track, with exports and household income up, and early signs of another strong shunto round. At the same time, the JPY is weakening again. This backdrop means the BOJ faces a very tough communication challenge at its October meeting.
Looking at today's data, the driver of all the recent policy activism is to get growth back to the 5% target. That doesn't suggest a big rebound in the nominal growth that equity investors need. The upside risk is this policy push is happening when there are tentative signs of property stabilising.
Cyclically, the labour market continues to look tight, with the UE rate again near multi-decade lows in September. But assessing the inflation implications is made tricky by big ongoing supply side changes, especially the rise in female part rate. Wage growth looks strong, but isn't accelerating.
Cyclically, credit is very weak, especially private sector borrowing. But credit is still rising relative to GDP. That's partly because of government borrowing. But it is also because of weak nominal GDP growth, and that is unlikely to change until the sharp fall in M1 relative to M2 reverses.
Exports dropped quite sharply in September. China is still making share gains in autos especially, but this is another sign that the best of the recovery in the regional export cycle is probably now done. That matters for China when exports have been the strongest sector of the economy.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Core inflation, which took one step-down during covid, has this year dropped again. Indeed, China has now been in sequential core CPI deflation since May. This implies rising real interest rates, and, with PPI turning down again too, a worsening debt burden.
As expected, the BOK's cut on Friday was hawkish. However, while I thought the bank would express some concern about services inflation, its only worry seems to be that lower rates will give a new boost to real estate. If housing is calm, the consensus will thus expect rates to fall further.
There was a decent bounce in per capita household incomes through Q2. But the rise in consumption was smaller, with better incomes fuelling stronger savings rather than much more spending. The Q2 BOJ consumer survey shows the big worry at the household level remains the high level of prices.
The MOF presser today was underwhelming, in both quantity and quality. The one real, positive change is allowing fiscal funds to be used to address the supply overhang in property, but only at the local government level (and, it seems, using existing funds). Markets are unlikely to be impressed.
There is a broad consensus that the BOK will cut this Friday. I wouldn't push back strongly against that expectation. But I don't think the bank can be too doveish when private services inflation – a proxy for domestically generated inflation – has been rebounding back above 2%.
Data continue to show little change in the constructive economic assessment that the BOJ was talking about in 1H24. The Economy Watchers survey for September ticked down, but is well above the LT average, and the outlook score is higher still. Growth in underlying wages remains firm.
My base case - that the economy won't turnaround without fiscal – isn't especially differentiated. But the reports of stronger real estate sales in the holiday highlight a risk case: that the equity rally mobilises household savings and boosts price expectations, lifting the economy without fiscal.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
I had an op-ed piece in today's Nikkei Asia. The headline argument is that monetary policy isn't sufficient to boost growth. On its own, that isn't much of a differentiated view. The nuance is the reasoning: China has monetary policy independence, so Fed cuts in themselves don't change anything.
