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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.
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.
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.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
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.
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.
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.
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.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
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.
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.
An update of our cyclical views, and summary of our recent structural work.
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.
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.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
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.
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.
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.
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.
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.
A summary of what happened on East Asia Econ last week, and what to look for in the next seven days.
Taiwan's exports have bottomed, but haven't improved much. Likely, they continue to go sideways for the next couple of months. Beyond that, there are now some upside risks, and so we'd been looking for the soft data to improve from here.
August inflation data raise the probability that the worst of the deflation scare for 2023 is likely over. We doubt there will be much inflation from here, but a stabilisation of prices will likely be a positive surprise relative to weak market expectations.
The post-covid recovery is still early, with domestic demand still weak. Full-time wage growth isn't changing much, but in July, part-time wages grew 4% YoY. That isn't enough when commodity price inflation is picking up, and means renewed pressure for JPY intervention.
A summary of our thematic work so far looking at the Japan experience of the 1990s and its relevance for China today.