Economy in Brief

In this week's newsletter, we delve into recent developments in Asian financial markets. These developments follow the recent spike in volatility triggered by the Bank of Japan’s (BoJ) July decision and the disappointing July US jobs report. Although some calm has returned to Asian markets, a repricing of assets seems to be underway, as investors reassess investment themes and the economic prospects for Asian economies. Most importantly, the carry trade themes are now shifting. Traditionally cheap funding currencies, such as the yen, are becoming more expensive as interest rates rise. Meanwhile, higher-yielding currencies, like the US dollar, are facing the prospect of reduced yields. Additionally, the technology theme is being reassessed, as evidenced by the significant selling in semiconductor-heavy equity indices for Taiwan and South Korea.

Beyond equity markets, we explore shifts in the relative currency performance of Asian economies. Notably, the Malaysian ringgit has shown a standout performance, with the rupiah having strengthened as well. We then examine the economy-specific factors driving these currency changes, including economic prospects and government measures. Overall, the interplay between global tech demand, monetary policy, and earnings is likely to continue shaping investor preferences in the near term. Investors will need to stay attentive to the key drivers of these themes, including inflation, geopolitical pressures, supply chain issues, and trade frictions.

Asian equities Echoing broader global developments, Asian equity markets have faced turbulence in recent weeks, initially triggered by volatility in Japan following the Bank of Japan’s (BoJ) hawkish July policy decision, and further exacerbated by a disappointing US labour market report for July. Although some stability has returned, volatility remains elevated. Overall, Asian equities initially dropped more than 10% since late July, recovering about half of those losses last week. Delving deeper, the sell-offs were more severe in specific economies and sectors, particularly within semiconductor-heavy indices in South Korea and Taiwan (see Chart 1). This trend reflects a broader reassessment by investors who now question whether semiconductor valuations have become overstretched after a prolonged rally.

German inflation is accelerating, rising month-to-month by 0.2% in May, by 0.3% in June, and by 0.5% in July. A broader acceleration sees the HICP up by 2.7% over 12 months, up at a 3.5% annual rate over six months, and up at a 4.1% annual rate over three months. Domestic CPI inflation excluding energy is on a rising path, up by 2.7% over 12 months, up at a 2.6% pace over six months then clearly accelerating, rising to a 3.1% annual rate over three months. The domestic headline inflation rate provides a counter-point, rising 2.3% over 12 months, accelerating ever so slightly to 2.4% over six months then sitting back at a 2% pace over three months.

Germany is in step with the other large economics in Europe as Spain and Italy both report core inflation accelerating over six months compared to 12-months and for 3-months compared to 6-months. Germanys 3.1% ex-energy rate increase is slower than Spain’s and Italy’s where the core rates rise by 4.3% and 3.5%, respectively.

The numbers on inflation are disappointing but not all threats are worsening. Brent oil prices are not stoking pressures as oil prices fell by 7% month-to-month in May, rose by 0.3% m/m in June and rose by 0.1% m/m in July. There is also good news from diffusion as inflation only accelerates year-over-year compared to a year ago in 18% of the major industry groups. Over six months, inflation accelerates in only 45.5% of the groups compared to their 12-month pace. Over three months, inflation accelerates in 36.4% of the categories compared to their pace over six months. So, the inflation acceleration Germany records is partly a matter of ‘bad luck’ in the sense that inflation is heating up the most in the categories that carry the largest weights in the index. Similarly, monthly inflation shows diffusion below 50% in two of the three most recent months.

Inflation is accelerating from 12-months to 6-months to 3-months for transportation equipment. It accelerates in 6-months and 3-months for ‘other’, recreation & culture, and transportation equipment again.

Inflation decelerates from 12-months to 6-months to 3-months for alcohol, health care, communications, and restaurants & hotels.

The economy watchers index rose to 47.5 in July from 47.0 in June, indicating less contraction on the month. Similarly, the future index improved to 48.3 in July from 47.9 in June, also signaling less deterioration is expected in July compared to June.

The current index has a 50.6 percentile standing on data back to 2003; the future index is slightly weaker at a 46.6 percentile standing. The current index is just above its median mark while the future index is below its median on that same period.

There are no indications of steady net gains being made over 12 months, six months, and three months for either the current or future surveys. That is not reassuring. However, there is persistent deterioration for five current components and five future components. The future declines that register persistent erosion also display net diffusion readings below 50 in July; so do four of the five current readings. Household-related metrics show a preponderance of persistent weakness. In the current survey, it is housing, employment, and eating and drinking places that are persistently weaker from period to period. In the future index, it is also household-related measures that are persistently weak: households overall, retailing, housing, and employment. Consumer-related sectors are weak and weakening.

The economy watchers survey shows momentum weakness as well as weak standings. The current index has four of nine components with standings below their historic medians and seven with diffusion values below 50, indicating contraction. In addition, the ranking of the employment metric at 22.1% is the lowest of all current components and that is disturbing. The future index has five components with rankings below 50% in addition to the headline. Eight of nine components have diffusion values below 50, as well as the headline. The weakest future standing is for housing at a 24-percentile value, but employment is also extremely weak with a 31-percentile standing.

The chart on the economy watchers survey shows that weakness was arrested over the last two months. Still, there is not much of a rebound established and there are still modest-to-weak readings all around. Broader momentum still points lower since the rebound as it stands is only a very localized affair. Despite two months of diffusion improvement, this is still a report that does not offer a lot of encouragement.