Morning Market Update: Korean Inflation Surprises, RBA Governor's Final Meeting Expected to Be Uneventful

Asia Morning Bites

Korean inflation surprises on the upside as bad weather causes food prices to spike. Lowe's last meeting as RBA Governor is likely to be uneventful.

 

Global Macro and Markets

• Global markets:  With the US out for Labour Day on Monday, there isn’t much market action to report. Equity futures aren’t providing much insight into today’s open either. Chinese stocks had a good start to the week, buoyed by further reductions in down payments for mortgages across a number of Chinese cities and the Country Garden debt repayment deal. The CSI 300 rose 1.52% and the Hang Seng rose 2.51%. European bond yields rose slightly, The yield on German 2Y and 10Y government bonds rose by about 3bp. EURUSD had a quiet day and remains below 1.08. The AUD was also steady ahead of today’s likely no-change RBA meeting. Sterling made some small gains taking it back above 1.26 and the JPY drifted fractionally higher to 146.49. There was very little action in Asian FX markets, besides the THB, which weakened to 35.235

 

• G-7 macro:  With the US out on vacation, there was nothing of note on the G-7 calendar yesterday.  Final service sector and composite PMIs are out today in Europe. No changes are expected.  Final US durable goods orders and factory orders are due for July. Factory orders will likely reverse the 2.3% gain in June with a 2.5% decline. The ECB’s Lagarde gave nothing away about next week’s rate meeting in a speech yesterday in London. But the Bundesbank President, Joachim Nagel, suggested raising reserve requirements to “tackle the excess liquidity story”.
• Australia: The Reserve Bank of Australia (RBA) meeting today is Governor Philip Lowe’s last, and it should be an uneventful one. The surprise drop in inflation in July from 5.4% to 4.9% should be enough to keep rates on hold at this meeting. And indeed, we may have seen the peak in rates from the RBA as Michele Bullock takes over. However, the next three months’ base effects are far less helpful than they have been in the prior 6 months, and we may see inflation’s progress stall or even backslide. So, while the chances of another and almost certainly final rate hike have diminished, we aren’t totally ruling out one more before the year-end.

 

• Singapore: Retail sales for July are set for release this afternoon. We expect another month of modest gains with retail sales up roughly 2%YoY.  The steady increase of visitor arrivals is likely supporting department store sales and services related to rest and recreation.  Retail sales have been one of the few bright spots for the economy this year with both trade and manufacturing struggling.   

 

• South Korea: Consumer price inflation reaccelerated in August after six months of cooling, recording a 3.4% YoY gain (vs 2.3% in July and the market consensus of 2.9%). The main upside surprises came from fresh food and pump prices, which rose more than expected due to bad weather and the recent pick-up in global oil prices. However, core inflation (excluding food and energy) stayed at 3.3% for a second month. Although the pace of inflation sped up again, it does not deviate much from the BoK’s own inflation projection and it is likely to be considered a temporary pick-up only. Also, with weaker-than-expected monthly activity data, domestic growth conditions are expected to deteriorate further in 2H23, so it is unlikely that the Bank of Korea (BoK) will respond with an additional rate hike. Looking ahead, we believe headline inflation will calm down after Chooseok holiday, but core inflation will likely accelerate again over the next couple of months which will support the BoK’s hawkish tone throughout the year. Based on today’s results, we have revised up our annual CPI forecast from 3.3% YoY to 3.5% for 2023 and 1.8% to 2.0% for 2024. Also, given inflation will likely remain above the BoK’s target until the end of this year, we have pushed back our forecast for the BoK’s first cut from 4Q23 to 2Q24. 

 

• Philippines: August inflation is set for release today. The market consensus is for inflation to be flat at 4.7%YoY.  We expect, however, the impact of accelerating prices for rice and energy-related commodities to push headline inflation to 5.0%YoY.  Crop damage and low production due to the onset of El Nino have pushed up retail prices for rice, which counts for 9% in the CPI basket.

• What to look out for: RBA decision

  • South Korea GDP and CPI inflation (5 September)

  • Japan Jibun PMI services (5 September)

  • Regional PMI (5 September)

  • China Caixin PMI services (5 September)

  • Philippines CPI inflation (5 September)

  • Thailand CPI inflation (5 September)

  • Australia RBA decision (5 September)

  • Singapore retail sales (5 September)

  • US factory orders and durable goods orders (5 September)

  • Australia GDP (6 September)

  • Taiwan CPI inflation (6 September)

  • US trade balance and ISM services (6 September)

  • Australia trade balance (7 September)

  • China trade balance (7 September)

  • Malaysia BNM policy (7 September)

  • US initial jobless claims (7 September)

  • Japan GDP (8 September)

  • Philippines trade balance (8 September)

  • Taiwan trade balance (8 September)

  • US wholesale inventories (8 September)

  Meanwhile, resurgent global energy costs have filtered through to higher domestic fuel prices. With inflation flaring up again, we could see Bangko Sentral ng Pilipinas forced to put off their rate cuts, possibly into mid-2024.