Asia-Pacific: The Week Ahead (Mar 25-Apr 1)

By Steven Levine

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South Korea: Struggling to Get it Into Gear

South Korea is set to release a slew of new economic updates in the week ahead, including consumer and business confidence, retail sales and an update on its slowing manufacturing sector.

South Korea’s economy has been battered recently, amid intensified risks from the U.S. Federal Reserve’s monetary policy normalization, as well as uncertainties over US-China trade talks.

Meanwhile, a somewhat slower pace of global economic growth has generally stymied the country’s exports, as well as its labor market and rate of inflation. In fact, South Korea’s consumer price index (CPI) has slowed to the upper-0% range, mainly due to declines in the prices of petroleum products and agricultural goods, including livestock and fish.

Against this landscape, the Bank of Korea at its meeting in late February left its Base Rate unchanged at 1.75%.

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The central bank also observed that South Korean domestic stock prices have generally risen on the back of optimism about the US-China trade dispute, while long-term market interest rates and the Korean won-US dollar exchange rate have fluctuated within narrow ranges.

To date, the iShares MSCI South Korea ETF has fallen roughly 17.8% year-on-year but has climbed nearly 10.6% from its 52-week low set in October 2018, according to the IBKR Trader Workstation. The Korean won has yet to recover from its June plunge and has lost more than 6.3% of its value against the U.S. dollar since its April 2018 high.  

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Elsewhere, household lending in the nation has also continued to slow, amid more stringent mortgage loan standards under the recently adopted Debt Service Ratio (DSR) for new borrowers. South Korea’s housing prices have also fallen slightly.

However, the country is not alone in its struggles to revive growth.

Moody’s Investors Service analyst Christian Fang recently noted growth in the Asia-Pacific region is slowing and “further downside risks have intensified,” including US-China trade tensions, tightening global financing conditions, and shifting domestic political and policy priorities.

Fang said a “weaker economic outlook means that the window for addressing credit challenges is closing.” Furthermore, he added that “tensions between the US and China could disincentivize investment and weigh on growth potential beyond Moody's current assumptions, given trade exposure to China and the integration of manufacturing supply chains within APAC.”

Indeed, manufacturing activity in South Korea, Japan and China has been recently diving deeper into contraction territory.

Moody’s said Asia's emerging and frontier market economies are “likely to experience the sharpest deceleration in 2019, with likely median GDP growth rates of 5.5% and 5.2%, respectively.” Meanwhile, growth in the advanced economies will likely slow to 2.5%.

Calendar of Events

South Korea’s economic releases in the week ahead will kick off in earnest with:

Tuesday, March 26

• Consumer Confidence (Mar)

Wednesday, March 27

• Business Confidence (Mar)

South Korea’s Composite Consumer Sentiment Index (CCSI) registered 99.5 in February, up 2 points from the prior month, but far from its June 2018 level of 105.4. The country’s Business Survey Index (BSI) on conditions in the manufacturing sector also rose 2 points from the previous month to 69 in February, with the outlook for March having risen by 11 points to 76.

The Economic Sentiment Index (ESI) – a composite of the BSI and Consumer Survey Index (CSI) for February rose 5.8 points year-on-year to 95.1.  

In the latter part of the week, investors will receive reports on:

Thursday, March 28

• Industrial Production (Feb)
• Retail Sales (Feb)

Sunday, March 31

• Trade Balance (Mar)
• Nikkei Manufacturing PMI (Mar)

The headline Nikkei South Korea Manufacturing Purchasing Managers’ Index (PMI) fell to a 44-month low of 47.2 in February, from 48.3 in January, suggesting the sharpest deterioration in the health of South Korea’s goods-producing economy since June 2015 and extending the current period of decline to four months.

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According to Nikkei and IHS Markit, the latest survey data highlighted “stronger declines in new orders from domestic and overseas markets in February, leading to sharper reductions of both output and staffing levels.”

Joe Hayes, economist at IHS Markit, noted that the latest PMI data indicates there is “no sign of recovery in South Korea’s manufacturing sector, with evidence that the struggling global trade cycle is pinching a key exporting market.

“International demand fell at the joint-sharpest pace in five-and-a-half years during February, with weak underlying conditions reportedly compounded by rising competitive pressures.”

Hayes added that for South Korea’s economy “to sustain its relatively robust growth path, the domestic economy will need to pick up the slack from overseas markets.”

Against this backdrop, coming off of the week-end investors will also get an update on South Korea’s flagging inflation rate, which slowed to 0.5% in February from 0.8% in the prior month.

Monday, April 1

• CPI (Mar)

Market participants will be keeping an eye on South Korea’s manufacturing sector, as well as its CPI, for any further signs of a potential downturn.

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.