On top of the data:So me good news…but not enough

　　Finally, some good news. Asian and global manufacturing PMIs picked up assertively inMarch - including in China - but at 49.7 the Caixin measure remains in contractionaryterritory. Other high frequency indicators in EM Asia show a similar trend. Export datasurprised on the upside in the majority of economies – albeit they are still contracting inmost places – as did production, particularly in China and Korea.

　　Let’s start with China. 1Q activity was stronger than expected, indicating that thedata may be starting to stabilize. In March we saw a pick-up in investment, industrialproduction, and retail sales – all of which were stronger than expectations. Theunderlying driver was a turn-around in the housing market: construction andinvestment data rebounded emphatically in 1Q. Chinese exports were better too –partly due to base effects - but there were also signs of some underlying momentum.

　　The export improvement was a theme across Asia. Take Korea, where thecontraction in exports moderated substantially, corresponding to a pick-up in IP. Not abad sign as we start 2Q – but it seems the improvement can be narrowly attributed tostrong smartphone orders, which helped to resuscitate the country’s important electronicsand semiconductor sectors. Outside of electronics, the outlook has not improved much;inventories are still high and G3 demand has yet to substantially improve.

　　But not all is positive. Take Japan, which has seen a chain of unfortunate events inrecent weeks. Most recently, two powerful earthquakes struck Kumamoto Prefecture,tragically resulting in dozens of deaths and injuring thousands. The damage may alsoimpact regional supply chains, dampening activity at the start of 2Q. From a dataperspective, IP fell by a sharp 5.2% m-o-m in February, and the most recent Tankansurvey showed that that business sentiment deteriorated. We think the BoJ will respondto the weakening outlook in the April 28 meeting with a JPY10trn increase in themonetary base target, focusing on equity purchases.

　　This brings us to the broader monetary policy outlook. In April most central bankskept policy on hold, including the Bank of Korea and Bank Indonesia, both of which arelikely to cut rates by the end of 2Q. Central banks in China, Taiwan, Australia and NewZealand are also likely to ease policy this quarter. Meanwhile, Singapore’s MAS surprisedmarkets in April by adopting a flat SGDNEER slope while in India the RBI cut rates. As wehave said in the past, there are clearly diminishing returns to monetary policy in Asia, andultimately fiscal policy needs to play a bigger role. See page 3 for more.