Robert Brusca

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<b>The Tankan assessment</b><br>
Japan's Tankan survey turned out much stronger than expected. The closely-watched manufacturing gauge for large enterprises in Q3 soared to a reading of 22, up from 17 in Q2 which in turn had risen from 12 in Q1. The Tankan has been making great strides. The quarterly manufacturing reading's q/q gain ranks as in the top 21st percentile of all quarterly changes back to 2004. The four-quarter change ranks in the top 16th percentile. The level of the reading for the large enterprise gauge in Q3 2017 stands in its 72nd queue percentile and is the highest reading in 40 quarters making it last higher before the onset of the global recession and financial crisis in late-2007. The lesser watched nonmanufacturing index was unchanged quarter-to-quarter and already has a 92.6 percentile standing.
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<b>The Tankan outlook survey</b><br>
The Tankan report also has an outlook section. The outlook for large manufacturing establishments gained four points on the quarter and rose to a reading of 19 for Q4. At that level, the reading has an 83.6 queue percentile standing in its historic queue of data. The quarterly rise itself  marks a top 19th percentile gain among all quarterly changes and the four-quarter gain of 13 points has been larger only 16% of the time. For nonmanufacturing, the outlook index has a reading of 19, a one-point quarter-to-quarter gain marking a 98.5 percentile queue standing. The combined standing of the two sectors has driven the outlook index for the large enterprise all-industry reading to its 85.5 percentile. But for medium-sized enterprises, the outlook for all of industry is at the highest value in the history of the survey and the same is true for small enterprises.
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<b>Other industries</b><br>
Aside from manufacturing that has a 72.2 percentile standing for its Q3 reading, there are Tankan readings for industries in the nonmanufacturing sector as well. Construction and personal services each have a 98.1 queue percentile reading in Q3. The "services for businesses" sector has an 88.9 percentile standing. Transportation has a strong 83.3 percentile standing. Real estate, restaurants & hotels and retailing industries have readings in the 70th percentile in Q3. Wholesaling has a 66th percentile standing.
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<b>Momentum</b><br>
The strongest gain relative to its one-year average comes from manufacturing followed by wholesaling. Transportation ranks as next best and there is a tie between services for businesses and retailing for the next slot. Restaurants & hotels are the clear lagging sector and the only one with a weaker Tankan reading in Q3 than over the previous year. Construction and real estate are two other relative laggard sectors, but they are both above their respective one-year average readings.
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<b>Conditions</b><br>
The Bank of Japan expects inflation to hit its 2% objective in the fiscal year ending in March 2020, as it argues (as does the Fed in the U.S.) that a tightening job market and solid economic growth will gradually push up prices. The Tankan produced an index gauging firms' views of the job market that showed that complaints of labor shortages, rather than excess staff, were at the highest since 1992. Large firms kept their capital spending plans intact. Big firms expect to increase capital expenditure by 7.7% in the current fiscal year ending in March 2018; that is roughly unchanged from their plans back in June.
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On balance, the Tankan report is a breath of fresh air. The survey is closely watched and considered an important and reliable gauge for Japan's economy. The leadership from manufacturing in terms of momentum is a very satisfying finding. While inflation in Japan continues to lag, the Tankan report is reassuring that growth remains on path. It largely agrees with the updated manufacturing survey from Markit for Japan in September also released and finalized today. The Tankan is just another global example of a report that shows that growth continues and is improving despite a lack of progress in lifting inflation to target.
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For Prime Minister Abe, the Tankan is support for his case that the economy is responding to his policies, an important consideration for a politician calling a snap election. To the BOJ, there is probably something comforting in this report, but there is no clear sense that this means the inflation target is more viable. Growth and inflation have decoupled globally recently; there is no sense in this report that inflation will perk up but on traditional analysis that would be expected. I would expect the BOJ to stay optimistic based on that scenario in the wake of this report.
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The Tankan assessment Japan's Tankan survey turned out much stronger than expected. The closely-watched manufacturing gauge for large enterprises in Q3 soared to a reading of 22, up from 17 in Q2 which in turn had risen from 12 in Q1. [...]

Japan's Tankan Marks 10-Year High Reading

Tom Moeller

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      <a href="/comment/171002g.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/171002g.png"></a></p>

<p align="justify">The value of construction put-in-place increased 0.5% (2.5%
y/y) during August following two months of sharp deterioration, -1.2% in July
and -0.8% in June. A 0.4% increase had been expected in the Action Economics
Forecast Survey.</p>

<p align="justify">Private sector building activity gained 0.4% (4.7 y/y) as
residential building activity rose by the same amount (11.6% y/y).
Nonresidential building activity improved 0.5% (-2.5% y/y), reflecting a 3.2%
increase (3.1% y/y) in the value of lodging construction. Commercial building
ticked 0.1% higher (10.4% y/y).</p>

<p align="justify">The value of public sector building activity gained 0.7%
(-5.1 y/y) after sharp declines in three of the prior four months. Conservation
&amp; development (-24.0% y/y), power facility production (-16.1% y/y) and
highway &amp; street construction (-6.0% y/y) have been notably weak.</p>

<p align="justify">The construction spending figures are in Haver's <b>USECON</b>
database and the expectations reading is contained in the <b>AS1REPNA</b> database.</p>

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      <a href="/comment/171002i.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/171002i.png"></a></p>

<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

  <thead>
    <tr>
      <th class="firstcol" scope="col" >Construction Put in Place
        (SA, %)</th>
      <th scope="col" >Aug</th>
      <th scope="col" >Jul</th>
      <th scope="col" >Jun</th>
      <th scope="col" >Aug Y/Y</th>
      <th scope="col" >2016</th>
      <th scope="col" >2015</th>
      <th scope="col" >2014</th>
    </tr>
  </thead>
  <tbody>
    <tr>
      <td class="firstcol" >Total</td>
      <td  >0.5</td>
      <td  >-1.2</td>
      <td  >-0.8</td>
      <td  >2.5</td>
      <td  >6.7</td>
      <td  >10.5</td>
      <td  >11.4</td>
    </tr>
  </tbody>
  <tbody>
    <tr class="odd">
      <td class="firstcol" >&nbsp; Private</td>
      <td  >0.4</td>
      <td  >-0.5</td>
      <td  >0.1</td>
      <td  >4.7</td>
      <td  >9.2</td>
      <td  >12.5</td>
      <td  >15.4</td>
    </tr>
  </tbody>
  <tbody>
    <tr>
      <td class="firstcol" >&nbsp;&nbsp;&nbsp; Residential</td>
      <td  >0.4</td>
      <td  >0.2</td>
      <td  >1.2</td>
      <td  >11.6</td>
      <td  >10.6</td>
      <td  >13.8</td>
      <td  >14.6</td>
    </tr>
  </tbody>
  <tbody>
    <tr class="odd">
      <td class="firstcol" >&nbsp;&nbsp;&nbsp; Nonresidential</td>
      <td  >0.5</td>
      <td  >-1.4</td>
      <td  >-1.2</td>
      <td  >-2.5</td>
      <td  >7.6</td>
      <td  >11.2</td>
      <td  >16.3</td>
    </tr>
  </tbody>
  <tbody>
    <tr>
      <td class="firstcol" >&nbsp; Public</td>
      <td  >0.7</td>
      <td  >-3.3</td>
      <td  >-4.1</td>
      <td  >-5.1</td>
      <td  >-0.4</td>
      <td  >5.0</td>
      <td  >1.9</td>
      </tr>
              </tbody>
            </table>
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The value of construction put-in-place increased 0.5% (2.5% y/y) during August following two months of sharp deterioration, -1.2% in July and -0.8% in June. A 0.4% increase had been expected in the Action Economics Forecast Survey. [...]

U.S. Construction Spending Activity Improves Modestly

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<p align="justify">Factories were humming last month. The ISM manufacturing
sector composite index jumped to 60.8 during September from August's unrevised
reading of 58.8. It indicated the 13th strait month of increased factory sector
activity, and the figure was at its highest level since May 2004. A level of 58.0
had been expected in the Action Economics Forecast Survey.</p>

<p align="justify">The new orders index increased to 64.6, the highest level in
six months. As a result of this strengthening, the supplier delivery series
surged to 64.4, indicating the slowest speeds of product delivery since July
2004. The production series ticked higher, but the inventories index fell
following sharp increases since 2015.</p>

<p align="justify">The employment figure increased slightly to 60.3, indicating
the twelfth straight month of payroll expansion. During the last ten years,
there has been an 88% correlation between the index and the m/m change in
factory sector employment. Twenty-four percent (NSA) of respondents reported
higher employment while seven percent indicated a decline.</p>

<p align="justify">The prices paid index surged to 71.5, its highest level since
May 2011. Forty-five percent (NSA) of respondents reported paying higher prices
while two percent paid less.</p>

<p align="justify">The export order index rose slightly to 57.0, down from its
June high but up sharply versus all of 2015. The import order index slipped and
remained below its July high. The order backlog series improved and was up
sharply from the 2015 low.</p>

<p align="justify">The ISM figures are diffusion indexes where a reading above
50 indicates increase. The figures from the Institute for Supply Management can
be found in Haver's <b>USECON</b> database. The expectations number can be found
in Haver's <b>AS1REPNA</b> database.</p>

<p><a href="/comment/171002c.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/171002c.png"></a>
      <a href="/comment/171002d.png" name="modal"><img class="small" src="https://haver-commentaries.s3.eu-west-1.amazonaws.com/comments/171002d.png"></a></p>

<table class="centered" width="100%" border="0" cellspacing="0">
	<colgroup><col><col><col><col><col><col><col><col></colgroup>

  <thead>
    <tr>
      <th class="firstcol" scope="col" >ISM Mfg (SA)</th>
      <th scope="col" >Sep</th>
      <th scope="col" >Aug</th>
      <th scope="col" >Jul</th>
      <th scope="col" >Sep'16</th>
      <th scope="col" >2016</th>
      <th scope="col" >2015</th>
      <th scope="col" >2014</th>
    </tr>
  </thead>
  <tbody>
    <tr>
      <td class="firstcol" >Composite Index</td>
      <td  >60.8</td>
      <td  >58.8</td>
      <td  >56.3</td>
      <td  >51.7</td>
      <td  >51.5</td>
      <td  >51.4</td>
      <td  >55.6</td>
    </tr>
    <tr class="odd">
      <td class="firstcol" >&nbsp;New Orders</td>
      <td  >64.6</td>
      <td  >60.3</td>
      <td  >60.4</td>
      <td  >55.0</td>
      <td  >54.7</td>
      <td  >52.6</td>
      <td  >58.9</td>
    </tr>
    <tr>
      <td class="firstcol" >&nbsp;Production</td>
      <td  >62.2</td>
      <td  >61.0</td>
      <td  >60.6</td>
      <td  >53.3</td>
      <td  >54.0</td>
      <td  >53.5</td>
      <td  >59.2</td>
    </tr>
    <tr class="odd">
      <td class="firstcol" >&nbsp;Employment</td>
      <td  >60.3</td>
      <td  >59.9</td>
      <td  >55.2</td>
      <td  >50.0</td>
      <td  >49.7</td>
      <td  >51.0</td>
      <td  >54.4</td>
    </tr>
    <tr>
      <td class="firstcol" >&nbsp;Supplier Deliveries</td>
      <td  >64.4</td>
      <td  >57.1</td>
      <td  >55.4</td>
      <td  >50.8</td>
      <td  >51.9</td>
      <td  >50.7</td>
      <td  >55.0</td>
    </tr>
    <tr class="odd">
      <td class="firstcol" >&nbsp;Inventories</td>
      <td  >52.5</td>
      <td  >55.5</td>
      <td  >50.0</td>
      <td  >49.5</td>
      <td  >47.2</td>
      <td  >49.0</td>
      <td  >50.8</td>
    </tr>
    <tr>
      <td class="firstcol" >Prices Paid Index (NSA)</td>
      <td  >71.5</td>
      <td  >62.0</td>
      <td  >62.0</td>
      <td  >53.0</td>
      <td  >53.5</td>
      <td  >39.8</td>
      <td  >55.6</td>
      </tr>
              </tbody>
            </table>
            </span>
</body></html>


Factories were humming last month. The ISM manufacturing sector composite index jumped to 60.8 during September from August's unrevised reading of 58.8. It indicated the 13th strait month of increased factory sector activity, and the [...]

ISM Factory Sector Index Strengthens to 13-Year High

USD/EUR exchange rate uncoupling from interest rate differential

Widespread downgrading of 2025 GDP outlook

Trade and fiscal policy uncertainty has exploded with the new administration

Much lower US electricity costs gives it a competitive advantage

Wage growth slowing in the US and Euro area; elevated and sticky in the UK

Stagflation-lite: Blue Chip forecasts below-trend growth and elevated inflation

US policy gyrations boosting policy uncertainty worldwide

Expected tariff hikes have boosted inflation expectations

US and Japan ended 2024 on solid ground in contrast to Europe

US economy expected to outperform other major economies in 2025

Only modest evidence of AI-related surge in US productivity growth

Previous Trump tariffs fading. A boost from new tariffs ahead?

Heavy US manufacturing states underperforming while Sun Belt states outperforming

Rising long-term yields a global phenomenon

US financial market concerns shifting from growth to inflation

Economic activity is picking up in the US but remains lackluster abroad

Policy uncertainty has surged since the US national elections.

Recent turnaround in US economic surprises leading to increases in rate-cut expectations

The outlook has brightened in the US, while it has dimmed for other major economies

Headline US PCE inflation elevated by sticky services prices

US and global equity prices have recently diverged

US leading global upturn in economic surprises

Blue Chip forecasters look for further significant monetary easing apart from Japan

Recent rise in global supply chain pressures could augur a pickup in global inflation pressures

Underperforming German economy generating increased policy uncertainty relative to Europe and the US

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The U.S. trade deficit in goods and services (BOP basis) in March grew to $140.5 billion after narrowing slightly to $123.2 billion in February, revised from $122.7 billion, after widening to $130.7 billion in January according to the U.S. Census Bureau. A $136.7 billion deficit was expected by the Action Economics Forecast Survey. Exports rose 0.2% (6.7% y/y) in March after increasing 2.8% in February. This was accompanied by a 4.4% rise (27.1% y/y) rise in imports which came after m/m stability in February. In Q1’25, the deficit grew to an average $131.4 billion, after rising to an average $83.3 billion in Q4’24.

The trade deficit in goods (BOP basis) widened to a record $163.2 billion in March from $147.9	 billion in February, revised from $147.0 billion. Goods exports (customs value) rose 1.4% (7.0% y/y) in March, after increasing 3.6% in February. The latest increase reflected an 8.2% (8.4% y/y) surge in auto exports which came after a 12.7% strengthening. A 3.5% (4.0% y/y) gain occurred in industrial supplies & materials exports which followed a 5.1% rise. Foods, feeds & beverage exports rose 6.6% (1.4% y/y) after declining in four of the prior five month. Working lower, capital goods exports fell 2.5% (+13.9% y/y) in March after a 4.	8% increase and nonauto consumer goods exports were off 1.1% (+3.4% y/y) in March after a 2.4% gain.

Imports of goods increased 5.5% (31.4% y/y) in March after a 0.2% February easing. Imports of nonauto consumer goods imports surged 27.9% (56.0% y/y) following a 3.1% February gain. Auto imports rose 6.6% (8.7% y/y) after a 1.2% rise. Capital goods imports rose 4.2% (22.5% y/y) following a 1.1% rise. Foods, feeds & beverage imports eased 0.4% (+11.1% y/y) following a 2.0% weakening. Industrial supplies & materials imports declined 12.4% (+39.5% y/y) after weakening 4.6% in February. Petroleum imports by end-use fell 4.1% (-10.2% y/y) after a 2.9% decline. Nonpetroleum imports increased 6.0% (34.8% y/y) after holding steady in February.

The inflation-adjusted goods trade deficit (customs value) deepened to $150.9 billion in March from $136.9 billion in February. Real exports rose 1.6% (5.3% y/y) after a 3.0% February increase, while real imports rose 5.8% (29.8% y/y) in March following a 0.5% February slip.

The services trade surplus narrowed to $23.0 billion in March after decreasing to $23.8 billion in February. It reached a peak of $25.7 billion in November of last year. Service exports fell 0.9% (+5.7% y/y) after a 0.8% decline in February. Construction services exports rose 1.0% (37.7% y/y) after increasing 2.6% in February. Travel services exports fell 7.1% (-3.7% y/y) and financial exports increased 0.9% (7.3% y/y). Transport exports rose 3.1% (2.4% y/y). Service imports eased 0.1% (+10.8% y/y) in March following a 0.8% gain. Maintenance & repair services declined 1.5% (+32.1% y/y) while imported transport services increased 1.2% (1.7% y/y). Imported travel services fell 2.2% (5.3% y/y) while charges for use of intellectual property rose 1.0% (13.6 y/y).

The U.S. goods trade deficit with China narrowed to a seasonally adjusted $24.8 billion in March from $26.6 billion in February. Exports to China declined 8.2% (-10.5% y/y) while imports weakened 7.2% (-2.7% y/y). The deficit with the European Union deepened to a record $48.3 billion in March from $30.9 billion in February. Exports rose 10.9% (14.5% y/y) while imports soared 34.0% (65.4% y/y). The deficit with Japan deepened to $5.8 billion from $5.2 billion in February. Exports rose 1.8% (8.8% y/y) and imports rose 6.4% (9.9% y/y).

The international trade data, including relevant data on oil prices, can be found in Haver’s **USECON** database. Detailed figures on international trade are available in the **USINT** and **USTRADE** databases. The expectations figures are from the Action Economics Forecast Survey in **AS1REPNA**.

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- Goods deficit grows as imports surge ahead of tariff imposition.
- Exports edge higher, led by autos.
- Petroleum product imports fall as crude oil prices decline.

U.S. Trade Deficit Deepens to Record in March

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Retail gasoline prices for all grades improved to an average $3.27 per gallon (-13.1% y/y) in the week ended May 5 and reversed the prior week’s easing to $3.26. Prices were $3.37 per gallon to begin the month but remained above their low of $3.13 in the week of December 9. An earlier high was $3.79 in the week ending April 22, 2024. The all-time high of $5.11 occurred in the week ending June 13, 2022. The retail price for on-highway diesel fuel eaed to $3.50 per gallon (-10.2% y/y) in the week of May 5 from $3.51 in the prior week. The latest diesel price stood well below a high of $4.63 in the week ending September 18, 2023 and a peak of $5.81 in the week ending June 20, 2022.

The price of West Texas Intermediate crude oil declined to $59.64 per barrel (-26.4% y/y) in the week ended May 2, after rising to $63.09 per barrel in the prior week. Prices remained below a high of $91.45 in the week of September 29, 2023. The cost of crude oil peaked at $120.46 in the week of June 10, 2022. Yesterday, the price was $57.13 per barrel. The price of European Brent crude oil declined to $63.50 per barrel (-25.9% y/y) in the week of May 2 from $67.92 in the previous week. Prices remained well below a recent high of $95.61 in the week of September 29, 2023 and compared to a peak of $127.40 in the week of June 10, 2022.

Natural gas prices improved to an average $3.09 per mmbtu (+88.4% y/y) in the week ended May 2, after falling to $3.00/mmbtu in the prior week. Prices remained well above a low of $1.40/mmbtu in the week of March 15, 2024 but below their peak of $9.56 in the week of August 26, 2022. Yesterday’s price was $3.26/mmbtu.

Gasoline demand rose 3.2% y/y in the four weeks ending April 25 following a 0.4% y/y decline in the prior four weeks. Demand for all petroleum products improved 0.3% y/y in the four weeks ending April 25 after a 0.4% y/y rise in the previous four-week period. Crude oil input to refineries eased 0.1% y/y in the four weeks ending April 25 after a 1.3% y/y decline in the prior four weeks.

Gasoline inventories slipped 0.7% y/y in the week ending April 25 after a 1.2% y/y rise in the week ending April 18. Residual fuel oil inventories fell 18.7% y/y in the week of April 25, after a 19.0% y/y fall in the prior week. Crude oil inventories rose 1.4% y/y in the week of April 25 after a 2.6% y/y rise in the previous week.

Measured in days’ supply, gasoline inventories fell w/w to 25.5 days in the week of April 25 from 26.4 days in the prior. The recent low was 22.9 days in the week of November 8. The supply of crude oil eased w/w to 27.9 days in the week of April 25 after three weeks at 28.3 days, and remained below a high of 31.9 days in the week of March 3, 2023.

These data are reported by the Energy Information Administration of the U.S. Department of Energy. The price and supply/demand data can be found in Haver’s **WEEKLY** & **USENERGY** database.

- Gasoline prices edge higher.
- Crude oil prices decline.
- Natural gas costs rise.

U.S. Energy Prices Remain Mixed in Latest Week

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Not many respondents are showing absolute slowing. Only five this month. Only six over the last three-months on average. The median total PMI score fell to 49.7 showing contraction in April from 51.1 in March. The average fared slightly better. The 12-months to 6-months to 3-months shows a moderate but consistent slowing. The breadth of slowing is wide with 60.9% of survey respondents slowing over 3-months compared to six months.

The percentile standings show the most strength for the BRIC group with reading above 50% (that marks the median). All other groupings have standings below the 50%, mark indicating that they are below their respective medians of the last four-plus years.

Over every horizon from 12-month to 6-month to 3-month, more than 50% of the respondents show a weakening (slowing) in their PMI responses.

Among the largest economies only Italy has a composite PMI standing above its median (above 50%).

Only 9 of 24 respondents have PMI ranked percentile standings above the 50% mark. That underlines the weakness in composite conditions and the breadth of the weakness.
 
Services sectors no longer are providing the lift to offset ongoing weakness in manufacturing. The differences among countries are narrowing.

Economic conditions across countries may be narrowing for several reasons, one being that the COVID period and then the shock reaction to Russia's invasion from Ukraine put all countries on the same timeline as central banks have been leaning against the shockwaves from those 2 events. As a result of those events, inflation flared but has more recently been falling. Still, inflation continues to be over the top of targets with the European Monetary Union right now making the most progress and Japan facing more late cycle weakness with excessive inflation than other countries in the mix.  More recently aggressive tariff policy the United States has put all countries on their back foot and puts everyone on notice that the future has become a lot more uncertain. Central banks that were progressing toward rate cuts now are worried about the possibility of more inflation from tariffs or from the possibility of recession from tariffs - tariffs up the ante on uncertainty as well as on risk.  What we see in this month's PMI statistics is a gradual continued erosion as the perceived risk here is that things get steadily but slowly worse as firms, investors, and consumers began to pull in their horns and prepare for something bad to happen not knowing what that might be.

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Global Composite PMIs Erode

Tian Yong Woon

This week, we focus on trade developments between the US and major Asian economies. Early indications coming out of US-India trade talks seem encouraging, with terms such as “forward most-favoured-nation” for the US and “zero-for-zero” tariffs appearing in news reports — terms which, if enacted, would represent a significant win for the US. India stands to benefit greatly as well if key exports to the US, such as pharmaceuticals (chart 1), receive substantial tariff relief. The benefits could be strongly mutual if a deal also grants the US greater access to India’s large auto consumer market, particularly for major US electric vehicle (EV) producers, given that EV adoption in India remains at a very early stage (chart 2).

Turning to South Korea, discussions also appear to be progressing at a healthy pace, although details remain limited and ongoing domestic political challenges continue to hinder substantive breakthroughs. Nonetheless, the South Korean won has shown signs of stabilisation, while local equity markets have remained buoyant (chart 3). Recent trade data for April has also provided some investor relief, as weak exports to the US were more than offset by a strong performance in semiconductor shipments (chart 4).

In Japan, the race to secure a trade deal with the US is well underway, with automotive exports expected to be a key focal point given their significance to Japan’s economy and the US being a major export destination (chart 5). China, however, remains a notable outlier, with formal trade talks with the US not yet underway. Still, the US-China trade relationship continues to be the most closely watched, given its scale and potential impact on global growth and trade dynamics. While markets await China’s official April trade data, early indicators such as port activity already suggest a decline in bilateral trade flows (chart 6).

**US-India trade talks**
US-India trade discussions have reportedly been progressing rapidly, with both sides having already finalized in April the terms of reference for talks, setting the stage for formal negotiations. One early sign of favourable momentum is India’s possible offering of a “forward most-favoured-nation” clause to the US. This would ensure the US always receives the most favourable tariff terms, ahead of any other trade partner. If enacted, this would be a significant win for the US and a major leap forward in the US-India trade relationship. Another reported breakthrough involves India’s reported proposal of “zero-for-zero” tariffs on steel, auto components, and pharmaceuticals—offered on a reciprocal basis up to a certain quantity. If agreed, this would be mutually beneficial, especially as pharmaceuticals remain one of the US economy’s key imports from India, as shown in chart 1. On a separate note, and more recently, India’s phone exports to the US have reportedly gained prominence. With steep US tariffs on China, firms like Apple are increasingly incentivised to accelerate production shifts to India.

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Additionally, India’s proposed “zero-for-zero” tariff plan for auto parts may galvanise US access to India’s large domestic auto market, which has remained comparatively insulated due to high import tariffs. Another area to watch in the trade talks is electric vehicle (EV) imports, especially given US EV giant Tesla’s continued interest in expanding into the Indian market. That said, EV adoption in India remains in its early stages by many measures. While India has an immense middle class with future sales potential, EVs accounted for only about 2% of new cars sold in 2023, as shown in chart 2. This is well below levels seen in other Asian economies like China, or leaders in this space like Norway, where nearly all new cars sold are EVs. Challenges remain in unlocking the domestic Indian market—particularly around affordability and the underdeveloped state of EV infrastructure.

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**US-South Korea trade talks**
Discussions on the US-South Korea trade front also appear to be progressing at a steady pace, with technical talks reportedly having concluded in Washington last week. However, details remain limited, and full-scale negotiations have not yet begun. Complicating matters is South Korea’s domestic political landscape. With the country heading into a snap presidential election on June 3, Vice Industry Minister Park has said there is no chance of a comprehensive deal being reached before then. Still, both sides have committed to working toward an agreement before the expiration of Trump’s 90-day reciprocal tariff pause on July 8. In financial markets, the won continues to swing but remains above its year-to-date lows (chart 3). Meanwhile, South Korean equities have been lifted by a softening in trade rhetoric from both the US and China, as well as optimism around the US-South Korea talks.

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Turning to the hard trade data, South Korea’s more complete April numbers offered some initial relief to investors. The economy still managed to post moderate export growth, surprising many, despite a nearly 7% y/y decline in exports to the US, as shown in chart 4. One of the key drivers was semiconductors, which recorded double-digit y/y growth for the second consecutive month. However, these figures likely do not yet reflect the full initial impact of the steep mutual tariffs between the US and China. Firmer indications may emerge in the coming months. By then, though, attention will likely have shifted toward the outcome of US trade talks with key partners, as the end of its 90-day reciprocal tariff pause draws near.

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**US-Japan trade talks**
Turning to Japan, there is a sense of cautious optimism, with Japan’s chief trade negotiator Akazawa expressing hope for a US-Japan trade deal by June, following the second and most recent round of talks held in Washington last week. A key point of interest is whether Japan can negotiate an exemption from the current 25% automotive tariffs imposed by the US. This is especially significant given the importance of the US as a destination for Japanese auto exports, as shown in chart 5, and the central role the sector plays in Japan’s broader manufacturing economy. Also worth noting is a recent clarification by Japan’s Finance Minister Kato, who walked back earlier remarks and stated that Japan will not use the sale of US Treasuries as a bargaining tool. The clarification may help defuse a potential point of friction between the two sides as trade discussions continue.

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**US-China trade developments**
Turning to US-China trade developments — while progress here has lagged, this relationship remains the most closely watched, given its potentially large impact if meaningful movement occurs. Recent messaging from both sides has softened, stepping back from the fiery exchanges and tariff escalations seen earlier in April, offering some interim relief for investors. China has reportedly exempted certain US imports from tariffs, including specific pharmaceutical and industrial chemical products. However, on US-China trade talks, they remain at a very early stage, with China merely “evaluating” the prospect of negotiations with the US. This suggests we are still far from anything resembling a formal deal. Investors are now closely watching for first-round effects of US tariffs, which are expected to appear in China’s April trade numbers due later this week. Early signs point to a slowdown. For example, vessel traffic at the Los Angeles–Long Beach port remains at range lows, hinting at reduced shipments from China.

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Asia

Economic Letter from Asia: Art of the Deal

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The U.S. ISM Services PMI rose to 51.6 during April, after falling sharply to 50.8 in March from 53.5 in February, according to today’s report by the Institute for Supply Management. The reading indicated service sector expansion for the tenth consecutive month, although the rate of expansion has slowed significantly. The index hit a recent high of 55.8 in October of last year and remains below the all-time high of 67.5 in November 2021. The Action Economics Forecast Survey expected 50.2 for April.

Haver Analytics constructs a composite index combining the services index and the manufacturing index released on Thursday. This index rose to 51.2 in Apri from 50.6 in March. The latest figure remains above its June low of 49.1.

Amongst the services component series, the employment index led last month’s improvement in the overall index. It rose to 49.0 after falling sharply to 46.2 in March. Higher employment was reported by a slightly improved 14.6% (NSA) of respondents while a lessened 16.4% reported a decline. The new orders index rose to 52.3 after falling to 50.4 in March. A higher 22.4% (NSA) of respondents reported a rise in orders while a lessened 15.3% reported a decline. Reporting slower delivery speeds, the supplier delivery series edged up to 51.3 in April after falling to 50.6 in March. Working lower, the business activity series declined to 53.7 after rising to 55.9 in March. A higher 26.2% (NSA) of respondents reported improved activity while a lessened 14.0% reported deterioration.

On the inflation front, the prices index surged to 68.9 in April after easing to 62.8 in March. A greatly increased 39.6% (NSA) of respondents reported higher prices while a lessened 1.9% reported lower prices. The index was increased from its December 2022 low 53.1 and stood at its highest level since October 2022.

Additionally, the new export orders index increased to 48.6 (NSA) in April following a decline to 45.8 in March from 52.1 in February. Just 14.8% of survey respondents reported higher exports while an increased 17.7% reported a decline. The imports index plummeted to 44.3 last month from 52.6 in March. A greatly lessened 4.7% of respondents reported higher imports while a doubled 16.2% reported a decline. The inventory change index jumped to 53.4, a six-month high. The order backlog index edged up to 48.0 in April after falling sharply to 47.4 in March. A lessened 12.2% of respondents reported higher backlogs while a fewer 16.2% reported a decline. These series are not seasonally adjusted and not included in the ISM Services PMI total.

The ISM Services PMI is a composite index consisting of four equally weighted diffusion indexes: Business Activity, New Orders, Employment, and Supplier Deliveries. A reading above 50 indicates expansion in the services sector, while below 50 suggests	 contraction. Supplier Deliveries is the only ISM index that is inversed; a reading above 50 indicates slower deliveries. The ISM figures are available in Haver's **USECON** database, with additional detail in the **SURVEYS** database. The expectations figure from Action Economics is in the **AS1REPNA** database.

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- Total index remains near nine-month low.
- Employment, new orders & supplier deliveries edge up. Business activity weakens. 
- Prices Index strengthens to roughly two-year high.

U.S. ISM Services PMI Edges Higher in April; Prices Strengthen

Economy in Brief: October 2017

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