Economy in Brief

PMI data show broad improvement month-to-month with the manufacturing readings improving in all reporting units except Australia and France.

Service sectors weakened in France, India, and the United States in June.

Only the US and France showed a lower composite index reading in June than in May.

The unweighted composite average of this reporting group of eight shows a steady improvement in the composite from April to May to June. The manufacturing PMI improved from April to May and then held there in June. The average service sector reading improved steadily from April to May to June.

The sequential patterns from 12-months to 6-months to 3- months on hard historic data show that over three months the composite indexes were weaker monthly in four reporting units. Four manufacturing readings were weaker over three months than they were over six months. And six service sectors were weaker over three months compared to six-months.

Over six months six service sector measures weakened compared to their 12-month values. This helped five composite indexes to weaken on the same timeline. Six manufacturing sectors’ gauges improved over six months compared to 12-months.

Compared to 12-months ago, the 12-month average for this month improved for all manufacturing sectors. Three service sectors weakened compared to their averages of 12-months earlier and two composite indicators- in the United Kingdom and in Japan were weaker over 12 months on average than for their average of 12-months ago.

Germany and the EMU show steady improvement in their respective composites over 12 months and for 6-months compared to 12-months and 3-months compared to 6-months. Their manufacturing sectors also were improved on this timeline as was the manufacturing sector in Australia.

No service sector was sequentially stronger in these periods, but the U.K. service sector did get sequentially weaker over 12 months, 6 months, and 3 months.

India and Australia have sector ranking data above their respective medians (ranks of over 50%) for all three sector queue rankings. Japan and Germany each have two sectors ranked above 50%: manufacturing and the composite.

The unweighted average PMI reading from 12-months to 6-months to 3-months shows a relatively flat and stable set of PMI readings while manufacturing PMI readings are improving. But the services readings show a slight deflation in their sequential progression. However, services readings for all horizons show growth, manufacturing shows slight contraction, and composite indexes show modest continuing expansion.

In this week’s letter, we analyse the performance of Asian currencies so far this year. While US dollar weakness has broadly supported regional currencies, economy-specific factors have driven significant divergence (chart 1). Advanced Asian currencies—such as the Taiwan dollar, Japanese yen, South Korean won, and Singapore dollar—have outperformed, not simply due to their advanced status but because of unique domestic drivers. Conversely, currencies like the Vietnamese dong, Indian rupee, Indonesian rupiah, and Chinese yuan have lagged, reflecting country-specific challenges.

Trade exposure has been a key influence on currency movements. The wave of US tariffs has spotlighted economies’ links to the US, making export-reliant nations more vulnerable to downside risks (chart 2). Vietnam’s high exposure to US exports helps explain its currency weakness, while India remains relatively insulated overall despite significant US trade ties. Markets remain cautious as the US 90-day tariff pause nears expiry.

Investor growth outlooks have also shaped currency trends. Taiwan’s 2025 GDP forecasts were upgraded after strong Q1 data, helping explain some currency divergence (chart 3), though growth alone does not fully determine currency strength. Monetary policy developments matter too. Most Asian central banks have held or cut rates this year, except the Bank of Japan, which has tightened policy, supporting the yen (chart 4). India’s rate cuts narrowed its interest rate differentials, pressuring the rupee, while Vietnam and Taiwan saw currency moves despite steady policies, underscoring other influences.

Policy uncertainty and geopolitical risks have also remained critical. South Korea’s political instability eased after recent elections, boosting sentiment (chart 5). India has faced challenges from Middle East tensions and resulting energy price pressures. Our Asia Currency Scorecard (chart 6) summarises these dynamics: the Taiwan dollar leads on growth optimism, the Japanese yen benefits from tighter monetary policy, and the South Korean won from reduced uncertainty. In contrast, the Vietnamese dong struggles with trade exposure, the Indian rupee is weighed down by rate cuts and geopolitical risks, and the Indonesian rupiah faces pressure from past policy uncertainty and recent easing.

Asia’s currency performance The performance of Asian currencies so far this year has been mixed. A common tailwind has been the weakness of the US dollar, which has provided some support to regional currencies. However, individual economy-specific factors have driven significant divergence in overall performance. On balance, advanced Asian currencies—such as the Taiwan dollar, Japanese yen, South Korean won, and Singapore dollar—have led the pack, recording the strongest year-to-date gains on a nominal effective exchange rate (NEER) basis, as shown in chart 1. That said, their outperformance is not due to their status as advanced economies, but rather to distinct, economy-specific factors, which we will explore further. Conversely, currencies such as the Vietnamese dong, Indian rupee, Indonesian rupiah, and Chinese yuan have been among the weakest performers in NEER terms. As with the top performers, their relative weakness also stems from country-specific factors.

Japan’s inflation measures excluding fresh food are showing significant pressure as the ‘all items ex fresh food’ metric soared at a 5.6% annual rate over 3 months while the measure excluding fresh food & energy rose at 3.7% pace over 3 months. The two gauges also rose by 3.7% and 3.3%, respectively, over a span of 12 months. The performance of the measure excluding fresh food & energy sequentially is plotted in the chart. It shows clear ongoing inflation pressure and acceleration.

This, of course, puts the Bank of Japan in a difficult position. Midyear elections are in prospect and sharp rise in rates could prove politically intrusive. At the same time, Japan’s largest trading partner, China, is struggling and its second largest trading parting, the United States, is embroiled in negotiations with Japan over tariffs. There is a great deal of uncertainty for Japan right now surrounding the policy process and that includes a large dose of geopolitical issues.

At the same time, there has been a kerfuffle in Japan’s bond market in the super-long end as purchaser demand has proved less solid and less stable than it was. The BOJ has had a scheduled taper of its purchases in place, one that the BOJ at its last meeting agreed to reduce in order to retain better demand in the long end of the JGB market. However, Japan does face some uncertain times for policy.

The inflation metrics with fresh food show the strongest growth rates for inflation. A traditional core measure that subtracts all food and energy shows less pressure at only 1.5% over 12 months, compared to core readings of 3.3% and 3.7% for the core measures that subtract out fresh food.

Looking across components, among the eight major categories only two have inflation easing over 12 months compared to 12-months ago; those two are ‘education’ where inflation is - and prices- are falling sharply, and ‘reading and recreation’ where inflation is at 2.9% but lower than it was 12-months ago. Over 6 months, only two of five categories show inflation acceleration (compared to the 12-month pace) and the 3-month annualized inflation across categories shows acceleration in half and deceleration in half compared to the paces over 6 months. Only education shows sequential deceleration – where the fall off is sharp. Only housing shows sequential acceleration, and the ramp up there is more moderate.

QTD (quarter-to-date) Quarter-to-data inflation (May & April over the Q1 average then compounded) shows a headline pace at 2%; ‘all items ex fresh food’ inflation is at a 4.7% pace; ‘all items ex fresh food & energy’ is at 3.3%, while the traditional core ‘excluding all food & energy’ is at 1.4%. So, again, we see on the QTD horizon the measures with fresh food subtracted – the BOJ’s preferred gauges- are showing the most pressure. By component, QTD pressure is lodged in ‘reading & recreation’ and in ‘transportation & communication;’ and ‘housing’ (without subtractions) flies below the 2% target at 1.8%.