Korea's manufacturing PMI hits 7-month high

It crept up to 50.8.

According to DBS, thanks to the continued improvement in the global environment, manufacturing PMI in Korea crept up to 50.8 in December (vs. 50.4 in Nov), the highest over seven months.

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This supports our forecast of a modest economic recovery in 2014, led by external trade. Meanwhile, the domestic demand outlook remains stable on the back of supportive policies.

The government bill of cutting the real estate acquisition tax has been passed by lawmakers in December, which will likely serve as a catalyst for the property market this year.

The 2014 fiscal budget, which was delayed due to political standoff between the ruling and opposition parties, has also been approved in the parliament on Jan 1. On monetary policy, there is good consensus that the Bank of Korea will maintain an accommodative stance, leaving the benchmark rate unchanged at 2.50% when they meet this Thursday.

In the financial markets, the KRW resisted pressures from the Fed’s QE tapering. The USD/KRW rate has stayed steady around 1050-1060 in the last two weeks since the tapering was announced.

Due to the further weakening of the yen, the JPY/KRW cross rate has fallen to 10, the level seen before the global financial crisis in Sep08.

This means that the price advantage enjoyed by Korean exporters over the Japanese ones during the post-crisis period has disappeared. The strength of the KRW versus the JPY is weighing on investor sentiment in the stock market.

The KOSPI slipped more than 1.5% over the past two weeks. More positive economic data will be needed to bolster investor confidence and assuage concerns about the competitiveness issue.