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 A second month of price-cutting in the euro zone, alongside only
tepid expansion in Germany - the bloc's growth engine - and
contractions in France and Italy, will be disconcerting for the
European Central Bank as it faces a real risk of deflation.
Meanwhile, regional manufacturing surveys from Asia were littered
with unwelcome landmarks, including a five-month low for activity in
China, a four-month trough for South Korea and a 14-month low for
Indonesia.
Japan's bold move in expanding its already massive asset buying
program raised expectations the ECB will eventually have to bite the
bullet on quantitative easing, but the move faces opposition from
Germany. [ECB/INT]
"You are going to need some out-turns that are weaker than these to
convince them they need to do QE but it is a trickle effect and
every month you get the absence of a pick-up you get a month closer
to QE," said Victoria Clarke at Investec.
"China is on a bit of a softer growth path than it has been, but
there is nothing there that suggest it is heading further south. The
authorities are going to continue to provide a floor to growth that
limits any downside and that is being evidenced."
Beijing has already cut taxes, quickened some investment projects,
offered short-term loans to banks, instructed local governments to
spend their budgets and reduced the amount of deposits that some
banks hold as reserves to spur lending.
Readings on Japanese activity were delayed by a holiday but will
likely be overshadowed by the Bank of Japan's decision on Friday
that took financial markets by surprise.
The BOJ's move stands in marked contrast with the Federal Reserve,
which on Wednesday ended its own quantitative easing, judging that
the U.S. economy had recovered enough to dispense with the emergency
flood of cash into its financial system.
Some form of quantitative easing - buying asset-backed securities,
corporate bonds or sovereign debt - is one of the last policy
options the ECB has left to fight deflation risks and rekindle
growth in the monetary union.
Euro zone inflation was just 0.4 percent in October, well within
what the ECB terms a "danger zone" and the surveys showed that
further discounts at the factory gate failed to drive up new orders.
Markit's final October manufacturing Purchasing Managers' Index was
50.6, beating September's 50.3 but shy of an earlier flash estimate
of 50.7. October marked the 16th month the index has been above the
50 line that divides growth from contraction.
An index measuring output, which feeds into a composite PMI due on
Wednesday that is seen as a good indicator of economic growth, rose
to 51.5 from September's 51.0, although that too was lower than the
flash reading, which came in at 51.9.
November will probably not be much better as orders fell, backlogs
were run down and stocks of finished goods built up.
"Perhaps most worrying is the trend in new orders, a key bellwether
of future output growth," said Rob Dobson, senior economist at
Markit. "It is hard to see any significant near-term boost to
performance."
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Germany's manufacturing industry returned to modest growth last
month but new business fell slightly for a second month as Russian
sanctions and a general economic slowdown weighed on demand.
Adding to the gloom, the surveys showed French factory activity
contracted faster than in September and Italian manufacturing slowed
at the sharpest rate in 17 months.
The relative outperformance of the U.S. economy should be evident in
the ISM survey out later on Monday which is expected to hold at a
healthy 56.2 while October's payrolls report on Friday is forecast
to show a solid increase.
British factories also reported a decent month of October. Activity
expanded at the fastest rate in three months but weak demand from
the euro zone, its main trading partner, sent export orders tumbling
at the fastest pace since January 2013.
After the releases the dollar powered to a seven-year peak against
the yen and a two-year high against the euro although the data
showing China's economy is losing momentum tempered investors' mood
and weighed on global stocks.
GREATER DATA DISAPPOINTMENT
HSBC's version of the China PMI, compiled by Markit, was a whisker
firmer at 50.4 in October, from September's 50.2, but showed growth
slowing in output and new orders, while companies trimmed staff
levels for the 12th straight month.
"Sentiment has slightly deteriorated on the back of the Chinese PMI.
Overall, the data is disappointing," Credit Agricole economists said
in a note to clients.
China's official PMI for services fell to 53.8 in October, down from
September's 54.0 and the weakest reading since January, the National
Bureau of Statistics said.
The comparable measure for manufacturing eased to 50.8 in October,
from September's 51.1, confounding analysts' expectations for a an
improvement to 51.2.
Foreign demand was partly to blame and the same trend was evident in
South Korea, where new export orders were down for a third straight
month and at the lowest in 14 months.
Even Taiwan's privileged position as a major supplier of Apple
products could not prevent some slowing as its PMI slipped to the
lowest in 13 months at 52.0.
A rare bright spot was India, where the HSBC PMI rose to 51.6 in
October, from 51.0 in September, extending its run above 50 to a
full year.
(Editing by Toby Chopra)
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