Asian equity markets traded higher, led by the rebound in Chinese tech stocks, with the Hang Seng index gaining more than 5%. The Reserve Bank of Australia raised interest rates by 25bp to 2.85%, as expected. China’s Caixin manufacturing PMI rose more than expected but remained in contraction territory at 49.2 in October, likely reflecting ongoing economic dislocations from Covid lockdowns.
Markets will likely be biding time ahead of policy updates from the US Federal Reserve tomorrow and the Bank of England on Thursday. The BoE’s active gilt sales (quantitative tightening) is scheduled to begin today. This morning’s UK October manufacturing PMI is expected to confirm the earlier ‘flash’ estimate showing output contracting for a fourth month in a row and a sharp deceleration in new orders. Due mostly to the drop in demand, the headline index fell to 45.8 from 48.4 in September, the weakest for 29 months during the early stage of the pandemic. Inflationary pressures eased slightly but remained elevated despite the weakening outlook for activity.
The US October ISM manufacturing survey is expected to fall towards the 50 no-change threshold. That would be broadly in line with the alternative S&P Global manufacturing PMI reading of 49.9 led by weakening demand and despite signs of improvement in supply chain disruptions. It would also be consistent with most regional Fed surveys. We forecast the ISM manufacturing to fall to 50.2 from 50.9 in September.x
Also out is US construction spending and the JOLTS survey. Construction spending in September is forecast to have contracted again on the back of a weakening housing market. Job openings, meanwhile, are expected to have fallen below 10 million in September for the first time since mid-2021, suggesting tentative signs of cooling of the buoyant labour market. The data releases are unlikely to change expectations for the Fed to raise interest rates by 75bp tomorrow.
US Treasury yields and the dollar edged lower overnight ahead of tomorrow’s Fed policy decision. The pound moved back above $1.15 and was marginally firmer against the euro. UK gilt yields closed higher yesterday but they remain well below levels during the aftermath of the mini-budget.