Asian factories crank up output, but U.S. election, Fed make investors wary

EghtesadOnline: Asia's largest economies posted strong factory activity in October, though poor showings in Korea and Southeast Asia and a weaker inflation outlook from the Bank of Japan kept market reaction muted.

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01 November 2016

China's official Purchasing Managers' Index (PMI) expanded at the fastest pace in more than two years in October, adding to views that the world's second-largest economy is stabilizing thanks to a credit and housing boom, reports Reuters.

India factory activity grew at the fastest rate since December 2014, boosted by a surge in output and new orders, as Asia's third largest economy continues to grow at a robust pace.

But investors remained cautious as the prospects of another U.S. Federal Reserve interest rate hike in December raise concerns about the impact on emerging market economies, despite positive trends in Asia.

"Asia is especially exposed to a potential rate hike by the Fed: the region's highly indebted economies will feel the pinch from rising dollar funding costs but will not receive a lift from stronger exports that a strengthening U.S. economy ordinarily entails," said Frederic Neumann, co-head of Asian Economic Research at HSBC.

Uncertainty was also on the rise as the acrimonious U.S. presidential election campaign entered its final week.

In China, there are worries that a pickup in activity over the last few months can't last, with record loan growth set to slow and the government seeking to dampen rocketing home prices.

For India, a sharp rise in input costs could point to heightened inflationary risks, which could crimp the Reserve Bank of India's room to ease policy interest rates further.

Inflation looked to be trending lower in the region's major developed economies.

The Reserve Bank of Australia held its policy interest rate at a record low on Tuesday, saying inflation was expected to remain subdued for some time and that the economy was likely to grow near its potential next year.

The Bank of Japan on Tuesday held off on expanding stimulus on Tuesday despite pushing back the time frame for hitting its 2 percent inflation target, signaling that it will stand pat unless a severe market shock threatens to derail a fragile recovery.

Japanese manufacturing activity expanded at the fastest pace in nine months in October as output and new export orders picked up, a private business survey showed on Tuesday, offering some hope for the struggling economy.

DIVERGING TRENDS

Factory surveys for major technology exporters Taiwan and Korea went in opposite directions in October.

Taiwan's manufacturing sector showed the fastest growth in two years, with output rising for the last five months.

Meanwhile, South Korea's purchasing managers index (PMI) contracted for a third straight month and was the second-lowest since August 2015. While the downturn eased slightly, persistent weakness in global demand hampered the recovery in the export-reliant economy, the private survey showed.

Factory activity also contracted in Indonesia and Malaysia in October, while growth in Vietnam cooled, according to IHS Markit purchasing managers' indexes released on Tuesday.

Surveys from Europe and the U.S. were due later Tuesday.

The U.S. economy grew at a faster than expected 2.9 percent in the third quarter, and consumer spending rose more than expected in September, which could bolster expectations of an interest rate hike from the Fed in December.