Factory growth ebbs in Europe & Asia, making case for more stimulus

Tuesday, 4 November 2014 00:15 - - {{hitsCtrl.values.hits}}

Euro zone factory activity expanded less than previously thought

Adds to pressure for more stimulus following BOJ’s bold move

Surveys of Asian manufacturing mostly point to slowing activity

LONDON/SYDNEY, Nov 3 (Reuters) - Factories across Asia and the euro zone reported a general loss of momentum last month that speaks volumes about the need for more policy stimulus on top of Japan’s latest efforts to ignite growth. 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.

Strong dollar squeezes commodities, BOJ puts onus on ECB Reuters: The US dollar powered to seven-year peaks against the yen on Monday and a two-year high on the euro, a punishing trend for commodities priced in dollars as gold, silver and oil all fell. Disappointing surveys out of China’s manufacturing and services sectors highlighted the relative health of the US economy, and piled pressure on other countries to ease monetary policy yet further. The dollar came within a whisker of 113.00 yen in early trade, before taking a breather at 112.72. It has climbed over 3% since the Bank of Japan stunned markets by doubling down on its already massive stimulus program. The bold move has raised expectations the European Central Bank will eventually have to bite the bullet on quantitative easing, even if not at its meeting on Thursday. “In this environment of subdued growth and long-term low-flation, we expect the ECB to announce the purchase of government bonds of euro area member states by early next year at the latest,” said Apolline Menut, an analyst at Barclays. That outlook is one reason the euro caved to a fresh two-year trough of $1.2444, and why the dollar reached levels not seen since mid-2010 against a basket of currencies. While Tokyo stocks were enjoying a holiday after Friday’s 4.8% surge in the Nikkei, shares across Asia were consolidating their gains. MSCI’s broadest index of Asia-Pacific shares outside Japan dipped 0.5% from a five-week high, but most regional markets were a shade firmer. In Europe, the FTSE and CAC 40 were all seen opening with minor changes. On Wall Street, both the Dow Jones industrial average and the S&P 500 index had notched record closing highs on Friday. The Dow gained 1.13% and the S&P 500 1.17%.

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.

Brent drops further away from $86 on strong dollar, China data SINGAPORE, Nov 3 (Reuters) - Brent crude inched lower on Monday, dropping further away from $86 a barrel as mixed Chinese data and a strong dollar pressured prices. Although growth in China’s vast factory sector rose to a three-month high in October as smaller firms saw more orders, according to a private survey, the numbers still pointed to a sluggish economy that is losing momentum. The U.S. dollar touched seven-year peaks versus the yen on Monday, dragging on oil prices as it makes the commodity more expensive for buyers holding other currencies. Brent crude for December delivery fell 28 cents to $85.58 a barrel by 0744 GMT. The oil benchmark fell more than 9 percent in October, hitting its lowest in almost four years at $82.60 on Oct. 16. U.S. crude fell 31 cents to $80.23 per barrel after losing more than 11 percent last month.

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. 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. 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.