China’s flash PMI weaker than expected

Filomena Scalise

Filomena Scalise

Published Feb 20, 2014

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Tokyo - Asian stocks tumbled on Thursday and the yen firmed as a survey painted a grim picture of China's manufacturing sector, heightening uncertainty about the outlook for the region's economic powerhouse.

Equities were already on the back foot after minutes of the Federal Reserve's latest policy meeting showed it remained on track to taper its stimulus.

MSCI's broadest index of Asia-Pacific shares outside Japan extended losses after the China survey, losing 0.7 percent, while Japan's Nikkei stock average was down 1.2 percent.

The preliminary China Purchasing Managers' Index (PMI) from HSBC/Markit for February fell to a seven-month low of 48.3 in February from January's final reading of 49.5, as employment fell at the fastest pace in five years.

“The building-up of disinflationary pressures implies that the underlying momentum for manufacturing growth could be weakening,” said Qu Hongbin, chief economist for China at HSBC, in comments accompanying the PMI data.

“We believe Beijing policymakers should and can fine-tune policy to keep growth at a steady pace in the coming year.”

Signs of weakness in the world's second-largest economy was one of the triggers for last month's selloff of emerging market assets. A series of PMIs in January showed growth in China's manufacturing and services sectors at multi-month or multi-year lows.

However, those disappointing PMI readings were countered by surprisingly buoyant growth in exports and bank lending, which suggested that economy was not faring as badly as some feared.

Sentiment in Tokyo was further darkened by data showing Japan posted a record trade deficit in January, as export growth slowed and imports outpaced shipments as a weak yen boosted import costs.

On Wall Street on Wednesday, the Dow Jones industrial average, the Standard & Poor's 500 Index and the Nasdaq Composite Index all skidded, following release of the Fed minutes.

The minutes showed members on the Fed's policy setting committee emphasised their commitment to trimming the central bank's asset-purchase program in predictable $10-billion steps.

John Williams, president of the San Francisco Fed, said late Wednesday he would only back an interest rate hike if inflation was closer to 2 percent, unemployment was dropping, and gross domestic product growth was “above trend”.

The yield on benchmark 10-year Treasury notes fell to 2.712 percent after the China flash PMI report, compared with Wednesday's US close of 2.734 percent.

The yen, which often gains in line with investors' aversion to risk, got a leg up against its rivals after the China flash PMI report. The dollar's early gains unravelled and it slipped 0.3 percent to 101.97 yen, moving further away from a two-week high of 102.73 yen hit on Tuesday.

The euro lost 0.3 percent to 140.16 yen, after it hit a three-week peak above 141.00 yen on Tuesday.

The dollar index inched lower to 80.135, moving back toward its Wednesday low of 79.927, which was its weakest since late December.

The euro added about 0.1 percent to $1.3741, not far from the previous session's high of $1.3773, which was its highest peak since January 2.

In commodities markets, US crude rose about 0.2 percent to $103.47 a barrel, after touching a four-month high on Wednesday after forecasts for more cold weather next week.

Spot gold was nearly flat at $1,31.49 an ounce, steadying after losing nearly 1 percent on Wednesday. - Reuters

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