China Manufacturing Data Supports Sentiment, Aussie Recovers On CPI

Asian equities reversed initial loss as boosted manufacturing data from China. Improvements in risk sentiments helped lift Aussie, which is additional supported by stronger than expected inflation reading. Meanwhile, dollar remains firm against other European majors even though it retreats mildly. Focus will turn to a string of economic data from the eurozone first, including PMIs and German Ifo. Later in the day, focus will be on US housing data, followed by BoC monetary policy report and then FOMC rate decision and statement. So, be prepared for a rough ride in the markets.

The China HSBC Flash manufacturing PMI jumped notably from 47.9 to 49.1 in October, hitting a three month high. Details were solid with improvements in new orders and export orders while inventories fell. The data argues that the slowdown in the manufacturing sector might have bottomed out already and there would be modest recovery ahead in the coming months.

Asian equities opened lower following the sharp -243pts fall in the Dow overnight. But the Chinese data helped turn Nikkei and HK HSI back positive. Though, sentiments seems to have lost momentum as the session went on.

Australian CPI rose more than expected by 1.4% qoq, 2.0% yoy in Q3, comparing to consensus of 1.0% qoq, 1.6% yoy. The RBA trimmed mean CPI rose more than expected to 2.4% yoy and the weighted mean CPI jumped to 2.6% yoy. While the stronger than expected inflation reading isn't enough to change RBA's loosening bias, the data would give the central bank more thoughts before cutting rates again. And that reduced the chance of another cut in November.

BoE Governor King said that he's still concerned if whether "some of the recent more positive signs will persist." He noted that "storm clouds coming from the euro area have not yet lifted" and China, India and Brazil are slowing. And he pledged that “should those signs fade, the MPC does stand ready to inject more money into the economy.” UK will release first estimate of Q3 GDP data later this week.

The October FOMC meeting will likely be an uneventful one. We expect policymakers to leave the Fed funds rate unchanged and made no adjustment on asset purchases. Few adjustments would be seen in the accompanying statement too. However, the December meeting would probably be an interesting one. By that time, Operation Twist would be complete and the new president would be elected. We expect the Fed would expand the size of QE3 from USD 40B per month now to USD 85B per month from January.

While there has been much talk about changes of the central bank if the Republican Party wins the election, Fed chairman Ben Bernanke's Fed chairmanship expires on January 31, 2014, while his term as a Governor runs through 2020. There should not be dramatic change in the monetary stance anytime soon.