Chinese factory, services activity both contract as Q4 begins

With the figures released on a Saturday, Monday's Asian trading session will be the first opportunity for markets to react to the disappointment. Weaker Chinese factory demand typically acts as a drag on industrial metals such as copper and iron ore, as well as on China-sensitive currencies like the yuan and the Australian dollar. Chinese equities may find some support from expectations of additional policy measures. For oil, a softer demand signal from a major crude importer would normally put downward pressure on prices, but for now that is likely to be outweighed by supply concerns in the Strait of Hormuz. Price sub-indices that are declining but still elevated also reduce the argument for interpreting the release as disinflationary.

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China's manufacturing expansion was short-lived, lasting only a month, as October's PMIs all dipped below 50, refocusing attention on Beijing's stimulus plans.

Summary:

• China's official manufacturing PMI came in at 49.3 in October, down from 50.1 and below the 49.9 median forecast, slipping back under the 50 threshold that divides growth from contraction
• Production fell to 49.8, new orders to 49.4 and new export orders to 48.7; large firms stayed at 50.2, while medium and small enterprises recorded 48.4 and 47.5
• The non-manufacturing PMI slid to 49.7 from 50.2, and the composite output index dropped to 49.7 from 50.7, with finance the only major service category showing a decline
• The NBS cited seasonal factors, including a retreat in export orders after September's jump, softer post-holiday consumer demand and demand brought forward before National Day
• Input prices eased to 56.8 and output prices to 51.7, both still above year-ago levels
• Beijing is targeting 4.5% to 5% growth this year and has indicated it is willing to add stimulus if conditions worsen

China's manufacturing sector returned to contraction in October. The official purchasing managers' index dropped to 49.3 from 50.1 in September, data released on Saturday by the National Bureau of Statistics and the China Federation of Logistics and Purchasing showed. The reading missed the median 49.9 forecast in a Bloomberg survey of economists and fell below the 50 mark that separates expansion from contraction, reversing the growth seen in September.

The weakness in factory activity was widespread. The production sub-index declined 1.9 points to 49.8, new orders fell 1.1 points to 49.4, and new export orders dropped to 48.7, leaving all three below 50 in the same month. Large manufacturers remained just in expansion at 50.2, but medium and small firms posted 48.4 and 47.5 respectively. High-technology and equipment manufacturing went against the trend, with readings of 51.3 and 50.6.

Activity outside manufacturing also weakened. The non-manufacturing PMI, which covers services and construction, fell to 49.7 from 50.2, and the composite output index dropped by a full point to 49.7. The NBS said finance was the only major service category to see a decline in business activity, and that the drop was relatively sharp. Water transport, postal services, and internet and software services all remained above 55. Construction activity was also weak.

Huo Lihui, chief statistician at the NBS service industry survey centre, attributed the factory slowdown mainly to seasonal factors. These included a retreat in overseas orders after a surge the previous month, weaker consumer demand following the holiday period and a seasonal slowdown in basic raw materials. The bureau also cited demand brought forward ahead of the early October National Day holiday and uncertainty in the international environment.

Price pressures eased but remained elevated. The raw material purchase price sub-index fell 4 points to 56.8 and the output price gauge dropped 2.3 points to 51.7. Both stayed above their levels from a year earlier, indicating that industrial prices remain relatively firm.

The data suggest the economy lost momentum at the start of the fourth quarter after a modest recovery in the third, as Beijing works to keep annual growth within its 4.5% to 5% target. Policymakers have said they are ready to add stimulus if conditions worsen, and October's figures are likely to increase market attention on whether further support arrives before year-end.