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PMIs Diverge as High Input Prices Lead to High Output Prices

Key News

Asian equities were mixed as Japan, India, and Northern Asia markets outperformed a weaker South Asia. Hong Kong and China were mixed as the Hang Seng fell -0.88%, dropping back to the big round number of 25,000. Hang Seng Tech fell -1.51%, Shanghai fell -0.08%, Shenzhen gained +0.49%, and the STAR Board gained +0.57%.

Sentiment going into today’s trading was weak as China’s “official” October PMIs were released over the weekend. The manufacturing PMI came in at 49.2 versus an expected 49.7 and September’s 49.6 while the Non-Manufacturing PMI was 52.4 versus an expected 53 and September’s 53.2. The release highlighted the problems facing policymakers globally: slower growth as new orders slowed combined with higher inflation as both input and output prices rose. On the positive side, business activity expectations remained elevated. Markets rebounded from morning lows when the October Caixin Manufacturing PMI was released as it beat expectations, coming in at 50.6 versus an expected 50 and September’s 50. The disparity between the two PMIs is likely driven by the size of companies they survey as the “official” PMI focuses on large companies while the Caixin PMI focuses on smaller companies. The bigger the company the bigger its energy needs.

Hong Kong internet stocks were weak though dual-listed stocks were not down as much as their US listings on Friday. Kuaishou Technology was off -3.48% after its founder and CEO Su Hua stepped away from daily management responsibilities to become Chairman.

A culprit of Friday’s sell-off was an announcement from the State Administration for Market Regulation (SAMR) creating a classification system for internet companies by category and size. Friday’s sell-off highlights how fragile investor sentiment is as investors decided to shoot first and ask questions later.

Healthcare was off in Hong Kong, falling -4.4%, and in China, falling -1.53% as concerns that the national drug buying program could be expanded to other market segments though there was no news triggering today’s sell-off so it could have been profit-taking. Banks had a strong day as investors digested strong Q3 revenue and profit growth while non-performing loans declined. Clean technology had a mixed day while old school energy and material stocks were weak as commodity prices fell.

Tencent saw a small net sell from Mainland investors via Southbound Stock Connect while Meituan and Kuaishou were small net buys. Mainland investors were net sellers of Hong Kong stocks today while foreign investors bought $111 million worth of Mainland stock via Northbound Stock Connect. Bonds had a strong day while CNY appreciated a hair versus the US dollar and copper was off.

Last Night’s Exchange Rates, Prices, & Yields

  • CNY/USD 6.41 versus 6.39 Friday
  • CNY/EUR 7.43 versus 7.47 Friday
  • Yield on 1-Day Government Bond 1.70% versus 1.54% Friday
  • Yield on 10-Year Government Bond 2.97% versus 2.97% Friday
  • Yield on 10-Year China Development Bank Bond 3.30% versus 3.31% Friday
  • Copper Price -0.79% overnight