Oct PMIs ease further : DBS Research Report

Private sector activity eased further in Oct to 50.7 from Sep's 51.2, nearing a two-year low. This sets 4Q on a softer footing, despite the anticipated boost from seasonal factors. Despite the pullback, the economy is amongst the few in the region where PMIs are still holding above the 50-neutral mark. By contrast, China's manufacturing activity has been in contractionary mode for good part of this year, necessitating monetary and fiscal support to boost growth.

The breakdown saw output and new orders decline simultaneously as businesses cited a challenging global demand backdrop and reluctance to commit for fresh projects. New export orders remained in expansionary terrain but the pace of pick-up continues to slow. At the same time, there were indications of a further build-up in pipeline inflationary pressures. Input and output prices inched up weighing on margins amidst lower business volumes.

Overall, the data points to some loss in momentum in 4Q (third quarter FY16), with a slip below the 50-threshold in the coming months to pose downside risks to growth. For now, boost from falling financing costs, higher government-led spending, pick-up in discretionary spending and benefit from lower commodity prices should see the economy expand 7.4% this year, little changed from 7.3% last year. The RBI will meanwhile pay close attention to the modest build-up in price pressures. We expect a pause at December's policy review, with an eye on renewed expectations that the US Fed might move on rates later this year. This cautious tone has also seen equity markets pare gains in recent sessions, while 10y bonds trim post-RBI rate cut gains.

Source : Equity Bulls

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