Asian markets were mostly lower on Monday as investors assessed the
latest economic data from Japan, Australia and South Korea.

The Nikkei 225 in Tokyo fell 1.17%, giving up early gains after Japan’s
preliminary manufacturing purchasing managers’ index showed an unexpected
contraction in October, the first since December. The services sector remained
in expansion but grew at the slowest pace this year amid worsening economic
conditions.

In Australia, the S&P/ASX 200 index rose marginally, reversing three
straight days of losses. However, the country’s composite PMI hit a 21-month
low in October with both manufacturing and services activity shrinking at a
faster pace.

South Korea’s Kospi tumbled 1.03% as the producer price index climbed 1.3%
year-on-year in September, accelerating from a 1% rise in August. This marked
the second straight monthly increase after 12 consecutive months of declines.

Hong Kong’s Hang Seng plunged 1.38% in its first day back from a holiday while
Chinese equities extended their slide with the CSI 300 touching lows not seen
since February 2019.

The mixed trading follows a choppy session on Wall Street Friday. The
tech-heavy Nasdaq snapped a four-day losing streak as yields retreated but the
Dow slipped 0.58% and the S&P 500 edged down 0.17%.

Japan’s Manufacturing Slumps Amid Gloomy Outlook

The au Jibun Bank flash Japan manufacturing PMI dropped to 47.3 in October
from 48.7 in September, marking the first deterioration since December.
Weighing further on growth was a slower expansion in the services sector as
the PMI fell to 51.1 from 53.8.

The disappointing data reinforces expectations that the world’s third largest
economy may be headed toward recession amid rising inflation, higher interest
rates and a weakening global economy.

Japan has struggled with lackluster growth for decades and the central bank’s
ultra-easy monetary policy has failed to spur inflation toward its 2% target.
With inflation now well above that level due to soaring import costs, the Bank
of Japan remains one of the few major central banks not tightening policy.

However, the weakening yen has driven up the cost of imports even higher. The
government recently intervened in currency markets to support the yen for the
first time since 1998 but analysts say the impact will be limited without
monetary tightening.

Australian Economy Seeing Broad Contraction

In Australia, the S&P Global flash composite PMI plunged to 47.3 in
October from 51.5 in September, indicating a sharp deterioration in private
sector output. Manufacturing activity hit a six-month low while the services
sector shrank for the first time in 10 months.

Both output and new orders declined amid falling business confidence in
October. Cost pressures remained stubbornly high even as demand weakened.
Input price inflation eased slightly but still signaled one of the steepest
monthly rises in business costs on record.

The Reserve Bank of Australia has been aggressively hiking interest rates to
curb inflation after years of record low borrowing costs. But with Sydney
house prices declining at the fastest pace since the 1980s, there are concerns
the RBA may have overtightened policy as the economy slows.

Australia has enjoyed an exceptionally long 29-year expansion but analysts
warn the country may soon dip into recession for the first time since the
early 1990s. High inflation, rising rates, falling real wages and declining
home values pose significant economic headwinds.

Korea Producer Prices Climb But Inflation Seen Cooling

In South Korea, the 1.3% jump in producer prices in September was driven by
increased costs for manufactured goods and utilities such as electricity and
gas.

But inflation may be close to peaking after the PPI stayed negative for over a
year through June. South Korea’s consumer price inflation also looks to have
passed its high point after hitting a 24-year high of 6.3% in July and cooling
to 5.6% in September.

The Bank of Korea has lifted its policy rate by a sizable 250 basis points
since last August to fight inflation. But with growth slowing both at home and
abroad, Governor Rhee Chang-yong said recently that the bank could shift to
smaller hikes going forward.

Korea relies heavily on exports so cooling demand from key trading partners
like China and the U.S. amid a global slowdown poses a significant risk. The
BOK last week slashed this year’s GDP growth forecast to 2.6% from 2.7%
previously.

U.S. Stocks Mixed With Focus on Big Tech Earnings

On Wall Street, stocks were directionless as Treasury yields eased after
spiking to fresh multiyear highs last week.

The benchmark 10-year yield dipped below 4.9% after topping 5% as inflation
expectations increased following hotter than expected consumer and producer
price data. The two-year Treasury yield, which is more sensitive to Fed
policy, remains above 4.5%.

Technology shares rallied ahead of earnings reports this week from
heavyweights like Alphabet, Microsoft, Meta and Amazon. But the Nasdaq remains
down over 30% for the year as the Fed’s aggressive rate hikes weigh on
valuations.

With inflation still hot and the job market resilient, markets expect the Fed
to deliver another oversized 75 basis point rate hike at its November meeting.
Taming price pressures remains the central bank’s number one priority even at
the risk of recession.

Third quarter earnings season is off to a weak start with companies from banks
to airlines missing estimates and warning of slowing demand. Analysts have cut
Q3 profit growth expectations to under 3% from 10% earlier.

Companies are also citing the soaring U.S. dollar as a headwind to both
earnings and revenues. The dollar recently hit a 32-year high against the yen
and a 20-year peak versus the euro, exacerbating inflationary pressures
globally.

Key Takeaways

– Economic activity contracted in Japan and Australia in October based on
preliminary PMI data, underscoring growth concerns

– South Korea producer price inflation accelerated in September but consumer
price pressures look to be easing

– Focus shifts to Big Tech earnings reports this week from Apple, Microsoft,
Google, Meta and Amazon

– Treasury yields retreated but the 10-year remains just under 5% as inflation
risks keep markets on edge

– Stocks are struggling to rebound as the Fed stays on its aggressive
tightening path to tame inflation

With recession risks rising, cooling inflation is critical to engineer a soft
landing. But central banks now face greater urgency to keep hiking rates
forcefully to regain credibility after misjudging inflation for so long.

Volatility is likely to remain high as markets weigh these competing forces.
We will be following Q3 earnings reports closely for clues on the pace of the
anticipated economic slowdown. Please check back for further coverage and
analysis.

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