For the first time in over 3 years, People’s Bank of China (PBOC) lowers the rate of the 1-year medium lending facility (MLF) by -5 bps to 3.25%. This surprising move underlines the rapid deterioration of domestic growth and paves the way for a cut in the loan prime rate (LRP), the current main policy rate, in coming weeks.

Ahead of the release of October macroeconomic data, leading indicators pointed to further weakness. Official manufacturing PMI slipped -0.5 point to 49.3, while non-manufacturing PMI fell -0.9 point to 52.8, in October. The composite index was down -1.1 points to 52. A similar trend was seen in small and micro enterprises. Caixin’s manufacturing PMI dropped -0.3 point to 51.7, while services PMI was down -0.2 point to 51.1. Despite slowing growth, inflation would remain elevated, heightening the risk of stagflation. The market expects headline CPI to have risen to +3.3% y/y in October, from +3% a month ago. Food price, in particular pork price, is the major driving force. Upstream deflation will be more pronounced. The market expects PPI to have contracted -1.5%, after declining -1.2% in September.