The survey shows weaker activity alongside firmer inflation, a difficult mix for rate expectations. Falling output argues against further tightening, while faster input and output price growth argues against easing. That uncertainty could add volatility to Australian dollar and short-dated bond pricing as traders weigh the two signals. Energy is a key channel: firms cited higher energy, shipping and commodity costs, so sustained oil prices above $110 a barrel are likely to keep feeding through to Australian business costs and consumer prices. Falling business confidence also points to a risk of softer investment and hiring intentions into year-end, which equity investors in domestically focused sectors are likely to watch.

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Earlier, looks like more rate pain ahead:

• RBA’s Hauser puts November hike in play

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Australia’s private sector slipped into contraction in October as higher prices and borrowing costs hit demand, yet cost pressures intensified, leaving the economy with weaker growth and firmer inflation at the same time.

Summary:

• The S&P Global flash Australia composite PMI output index fell to 47.7 in October from 51.3, the first contraction in five months and the lowest reading since March.
• Services activity dropped to 47.8 from 51.9, its first decline since May. The manufacturing PMI edged up to 49.7 from 49.6, and manufacturing output rose to 46.5 from 46.2, still in contraction.
• New orders growth eased to near-neutral, with goods orders falling faster and services new business growth slowing. Export demand was broadly stable.
• Input costs rose at the fastest pace since May, driven by energy, shipping, commodity and wage costs, and output price inflation picked up for a second month.
• Employment rose on services hiring, and backlogs of work grew at the sharpest rate in a year and a half.
• Business confidence stayed positive but fell to its lowest since June.

Australia’s private sector contracted in October for the first time in five months, as higher prices and rising borrowing costs weighed on demand, according to flash survey data from S&P Global. At the same time, inflation pressures intensified.

The S&P Global flash Australia composite PMI output index fell to 47.7 from 51.3 in September, dropping below the 50 level that separates growth from contraction. It was the lowest reading since March. The decline came mainly from services, where the business activity index slid to 47.8 from 51.9, the sector’s first contraction since May. Manufacturing output continued to shrink, though slightly less sharply, with its index edging up to 46.5 from 46.2. The headline manufacturing PMI was little changed at 49.7, up from 49.6.

Demand was the main source of weakness. Growth in new business slowed to near-neutral, reflecting a deeper fall in goods orders and slower growth in services. Companies in both sectors said a lack of market confidence, higher borrowing costs and broad inflationary pressures had hurt demand at the start of the fourth quarter. Overseas demand was broadly unchanged, an improvement on September’s modest decline, as manufacturers reported a smaller fall in new export orders.

Despite lower output, firms added staff in October, all of it in services. Service providers, which had cut jobs at the end of the third quarter, hired again to deal with growing workloads. Backlogs of work across the private sector rose at the fastest pace in a year and a half.

The inflation picture was less encouraging. Average input costs rose at the fastest rate since May, with manufacturers facing steeper increases than services companies. For goods producers, the rise mainly reflected supply pressures, as delivery times lengthened further. Firms in both sectors pointed to higher energy, shipping, commodity and wage costs. Companies increasingly passed those costs on to customers, lifting output price inflation for a second consecutive month.

Jingyi Pan, economics associate director at S&P Global Market Intelligence, said business conditions had deteriorated at the start of the fourth quarter, with services now joining manufacturing in contraction. Based on company feedback, she attributed the downturn to higher prices and interest rates eroding demand, alongside weaker business confidence amid economic uncertainty. She warned that faster rises in both input costs and selling prices suggest inflation could stay elevated in the coming months, posing a further risk to demand in the near term.

Business sentiment remained positive overall, with firms hopeful that expansion plans would lift output over the next 12 months. However, confidence fell to its lowest level since June, as some companies cited concerns about the economic outlook and tougher operating conditions.

Final October data are due on November 2 for manufacturing and November 4 for services and the composite. Historically, flash readings have differed little from final figures.

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This article was written by Eamonn Sheridan at investinglive.com.

Source: Investing Live - News