3 things to watch out for as the ASX 200 fizzles another rally

The ASX 200 has fizzled another strong open after China's manufacturing PMI came in weaker-than-expected and re-entered contraction territory in October.

On Monday, the market briefly rallied to session highs of 1.23% and currently 0.8% higher.

There's been a recurring theme of strong opens into a weaker (but still positive) close in the past few days, including:

Table: Market Index

Watch out for China

China's economic growth and political concerns has had a massive impact on iron ore prices and the local resources sector.

"Iron ore futures hit a two-year low over mounting concerns over the global steel outlook. Sentiment remains weak amid concerns of a prolonged downturn in the Chinese property market," said ANZ senior commodity strategist, Daniel Hynes.

"The National People's Congress failed to provide any measures to tackle the issues the sector is experiencing. The prospect of winter output curbs is also rising."

On Monday, China's manufacturing PMI fell to 49.2 in October from 50.1 in September and below expectations of 50. The 50 point mark separates expansion from contraction.

RBA: Still dovish or back to hawkish

The RBA's interest rate decision will take place on Tuesday, 2:30 pm AEDT. Consensus expects the RBA to continue to slow the pace of its hiking with another 25 bp increase to take the cash rate to 2.85%.

Westpac is one of few outliers with expectations of a 50 bp hike.

"We do not believe that the Board has backed itself into a corner with its surprise, lower than expected 25bp increase at the October meeting," Westpac said in a note last week.

Australia's September quarter core CPI accelerated to 6.1% year-on-year, the highest quarterly and annual increase since the ABS started producing estimates in 2002.

Source: Bloomberg

"Of particular concern is the widening distribution of gains across Index components. We find that 90% of expenditure items have increased by 2.5% or more in the quarter," notes Westpac.

"If the inflation report had been in line with expectations, then continuing the sequence of 25bp moves would have been appropriate. But not responding firmly to this genuine shock would risk the impression of a central bank that is less than fully committed to the inflation task."

The smaller-than-expected hike on 4 October witnessed a massive 3.48% rally for the ASX 200. While the larger-than-expected hikes in May and June saw declines of -0.42% and -1.53% respectively, on the day of the interest rate decision.

The Fed: Another pivot narrative

The Fed is widely expected to make its fourth consecutive 75 bp hike on Thursday.

The million dollar question is whether or not the Fed will guide to a fifth consecutive 75 bp hike or consider the possibility of taking things down a notch.

The Fed continues to argue that inflation risks are skewed towards the upside, with intentions to keep hiking 'until the job is done'.

Recent comments from San Francisco Fed president Mary Daly and Fed governor Chris Waller also noted that the Fed is "thinking about a step down [in the pace of hikes], but we're not there yet."

ING puts together a table of possible scenarios and market implications:

Source: ING