By Tom Westbrook
SINGAPORE China's yuan hit a six-month low and Asia's stockmarkets staggered toward a second month of losses on Wednesday as weak factory activity figures offered the latest evidence that recovery in the world's second-biggest economy is faltering.
MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.2% and is down 2.5% in a month where hopes a resurgent China would drive global growth have run dry. Hong Kong stocks are down 20% from a peak in January.
Data showed China's manufacturing activity PMI fell to 48.2 for May, contracting even faster than expected. Services growth slackened to its slowest pace in four months.
The yuan dropped 0.3% to 7.1090 per dollar after that - a level not seen since the country was under tight public health restrictions in November last year.
The currency is down more than 2.6% on the month as indicators from output to industrial profits, retail sales and loan growth have missed forecasts.
"There were concerns China's economic comeback could be so strong that it would complicate advanced economy central banks' fight against inflation," said Carol Kong, economist and currency strategist at the Commonwealth Bank of Australia.
"Fast forward to today, those expectations look misplaced."
The disappointment has filtered through to other China-sensitive assets. The Australian dollar hit a near seven-month low of $0.6489 and is down four months in a row. [AUD/]
Aussie stocks are eying their worst day since March and a monthly drop of 2.7%. A tourism-led rally for Thailand's baht and stock index has also failed to arrive.
In China, blue chip stocks dropped 1% to 2023 lows and government bonds rallied. Hong Kong's Hang Seng fell 2.5% to put the index more than 20% beneath a January peak touched when hopes of a reopening rally were high.
Even stocks in Asia's brightest market, Japan, took a step down on Wednesday. The benchmark Nikkei fell 1.6%, though that caps a 6.8% monthly gain that's driven the index above 30,000 to its highest levels in more than 30 years. [.T]
DATA DRIVEN
Elsewhere inflation and the U.S. debt ceiling are in focus.
German inflation figures come later on Wednesday and are expected to show a fairly sharp moderation. Signals from Asia were less hopeful.
Data from Australia showed an unexpected rise in consumer prices and came with a warning from the central bank chief of pain ahead - prompting traders to nudge up the chances of another rate hike there next week.
"It may be difficult to deny the possibility that we are already in a new normal," Bank of Japan (BOJ) Governor Kazuo Ueda said on Wednesday, where interest rates and inflation do not return to the low levels of the past.
A deal to suspend the U.S. debt limit and avoid a default cleared a House of Representatives committee overnight and is set for debate and passage on Wednesday, which would send it to the Senate where debate could stretch to the weekend.
Treasuries rallied after the initial deal was struck, on the expectation a U.S. default would be averted, but the market remains skittish as once authorised to borrow the Treasury is likely to issue lots of debt to replenish its coffers. [US/]
Benchmark 10-year yields dropped 12.4 basis points overnight and fell another 3 bps on Wednesday in Asian trade to 3.6675%. Yields fall when bond prices rise. Two-year yields were down 3.5 bps to 4.4379% on Wednesday.
The dollar has been on the rise in anticipation that yields eventually go up again and as U.S. data comes in stronger than in Europe. This month the euro is down nearly 3% on the greenback to $1.0686 and the yen is down about 2.3% to 139.51 per dollar. [FRX/]
In commodity markets, growth jitters have benchmark Brent crude futures down 7.8% this month to $73.35 a barrel. Gold is off 2-1/2 year highs at $1,954 an ounce.
(Editing by Sam Holmes)