By Lucia Mutikani

WASHINGTON (Reuters) - The U.S. economy grew almost 5% in the third quarter, again defying dire warnings of a recession, as higher wages from a tight labor market helped to fuel consumer spending and businesses restocked at a brisk clip to meet the strong demand.

The fastest growth pace in nearly two years reported by the Commerce Department's Bureau of Economic Analysis on Thursday in its advance estimate of third-quarter gross domestic product was also spurred by a rebound in residential investment after contracting for nine straight quarters.

Government spending picked up. But business investment dipped for the first time in two years as outlays on equipment like computers declined and the boost faded from the construction of factories related to a campaign by President Joe Biden's administration to encourage more semiconductor manufacturing in the United States.

Though the blockbuster performance over the summer is likely not sustainable, it showcased the economy's stamina despite aggressive interest rate increases from the Federal Reserve. Growth could slow in the fourth quarter because of the United Auto Workers strikes, the resumption of student loan repayments by millions of Americans and the lagged effects of the rate hikes.

The report also showed underlying inflation subsiding considerably last quarter. Most economists have revised their forecasts and now believe the Fed can engineer a "soft-landing" for the economy, citing expectations that the July-September period will show a continuation of second-quarter strength in worker productivity and moderation in unit labor costs.

"We've seen for a period of time now a post pandemic induced negative bias about an imminent recession and persistent inflation," said Brian Bethune, an economics professor at Boston College. "But not only is the economy surprisingly resilient, we also got productivity-driven growth for two consecutive quarters in 2023, meaning the business cycle still looks very solid."

Gross domestic product increased at a 4.9% annualized rate last quarter, the fastest since the fourth quarter of 2021. Economists polled by Reuters had forecast GDP rising at a 4.3% rate. The economy grew at a 2.1% pace in the April-June quarter and is expanding at a pace well above what Fed officials regard as the non-inflationary growth rate of around 1.8%.

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, accelerated at a 4.0% rate after only rising at a 0.8% pace in the second quarter. It added 2.69 percentage points to GDP growth, and was driven by spending on both goods and services.

Though wage growth has slowed, it is rising a bit faster than inflation, lifting households' purchasing power.

The increase in wages last quarter was partially offset by a rise in personal taxes, resulting in income at the disposal of households after taxes falling at a 1.0% pace. That led to consumers tapping their savings to fund some of their spending. The saving rate dropped to 3.8% from 5.2% in the second quarter.

Stocks on Wall Street fell. The dollar rose against a basket of currencies. U.S. Treasury yields dipped.

SLOWDOWN AHEAD

The declining saving rate combined with the resumption of student loan repayments in October, which economists estimated was equal to roughly $70 billion, or around 0.3% of disposable personal income, could dent spending. Low-income consumers are increasingly relying on debt to fund purchases, with higher borrowing costs boosting credit card delinquencies.

Economists estimate that excess savings accumulated during the COVID-19 pandemic are mostly concentrated among high-income households and will run out by the first quarter of 2024. Some economists see a sharp slowdown around the corner, a concern shared by United Parcel Service (NYSE:UPS), which on Thursday cut its 2023 revenue forecast for the second straight quarter.

But others are not too worried, arguing that spending was not reliant on credit, but rather on the strong labor market and generous government transfers during the pandemic.

"It is too early to take slower growth for granted, especially after three quarters of consistently stronger-than-expected economic activity," said Chris Low, chief economist at FHN Financial in New York. "Any economist working on an update of their estimate of when pandemic savings will run out needs to tear it up and start thinking about what has allowed consumption to remain so strong. It is not borrowing."

Labor market resilience was highlighted by a separate report from the Labor Department on Thursday, showing initial claims for state unemployment benefits rose 10,000 to a seasonally adjusted 210,000 during the week ending Oct. 21, staying in the very low end of their range of 194,000 to 265,000 for this year.

The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 63,000 to 1.790 million for the week ended Oct. 14, the highest since early May. Economists were divided on whether this was a sign that the unemployed were experiencing longer spells of joblessness or reflected difficulties adjusting the data for seasonal fluctuations.

Inventory accumulation rose at an $80.6 billion pace last quarter, contributing 1.32 percentage points to GDP growth. Businesses relied on imports to restock, resulting in a small trade deficit that imposed a minor drag on GDP growth. Excluding inventories and trade, the economy grew at a solid 3.5% rate.

The GDP data likely has no impact on near-term monetary policy amid a surge in U.S. Treasury yields and a recent stock market selloff, which have tightened financial conditions.

Underlying price pressures abated further, with the price index for personal consumption expenditures (PCE) excluding food and energy rising at a 2.4% rate. That was the slowest pace since the fourth quarter of 2020 and followed a 3.7% pace of increase in the second quarter.

The so-called core PCE price index is one of the inflation measures tracked by the Fed for its 2% target. The U.S. central bank is expected to leave rates unchanged next Wednesday. It has raised its benchmark overnight interest rate by 525 basis points to the current 5.25% to 5.50% range since March of last year.

"From the Fed perspective there is little here to suggest any need to start lowering rates, nor does this suggest an imminent need to raise them again either," said Richard de Chazal, macro analyst at William Blair in London.

By Henry Romero and Diego Oré

ACAPULCO, Mexico (Reuters) -Hurricane Otis claimed the lives of at least 27 people, Mexico's government said on Thursday after one of the most powerful storms ever to hit the country hammered the beach resort of Acapulco, causing damage seen running into billions of dollars.

Otis, which struck Mexico Wednesday as a Category 5 storm, flooded streets, ripped roofs off homes and hotels, submerged cars and cut communications, road and air access, leaving a trail of wreckage across Acapulco, a city of nearly 900,000.

Four people are still missing, the government said.

"What Acapulco suffered was really disastrous," President Andres Manuel Lopez Obrador told a press conference in Mexico City tallying the damage from the storm, which ripped into southern Mexico with winds of 165 miles per hour (266 kph).

Otis, which intensified unexpectedly rapidly off the Pacific coast, was so powerful it tore large trees up by the roots, scattering debris all over Acapulco. It flooded hospitals, and hundreds of patients had to be evacuated to safer areas.

Erik Lozoya, a professional magician, said he endured "three hours of terror" with his wife and two baby daughters in an Acapulco hotel room as the hurricane smashed through the windows and swept through the building with a deafening intensity.

"It literally felt as though our ears were going to explode," said the 26-year-old Lozoya, who barricaded himself in a bathroom with his family and four others. "We saw mattresses, water tanks flying. The ceiling began to cave in."

The family left the bathroom, but the eighth-floor room soon began to flood, and Lozoya had to stand carrying his daughters with water up to his ankles for two hours because the wind was so strong they could not open the door to get out.

The hurricane peeled off sections of buildings in downtown Acapulco. Some Mexican media posted videos of looting in the city. Reuters could not immediately confirm their veracity.

The government has so far not estimated the cost of Otis, but Enki Research, which tracks tropical storms and models the cost of their damage, saw it "likely approaching $15 billion."

The people still missing are believed to be members of the navy, said Lopez Obrador, who went to Acapulco on Wednesday by road, changing his vehicle more than once as the storm caused him hold-ups, according to pictures published on social media.

One showed him sitting in a military jeep stuck in mud.

On Thursday afternoon, the government said the air traffic control tower of Acapulco's international airport was up and running again and that an air bridge enabling tourists to reach Mexico City would be operating from Friday.

SHOCKING POWER

Mexican authorities said Otis was the most powerful storm ever to strike Mexico's Pacific coast, although Hurricane Patricia, which slammed into the resort of Puerto Vallarta eight years earlier, whipped up even higher wind speeds out at sea.

Nearly 8,400 members of Mexico's army, air force and national guard were deployed in and near Acapulco to assist in cleanup efforts, the defense ministry said.

The destruction wrought by Otis has added to concerns about the impact of climate change, which many scientists believe will lead to more frequent extreme weather events.

Acapulco is the biggest city in the southern state of Guerrero, one of the poorest in Mexico. The local economy depends heavily on tourism, and Otis caused extensive damage to some of the most famous hotels on the city's shoreline.

Calling the storm "totally devastating," Guerrero state Governor Evelyn Salgado said 80% of the city's hotels had been hit by the storm and that authorities were working to restore electricity and reactivate drinking water pumps.

Operations at Acapulco's international airport remain suspended, officials said, citing structural damage.

School classes were canceled in Guerrero for a second day and opposition politicians criticized the government for a lack of preparedness in the face of the storm's onslaught.

Magician Lozoya said he and his family were not alerted by the hotel about the approach of hurricane until about 10:30 p.m. on Tuesday, barely 1-1/2 hours before Otis came ashore.

Lopez Obrador had issued a warning about two hours earlier on social media about the impending arrival of Otis.

Mexican oil and gas company Pemex said there was a enough gasoline and diesel for the port of Acapulco and the entire state of Guerrero. State power utility CFE had over 1,300 employees working to restore power it said on Wednesday evening, when some 300,000 people remained without electricity.

Telmex, the Mexican telecommunications firm controlled by the family of tycoon Carlos Slim, said it had restored its network in Acapulco by Thursday morning.

By Tetsushi Kajimoto and Leika Kihara

TOKYO (Reuters) -Japanese policymakers maintained their warning to investors against selling the yen on Thursday in the wake of the currency's renewed slide beyond 150 to the dollar, a level seen by traders as authorities' threshold for intervention.

"It's important for currency rates to move stably reflecting fundamentals. Excess volatility is undesirable," Deputy Chief Cabinet Secretary Hideki Murai told a regular news conference, when asked about the yen's declines. He declined to comment on whether Japan will intervene in the currency market.

Finance Minister Shunichi Suzuki also told reporters earlier on Thursday that authorities were watching markets "with a sense of urgency," but did not make any comment about intervention.

The Japanese yen weakened to a fresh one-year low of 150.50 per dollar on Thursday and was not far off the 151.94 it touched in October last year, which prompted Japan to intervene in the currency market.

While a weak yen boosts exporters' profits, it has recently become a headache for Japanese policymakers as it inflates the cost of raw material imports and households' cost of living.

The comments on Thursday used softer language than those typically used ahead of intervention.

Authorities tend to escalate their warnings when currency intervention is imminent, saying they stand ready to take "decisive action" and that they won't rule out any options.

The yen's falls, driven by the gap between U.S. and Japanese interest rates, will likely keep pressure on the Bank of Japan to tweak its policy of capping long-term yields around zero.

Sources have told Reuters a hike to an existing yield cap set just three months ago is being discussed as a possibility in the run-up to next week's policy meeting.

Rising global yields and expectations of a near-term BOJ policy shift pushed up the benchmark 10-year Japanese government bond (JGB) yield to 0.885% on Thursday, hitting its highest since July 2013 and approaching the bank's 1.0% cap.

Japan's core inflation hit 2.8% in September, exceeding the BOJ's 2% target for the 18th straight month, heightening expectations the central bank will soon end negative short-term rates and its yield curve control (YCC) policy.

BOJ Governor Kazuo Ueda has stressed the need to keep monetary policy ultra-loose until the current cost-driven price rises shift to a more durable, demand-driven inflation.

With wages failing to rise enough to beat inflation, the government plans to compile a package of measures to cushion the blow to households from rising living costs that could include around $33 billion for payouts and income tax cuts.

By Xie Yu

HONG KONG (Reuters) - Asian stocks slid to 11-month lows on Wednesday, U.S. futures dropped and the dollar surged as Treasury yields spiked back toward peaks on fears that U.S. interest rates will stay high.

A rebound in U.S. home sales was the latest trigger for concern in the bond market. Corporate earnings have also been mixed. Alphabet (NASDAQ:GOOGL) shares logged their worst session since March 2020 overnight, dropping 9.5% as investors were disappointed with stalling growth in its cloud division.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 1%. Japan's Nikkei fell 2%. Alphabet shares slid another 2% after hours and pulled Nasdaq futures down by nearly 1%.

The benchmark 10-year Treasury yield, a bedrock for pricing risk-taking across financial markets, jumped 11 basis points (bps) overnight and traded at 4.96% on Thursday.

"There is no anchor in U.S. treasuries," said Ben Luk, Senior Multi Asset Strategist at State Street (NYSE:STT) Global Markets.

"If (the 10-year yield) doesn't stay below 5%, then I think it's still going to be a very choppy market for both U.S. and Asia," he said.

"Once you have more stable treasury environment, you will have a clearer earnings revision story," he added, noting markets dominated by tech firms, which rely heavily on financing, will be vulnerable to higher rates due to borrowing costs.

Shares in Facebook (NASDAQ:META) parent Meta fell 4% on Wednesday and another 3% in after-hours trade after publishing results showing better-than-expected revenue but a cloudy outlook, with expenses seen topping Wall Street estimates.

Australian shares fell to a one-year low, as stronger-than-expected third-quarter inflation data raised bets that the central bank might raise rates next month.

The S&P/ASX 200 index retreated 0.7% to 6,854.20 in early trade, hitting its lowest level since Oct. 31, 2022.

In the currency markets, the dollar index hit a two-week high of 106.77.

The yen weakened past 150 per dollar, a level that has put traders on guard for intervention to support the Japanese currency. By 0300 GMT the yen was trading at a one-year low of 150.43 per dollar.

The Australian dollar fell to an almost one-year low of $0.6271 in morning trade. The head of Australia's central bank on Thursday said the strong third-quarter inflation report was around policymakers' expectations, and they were still considering whether it would warrant a rate rise.

The New Zealand dollar also hit a nearly one-year low at $0.5776.

In China, markets' bounce on news that China would issue a trillion yuan ($137 billion) in sovereign debt was quickly fading away, with mainland and Hong Kong indexes winding back gains. The Hang Seng fell 0.8%.

Oil prices slipped. U.S. crude dipped 0.15% to $85.26 a barrel. Brent crude fell to $90.05 per barrel.

Oil prices rose about 2% on Wednesday on worries about the conflict in the Middle East, but gains were capped by higher U.S. crude inventories and gloomy economic prospects in Europe.

Gold was slightly higher. Spot gold was traded at $1983.015 per ounce.

South Korea's economy fared better than expected in the third quarter with the expansion underpinned by exports, backing the case for the central bank to keep rates on hold for the months ahead.

The won fell sharply, in line with the dollar's broad gains.

($1 = 7.3181 Chinese yuan renminbi)

By Lucia Mutikani

WASHINGTON (Reuters) - The U.S. economy likely grew in the third quarter at its fastest pace of any quarter in nearly two years, again defying dire warnings of a recession, as higher wages from a tight labor market helped to power consumer spending.

The Commerce Department's advance estimate of third-quarter gross domestic product on Thursday is also expected to show residential investment rebounding after nine straight quarters of declines. Business investment is believed to have slowed as the boost fades from the construction of factories. President Joe Biden's administration has taken steps to encourage more semiconductor manufacturing in the U.S.

While the anticipated robust growth pace notched last quarter is probably not sustainable, it would demonstrate the economy's resilience despite aggressive interest rate hikes from the Federal Reserve. Still, growth could slow in the fourth quarter because of the United Auto Workers strikes and the resumption student loan repayments by millions of Americans.

Most economists have revised their forecasts and now believe the Fed can engineer a "soft-landing" for the economy, citing expectations that the July-September period will show a continuation of second-quarter strength in worker productivity and moderation in unit labor costs.

"We're seeing the exact opposite (of a recession)," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. "The American consumer, the biggest engine of the U.S. economy seems to have had a mid-year resurgence, largely because confidence improved through the summer because of the rally in the stock market and steadier gasoline prices."

According to a Reuters survey of economists, GDP likely increased at a 4.3% annualized rate last quarter, which would be the fastest since the fourth quarter of 2021. The economy grew at a 2.1% pace in the April-June quarter and is expanding at a pace well above what Fed officials regard as the non-inflationary growth rate of around 1.8%.

Estimates ranged from as low as a 2.5% rate to as high as a 6.0% pace, a wide margin reflecting that some of the input data, including September durable goods orders, goods trade deficit, wholesale and retail inventory numbers will be published at the same time as the GDP report.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was likely the main driver, with Americans buying long-lasting goods like motor vehicles as well as going to concerts. Spending on goods appears to have picked up considerably because prices have come down.

A strong labor market has supported consumer spending. Though wage growth has slowed, it is rising a bit faster than inflation, lifting households' purchasing power. Growth in consumer spending is expected to have exceed a 4.0% rate after only rising at a 0.8% pace in the second quarter.

SPEED BUMP AHEAD

Student loan repayments resumed in October, which economists estimated was equal to roughly $70 billion, or around 0.3% of disposable personal income, and could dent spending. Though excess savings accumulated during the pandemic remain ample, they are largely concentrated among high-income households.

Low-income consumers are increasingly relying on debt to fund purchases, with higher borrowing costs boosting credit card delinquencies.

As a result, some economists see a sharp slowdown around the corner. Others are not too concerned, noting the labor market continues to churn out jobs at a solid clip.

"We see scary headlines about credit card debt rising too fast, but it had fallen quite a bit during the pandemic," said Luke Tilley, chief economist at Wilmington Trust in Philadelphia. "When you look at it as a share of people's monthly flow of income, it's actually fairly normal. I don't think that we've hit a point where it's a canary in the coal mine."

Labor market resilience should be evident in a separate report from the Labor Department on Thursday, which is expected to show a modest rise last week in the number of people filing new claims for unemployment benefits from the previous week's nine-month low.

The GDP data probably will not affect near-term monetary policy as financial conditions have already tightened with U.S. Treasury yields surging while the stock market sold off.

Financial markets expect the Fed to keep interest rates unchanged at its Oct. 31-Nov. 1 policy meeting, according to CME Group's (NASDAQ:CME) FedWatch. Since March, the U.S. central bank has raised its benchmark overnight interest rate by 525 basis points to the current 5.25% to 5.50% range since March 2022.

"I think that (strong GDP report) has already been incorporated into their thinking," said Yelena Shulyatyeva, a senior economist at BNP Paribas (OTC:BNPQY) in New York. "This has been our view that we have reached the terminal rate for this business cycle."

Growth last quarter was also seen lifted by a smaller trade deficit, thanks to strong exports and increased inventory investment. No impact was expected from the auto strikes, which started in mid-September. But the labor dispute, which is costing auto makers millions of dollars per week, could weigh on growth in the fourth quarter.

"I see a speed bump because of the strikes," said Brian Bethune, an Economics professor at Boston College. "But I don't see that suddenly we'll get thrown overboard."

By Milounee Purohit

BENGALURU (Reuters) - Indian consumer spending during this year's festival season will be slightly better than in 2022, said economists polled by Reuters, but probably not enough to ramp up the speed of what is already the world's fastest-growing major economy.

The broadly optimistic survey data, taken together with expectations for 6.3% growth this fiscal year and next, suggest even with a dip in inflation, prospects for a Reserve Bank of India interest rate cut are still a long way off.

Battered during the pandemic, consumption, which makes up for about 60% of Asia's third-largest economy has been slow to reach its pre-COVID levels.

While consumer spending in the current quarter was predicted to provide some lift to the economy, the overall growth outlook for the year has remained largely unchanged.

Nearly 75% of economists, 25 of 33, said spending during this year's festival season, which lasts from October through December, will be higher compared to last year. Among those, 21 said slightly higher and four said significantly higher.

The remaining eight said slightly lower.

GDP growth will average 6.3% this fiscal year and next, based on the median forecasts of a wider sample of 63 economists in the Oct. 16-25 survey. The median forecast was almost exactly the same in a September poll, 6.2% and 6.3%, respectively.

"Festive demand could be substantial this time, and I think that bodes well for private consumption expenditure in Q4, and I hope it delivers that extra kick it does every year," said Dhiraj Nim, an economist at ANZ Research.

"From a year-on-year growth rate perspective, it may not be a substantial upside so to speak."

Economists generally agree India needs an even higher growth rate to generate enough jobs for millions of young people who enter the workforce every year.

The RBI's bulletin early this year said India needs to grow 7.6% annually for the next 25 years to become a developed nation. No economist in the poll expects India to grow at that rate this year or next.

"India's long-term success will ultimately depend on whether it can create enough adequate jobs to leverage its huge demographic dividend. At the moment, employment is largely concentrated in the low-productivity agricultural sector," said Alexandra Hermann at Oxford Economics.

"In the current services-based model, achieving sustainable and inclusive growth will be challenging, though not inconceivable."

When asked what was India's potential economic growth rate over the next 2-3 years, economists returned a median range of 6.0%-7.0%.

The survey also showed inflation averaging 5.5% this year and 4.8% in 2024, higher than the mid-point of the RBI's 2-6% target range.

The RBI was expected to leave its repo rate unchanged at 6.50% until at least end-June of next year, with the first 25 basis point cut forecast to come in the July-September quarter, poll medians showed.

(For other stories from the Reuters global economic poll:)

WASHINGTON (Reuters) - U.S. Treasury Secretary Janet Yellen said on Wednesday that $8.5 billion in COVID-era investments in community development financial institutions and minority-owned banking firms will boost lending to Black and Latino communities by nearly $140 billion over a decade.

Yellen said in prepared remarks to the Treasury's Freedman's Bank Forum that early reporting from the investment program indicates that one-third of total originations by recipient lenders were "deep impact" loans made to the hardest-to-serve borrowers.

"This is just the start," Yellen said of the Emergency Capital Investment Program (ECIP). "Over the next decade, we expect that ECIP will result in nearly $80 billion in increased lending in Black communities and nearly $58 billion in Latino communities."

The ECIP funding was authorized as part of a COVID-19 aid package approved by Congress in December 2020 and signed into law by then-President Donald Trump just before he left office. The program was implemented by the Biden administration.

Earlier on Wednesday, the Treasury announced a new goal to attract $3 billion in deposits to community development financial institutions and minority-owned banking institutions to help meet these lending targets, up from a $1 billion target for deposits reached in June.

TOKYO (Reuters) - Japan's 10-year government bond yield touched a new decade-high on Wednesday on speculation that the Bank of Japan (BOJ) may raise its cap for the benchmark yield.

The 10-year JGB yield rose to 0.865% earlier in the session, its highest since July 2013. The yield retreated to 0.850%, up 1 basis point (bps) from the previous session.

A recent surge in global interest rates is heightening pressure on the BOJ to raise the existing cap on the 10-year bond yield at its policy meeting next week.

"If the BOJ raises the ceiling of the 10-year bond yield, that implies the BOJ's stance to protect its yield curve control (YCC) is different from before," said Naoya Hasegawa, senior bond strategist at Okasan Securities.

"When (Haruhiko) Kuroda was the governor, they conducted relentless bond buying to contain elevated yields. But according to what media has reported, the current administration is trying to raise the ceiling so that the BOJ can reduce the bond-buying amounts."

The BOJ has conducted several unscheduled bond-buying operations recently, including the one in the previous session. Strategists have said the BOJ has not aggressively tried to contain yields based on the amounts they offered to buy.

The central bank uses the YCC to guide the 10-year yield to around 0% to support the economy. In July, it raised the de-facto cap on the yield to 1.0% from 0.5% to allow long-term rates to rise more, reflecting increasing inflation.

The five-year yield was flat at 0.355%.

Yields on other tenors fell after a solid outcome of a liquidity-enhancing auction, with the 20-year JGB yield slipping 1.5 bps to 1.630%.

The 30-year JGB yield fell 2.5 bps to 1.830%.

The two-year JGB yield fell 0.5 bp to 0.070%.

A look at the day ahead in European and global markets from Tom Westbrook:

Giants of tech and luxury goods have turned in mixed reports. Microsoft (NASDAQ:MSFT) and Google parent Alphabet (NASDAQ:GOOGL) each beat forecasts, but their share prices went in opposite directions as investors zeroed in on cloud computing.

Google shares fell 6% in after-hours trade. Microsoft shares rose 4%, leaving Nasdaq 100 futures down 0.3% in Asia.

Here's the wrapup of the pair's results.

Facebook (NASDAQ:META) parent Meta reports after-market on Wednesday. Its shares had fallen on Tuesday and slipped a little further after hours as dozens of U.S. states sued the company and its Instagram business, accusing them of addicting teens.

On the luxury front Kering (EPA:PRTP), owner of Gucci and Balenciaga, reported a bigger-than-expected drop in third-quarter sales. That was worse than the slowdown reported by LVMH, and the surprise jump in sales logged by Birkin-bag maker Hermes on Tuesday, which sent its shares up 3%.

Gucci's revamped look, unveiled last month in Milan by designer Sabato De Sarno, is yet to hit stores.

European loans data and a survey of German business conditions will be closely watched later on Wednesday. Santander (BME:SAN), Deutsche Bank and Dassault Systemes also report results.

In Asia, China's plans to raise a trillion yuan ($137 billion) in sovereign debt boosted Chinese shares in anticipation of spending and lifted MSCI's broad index of Asia ex-Japan stocks away from Tuesday's 11-month low. [MKTS/GLOB]

Central Huijin's vow to buy exchange-traded funds and keep doing so was also reminiscent of similar announcements from the state fund that drove strong rallies in 2013 and 2015. [.SS]

The Aussie dollar was the main mover in the foreign exchange market, rising as surprisingly strong inflation data prompted traders to re-price the risk of another rate hike.

Just this week, RBA Governor Michele Bullock said the bank would not hesitate to raise its 4.1% cash rate if there was a "material" upward revision to the inflation outlook.

Key developments that could influence markets on Wednesday:

Economics: Euro zone lending, German business survey

Earnings: Dassault Systemes, Deutsche Bank, CME Group (NASDAQ:CME), Hilton, Boeing (NYSE:BA) and, after market close, IBM (NYSE:IBM) and Meta

($1 = 7.3118 Chinese yuan)

By Kevin Yao

BEIJING (Reuters) -China is set to unleash fresh fiscal stimulus to shore up its economic recovery, drawing on a well-used playbook that relies heavily on debt and state spending but falls short on the deeper reforms called for by a growing number of analysts.

Some government advisers are recommending China lifts its 2024 budget deficit target beyond the 3% of gross domestic product (GDP) set for this year, which would allow Beijing to issue more bonds to revive the economy, policy insiders and economists have told Reuters.

The world's second-largest economy grew faster than expected in the third quarter, improving the chances Beijing can meet its growth target of around 5% for 2023.

But while the upbeat surprise gave battered China investors some cause for cheer, there are deeper concerns about the continued demise of private sector activity and the lack of longer-term reforms needed to shift the economy to consumer-led growth.

For now, the focus remains on sustaining a fragile recovery to avoid economic disaster.

"We need to make good preparations for next year and implement policies to stabilise growth. The foundation of economic recovery is not solid," said an adviser to the cabinet who spoke on condition of anonymity.

"For next year, we should still set a 5% GDP growth target."

China's parliament is set to approve just over 1 trillion yuan ($137 billion) in additional sovereign debt issuance when it concludes a five-day meeting that began on Oct. 20, sources told Reuters.

Such bonds will likely be used to fund water conservancy and flood prevention projects and come on top of an expected front-loading of 2024 local bond quotas.

CALLS FOR AMBITION

China's feeble post-pandemic recovery has exposed growing structural constraints and raised a sense of urgency around reforms to put growth on a more sustainable footing.

The debate about economic policy in China has heated up in recent months with some government advisers advocating reforms to help unleash new growth engines beyond property and infrastructure investment.

For those looking for structural reforms, the focus is on policies that spur urbanisation and household spending power, reduce the reliance on investment and level the playing field between state-owned enterprises and private firms.

Without such changes, economists warn China could be headed for a long-period of deflation and stagnant growth that fails to lift living standards for the country's 1.4 billion people.

However, near-term needs have largely overshadowed those calls for more politically ambitious reforms and instead centre on authorities stepping up fiscal and monetary support.

Local governments have been told to complete the issuance of the 2023 quota of 3.8 trillion yuan in special local bonds by September to fund infrastructure.

Some advisers say the central government has room to spend more as its debt as a share of GDP is just 21%, far lower than 76% for local governments.

"Fiscal policy should still play the leading role next year," said Xu Hongcai, deputy director of the economic policy commission at the state-backed China Association of Policy Science.

"For next year, actual growth could be lower than 5% but it cannot be too low, otherwise some problems will become more striking, such as employment and incomes," Xu told Reuters.

The central bank, which delivered modest interest rate cuts and has pumped more cash into the economy in recent weeks, is constrained in how much it can ease monetary policy for fears of stoking capital flight and hurting the yuan, analysts said.

"There is still room to cut interest rates and reserve requirement ratios but there is a question of sustainability," said Guan Tao, global chief economist at BOC International and a former official at the State Administration of Foreign Exchange (SAFE).

However, policy insiders believe more fundamental changes, especially a revival of market-based reforms, will be limited due to the political environment, under which the state has increased its control over the economy, including the private sector.

An expected Communist party plenum, which is likely to take place in November and traditionally focuses on reforms, could disappoint those awaiting big changes.

"We should push reforms as many problems are structural, but reforms are difficult to implement and require political will," said one policy insider.

($1 = 7.2987 Chinese yuan)