By Isla Binnie

NEW YORK (Reuters) - Money managers in the United States have closed funds with sustainability mandates faster than they opened new ones over the past three months as investor appetite waned for the asset class overall, data firm Morningstar said on Monday.

Investment products with a declared aim to promote ethically responsible practices, from cutting greenhouse gas emissions to increasing workplace diversity, have lost their lustre in the U.S. since a 2021 boom, as regulators scrutinised how they were marketed and Republican politicians alleged industries were being boycotted to the detriment of retirees' savings.

"For the first time in recent history, sustainable fund departures outpaced arrivals" in the three months September, Chicago-based researcher Alyssa Stankiewicz wrote.

Three new funds were launched while thirteen closed in this category. One existing fund took on the "sustainable" label and four other funds moved away from that mandate.

Morningstar's definition includes open-ended and exchange-traded vehicles with a "clear and prominent commitment" to sustainability, impact or environmental, social and governance (ESG) factors.

The slowdown came on the heels of 27 launches and 9 closures in the previous quarter, and compares with a record 44 launches in the fourth quarter of 2021.

Investors pulled money out of U.S. funds in general in the period, but sustainable funds fared worse than conventional peers, registering their fourth consecutive quarter of outflows for a contraction of 0.85% versus 0.02% for the total fund universe. More conventional funds were launched than closed in the third quarter.

"Although the motivations behind outflows cannot be perfectly quantified, many factors are in play," Stankiewicz said. "These include rising energy prices, high interest rates concerns about greenwashing, and political backlash."

(Reuters) -Escalating tension in the Middle East and surging U.S. bond yields set financial markets up for more turbulence, exacerbated by high oil prices and China's property pain.

The European Central Bank looks set to sit tight after a string of interest rate hikes, while there is a slew of U.S. earnings and Argentina's presidential election.

Here's your week ahead in markets from Amanda Cooper and Naomi Rovnick in London, Kevin Buckland in Tokyo, and Lewis Krauskopf and Rodrigo Campos in New York.

1/ UNEASY CALM

War is raging between Israel and Palestinian militant group Hamas and an uneasy calm grips markets as they wait and see how the conflict unfolds.

Market reaction has been relatively modest with Wall Street's so-called fear gauge, the VIX index, showing investors are not as nervous as they were when Russia invaded Ukraine last year - at least, not yet.

Oil is the barometer to watch. It hit $93 a barrel on Wednesday as the risk of escalation threatened to disrupt Middle East oil supplies.

A wider conflict would deliver another shock to markets, potentially forcing the hand of central banks that have been unswerving in their determination to fight inflation.

The "flash" manufacturing and service sector activity surveys in coming days could add to uncertainty if they point to economic weakness.

2/ STOPPING HERE?

The European Central Bank, meeting on Thursday, will likely have one eye on the potential for conflict in the Middle East to disrupt dis-inflationary trends and the other on a weakening economy.

Hopes for rate cuts would be premature. ECB chief economist Philip Lane says the central bank was still "quite some distance" from easing monetary policy.

But traders can expect, at least, a pause for now.

After the ECB raised its deposit rate at each of its last 10 meetings to a current record high, policymakers have signaled it is time to keep borrowing costs on hold as they assess the impact of monetary tightening so far.

Canada's central bank, meeting on Wednesday, is tipped to leave rates steady as inflation eases.

3/ CUE THE MEGACAPS

    Reports from megacap companies highlight a big batch of third-quarter U.S. corporate earnings, a key test for stocks that have propelled equity indexes higher this year.

    Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) results are due on Tuesday, Meta Platforms (NASDAQ:META) on Wednesday, and Amazon (NASDAQ:AMZN) on Thursday. Those stocks along with Apple (NASDAQ:AAPL), Nvidia (NASDAQ:NVDA) and Tesla (NASDAQ:TSLA) combined have accounted for the bulk of the S&P 500's 11% year-to-date gain, so any results disappointment could have broad fallout.

    Others reporting in the coming week include Coca-Cola (NYSE:KO), General Motors (NYSE:GM), Merck and United Parcel Service (NYSE:UPS). Investors are banking on an overall recovery in U.S. profits after a tepid first half.

    Markets also get a fresh look at the state of the economy from data including third-quarter GDP and the monthly personal consumption expenditures price index.

4/ WEEDS VS GREEN SHOOTS    

    Signs of green shoots for China's economy after upbeat retail sales, factory production and GDP data are hard to spot as the weeds in the property sector get thicker.

    Making up a quarter of the world's No. 2 economy, property turmoil threatens China's 5% growth target - even after a consensus-smashing 4.9% quarterly expansion.

    That hasn't escaped investors, who pushed mainland shares to a nearly one-year trough.

    A lot of what's happening is hidden from view: A default deadline for Country Garden's debt passed in silence, and the property developer was forced to deny its founder and his daughter had fled China. The market is scouring the landscape for who's next, and the sudden resignation of Gemdale's chairman, for unspecified health reasons, spurred a fire sale of its bonds.

    Pressure on Beijing for further stimulus is strong and steps so far have disappointed.

5/ CROSSROAD FOR ARGENTINA

Argentina's ruling Peronist coalition smashed expectations in the country's general election on Sunday, setting the stage for a polarized run-off vote on Nov. 19 between Economy Minister Sergio Massa and far-right libertarian radical Javier Milei.

Latin America's third largest economy is engulfed by a severe economic crisis - inflation runs at 138% and is on the verge of going hyper, interest rates stand at 133% and the black-market peso has weakened more than 60% this year alone.

For investors, the survival of the country's $43 billion program with the International Monetary Fund is at stake, as well as the possibility of Argentina defaulting on its debt for the tenth time.

The surprise strength of the Peronists sets up a battle between two polar opposite economic models for the country. The result eases concerns about a radical shift in policies in the event of a decisive win for Milei, who has pledged to dollarize the economy and shut the central bank. But it still leaves the country with few answers to its worst economic crisis in two decades.

(Graphics by Vineet Sachdev, Pasir Kongkunakornkul and Sumanta Sen; Compiled by Dhara Ranasinghe and Karin Strohecker; Editing by Simon Cameron-Moore and Sharon Singleton)

By Wayne Cole

SYDNEY (Reuters) - Asian shares hit one-year lows Monday as the risk of a wider conflict in the Middle East clouded sentiment in a week laden with data on U.S. growth and inflation as well as earnings from some of the world's largest tech companies.

Bonds were also under pressure as U.S. 10-year Treasury yields crept to within a whisker of 5.0%, pushing borrowing costs up across the globe and testing equity valuations.

Washington warned over the weekend of a significant risk to U.S. interests in the Middle East as ally Israel pounded Gaza and clashes on its border with Lebanon intensified.

The European Central Bank and Bank of Canada also hold policy meetings and, while no hikes are expected, investors will be sensitive to guidance on futures moves.

The recent surge in bond yields has tightened monetary conditions without the central banks having to do anything, allowing the Federal Reserve to signal it will likely stay on hold at its policy meeting next week.

Indeed, futures imply around a 70% chance the Fed is done tightening for this cycle and are flirting with the chance of rate cuts from May next year.

The jump in yields has challenged equity valuations and dragged most of the major indices lower last week, while the VIX 'fear index' of U.S. stock market volatility hit its highest since March.

On Monday, MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.5% to its lowest in almost a year. China's blue chip index lost 0.6% to its weakest since early 2019.

Japan's Nikkei eased 0.6%, as did South Korea's market.

EUROSTOXX 50 futures and FTSE futures were flat. Both S&P 500 futures and Nasdaq futures added 0.2%, underpinned by hopes a rush of earnings reports this week will provide some support.

Mega caps Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN) and Meta Platforms (NASDAQ:META) are all reporting. IBM (NYSE:IBM) and Intel (NASDAQ:INTC) are also on the docket.

GROWTH SURGE

Profits should be supported by the strength of consumer demand with figures on U.S. gross domestic product this week expected to show annualised growth of a heady 4.2% in the third quarter, and nominal annualised growth possibly as high as 7%.

"At the same time, last quarter's modest rise in hours worked points to a strong productivity gain and surge in corporate profits," wrote JPMorgan chief economist Bruce Kasman in a note.

"As corporate and household income share the benefits of this nominal activity surge, the underlying resilience of the U.S. private sector is being reinforced."

This U.S. outperformance has underpinned the dollar, though the threat of Japanese intervention has capped it around 150.00 yen at least for the moment. The dollar was last trading at 149.93 yen, just below the recent peak of 150.16.

Yields in Japan were also on the rise on speculation the Bank of Japan was discussing a further tweak to its yield curve control policy, which might be announced at its policy meeting on Oct. 31.

The euro was flat at $1.0578, while the Swiss franc held firm at 0.8946 per dollar having benefited from safe haven flows over the past couple of weeks.

Gold has likewise attracted a safety bid to stand at $1,973 an ounce, having hit its highest since May last week.

Oil prices gave back some ground in the absence of any disruption to supplies from the Middle East, at least for now.

Brent was last down 73 cents at $91.43 a barrel, while U.S. crude eased 82 cents to $87.26.

By Vidya Ranganathan

SINGAPORE (Reuters) -Japan's yen took the spotlight in Asia on Monday, weakening to the 150-per-dollar level, but just briefly, as investors betting on a further rise in dollar yields lost out to those expecting Japanese authorities will intervene in markets.

The risk of Israel's war on the Islamist group Hamas becoming a wider regional conflict kept markets on edge, as Israeli air strikes battered Gaza early on Monday, and the United States dispatched more military assets to the region.

U.S. Treasuries were subdued as investors hunkered down for a European Central Bank meeting and U.S. GDP data later in the week.

Ten-year yields were around 4.97%, having briefly popped above 5% last week after Federal Reserve Chair Jerome Powell said the U.S. economy's strength and tight labor markets might warrant tighter financial conditions.

The dollar index added 0.02% to 106.19, with the euro down 0.07% at $1.0586.

The Japanese yen last traded at 149.83 per dollar, after briefly easing early on Monday to 150.14, a level last seen on Oct.3 when traders had suspected the Bank of Japan intervened to nudge it to the stronger side of 150.

Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo, said it seems like a set of investors were betting the Bank of Japan will defend the 150 level, even as others saw rising U.S. yields as a reason to keep pushing the dollar up.

"Potentially there are two camps out fighting around 150, so that's why dollar-yen doesn't move from here," Yamamoto said.

While there was some speculation the BOJ might once again tweak its yield-curve policy band at a scheduled policy review next week, the BOJ had also shown it will not let domestic yields rise sharply, he said.

The benchmark JGB yield was at 0.835%, just below Friday's peak which was the highest since July 2013. Yields dipped on Friday after the BOJ announced more loans to encourage financial institutions to buy JGBs.

Even though it hasn't risen lockstep with yields, the dollar was underpinned by the steady rise in yields at the long end of the U.S. Treasuries curve, driven by widening term premiums on expectations of stronger growth and fiscal slippage.

Since mid-July, the trade-weighted dollar index is up 6.7% but has been nearly steady this month.

"It is a bit of a puzzle that DXY hasn't retested the early October lows, given its strong foundations of high yields backed by strong growth, strong energy production as concerns grow over the Middle East and haven status," said Sean Callow, a currency strategist with Westpac.

"However, DXY downside is likely limited to the mid-105s and we continue to target 109 in Q4/Q1."

Oil prices dipped on Friday after Hamas released two U.S. hostages from Gaza, leading to hopes the crisis could de-escalate without dragging in the rest of the Middle East region and disrupting oil supplies. Brent crude futures were 0.6% lower at $91.55 a barrel, but are still up 10% over 10 days.

The ECB meets on Thursday. Its rate hiking cycle is over, according to all 85 economists polled by Reuters, but it won't be until at least July 2024 before it begins easing as the battle against elevated inflation continues.

The ECB raised its key interest rates by 25 basis points in September, taking the deposit rate to 4.00% and the refinancing rate to 4.50%, but signalled its 10th hike in a 14-month-long streak was likely to be its last.

(Reuters) - S&P Global is the first among the “big three” rating agencies to upgrade Greece to investment grade since the country’s debt crisis in 2010.

It raised late on Friday the country's local and foreign currency long-term issuer ratings to 'BBB-/A-3', with a stable outlook, citing stronger budgetary position.

The other two agencies, Fitch and Moody's (NYSE:MCO), rate the country one notch below investment grade. DBRS Morningstar upgraded Greece's rating to investment grade BBB (low) last month.

S&P said it expects budget surplus target to help in paring the country's government debt, and added that it is cautious about political pressures hindering Greece's ability to sustain large primary budget surpluses.

Greece lost its investment-grade credit rating, which implies a low risk of default, in 2010 when its decade-long debt crisis erupted, forcing it to sign up for international bailouts worth about 260 billion euros ($275.34 billion) to stay afloat.

It emerged from the debt crisis in 2018 and was the only country in the eurozone with a "junk" rating.

S&P expects "additional structural economic and budgetary reforms, coupled with large EU funds, will support robust economic growth in 2023-2026."

Greece expects economic output to rise 3% in 2024 following a 2.3% expansion this year more than twice the eurozone average. It also projects a 2.1% of GDP primary budget surplus next year on higher investment and strong tourism revenue.

The conservative government hopes now that the upgrade will trigger more capital inflows and reduced borrowing cost for the country's businesses.

"In the short and medium term, we expect inflows from index-tracking funds, upgrade of banks assets and more favorable borrowing cost for companies," a senior finance ministry official told Reuters.

Greece's 10-year government bond yield was at 4.38% on Friday, about 58 basis points below Italy's equivalent.

"I think all the ratings specific news is priced in. It’s trading as investment grade anyway,” Rabobank senior rates strategist Lyn Graham-Taylor told Reuters.

($1 = 0.9443 euros)

Investing.com -- The risk-off mood dominating markets looks likely to continue in the coming week, while four out of seven megacap companies are due to report earnings. U.S. data will give markets another update on the strength of the economy. Oil prices look set to remain choppy and the European Central Bank will announce its latest rate decision. Here’s what you need to know to start your week.

Risk-off mood

A risk-off mood is dominating markets with investors worried about the prospect of more interest rate hikes and the Israel-Hamas conflict spreading. A weaker-than-expected earnings report for Tesla (NASDAQ:TSLA) last week also darkened the mood.

Wall Street’s most closely watched measure of investor nervousness, the CBOE Volatility Index, closed Friday at its highest in nearly seven months. For the week the Dow was down 1.6%, the S&P 500 fell 2.4% and the Nasdaq slid 3.2%.

The benchmark 10-year Treasury yield eased on Friday, a day after crossing 5% for the first time since July 2007 in the wake of comments by Fed Chair Jerome Powell (see below).

That has left investors piling into other traditional safe-haven assets such as the dollar and gold, as well as short-term Treasuries or money-market funds, which are providing more attractive returns since interest rates began rising early last year.

Megacap earnings

Third quarter earnings season is well underway and results from four megacap companies are due this week, in what will be a key test for a group of stocks whose gains have propelled the S&P 500 higher this year.

Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) are due to report on Tuesday, Meta Platforms (NASDAQ:META) is to report on Wednesday and Amazon (NASDAQ:AMZN) reports on Thursday.

Those stocks, together with Apple (NASDAQ:AAPL), Nvidia (NASDAQ:NVDA) and Tesla have accounted for the bulk of the S&P 500's 10% year-to-date gain, so any disappointing results could result in widespread fallout.

Other big names reporting in the coming week include Coca-Cola (NYSE:KO), General Motors (NYSE:GM), Merck (NYSE:MRK) and United Parcel Service (NYSE:UPS). Investors are banking on an overall recovery in U.S. profits after a tepid first half.

U.S. data

Market watchers will get a fresh update on the strength of the U.S. economy this week from data including third-quarter growth and the Fed’s favored measure of inflation, the core personal consumer expenditures price index.

Economists are expecting third quarter gross domestic product to come in at an annualized rate of 4.1%, boosted by strong consumer spending.

The core personal consumption expenditures price index, which excludes volatile food and fuel costs, is forecast to increase 3.7% on a year-over-year basis.

Fed Chair Jerome Powell on Thursday said the stronger-than-expected U.S. economy might warrant tighter policy though rising market interest rates could make action by the central bank itself less necessary.

Oil prices

Oil prices settled lower on Friday after the Islamist group Hamas released two U.S. hostages from Gaza, leading to hopes the Israeli-Palestinian crisis could de-escalate without engulfing the rest of the Middle East region and disrupting oil supplies.

Brent crude futures fell 22 cents, or 0.2%, to settle at $92.16 a barrel.

U.S. crude futures for November delivery, which expired after settlement on Friday, fell 62 cents, or 0.7%, to $88.75 a barrel. The more-active December crude contract closed 29 cents lower at $88.08 a barrel.

For the week, both front-month contracts rose over 1%, a second straight weekly jump.

"The Middle East remains a big focus of the market because of fears of a region-wide conflict that would likely involve a disruption of oil supplies," John Kilduff, a partner at New York-based Again Capital told Reuters.

ECB likely to hold

The ECB is holding its latest policy meeting on meeting on Thursday, with the broad consensus being for interest rates to remain on hold.

After the ECB hiked its deposit rate at each of its last 10 meetings to a current record high, policymakers have indicated it is time to pause as they assess the impact of monetary tightening so far.

Market participants will be on the lookout for any indications of a possible final rate hike for this year in December.

Ahead of Thursday’s meeting, the Eurozone is to release what will be closely watched October PMI data on Tuesday. Recent economic data has raised concerns over the outlook for the bloc’s economy amid weakening consumer spending in the face of still high inflation.

--Reuters contributed to this report

By Rodrigo Campos

NEW YORK (Reuters) - Argentines will on Sunday move a step closer to deciding who will run the $600 billion economy engulfed by a deep crisis that involves runaway inflation, a dearth of U.S. dollar reserves and an electorate with little trust in its currency.

Regardless of who wins the race between libertarian populist Javier Milei, center-left economy minister Sergio Massa and center-right ex-minister Patricia Bullrich, the next government will have to deal with a gargantuan pile of debt and a peso so weak that the leading candidate is on a platform to scrap it.

Investors arrive to the election looking at an economy in recession as a crippling drought hit the key agricultural sector. Inflation runs at 138%, local interest rates stand at 133% and the black-market peso has lost over 60% of its value this year. The gap to the official rate is above 150%.

On the line is the survival of the country's $43 billion program with the International Monetary Fund and the possibility that Argentina defaults on its debt for a 10th time.

"The next government will face substantial execution challenges in a context of accelerating inflation (and) lack of meaningful FX reserves," said Alejandro di Bernardo, investment manager for fixed income – EM debt at Jupiter Asset Management.

Recent rising government spending was "being financed by central bank monetization, which had the unintended consequence of fueling inflation expectations even further," added di Bernardo.

Polls show primary vote surprise victor Milei in the lead. Ruling coalition candidate Massa has expanded subsidies and cut taxes as he jockeys with Bullrich for the second spot in an expected November runoff. Polls were widely misleading ahead of primaries, adding to uncertainty.

IN GREEN WE TRUST

Milei has promised to shut the central bank and dollarize the economy to cut inflation at the root, recommending Argentines stay away from the peso which does not even serve as "excrement".

Deputy Economy Minister Gabriel Rubinstein posted on social media site X, formerly known as Twitter, that the dollar would remain at 350 pesos to the dollar after Sunday's vote, turning to a 3% monthly crawling peg starting Nov. 15.

The currency outlook is murky at best. The peso faces three main sources of uncertainty, warns JPMorgan: inflation, the gap between the official and black rates, and the chance each candidate has to win. The bank sees the exchange rate at 750 by the end of the year and 1,400 next September.

Argentina's monetary base is just over $20 billion at the official exchange rate of 350, but drops to $8 billion at the black market rate. Excluding a currency swap line with China announced on Wednesday, forex reserves are negative.

"They don't have enough dollars to convert the monetary base so they would have to issue external debt just to start to dollarize," said Elijah Oliveros-Rosen, chief economist for emerging markets at S&P Global Ratings.

"Dollarization would not cure the main issue in Argentina, which is a really large fiscal problem."

Despite different approaches, all three candidates agree cutting spending is necessary. Argentina is committed to a fiscal deficit of 1.9% of GDP in its IMF program - estimates see it closer to 3%.

Milei and Bullrich have spoken of slashing subsidies, but the government has leaned into them, even informing voters that 59 peso bus tickets would cost 700 pesos without state support.

Financing subsidies is partly behind the increase in government debt, which surpassed $400 billion in the second quarter to hit historic highs, data from the Institute of International Finance shows. The total debt-to-GDP ratio is expected to rise to 89.5% this year from 84.7% in 2022, according to the IMF.

"The reality is sobering in the sense that Argentina has just too much debt," said Zulfi Ali, portfolio manager with a focus on Latin America for PGIM.

Analysts at Oxford Economics see default as "virtually unavoidable" by 2025 but with fair value between 30-35 cents on international bonds, current prices are attractive - if you can stomach the risk.

Unclear FX and capital controls policies compound uncertainty in local bond markets, said JPMorgan, recommending staying on the sidelines of the $125 billion domestic sovereign debt market while remaining market-weight on international notes where uncertainty is already priced in.

With relatively small payments due on commercial debt and expectation that the current IMF program will continue to pay for the previous one, Argentina's debt pile may not be the most urgent issue, said Shamaila Khan, head of fixed income for Emerging Markets and Asia Pacific at UBS Asset Management.

"Debt does not need to be an immediate priority," said Khan, who doesn't expect dollarization to top the near-term list either.

"It will be important to exhibit a commitment to orthodox policies through devaluation and fiscal adjustment as well as establishing cooperation with the IMF."

Especially the latter could be hard for Massa, a key figure amid the deteriorating relationship with the Washington lender.

However, having been at the table could also help him, according to Hans Humes, chief investment officer at Greylock Capital Management.

"(Massa) has stepped on the IMF toes and they don't love him, but he's a known quantity," Humes said.

By Kevin Buckland and Brigid Riley

TOKYO (Reuters) - The Bank of Japan intervened in the Japanese government bond (JGB) market on Friday for the fifth time this month after the 10-year yield pushed to a fresh decade high, pitting the central bank in a fight against market forces as U.S. yields surge.

The benchmark JGB yield climbed to 0.845% right at the start of the trading day, its highest since July 2013, after revisiting peaks the previous day as well.

But it eased immediately after the BOJ announced a fund-supplying operation, aimed at encouraging financial institutions to snap up cheap loans in order to buy JGBs. However after retreating as low as 0.83%, the benchmark yield had crept back to 0.835% by 0610 GMT, just half a basis point below Thursday's closing level.

The BOJ caps the 10-year yield at 1% under its yield curve control (YCC) policy, after doubling it in a surprise move at the end of July. However the central bank has shown it will not tolerate sharp moves toward the ceiling, stepping in several times to curb the pace of increases.

"The BOJ wants market participants to acknowledge that they're still there with YCC," said Shoki Omori, chief Japan desk strategist at Mizuho Securities.

"The message is simple: Don't sell JGBs too much, and don't challenge the BOJ."

Policymakers have stepped up intervention in recent weeks, with Japanese rates succumbing to the gravitational pull of U.S. yields. The 10-year Treasury yield briefly breached the psychological 5% mark on Friday for the first time in more than 16 years.

The BOJ offered to supply five-year loans against collateral in its latest operation, deploying the tool for the second time this month. Its other go-to option is to make additional bond purchases, which it has conducted three times this month, including earlier this week.

Japan's central bank is walking a tightrope with bond market intervention, which risks tipping the yen to the weaker side of 150 per dollar, a level that many see as a red line for currency intervention.

Yawning interest rate differentials have driven a slump as deep as 7.1% in the yen against the dollar since the BOJ's July 28 policy announcement, as the promise of more flexibility in the conduct of YCC was overwhelmed by the relentless climb of U.S. yields.

However the exchange rate has stabilised below 150 since briefly topping that level at the start of the month, only to violently pull back. Some had speculated that authorities had intervened in the currency market, but BOJ data suggests that was not the case.

The weak yen is a political flashpoint, driving up imported energy and food prices at a time when Prime Minister Fumio Kishida may be pondering a snap election.

"If the yen crosses 150, it would of course be more difficult for the BOJ to intervene in the JGB market. But because the yen is stable, the BOJ is able to try and rein in long-term interest rates, and watch the reaction in the foreign-exchange market also," said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui (NYSE:SMFG) DS Asset Management.

"That's the kind of delicate balancing act facing the BOJ."

By Leika Kihara and Takahiko Wada

TOKYO (Reuters) -Japan's core inflation in September slowed below the 3% threshold for the first time in over a year but stayed above the central bank target, keeping alive expectations that policymakers will phase out ultra-easy monetary policy.

The data will be among a host of indicators the Bank of Japan (BOJ) will scrutinise at its two-day policy meeting ending on Oct. 31, when it produces fresh quarterly growth and price forecasts.

"While inflation weakened in September, we think inflation will only fall below the BoJ's 2% target by the end of next year," said Marcel Thieliant, head of Asia-Pacific at Capital Economics.

The core consumer price index (CPI), which excludes volatile fresh food costs, rose 2.8% in September from a year earlier, government data showed on Friday, slightly exceeding a median market forecast for a 2.7% gain but easing from 3.1% in August.

Utility bills fell reflecting the lagged effect of past oil price falls, helping inflation slow below 3% for the first time since August 2022, the data showed.

Prices of food and daily necessities continued to rise but at a slower pace than in August, a sign that cost-push pressures were easing.

The core-core index, which strips away fresh food and fuel costs and is closely watched by the BOJ as a better gauge of trend inflation, rose 4.2% in September from a year earlier, slowing from a 4.3% gain in August.

While inflation will likely moderate in coming months, a renewed spike in oil costs and persistent yen falls could prod firms to raise prices again, said Shinke Yoshiki, chief economist at Dai-ichi Life Research Institute.

"There's strong uncertainty on the expected pace of declines in inflation," he said, adding that core inflation may not fall below 2% until the latter half of 2024.

Markets are rife with speculation the BOJ will soon end negative short-term interest rates and yield curve control, which sets a 0% cap for the 10-year bond yield, in response to broadening inflationary pressure.

The BOJ has played down the near-term chance of phasing out its massive stimulus, arguing the recent cost-driven price rises need to change into demand-driven increases in inflation for the bank to consider hiking interest rates.

An upgrade to its inflation forecasts alone won't prod the BOJ to phase out stimulus as policymakers are focusing more on whether wages will rise enough to underpin consumption, said two sources familiar with its thinking.

There are growing signs consumers are feeling the pinch from rising prices as inflation-adjusted real wages keep falling.

In a quarterly meeting on Thursday, some BOJ regional branch managers said consumers are becoming more sensitive to price hikes and buying less items at supermarkets.

A government survey on taxi drivers, restaurants and other service-sector firms showed their sentiment souring in September, highlighting the fragile nature of consumption.

While firms offered wage increases unseen in three decades this year, the key for policymakers is whether the trend continues next year and spreads to smaller firms across regions, analysts say.

A Reuters poll showed core consumer inflation in Japan's capital Tokyo, seen as a leading indicator of nationwide figures, will likely hit 2.5% in October, steady from the previous month. The Tokyo CPI data is due out Oct. 27.

BEIJING (Reuters) -China will require export permits for some graphite products from Dec. 1 to protect national security, the commerce ministry said on Friday, as it faces growing challenges from foreign governments over its manufacturing dominance.

Graphite is used in the batteries for electric vehicles (EV) and China is the world's top producer, providing 67% of global supplies of the natural form, according to the U.S. Geological Survey.

It also refines more than 90% of the world's graphite into material used in virtually all EV battery anodes.

China is enacting the curbs at the same time that foreign governments are increasing their pressure on its companies over their industrial practices.

The European Union is weighing levying tariffs on Chinese-made EVs, arguing they unfairly benefit from subsidies. Also, the U.S. government earlier this week widened curbs on Chinese companies' access to semiconductors, including stopping sales of more advanced artificial intelligence chips made by Nvidia (NASDAQ:NVDA).

Under the new restrictions announced on Friday, China will require exporters of two types graphite to apply for permits, including high-purity, high-hardness and high intensity synthetic graphite material, and natural flake graphite and its products.

Three types of "highly sensitive" graphite items had already been under temporary controls, the commerce ministry said, and are included in the new list.

The curbs are similar to those in place since Aug. 1 for two chip-making metals, gallium and germanium. The restrictions have slashed exports of the metals from China in recent months.

New investments in the United States and Europe are designed to challenge China's stranglehold on graphite but industry experts expect it to be an uphill battle.

Top buyers of graphite from China include Japan, India and South Korea, according to Chinese customs data.