China surprises with a rate cut as data shows that the economic recovery weakened amid a worsening property sector and continued COVID lockdowns.
– AUD/USD & NZD/USD fall after disappointing Chinese data
– USD/JPY falls after Japan’s GDP rebounds in Q2
– German PPI slips to 19.5% from 21.1%, and the DAX rises
After solid gains in the previous week, which saw both the FTSE and the DAX rise to two-month highs, European indices are set for a stronger start on Monday.
US stocks also booked strong gains across the previous week, marking the fourth consecutive weekly rise amid signs of US inflationary pressures cooling. Both CPI and PPI data came in weaker than expected, promoting bets that peak inflation has passed and that the Federal Reserve will slow the pace of rate hikes. Expectations are now for a 50 basis point rate hike in September, down from 75 basis points previously.
Tempering Fed bets not only boosted stocks and risk sentiment but also pulled the USD 0.9% lower last week.
China data & PBOC rate cut
This week, Asia has set off cautiously as investors digest mixed data from China and an unexpected rate cut from the PBOC. Chinese retail sales rose 2.7% YoY in July, down from 3.1% in June and short of the 5% forecast. Industrial production grew a weaker than forecast 3.8% YoY in July, down from 3.9% in June and below the 4.6% expected.
Retail sales, investment, and industrial production all missed expectations indicating that the recovery in the world’s second-largest economy was losing steam and struggled to rebound from Beijing’s zero -COVID policy and the ongoing property crisis.
The Chinese economy narrowly escaped contraction in Q2, and the outlook remains uncertain. The PBOC is stepping up support in response to the headwinds facing the economy and caught the market by surprise today, cutting key lending rates.
Chinese shares were mixed, and the yuan fell to a one-week low. Meanwhile, AUD/USD and NZD/USD fell to a weekly low following the data and surprise move by the PBOC. AUD/USD drops below 0.71.
Japan GDP
Elsewhere in the FX market, USD/JPY extends its selloff following Japan’s GDP data which showed that the economy rebounded in the second quarter. Q2 GDP annualised hit 2.2%, exceeding pre-COVID levels. On a quarterly basis, GDP rose 0.5%, up from -0.1% in Q1, as COVID measures were relaxed. However, this was still below the 0.6% level forecast.
USD/JPY fell 0.9% last week owing to the weaker USD. Today the pair trades a further 0.15% lower. Investors will now look toward the minutes of the July Fed meeting, which are due to be released on Wednesday.
German PPI
European stocks are set to open cautiously higher as investors digest data from Asia and a slight cooling in Germany’s wholesale inflation. PPI slipped to 19.5% YoY in July, down from 21.2% in June. While cooling PPI could suggest that consumer prices will ease, it seems premature to expect inflation in Europe to follow in the footsteps of the US and fall, given that natural gas prices continue to rise. The DAX is set to open 0.4% higher.
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