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European equities experienced a decline on Monday, continuing the downward trend from the previous week. However, Asian stock markets saw slight gains despite new data indicating that China’s economy is on the brink of deflation.
In early trading, the Stoxx 600, Cac 40, and Dax in Europe all dropped 0.2%, while the FTSE 100 in London remained stable.
This decline in equities followed China’s consumer price index falling by 0.2% month on month, with factory gate prices also experiencing the fastest decline in seven years due to weakened demand for consumer and manufactured products.
Brent crude, the international benchmark, also saw a decrease of 0.7% to $77.85 a barrel on Monday morning.
Despite these developments, major Asian markets closed positively, with Hong Kong’s Hang Seng index up by 0.6% and China’s CSI 300 gaining 0.5%. Analysts believe that weak economic data strengthens the case for the People’s Bank of China to implement further interest rate cuts and fiscal support.
In contrast, the US and Europe are dealing with persistently high inflation, and interest rates are expected to rise in both regions during the summer.
The stagnation in price growth adds to concerns about China’s sluggish recovery this year. Investors had anticipated a substantial rebound following the relaxation of strict zero-Covid measures in late 2022.
“While other economies face signs of stubborn inflation, China is experiencing disinflationary forces that could potentially push the world’s second-largest economy into a deflation scenario,” stated Susannah Streeter, head of money and markets at Hargreaves Lansdown.
Alongside China’s consumer price figures on Monday, the Bureau of Labor Statistics released data showing that the US economy added 209,000 jobs in June. This employment report fell short of expectations for the first time in 15 months.
Traders were left “confused” by these numbers, according to Mike Zigmont, head of trading and research at Harvest Volatility Management. They questioned whether this data was strong enough for the Federal Reserve to continue raising rates or if it was weak enough to keep the Fed on hold. Some even wondered if the relatively weak report, compared to previous strong months, indicated an upcoming recession.
Contracts tracking Wall Street’s S&P 500 slipped by 0.3%, while those tracking the Nasdaq 100 fell by 0.4% before the New York market opened.
Investors will be closely monitoring US consumer price inflation headlines this week, as it is expected to have slowed in June. This easing of inflationary pressure could influence the Federal Reserve’s decision on whether to resume raising rates at the July meeting.
If the year-on-year headline inflation rate falls to the predicted 3.1% in June, it would mark the lowest rate since March 2021.
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