What AU CPI and China Growth Mean for Markets

On Wednesday, June 28, the Australian Bureau of Statistics (ABS) reported that inflation had fallen to a 13-month low of 5.6%. That was the smallest increase recorded since April last year and compares to the 6.8% release reported in April 2023. The figures came in well-below market forecasts of 6.1%. In response, as of the time of the writing, the AUD/USD  fell to a low of $0.66200, as the possibility of a rate hike from the Reverse Bank of Australia (RBA) saw a reduction to 30%.

The Australian stock market may have reacted enthusiastically, as Australia 200's (SPI200) index jumped 1.1% to 7196.5, the most prominent daily increase since April 2023 on Wednesday. Consumer discretionary and real estate stocks were among the strongest performers, rising 2.1%. Stockland (SGP.CHA) gained as much as 1.9% at the time of writing.

The news came on the heels of confidence from the leaders of Australia's largest trade partner, China, where Premier Li Qiang affirmed that the country was on the path to reaching its 5.0% growth target for this year. On Tuesday, June 27, Premier Li said that his country saw a clear rebound and improvement in remarks before the opening of the World Economic Forum's summer meeting. Following the Premier's comments, Chinese stocks gained. Hong Kong's 50 index (HSI) bumped up 0.12% while China's A50 (CN) Composite index saw a gain of 0.36% as of the time of the writing, Wednesday.

What Could It Mean For the Markets?

Despite the growth forecasts, some economists warn not to be too optimistic about China's ability to boost commodities, pointing to the price slide being related to factors outside China. 

Last year, commodity prices saw a bust over uncertainty following Russia's invasion of Ukraine and continuous easy monetary policy in the early part of post-covid. With a staggering global economy and monetary tightening causing contraction in the manufacturing sector, demand for commodities might be under pressure.

China has been putting on an effort to boost trade, with a recent trip by Premier Li to Europe. However, analysts are pointing to a trend towards "de-risking" from China could put up roadblocks to securing trade growth. The recent trip showed some of the challenges of China's trade outlook, as French and German officials assured the Chinese leader that they were not seeking to decouple from China. But, the EU security roadmap emphasized trade defense instruments.

The Growth Outlook

While economists have trimmed their growth outlook for China in the last few weeks, major investment firms are still seeing growth above the 5% target set by the Chinese government. The World Bank hiked its growth outlook to 5.6% in June, and the IMF sees China growing at 4.4%. (Source:CNBC)

China's economy grew a solid 4.5% annualized in the first quarter, but in recent months saw a loss of momentum, including in trade. Other sectors that have failed to keep up with the pace include manufacturing, real estate, and retail. Of particular concern is the unemployment rate among young people, pushing to a new record high in May of 20.8%. Following its release on Monday, June 26, S&P Global joined the chorus of analysts taking on a less optimistic view of China and cut its growth forecast to 5.2% from 5.5%.

Meanwhile, on Wednesday, it was reported that the annual profits of China's industrial firms saw a double-digit decline in the first five months of the year. It added to evidence that China's economy is slowing and affecting retail sales, exports, and investment. It also reinforced hopes that the government would implement new policies to boost the economic recovery. But, the government has taken a cautious approach to supporting the economy. As part of his speech at the World Economic Forum (WEF) meeting in Tianjin, China's Premier Li said that he expected growth in the second quarter to be higher than in the first.

Conclusion

On Wednesday, the Aussie dollar weakened following the release of slower-than-expected inflation figures. Following gains on Tuesday after China Premier Li affirmed the country's commitment to about 5.0% annual growth and offered an optimistic tone ahead of the World Economic Forum (WEF) meeting in China, Chinese markets also turned negative. What can traders expect going forward?