Soft China GDP data weighs on equities

OVERNIGHT

Following broad gains last week, equity markets have started this one on a soft footing following a round of weak data from China. GDP was up 6.3% in Q2 relative to a year ago, weaker than the 7.1% expected. Monthly data showed a marked slowdown in the pace of retail activity, which grew by 3.1%y/y in June, down from May’s 12.7%y/y reading and weaker than the 3.3% pace expected, raising concerns of a slowdown in overall consumer spending. However, more positively, June industrial production growth exceeded expectations.

THE DAY AHEAD

Last week’s market moves saw a reversal relative to the previous week with a marked moderation in interest rate expectations. The turnaround was already underway in the early part of the week but was given added impetus by Wednesday’s release of lower-than-expected US CPI inflation data. That provided a boost to hopes that US interest rates are close to a peak. Expectations around how high interest rates would go elsewhere also moderated albeit to a lesser extent. Despite stronger-than-expected UK GDP and wage growth figures, market pricing for the peak in UK interest rates eased by around a quarter-point.

For the Eurozone, markets continue to price in a further 50bp of rate increases and comments from ECB officials later today will be watched for guidance on how appropriate current market pricing is, particularly as the July policy meeting draws near. Last week’s release of the Minutes to the June meeting indicated that there was an initial preference to hike by 50bp expressed before the committee settled on a quarter-point increase. In that regard, comments from President Lagarde, as well as from other ECB officials including Vasle, Elderson and Vujcic will be closed watched by market participants.

Data wise, it is a very quiet data with no key releases due across the major economies. In the US, some attention is likely to be on the Empire State manufacturing survey for July but that can be very volatile.

Early tomorrow morning, the Reserve Bank of Australia will publish the Minutes to its last policy meeting. These will be scoured for insight into the likely timing and extent of any further hikes in Australian interest rates.

MARKETS

Following a noticeable slide last week, the US dollar is stable in early trading with the Bloomberg US dollar index slightly higher relative to Friday’s close. GBP/USD, however, continues to trade above 1.30, having moved above the mark last week for the first time since last April.