Markets Focus on Chinese House Prices, US Retail Sales and UK Inflation

Many Asian stocks fell on Wednesday and the UK market opened lower as investors digest news of weak Chinese house prices, fears of further rate hikes in the US and the latest UK inflation data. Let’s take a closer look at what’s been going on in the markets.

US Consumers Remain Resilient

On Tuesday, retail sales in the US rose significantly more than expected as consumption appears to remain strong despite high prices. This higher than expected reading comes several days after the announcement that US annual inflation rose to 3.2% in July, up from 3% in June, although this increase was less than had been anticipated.

Strong retail sales have stoked fears that the Federal Reserve may decide it still has work to do on inflation. Consequently, Wall Street closed the day in the red, with bank stocks also hit by news that Fitch Ratings may downgrade a number of US banks. The Dow Jones, Nasdaq Composite and S&P 500 dropped by 1.02%, 1.14% and 1.16% respectively.

More Disappointing Data from China

Fears of further rate hikes in the world’s largest economy combined with weak house price data in China led to many Asian stocks falling on Wednesday, with the Chinese yuan also negatively affected.

House prices fell year on year in July, increasing concerns over the Chinese property sector which has been struggling for some time. This announcement followed news that China’s central bank had unexpectedly cut interest rates after a reported slowdown in retail sales and industrial production. Furthermore, last week, Chinese inflation was reported negative amidst weak domestic demand and falling exports.

All this is indicative of a stuttering Chinese economy, which has underwhelmed since its post-Covid reopening and dented expectations for both Chinese and global economic growth in 2023.

Consequently, the Shanghai Composite and Hong Kong’s Hang Seng Index closed on Wednesday with losses of 0.82% and 1.23% respectively, both marking a fourth consecutive day of declines.

UK Inflation a Mixed Bag

On Wednesday, UK annual inflation fell sharply to 6.8% in the twelve months to July as had been expected. Although this marks a decided decline from October’s four decade high of 11.1%, it is still a far cry from the Bank of England’s (BoE) target rate of 2%.

Whilst the headline inflation rate is likely to steal the, well, headlines, other inflation indicators are likely to have caused headaches for policy makers at the BoE.

Core inflation, which strips out volatile food and energy prices, remained unchanged in July at 6.9%, despite being expected to fall to 6.8%. Services inflation rose to 7.4%, up from 7.2% in June. Sticky core inflation and higher services inflation suggest there is still work to be done in taming rising prices in the UK.

This latest inflation data follows the announcement on Tuesday that UK wages grew far more than expected and at a record annual rate between April and June, emphasising BoE concerns that strong pay growth is feeding inflation.

After closing Tuesday’s session with a loss of 1.57%, the UK’s FTSE 100 opened lower on Wednesday as the market mulls the prospect of rate hikes at home and on the other side of the Atlantic. Conversely, the GBP strengthened against both the US dollar and the euro.

What Next?

Following July’s inflation data from the US, China and the UK, the eurozone is due to announce its latest figures on Friday.

Whilst headline inflation is expected to fall to 5.3% in the twelve months leading to July, core inflation is anticipated to remain static at 5.5%.

Remember to exercise particular caution in the markets around the time of this announcement, as any unexpected results could spark an increase in volatility.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.