China reported weaker-than-expected consumer price inflation in August, suggesting domestic consumer demand remains weak, which could put further pressure on key sectors of European stock markets such as luxury consumer goods and mining stocks that are sensitive to Chinese economic data.
China’s consumer prices rose 0.6% year-on-year in August, below the expected 0.7% increase but marking a slight improvement from July’s 0.5% increase.
However, factory gate prices, as measured by the Producer Price Index (PPI), remained deflationary, falling 1.8% from a year earlier, better than the estimated 1.5% decline and following a 0.8% drop in July.
The data showed China’s economic recovery continues to falter, due in part to a sluggish housing market and the lingering effects of long-term coronavirus-related restrictions.
China’s gross domestic product (GDP) grew at an annualized rate of 4.7 percent in the second quarter, below the 5.1 percent expected and down from 5.3 percent in the first quarter.
China also released a weaker-than-expected manufacturing purchasing managers’ index (PMI) a week ago, marking the fourth consecutive month of decline.
These figures have increased pressure on China’s 5% growth target through 2024, prompting several agencies to cut their forecasts.
UBS now sees the country’s economy growing 4.6% this year and 4% in 2025, up from previous forecasts of 4.9% and 4.6%, respectively.
European luxury brands and mining stocks face pressure
Weakening Chinese consumer demand is having a major impact on key sectors of the European market, particularly luxury goods and mining stocks.
Last week’s Wall Street sell-off triggered broad-based sell-offs in global markets, but European luxury consumer goods stocks suffered the sharpest declines as analyst downgrades hit China’s uncertain economic outlook.
Shares of big-name European luxury brands, including LVMH, Hermes, Christian Dior and Kering, have fallen between 7 and 12 percent in the past week. Over the past six months, LVMH and Kering’s market valuations have fallen by a third and nearly a half, respectively, as China’s economic slowdown continues to weigh on sales.
European mining stocks have also been hit hard by falling prices of base metals and critical minerals, particularly copper and iron ore.
Shares in Rio Tinto, Anglo American and BHP have fallen 14 percent over the past three months, largely due to sluggish demand amid China’s property crisis.
The performance of mining stocks is often closely linked to price fluctuations of their main products, with copper and iron ore being the primary outputs of these major mining companies.
The downward trend in prices of these growth-sensitive commodities is likely to continue, putting further pressure on mining stocks.
In early morning trading in Asia on Monday, Singapore iron ore futures (SGX TSI Iron Ore 62%) fell to just over $90 a tonne, their lowest level since November 2022.
COMEX copper futures also fell to their lowest level in a month.
China’s Strategy to Strengthen Economic Growth
China is stepping up efforts to stimulate economic growth as household spending continues to stagnate.
The People’s Bank of China (PBOC) unexpectedly cut two key benchmark interest rates by 10 basis points in July, simultaneously lowering the seven-day repo rate from 1.8% to 1.7%.
These rate cuts came after the Third Plenary Session of the Central Committee, a key event that will shape China’s economic strategy for the next five years.
China is considering allowing homeowners to refinance up to $5.4 trillion (4.9 trillion euros) worth of mortgages as part of efforts to free up consumer purchasing power, Bloomberg reported.
The People’s Bank of China in May removed the floor on mortgage interest rates and lowered down-payment requirements, and is providing 300 billion yuan (38 billion euros) in aid to state-owned enterprises to buy excess inventory from property developers.
Mike Henry, CEO of BHP, the world’s largest mining company, said after the company’s earnings report in August: “The government has recently enacted policies to support the real estate sector and we are hopeful that we will see an upturn in the real estate sector over the coming year.”
The market will now focus on upcoming Chinese economic data, including new yuan-denominated loans, trade balance, retail sales, industrial production and fixed asset investment, due to be released later this week.