Next week starts with some data that could shake up or reaffirm the market’s confidence in the future. The last few days have seen markets moving back to a risk-on profile, with stocks rising and safe havens falling. This has left gold and the Swiss franc struggling, for example. But that optimism is reliant on the effects of the tariff spike and climb down not being too bad or lasting.
In the data coming out so far, there have been limited signs of tariff impact. Certainly a lot less than economists and analysts were warning about. This has led many to suggest the effects of tariffs won’t be seen until the May data.
Keeping the Ride Going
A similar pattern might reappear with the upcoming key Chinese figures. Now, economists are revising higher their projections for April figures. But the good news could leave the markets simply shifting their expectations to one month ahead. On the other hand, a significant decline in the figures would now count as a surprise, and that could move the markets lower.
After the relatively good news, particularly in the wake of the US-China trade framework deal from a week ago, markets will also likely need another boost to keep up the risk-on attitude. That could come in the form of a trade deal announcement at any moment, including over the weekend. But, barring that, Chinese trade data is expected to suggest that at least for now, the world’s second largest economy is going strong.
A Strong Domestic Market?
As China faces turmoil on the export front, its economy could still manage to surge if the domestic market remains solid. The central government has been aiming to strengthen domestic consumers for years now. Just recently, the government announced new stimulus measures to shore up consumer demand and reorient the economy away from depending on exports. With tariffs ramped up to the max in April, now is a good time to test to see if those programs are working.
April China retail sales are expected to slow slightly to 5.6% from 5.9% prior. But the March figure was a significant jump, and well above normal figures, with analysts pointing to an increase in food buying. If China can maintain strong retail momentum, it could help support commodity currencies, and particularly gold. China is the world’s largest gold importer.
The Effects of Trade
Chinese industrial production is also expected to show a slowdown, growing at 6.2% compared to 7.7% a month earlier. However, March data saw the largest surge in production in over a year, as businesses increased buying ahead of expectations of tariff impact. If Chinese firms manage to continue to grow production in spite of the tariffs, it could be a sign of more stable demand.
As exports to China are a major component of the Australian economy, the AUDUSD rose last week despite expectations that the RBA would cut rates. A surprise downturn in industrial production in China could have an acute reversal effect on the Aussie. Meanwhile, the yen losing weakness as a result of market optimism given its safe haven status, could be impacted in machinery demand in its largest export market declines.
