European stocks gain after data shows China on brink of deflation

Receive free Markets updates

We’ll send you a myFT Daily Digest email rounding up the latest Markets news every morning.

European equities inched higher on Monday, reversing earlier losses to follow stock markets in Asia after new data showed China’s economy on the cusp of deflation, potentially boosting the chances of more accommodative monetary and fiscal policy.

Europe’s region-wide Stoxx 600 added 0.2 per cent, while France’s Cac 40 rose 0.6 per cent and Germany’s Dax rose 0.5 per cent, having dipped in early trade. London’s FTSE 100 added 0.3 per cent.

Those moves came after China’s consumer price index dropped 0.2 per cent month on month, while factory gate prices fell at the fastest pace in seven years as demand for consumer and manufactured products waned.

Prices for Brent crude, the international benchmark, fell 0.5 per cent on Monday morning to $78.11 a barrel.

Big Asian markets closed in positive territory, with Hong Kong’s Hang Seng index up 0.6 per cent and China’s CSI 300 gaining 0.5 per cent.

Though weak economic data bolstered the case for further interest rate cuts from the People’s Bank of China, as well as an injection of fiscal support, help from Beijing was by no means guaranteed, analysts said.

China’s “slide into the world of deflation” increased the need for economic stimulus including tax breaks and investment for strategic sectors, said Michael Every, an analyst at Rabobank. But “due to the current levels of debt and the ongoing real estate crisis, we do not anticipate any significant economic stimulus measures”.

Stagnant price growth will only add to investor concerns over China’s stuttering recovery this year. Investors had tipped China to explode back into life after the removal of strict zero-Covid measures in late 2022.

Unlike China, the US and Europe are grappling with stubbornly high inflation. Interest rates are expected to rise in both regions over the summer.

Monday’s Chinese consumer price figures came after data from the Bureau of Labor Statistics showed the US economy added 209,000 jobs in June. The employment report on Friday undershot expectations for the first time in 15 months.

Traders were left “confused” by the numbers, said Mike Zigmont, head of trading and research at Harvest Volatility Management. “Is this strong enough for the Fed to keep hiking? Is this weak enough to keep the Fed on pause? Is it so weak compared to the past strong months that we’re looking at a soon-to-come recession?”

Contracts tracking Wall Street’s blue-chip S&P 500 slipped 0.1 per cent, while those tracking the tech-heavy Nasdaq 100 fell 0.2 per cent ahead of the New York open.

Investors’ attention this week will be focused on headline US consumer price inflation, which is expected to have slowed in June, easing pressure on the Federal Reserve to resume raising rates at its July meeting.

If year-on-year headline inflation were to fall to 3.1 per cent in June as expected, it would mark the lowest rate since March 2021.