China’s stimulus move fails to inspire market sentiment

China attempts to boost lending by cutting key interest rates in a widely expected move.

The move fails to shift expectations of falling global demand with Brent Crude gaining some ground but staying around $76.

German producer price inflation drops sharply, indicating lower wholesale prices are feeding through for some commodities.

European markets open slightly lower over concerns about monetary tightening and the global outlook.

Marks and Spencer and Morrisons cut some prices and Kantar snapshot shows grocery inflation retreating, but food prices overall remain stubborn.

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Susannah Streeter, Head of Money and Markets of Hargreaves Lansdown: “China’s injection of stimulus in its flagging economy was expected, and so it’s failed to pump a bounce of sentiment into the markets.

“By cutting the 1-year and 5-year loan prime rates by 0.1%, the aim is to bolster lending, but investors appear a little underwhelmed by the action and are waiting until further moves promised to bolster the economy materialise. The lukewarm reaction has shown up in the oil price, with Brent Crude gaining some ground but staying around $76.

“The move has failed to lift shares in mining companies, which were largely in retreat in early trade on the FTSE 100. High hopes that China’s snap back from the pandemic would help power up growth being lost elsewhere in the global economy have evaporated.

“Its recovery has lost steam as export customers in key markets grapple with inflationary pressures and consumer demand stays sluggish in China amid skepticism about the economic rebound with the urge to save rather than spend still strong.

As Wall Street revs back into gear after the Juneteenth holiday, a more cautious mood is continuing, with worries about a US recession, and just where interest rates will end up, colliding with concerns the recent rally in tech stocks has been overcooked.

“Investors are eyeing the Fed’s dot plot with two more rate hikes penciled in, while the frenzy over AI possibilities has bolstered big tech even further – giants which have accounted for much of the gains of the S&P since October.

There are fresh signs that inflation will go further into retreat as the growth in wholesale commodity prices paid by companies slows sharply overall, even though food costs are still staying stubbornly high. Producer price inflation in Germany dropped to 1% in the year to May, from 4.1% in April, a larger fall than expected.

“Big falls in energy costs are showing up in the figures, along with major decreases in wood and metal prices. However, producer price inflation for food still came through at 11.9% for the year to May. This indicates that there is still a very long way to go before there is significant relief pressure for consumers at the tills.

“Tesco’s boss has already warned that although there are signs inflation may have peaked, prices will stay stubbornly high.

This has been backed up by the latest snapshot from Kantar, which shows that although grocery price inflation has fallen back, it was still a scorching 16.5% in the four weeks to June 11.

“Predictions that inflation will continue to drop will come as a relief and fierce competition in the UK grocery sector has seen further reductions passed onto shoppers, with Marks and Spencer and Morrisons joining the price cut party to help lure customers through the doors.

“Although any decrease in the cost of essentials is hugely welcome, producers are still having to pay increases for ingredients, so a meaningful reduction in prices across the aisles still looks a long way off. Shopping safaris where customers cherry-pick the best prices from multiple stores look set to stay the trend in the grocery market.’’

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