Chinese Industrial Output to Slow in April; Could Spark Growth Concerns as Trade Deal Looks Distant

Fundamental analysis of Forex market

China will publish the latest stats on industrial output, fixed-asset investment and retail sales on Wednesday at 2:00 GMT. The data will be watched to assess whether the rebound observed in March carried through to April amid worries the economy could lose momentum again as trade tensions flare up. With a trade deal hanging in the balance, a discouraging set of figures would only add to the negative market sentiment.

Back in April, hopes that a rebound in growth is underway were lifted following a beat in the industrial output and retail sales numbers, as well as the first quarter GDP estimate, which was published alongside. But data published since then has underwhelmed, suggesting it may take a while longer before we see a sustained improvement in economic momentum.

China’s economy probably lost some steam in April

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The next releases on industrial output, fixed-asset investment and retail sales will likely confirm that the economy lost some steam in April. Industrial production is expected to have increased by 6.5% year-on-year in April, slowing from the 8.5% rate seen in March, which was the fastest since July 2014. Retail sales are also forecast to have grown at a more moderate pace, rising by 8.6% y/y rate versus 8.7% growth in March. However, fixed-asset investment is expected to buck the trend to accelerate to 6.4% y/y in the year to April and extend its recovery from the lows reached in 2018.

With markets still reeling from the dramatic breakdown in Sino-US trade talks, disappointing numbers on Wednesday risk deepening the sell-off in Chinese equities, as well as the Australian dollar, which is sensitive to China-related flows. The latest escalation in trade tensions pushed the aussie/dollar below the 61.8% Fibonacci retracement of the 0.6743-0.7295 upleg, at 0.6954, opening the way for the 78.6% Fibonacci at 0.6861 should the risk-off tone intensify.

Aussie could be pulled in different directions

But should the April data come in above expectations, aussie/dollar could recover towards the 50% Fibonacci at 0.7019. It should be noted, however, that domestic releases are on the agenda too from Australia on Wednesday and Thursday, not to mention the trade news flow, meaning the aussie could be pulled in different directions over the next few days.

The underlying tone for the aussie and other risk assets, though, will be dependent on trade developments, with investors keeping an eye out for the setting of the date of the next round of US-China trade talks. There’s a danger that even after the latest moves, investors are being complacent about the prospect of US and Chinese negotiators being able to strike an agreement anytime soon. One report according to Axios suggests differences between the two sides are so profound that a deal before the end of the year is unlikely.

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