Asian stocks climbed Wednesday after U.S. inflation data eased pressure for further interest rate hikes, but China's sharp economic slowdown to 4.3% annual growth in the second quarter underscored the fragility of the global recovery and raised questions about whether Beijing will intervene to support struggling households and small businesses.
The U.S. headline consumer price index fell 0.4% in June, its first decline since the COVID-19 pandemic, while core inflation for the month was flat. Bond yields and the dollar fell on the figures, leaving the euro comfortably above $1.14 on Wednesday and 2-year Treasuries at 4.2%, about 9 basis points below Tuesday's 17-month high of nearly 4.3%.
South Korea's volatile KOSPI index surged 6% and Japan's Nikkei rose 1%, though volume was light and the mood nervous as momentum in AI stocks has started to stutter. European futures were down 0.2% and FTSE futures fell 0.3%, while Nasdaq futures rose 0.8%.
China's Growth Disappointment
China's annual economic growth slowed sharply to 4.3% in the second quarter, official data showed Wednesday, missing analysts' expectations as weak domestic demand outweighed stronger production and exports. The slowdown reflects the uneven nature of China's recovery, with tech sectors thriving while the broader economy continues to underperform and ordinary consumers struggle with declining confidence.
UOB economist Woei Chen Ho said: "I don't think they will be worried enough to announce any big stimulus, but it is going to be targeted, since they are aware that growth is only for the tech areas whereas the broader economy is continuing to underperform." A rebound in Chinese retail sales in June, relatively strong nominal GDP and hopes that authorities will respond were the positives for investors. China's yuan traded at a one-month high of 6.7635 to the dollar.
Market Volatility and AI Uncertainty
A 25% drop in IBM's share price after the technology company's revenue forecast missed analyst expectations showed how stretched and skittish the market's rally in AI-related stocks has become. Damien Boey, portfolio strategist at Wilson Asset Management in Sydney, said: "It doesn't take much for people to say, look, I've made a good profit here, I'll cut and run." He added: "It's a winner-takes-all dynamic. So if you're looking like you're going to be left behind in this AI boom, you get absolutely hammered."
Boey noted that AI uncertainty is actually the highest of all categories of uncertainty at the moment, and the sharp stock market reactions to results reflect that anxiety. Federal Reserve Chair Kevin Warsh told Congress that one data point was not enough to declare victory over inflation, tempering optimism about future rate cuts.
J.P. Morgan analysts said in a client note: "For market bulls this is even better than Goldilocks could have imagined." They added: "This print should remove any fears over a July rate hike and may assuage fears on September, too. This sets up the market to move higher and to broaden as it does so."
Geopolitical Tensions and Energy Markets
Brent crude futures steadied around $85.80 a barrel, having gained almost 13% this week on a flare-up in Middle East fighting. U.S. President Donald Trump reimposed a naval blockade of Iranian ports on Tuesday and threatened to attack power plants and bridges next week unless Iran resumes negotiations to end their conflict, though he scrapped a plan for a 20% fee on shipping through the Strait of Hormuz.
The Australian dollar was testing resistance around 70 cents and the struggling yen was pinned to the weak side of 162 per dollar. ASML, Europe's most valuable company and the world's biggest supplier of chipmaking equipment, beat revenue expectations and was likely to set the tone at the European open.
Stellar profit at Wall Street banks was the highlight of Tuesday's earnings calendar and on Wednesday Morgan Stanley, BNY, BlackRock and Johnson & Johnson were due to report earnings before the morning bell.
Why This Matters:
The combination of cooling U.S. inflation and China's economic slowdown reveals the uneven nature of the global recovery. While easing price pressures may provide relief to American consumers who've struggled with the cost of living, China's weak domestic demand signals that hundreds of millions of workers and families aren't seeing the benefits of growth concentrated in tech sectors. Beijing's reluctance to deploy broad stimulus means ordinary Chinese households may continue to face economic uncertainty while export-driven industries thrive. Meanwhile, escalating tensions in the Middle East and volatile AI stock valuations add layers of instability that could quickly reverse market gains. The gap between financial market optimism and real economic conditions for working families on both sides of the Pacific remains wide, raising questions about the sustainability of this rally and whether policymakers will prioritize Main Street over Wall Street.