China Inflation Report Signals Weakening Demand ahead of US-China Trade Talks

China Faces Mounting Deflation Risks Ahead of US Trade Talks

China’s economy came into focus on Saturday, May 10, ahead of the highly anticipated US-China trade talks. While April inflation data hinted at a possible demand pickup, deflationary pressures persisted at the start of Q2 2025.

Consumer prices rose 0.1% month-on-month in April after falling 0.4% in March. However, prices were down 0.1% year-on-year in April, mirroring March’s drop, reflecting lackluster demand.

Producer prices pointed to further deflationary pressures despite Beijing’s efforts to stimulate domestic demand and consumption. Prices fell 2.7% year-on-year in April after declining 2.5% in March.

April’s inflation figures aligned with China’s Caixin PMI surveys, which showed heightened competitive pressures. Firms reportedly continued to cut prices to maintain client demand.

Potential Market Reaction to China’s Inflation Report

The market’s reaction to April’s inflation report will hinge largely on the outcome of the trade talks. Progress toward a US-China trade deal, particularly lifting tariffs, could offset the negative impact of the inflation data on risk sentiment. Conversely, stalled trade talks could increase market sensitivity and curb demand for risk assets.

The Hang Seng Index gained 1.61% in the week ending May 9 amid easing US-China trade tensions. Progress toward a trade deal could drive the Index toward 24,000, bringing the March 17 high of 24,874 into sight. On the other hand, stalled talks may drag the Hang Seng Index below 22,000.

In the forex market, the AUD/USD fell 0.55% over the week to $0.64089 as improving trade sentiment supported the US dollar.

However, US-China trade talks could be crucial for the AUD/USD pair’s trajectory. Given that China accounts for one-third of Aussie exports, the Aussie dollar remains sensitive to China’s economic data and US-China trade headlines.

A breakthrough in trade talks may ease near-term demand concerns, potentially sending AUD/USD toward $0.65. Conversely, a breakdown in negotiations may increase AUD/USD sensitivity to the inflation report. A weakening demand outlook could temper Aussie dollar appetite, potentially sending AUD/USD to the $0.63623 support level.

What’s Next? Trade Talks

On Saturday, May 10, the US and China will resume trade talks after several weeks of tit-for-tat moves. Trade headlines will be crucial for the Hang Seng Index the and Aussie dollar. Optimistic headlines could fuel a bullish start to the week. However, renewed tensions could trigger market volatility, weigh on US dollar demand, and drive safe-haven flows into gold and the Japanese Yen.

Discover strategies to navigate this week’s market trends here.