China unexpectedly cuts rates but economic data misses expectations; iron ore stocks whipsaw

The People's Bank of China unexpectedly cut short-term interest rates in an effort to support an economy that's struggling to bounce back from covid.

One-year policy loans was cut by 10 basis points to 2.75% on Monday. All of the 20 economists polled by Bloomberg expected rates to be left unchanged at 2.85%.

The rate cut witnessed some sharp spikes across iron ore names like BHP (ASX: BHP), Fortescue (ASX: FMG) and Grange Resources (ASX: GRR) around 11:15 am AEST.

Fortescue intraday price chart (Source: TradingView)

China's pump and dump

Shortly after the rate cut, China released a string of depressing economic updates, including:

• In July, total retail sales rose 2.7% year-on-year but down 0.3% month-on-month

  • Missed economists expectations of a 4.9% annual gain

• Between January and July, nationwide fixed asset investment rose 5.7% year-on-year

  • Missed economist expectations of a 6.2% gain

• In July, nationwide industrial output rose 3.8%

  • Missed economists expectations of a 4.3% gain

• In July, residential property sales fell -28.6% year-on-year

By 11:45 am AEST, iron ore miners began to turn and quickly gave back the rate cut inspired gains.

Mixed signals

China remains committed to its 'zero tolerance' strategy, quick to impose strict lockdowns on just a handful of cases. The latest outbreaks in China could discourage tourism and reduce consumption, according to the latest research by Bloomberg Economics.

"Firms told us in June and July they weren't ready to invest, hire or borrow for their company's futures," said China Beige Book International.

The rate cut was in itself another mixed signal as the central bank simultaneously drained liquidity from the local financial system.

"Trying to ease conditions for the desperate while recognising a dip in credit costs still won't generate demand from the masses," commented China Beige Book.