China’s industrial profits in July dropped by 1.5% compared to last year, but this was an improvement from the previous decline of 4.3%. For the year so far, profits are down 1.7%, which is a bit better than the earlier 1.8% decrease. These numbers reflect the ongoing impact of tariffs and persistent deflation at the wholesale level.

Industrial Profit and Deflationary Pressures

While the July improvement in industrial profits is encouraging, profits are still down 1.7% for the year. This slight recovery comes amid ongoing wholesale deflation, which is putting pressure on profit margins. The bigger issue of weak domestic demand remains unresolved. This trend corresponds with the July Producer Price Index (PPI), which showed a 2.2% year-over-year decline. Flash manufacturing PMI data for August indicates that factory prices continue to fall at a similar rate, highlighting the stubborn deflationary environment. Thus, any optimism from profit data needs to be approached with caution. For traders on indices like the FTSE A50, this suggests a stable market may exist in the next few weeks. Since profits are no longer rapidly declining but are restricted by weak pricing power, selling out-of-the-money options for premium income seems like a smart strategy. We don’t expect significant price movements until the next round of macroeconomic data is released.

Commodities and Currency Watch

This cautious outlook also applies to industrial commodities, especially copper and iron ore. We don’t foresee a drastic drop in demand like we feared in the second quarter of 2025, but there’s limited upside for futures prices. Any price increases stemming from government stimulus discussions should be seen as opportunities to sell. We are also monitoring the Australian dollar, which serves as a reliable indicator of China’s industrial sector. After the People’s Bank of China reduced the reserve requirement ratio by 25 basis points last week to boost the economy, further easing is likely on the horizon. This difference in policies may cap any gains in AUD/USD. The main external factor to watch remains the tariff situation, with new trade talks set for mid-September. This development poses a significant risk, making it wise to hedge any positions. Buying inexpensive, short-dated volatility on currency pairs like USD/CNH could be a safe choice to guard against unexpected outcomes. Create your live VT Markets account and start trading now.

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