Traders await inflation, Chinese manufacturing data

Chinese manufacturing and Australian inflation will dominate activity on domestic markets this morning, which are expected to mark time in early trade.

An annualised core inflation read of 2.5% or lower will give the Reserve Bank plenty of leeway for a rate cut at next month’s meeting. Speculation of a rate cut will boost equities and provide selling pressure on the Aussie dollar.

The dollar rose to just below US93c overnight as the greenback weakened, a development that will not be welcomed by the Reserve Bank which has clearly espoused the view that the currency could fall further.

Unlike many other developed economies, the Consumer Price Index is released only quarterly, delivering an inflection point on interest rate decisions.

HSBC’s survey of Chinese manufacturing, due to be delivered at 1145 AEST, is expected to show a slight rise from the previous read of 48.2 which, while still contractionary, should provide some comfort about the health of the world’s second biggest economy.

Chinese leaders yesterday pledged that Chinese economic growth would not drop below 7%, which helped lift markets overnight and provided some support for the Aussie dollar.

Iron ore prices rose again and now have cemented themselves above $US130 a tonne as Chinese steel mills restock their raw materials supplies. That price is well above the $US120 a tonne most analysts have pencilled into their valuation modelsfor the major miners (see Annette Beacher's If China is slowing, why won't iron price fall?). Other commodities enjoyed gains as well including base and precious metals.

Heavyweight miners have driven Australian equities higher in recent weeks, while the Commonwealth Bank has been surging in recent trading on speculation of a lift in the dividend at the upcoming annual results, due to be released on August 14.

The sharp recovery in the gold price in the past fortnight continued overnight which has helped drive Australian gold miners higher, providing some much needed relief for trouble plagued Newcrest, Australia’s biggest gold producer.

With the Australian market now perched above 5,000, some selling pressure is likely to emerge as traders take profits from the recovery in recent weeks.