China has been a major force in helping the global economy recover from the recession that followed the 2008 financial collapse. Investors have been worried that the government would not be successful in engineering a so-called soft landing for the economy while it dealt with high inflation.
China announced Friday night that its May inflation fell to 3 per cent from April's 3.4 per cent.
However, the weak data from the world's second-biggest economy wasn't a complete shock to traders as China's central bank had moved last Thursday to cut its key lending rate by 0.25 of a percentage point, lowering the rate for the first time in four years.
And traders are likely to view the rate cut as the more important element since it indicates that the Chinese government is ready to put economic stimulus on the front burner again.
China's growth fell to a nearly three-year low of 8.1 per cent in the first quarter and private sector analysts expect this quarter’s growth to fall further as the government worked to bring inflation down from unacceptable levels.
Analysts think trimming the interest rate in one of the world's fastest-growing economies will provide important support to a market depressed by the worsening eurozone debt crisis which has spread to the region's banks and a slowing U.S. economy.
The Chinese have adopted other stimulus measures this year, particularly lowering bank reserve requirements.
But the rate cut "is what they would call high-octane monetary policy easing," said Andrew Pyle, investment adviser with ScotiaMcLeod in Peterborough.
"When you start cutting rates, authorities are obviously taking this very, very seriously. And that becomes a game changer because what they have done is actually put a floor under where growth in China will fall, so that supports the risk-on trade in the market. It supports commodities, resources, which will help the TSX."
Pyle said further Chinese rate cuts this summer are likely, perhaps three over a fairly short period of time.
"Clearly they’re focusing on the domestic side of the economy in China, and looking at stimulating consumption and investment spending," he said.
"But now it’s taken the burden off the U.S. economy in terms of a fundamental backstop, so now we have the biggest growth target in the world taking growth seriously."
Meanwhile, Europe will continue to demand investor attention as the eurozone debt crisis has shifted to the banking sector, particularly Spanish banks. Those institutions have heavy losses on their books from a burst real estate bubble and need government help to survive.
Spain asked for a bank bailout from Europe on Saturday, becoming the fourth and largest country to seek help since the single currency bloc's debt crisis erupted.
Economy Minister Luis de Guindos gave no figure as to how much Spain will request, saying that he would wait for the completion of independent audits of the country's banking sector before asking for a specific amount.
However De Guindos said after a video conference with his eurozone counterparts that Spain would request enough money for recapitalization, plus a safety margin that will be "significant."
A statement issued after the video conference said up to €100 billion would be made available to Spain.
The Toronto stock market finished positive last week, up 139 points or 1.22 per cent. The gain was due to a bout of bargain-hunting after the TSX endured a series of losses during May that left the main index down more than 11 per cent from its highs of late February, which suggested the market was oversold.
Meanwhile, the economic calendar for this week is thin.
The major report is the U.S. retail sales report for May. Economists expect sales declined by 0.1 per cent, largely reflecting prices changes, particularly for gasoline.
Investors will also get the latest reading on consumer sentiment Friday from the University of Michigan's survey.