China growth disappoints – US earnings in focus

The Chinese economy grew 6.3% in Q2 and that’s faster than a 4.5% growth in Q1 but lower than the market estimate of 7.3%. Now don’t be blindsided by the strong look of these numbers, because the latest figures were distorted by a low base effect last year when Shanghai and other big cities were in lockdown and life in China was running at a very low speed. If we look at a seasonally adjusted basis, the Chinese economy grew by only 0.8%, slowing sharply from a 2.2% rise in Q1.  

Market sentiment regarding the weakening growth numbers is mixed. In one hand, weak growth means that the government and the People’s Bank of China (PBoC) will step up efforts to further ease the financial conditions and pave the way for a quicker recovery. On the other hand, supportive policies put in place so far have had little impact. The Chinese property downturn, risk of disinflation, and falling exports have been difficult to reverse. As a result, the kneejerk reaction in markets was unenthusiastic. American crude extended retreat below the $75pb, after hitting and bouncing lower from the 200-DMA, that stands near $77pb last week. The rejection was expected, and the selloff could deepen toward the 100-DMA, near $73.50 level. Copper futures are also down this morning and testing the 100-DMA following a 7% rebound since the start of the month. Iron ore futures remain under pressure, and the Aussie is down nearly 1.30% against the US dollar, after forming a double top near the 69 cents level last week, on the back of a broad-based dollar weakness.  

Zooming out, the US dollar is not further sold across the board this Monday, but the dollar index consolidates near the lowest levels since April 2022, and is below the 100 mark and is expected to further cool down. The softer dollar is good for cooling inflation elsewhere than the US, it could be good for boosting the revenues of US companies, including the Big Tech, which suffered from a rapid appreciation of the greenback last year, and it’s good for boosting the US exports – which should support the US economic growth.  

So, all eyes are now turning toward the US companies’ earnings this week. The first earnings from the bis US banks came in better-than-expected last Friday and added to the overall investor enthusiasm after the US inflation data confirmed an encouraging easing in the US inflation, which in return softened the hawkish Federal Reserve (Fed) expectations and fueled a rally in both stock and bond markets.  

JPMorgan Chase, Citigroup, and Wells Fargo all reported stronger-than-expected earnings last quarter due to rising interest rates. Deposits in Citigroup were nearly flat, Welss Fargo for saw its deposits fall 1% compared to Q1, and 7% compared to a year ago, and the average interest rates that the banks had to pay on deposits to prevent them from evaporating and going toward higher-yielding investments, rose 1-3% and their interest expenses climbed significantly. But still, JP Morgan’s net interest income rose 44%, Citi’s 16% and Wells Fargo’s nearly 30%! Some smaller banks like Silicon Valley Bank, Signature Bank, and First Republic struggled with the effects of higher interest rates, as well. And deposit levels at major banks have been declining, with growth turning negative and reaching -6%, its lowest level in April. Blackrock amassed some good inflows and closed the quarter just shy of $10 trillion under management. The mix of the good and the bad led Citigroup shares 4% down. Wells Fargo first rallied before closing the day in the negative on Friday. The upcoming earnings reports from Bank of America, Morgan Stanley, and Goldman Sachs will be closely watched, among other big names. 

On the list of companies that are due to release earnings this week, we find Netflix, Tesla, IBM, TSM, American Airlines and American Express. Overall, analysts project that S&P 500 companies will see the biggest contraction in earnings growth during the second quarter, where profits are expected to fall by 7-9% year-over-year. That doesn’t really match what we see in the S&P500 chart, as the index advanced to a fresh high since April 2022 and is up by around 24% since last October dip. But the reality is that, with just over 5% of companies in the index having reported, profit growth for the period is on track to have contracted by 9.3% thus far, according to Bloomberg. It’s too early to call of course because the tech is what carried the S&P500 this high over the past half-a-year and their earnings should be the ones to confirm the nice rally we saw on index level, but we could come down to earth with less shinier figures on that end. Yes, AI boosts revenue, and revenue expectations but Taiwan’s exports of chips fell for the 6th consecutive month in June due to weaker global demand. Exports decreased more than 20% from a year earlier to a four-month low and when  you think that the island is home to some big and loved names like Apple and Nvidia’s go-to chipmaker, TSMC, you question whether the biggest annual decline in Taiwan’s chip exports since March 2009 isn’t a warning that equity investors may have gone ahead of themselves when rushing to these stocks.