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The China GDP 'miss' provides the backdrop for today's trading
action, raising doubts that the recovery in that country's economy
may not be that strong. Earnings also remain in focus today, with
this morning's better received Citigroup ( C ) report providing a
contrast to how the market responded to Friday's J.P.
Morgan ( JPM ) and Wells
Fargo ( WFC
The 7.7% first-quarter GDP growth in China is by no means weak,
particularly given the almost non-existent growth elsewhere in the
world. But the expectation was for the growth pace to come in at
close to 8% after the 7.9% growth in the preceding quarter. The GDP
'miss' adds to other recent economic data like industrial
production and retail sales that shows that the economy may have
lost some of its momentum towards the end of the first quarter.
Bank credit has been expanding rapidly in recent months and this
GDP data coupled with subdued inflationary pressures would indicate
that fiscal and monetary conditions would remain supportive. That
said, this report brings back questions about China's growth
outlook and that is a net negative for commodities and other
economically sensitive sectors.
On the earnings front, this morning's Citigroup 'beat' is
positive, but Friday's J.P. Morggan and Wells Fargo reports show
that overall conditions in the banking group remain difficult.
Deceleration in the mortgage business, net interest margins
pressures, and weak demand for loans will likely be the recurring
theme in this week's regional bank reports. But banks are not the
only companies reporting this week. In fact, this week's reporting
docket will give us a fairly good sense of the entire Q1 earnings
season. The expectation is for total Q1 earnings to be down -1.6%
from the same period last year, which would follow the +2% growth
in 2012 Q4.
My sense is that the Q1 earnings season will not be materially
different from what we saw in the last two quarterly reporting
cycles. What this means is that about two-thirds of the companies
would beat expectations, earnings and revenue growth would be
essentially non-existent and the overall tone of guidance would be
on the weak side. If we see a repeat performance, then estimates
for Q2 (currently for up +3.5%) will come down, but estimates for
Q3 (currently at +7.5%) and Q4 (currently at +14.5%) will hold up.
As long as growth expectations for the second half of 2013 and
full-year 2014 remain in place, the market's current Fed-inspired
trajectory will remain undisturbed.
Director of Research