The market will likely find China's second quarter GDP growth
numbers reassuring as many read last week's second interest rate
cut in less than a month as a sign of much weaker growth trend. But
the inline growth number notwithstanding, it is nevertheless
further confirmation that the global economy remains in a
precarious state.
On the home front, we got more details this morning about
J.P. Morgan's (
JPM
)
trading loss, prompting the bank to restate its prior-quarter
results even as its second quarter earnings and revenue numbers
came in better than expected. While J.P. Morgan's trading woes are
clouding at the true earnings power of its banking franchise, we
have no such issue with
Wells Fargo (
WFC
) results this morning, which are almost boring by comparison
(perhaps we need more boring and less exciting banks). Wells beat
EPS expectations by a penny on in-line revenue.
In other economic news, the June producer price index was a tad
bit hot on the 'headline', but the 'core' number broadly in-line
with expectations. The University of Michigan consumer sentiment
survey coming out a little later is expected to show a modest gain
from its last reading.
With respect to China and the global growth worries, the issue
came full circle for stock market investors this week when engine
maker
Cummins (
CMI
)
preannounced and cited not only China, but also weakness in Brazil,
India, and the U.S. Cummins is the poster child for the export
centric industrial corporate players, but we have been hearing
about weak economic growth affecting the earnings outlook from a
host of companies in different industries ahead of this earnings
season, like
FedEx (
FDX
),
Proctor &
Gamble (
PG
) and
Nike (
NKE
), to name just a few. This has raised concerns that we may see a
material deterioration in the corporate earnings picture as the
second quarter reporting season unfolds.
China's in-line second quarter GDP growth rate of 7.6% was the
lowest since the beginning of 2009 and the bellow the first
quarter's 8.1% growth pace. Many expect that the second quarter
growth rate could be the low point of this year's quarterly GDP
growth readings as already implemented stimulus measures start
taking effect. The proportion of growth coming from domestic
consumption appears to be steadily increasing, though it will
likely be a while before domestic consumption can offset weakness
in exports and investments, which have thus far been the biggest
drivers of growth.
Europe's problems have contributed to China's slowdown though
the trade route, but the government's policy of reining in
speculative excesses in the real estate sector has also been
significant in bringing down economic growth. Some estimates put
the size of the real estate sector as high as 12% of the GDP.
Tighter government regulations in the sector have showed up in
reduced new construction and in demand for cement, furniture, and
appliances. While government officials continue to state their
determination to maintain strict controls on the sector, many
observers are starting to see evidence to the contrary. This could
mean that the real estate sector will stop being a drag on the
economy going forward.
Bottom line, the Chinese growth numbers turned out to be less
worrisome than many were fearing. And J.P. Morgan's results,
particularly its restatement of last quarter's results, raise
serious questions about internal controls at the country's
supposedly best-run bank, which also happens to be the largest by
assets.
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