China News Tops Earnings Results

Reassuring news out of China and Europe should help stocks start the holiday-shortened week on a positive note. Data from China shows that the economy is slowing, but the pace of slowdown appears to be a lot steadier than many had been fearing.

Europe is handling the rating downgrades a lot better, with yields on government bonds continuing their downtrend of the last many days. This should help offset the drag from weak Citigroup (C - Analyst Report) results this morning.

With respect to Europe, we have declining inflation numbers for December, increasing the odds that the European Central Bank (ECB) will cut interest rates at the next policy meeting. Elsewhere in the Euro-zone, Spain held a successful auction of short-term treasury bills where the average yield came in lower than the level of a month ago. Yields on 10-year Italian government bonds have fallen below 6.5%, continuing their favorable trend of recent days despite the rating downgrade.

But the big news of the day is about China. That country’s fourth quarter GDP grew at a better than expected 8.9% year-over-year rate. Compared to the third quarter, annualized fourth quarter growth came down to 8.2% from the third quarter’s 9.5% pace. For all of 2011, the country’s economy grew 9.2%, down from the 2010’s 10.4%. The fourth quarter growth rate was the lowest since the second quarter of 2009, but the economy appears to be slowing at a steadier pace than many have been fearing.

This is a net positive for the markets, particularly for commodity prices, and eases concerns of the growth pace falling below the 8% rate on a year-over-year basis. This would be an indication to the Chinese authorities that they should continue with their recent policy of monetary easing and prudent fiscal policy.

On the earnings front, we have a big negative surprise from Citigroup, with the bank missing top- and bottom-line expectations by big margins. Wells Fargo (WFC - Analyst Report) came ahead of expectations, both on the EPS as well as the revenue fronts. In other news, Walter Energy (WLT - Analyst Report), the coal miner, lowered guidance for the fourth quarter, citing lower production volumes due to operational issues at one of its mines.

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