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) results.
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.