Chinese GDP was weaker than expected, which combined with the Federal Reserve toning down its hawkish chatter has helped the market pare back aggressive rate hike bets.
· Chinese GDP contracted -2.6% QoQ and grew just 0.4% annually in the second quarter, AUD falls
· 1% Federal Reserve rate hike bets are scaled back, lifting EU & US indices
· US banks’ earnings set off to a gloomy start, Wells Fargo & Citigroup are due
China reported slower than expected economic growth across the second quarter. The world’s second-largest economy contracted by -2.6% QoQ in the April to June period after growth of 1.3% in the previous quarter. The contraction was deeper than the -1.3% forecast, bringing the annual growth rate to just 0.4%, down from 4.8%.
The slow growth resulted from China’s zero COVID-19 policy and harsh lockdown restrictions, which hit industrial production and consumer spending across the second quarter. Given the size of the contraction and the uncertain outlook as China faces a COVID-19 resurgence and concerns surrounding the property market, China’s 5.5% GDP 2022 target is looking far too optimistic.
There were some rays of light in the data, such as a solid rebound in retail sales, which rose 3.1% MoM in June, rebounding from -6.7 in May thanks to pent-up demand, although confidence remains soft. Industrial production rebounded by 3.9% YoY in June, up from 0.7% in May.
AUD/USD fell overnight following the data release and trades around its lowest level in 2022. Asian stocks were also weaker after the report.
Aggressive Fed bets ease
European and US futures are pointing to a stronger start. The weaker Chinese data combined with a softer tone from Federal Reserve official Christopher Waller, who said that the market could be getting ahead of itself with a 1% rate hike, has helped scale back aggressive Federal Reserve bets. Following hotter than expected CPI and PPI inflation data, the market had priced in an 80% possibility of a 1% rate rise by the Federal Reserve in July, which has now eased to 48%, bringing some respite to the market.
The FTSE is set to open 0.3% high, and the DAX is pointing to a 0.7% gain on the open. However, across the week, the FTSE is looking at a 2% loss and the DAX a 3% fall as slowing growth concerns dominated.
US banks earnings
Looking ahead, the economic calendar in Europe is relatively quiet. The main focus will be on US bank’s earnings and retail sales data, which is expected to rebound in June, rising 0.8%, up from -0.3%.
JP Morgan and Morgan Stanley kicked off earnings season yesterday in a disappointing fashion, reporting a larger than expected fall in second-quarter profit, signaling the end of the pandemic era-boom. Both banks reported around a 30% fall in net income, with larger than expected declines in investment banking revenue and larger amounts set aside for bad loans. The downbeat numbers have set a gloomy tone for the rest of the US bank’s earnings, with Wells Fargo and Citigroup out today before the open and Goldman Sachs and Bank of America on Monday.
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