Friday, January 11, 2013

Data about a bigger than expected rise in Chinese inflation, a wider than expected trade deficit in the U.S. and a positive start to big-bank earnings provide the backdrop for today’s trading action. The Chinese inflation picture may not actually be that worrisome, but the domestic trade deficit numbers could be problematic for GDP growth estimates in the fourth quarter. Overall though, stocks may not do much today after reaching 5-year highs on Thursday, particularly with the fourth quarter reporting getting into high gear next week.

The rise in China’s December CPI at a bigger than expected 2.5% pace could potentially limit the monetary authorities’ flexibility. But the rise may not be worrisome enough at this stage as it still remains below their target and pressures at the wholesale level appear contained. The Chinese authorities lowered interest rates twice in 2012 and have largely relied bank reserve requirements as a choice monetary policy tool. But it hasn’t lowered reserve requirements since May last year either despite widespread clamor in the market for such action. A key concern for them remain pricing trends in the property markets. The December survey shows that average home prices in China’s 10 biggest cities increased for the second time in 2012. Overall, one could reasonably infer from today’s inflation data that China could afford to keep current policy in place without stoking inflation fears.

Wells Fargo’s (WFC) earnings beat this morning kick-starts earnings results for the big banks. Wells Fargo along with other major banks like J.P. Morgan (JPM), Bank of America (BAC), Citigroup (C) and others were in the news this week with respect to the $8.5 billion settlement about foreclosure issues.

Wells Fargo has been a standout performer in the group, with a track record of consistent profitability quarter after quarter. The bank’s large mortgage business has helped it offset the other difficult operating environment of compressed net interest margins and weak loan demand. Notwithstanding the earnings and revenue beat and a decent loan growth, Wells Fargo’s net interest margin was lower than in the previous quarter, which some may find as problematic.

Overall the banking sector is expected to be once again one of the strongest earnings performers this quarter though estimates have been coming down since the announcement of the foreclosure settlement earlier this week. Excluding earnings from the Finance sector, total fourth quarter earnings for companies in the S&P 500 fall into the negative territory.

Sheraz Mian
Director of Research