Wall Street Breakfast: China The Outlier

China the outlier

China lowered two key lending rates and injected more cash into its economy Monday as it looks to keep stimulating the economy. The country remains the global monetary policy outlier, with the rest of the major economies tightening in an effort to tame inflation.

The People’s Bank of China cut its one-year lending facility rate by 10 basis points to 2.75% and cut the seven-day lending rate the same amount to 2%. The PBOC added 2 billion yuan through seven-day reverse repos.

Economists had expected the seven-year rate to stay steady. But policymakers are still clearly worried that risks are to the downside with strict COVID policies and weakness in housing, even though plenty of liquidity is stoking inflation pressures.

Later in the day, the government reported a batch of mostly disappointing economic data.

China July Industrial Production rose 3.8% y/y (vs. 4.6% expected) and slightly lower than the 3.9% figure reported in June. Retail sales increased 2.7% in July compared with the same period in 2021, below the 5% forecast. In addition, China’s jobless rate for 16-to-24-year-olds hit 19.9%, the highest ever recorded. And new house prices were down 0.9% y/y (vs. down 0.5% prior).

The Shanghai Composite (SHCOMP) was flat. The Hang Seng (HSI) was down 0.5%. China bond yields were lower.

Rebound still seen: Still, the “question is no longer whether we get a rebound (in the Chinese economy), but how much of one,” Morgan Stanley Economist Seth Carpenter wrote in a note. “Covid-zero policies are slowly easing and we think more relaxation will follow the Party Congress in October,” Carpenter said. “But will freedom of mobility be enough to reverse the challenges of the housing market? Recent policy action to address the housing crisis will help, but I fully expect that a much larger package will be needed. Ultimately consumer and property confidence will need to make a rapid recovery if the rebound can take shape,” he added. (2 comments)

Retail revisions

The bad news for major retailers is likely to continue flowing into the second half of 2022, according to Morgan Stanley.

While consumer discretionary stocks have underperformed in 2022, the sector has surged as of late. For example, the Consumer Discretionary Select Sector SPDR (XLY) has roared about 20% higher in the past month as bulls pounce on signs of peak inflation and improving (albeit modestly) consumer sentiment. Retailers, of course, have been major beneficiaries of this swift sentiment shift.

In a note to clients previewing Q2 and second-half results across hardlines retail ahead of a busy earnings week, equity analyst Simeon Gutman advised that the sector’s rally may be short-lived. He observed that about half of the companies in his coverage have already cut guidance this year. Yet, despite the preemptive move to temper expectations, Gutman sees it as “almost inevitable” that more negative revisions come during earnings week.

“Only the Dollar Stores and (to a lesser extent) [Home Depot] (HD) appear relatively insulated in Q2,” he explained. “For the rest, there is potential for downward revisions, even from companies that have pre-announced.”

As such, he retained Buy-equivalent ratings on Dollar General (DG), Walmart (WMT), AutoZone (AZO), and Driven Brands (DRVN). He was conversely cautious on more discretionary names such as Target (TGT), Best Buy (BBY), and Williams Sonoma (WSM). (48 comments)

Streaming ratings

Netflix’s (NFLX) runaway hit Stranger Things topped streaming ratings yet again – holding status as the only program to stream a billion minutes for the week, and then some.

The show, riding high off an Independence Day weekend release of the end of its fourth season, streamed 2.947B minutes to easily top Nielsen’s most recent weekly streaming ratings (for July 11-17). The offering that came closest to the horror/sci-fi hit was Netflix’s own animated film The Sea Beast, which doubled up its minutes from the prior week, to 920M.

But Amazon Prime Video (AMZN) is keeping up its recent momentum with two top-five programs: Action series The Terminal List landed at the No. 3 spot with 887M minutes streamed; and with its season over, Amazon’s The Boys held a lot of the prior week’s viewing to sit at No. 5 with 828M minutes, just behind Netflix’s new take on Resident Evil (858M minutes), and just ahead of No. 6 – a show on both Netflix and Hulu (DIS) (CMCSA), Alone (818M minutes). (9 comments)

Saudi Aramco record

Saudi Aramco CEO Amin Nasser said on Sunday it is ready to raise crude oil production to its maximum capacity of 12M bbl/day if asked to do so by the Saudi government.

“We are confident of our ability to ramp up to 12M bbl/day any time there is a need or a call from the government or from the ministry of energy to increase our production,” Nasser reportedly said.

The comments came as Aramco (ARMCO) reported a 90% surge in Q2 profit to a stronger than expected 181.64B riyals ($48.4B), the state oil company’s highest quarterly net profit since it started trading shares on the Saudi stock exchange in 2019. (6 comments)

Long inflation road

Last week’s inflation data – July’s consumer price index and producer price index – started to show some relief in rising prices, but the U.S. economy is still a far way off from reaching the Federal Reserve’s 2% inflation target.

Much of the relief came from lower gasoline prices. The bad news is that the “stickier” prices such as shelter costs kept rising.

“So this month-to-month 0% increase is better than what we’ve been seeing, but there’s still a lot of worrying, underlying trends and inflation,” said Robert Frick, corporate economist at Navy Federal Credit Union, in an interview with Seeking Alpha.

“One of the more troubling things that I don’t think got enough analysis was food costs,” he said. Global upward pressure on grain prices is fueling baked goods prices. The avian flu has reduced the chicken flocks, and the U.S. milking herd is very low. “So you’re going to see a lot of stickiness in food costs,” which traditionally are fairly flexible – “but not this time around.” (23 comments)

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