Today’s data from China and Japan provides further evidence that the emerging signs of a growth spurt at home will remain unsupported by weakness abroad. This may not be a big deal for U.S. economic growth, but it could become a challenge for the corporate earnings picture.
With respect to China, the focus remains on the unsettled Hong Kong situation where pro-democracy demonstrations present a key challenge to the mainland authorities. Questions about China’s growth outlook refuse to go away as well, as today’s final factory sector PMI read from HSBC Bank (HSBC) for August reconfirms. The final August PMI index was revised down to 50.2 from the interim 50.5 level, just barely above the dividing line between expansion and contraction in this key sector of the economy. The unsettled situation in Hong Kong, a key hub for China’s finance and international trade, adds another layer of uncertainty about the country’s growth prospects.
Elsewhere in Asia, the shine appears to be coming off Japan’s ‘Abenomics’ miracle, with all recent data indicating that the country’s economy has yet to come out of the slump that it fell into following the April sales tax introduction. The latest industrial production and consumer spending data show that the fiscal authorities will have to weigh their existing plan for a second round sales tax increase against the need for spurring growth. The consensus view was that GDP growth would rebound in the current quarter after the sharp contraction in Q2, but these consumer and business spending trends indicate that Q3 growth expectations will need to come down.
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Beyond these two key Asian economies, questions remain about the growth and inflation outlook in the Euro-zone, which will all figure prominently in the IMF’s latest world economic outlook report coming out later today. Stock market bulls will justifiably argue that these global headwinds will have the least impact on U.S. growth given its domestic orientation. But it will nevertheless be a challenge for corporate profits as almost 40% of S&P 500 index earnings come from outside North America.
References to Europe on the earnings calls in the last few reporting cycles had taken a decidedly favorable and reassuring tone. But as today’s Ford (F) profit warning indicates, we should probably get ready for a somewhat negative shift on that front this coming earnings season. This, coupled with the strengthening U.S. dollar, remains a fresh headwind for earnings.
In corporate news, eBay (EBAY) has finally decided to do what Carl Icahn was asking them to do all along – split off the company’s PayPal unit as a standalone company. eBay came around to accepting Icahn’s course after successfully fighting him off. In other news, Walgreen (WAG) came in with in-line results on positive same-store sales data, in the first quarterly release after dropping plans to decamp to Europe in a tax-inversion move.
