Delicate China

Delicate China
Reda Farran, CFA

5 months ago4 mins

What happened last week?


  • Top US banks reported bumper profit during the second quarter, benefitting from higher interest rates.
  • Netflix reported okay-ish results but gave a disappointing outlook, sending its shares lower.
  • Multiple rounds of price cuts sent gross margins at Tesla’s auto division to a four-year low.


  • Inflation in the UK fell more than expected in June, hitting a 15-month low.


  • China’s economy lost further momentum last quarter.

What does all this mean?

US banks have been jacking up what they charge for loans far more quickly than they’ve been increasing interest rates for savers, boosting their net interest incomes last quarter. But their shareholders are questioning how long this gravy train might last, with banks under increasing pressure to pass on higher interest rates to depositors – especially when savers can earn yields of around 5% via money market funds.

Netflix added almost six million subscribers last quarter – more than double what analysts were expecting – suggesting that its crackdown on password sharing is helping it drive new users. However, the firm’s revenue last quarter and its forecast for the current quarter both came in below expectations. Netflix’s push toward lower-priced, ad-backed services, and price reductions in over 100 countries earlier this year both played a role.

Tesla reported record deliveries and revenue for the second quarter, but the gross margin at its auto division sank to a four-year low after months of price reductions. Investors, already on edge, sent the firm’s shares lower after Elon Musk warned of more price cuts to come. That sent ripples through the industry, with stocks of other EV makers falling last Thursday too.

Consumer prices in Britain were 7.9% higher in June compared to the same time last year – the lowest reading since March 2022 and a sharp drop from the 8.7% registered in May. The figure was also lower than the 8.2% forecast by economists, marking the first time in five months that inflation came in lower than expected. Following the release, the market now sees interest rates in the UK peaking below 6%, down from as high as 6.5% priced in earlier this month.

China’s economy expanded by 6.3% last quarter from a year ago. But economists were expecting a perkier 7.3% lift, considering dozens of Chinese cities were in lockdown during much of 2022. And the Chinese economy grew by just 0.8% from the quarter before – a far slower pace than the 2.2% registered in the first three months of the year.

This week’s focus: China

China’s disappointing figures prompted several major banks to downgrade their growth forecasts for the world’s second-biggest economy. That’s not good news for the world economy either: the International Monetary Fund expects China to be the top contributor to global growth over the next five years, with a share expected to represent 22.6% of the total – roughly double that of the US. No wonder, then, the Chinese government is under increasing pressure to step up stimulus measures to boost its faltering economy.

But China has so far only hinted at limited, targeted measures rather than broad ones, reflecting its conservative growth target of around 5% for the year. Officials are also reluctant to drive up debt, especially in the country’s troubled property sector. The reality, though, is that China was still under its Covid-z Zero rules in 2022, which gives a low base for comparison and makes the 5% growth target this year seem more ambitious than it actually is. Netting out that effect, growth for 2023 will look closer to 3% – less than half of China’s pre-pandemic average.

The week ahead

  • Monday: US, Japan, eurozone, and UK purchasing managers indexes (July).
  • Tuesday: US consumer confidence (July). Earnings: 3M, General Electric, General Motors, Spotify, Alphabet, Microsoft, Snap, Visa, Verizon Communications.
  • Wednesday: Federal Reserve interest rate announcement, US new home sales (June). Earnings: AT&T, Boeing, Coca-Cola, Meta Platforms.
  • Thursday: European Central Bank interest rate announcement, US GDP (Q2), US durable goods orders (June). Earnings: AbbVie, Mastercard, McDonald’s, Ford, Intel, Mondelez.
  • Friday: Bank of Japan interest rate announcement, eurozone economic sentiment (July). Earnings: Chevron, ExxonMobil, Procter & Gamble.


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