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China Could Be Sending a Warning Signal for US Earnings Season

Published 10/01/2024, 08:26
Updated 20/09/2023, 11:34

Stocks gapped lower, while the equal-weight and small-cap indexes didn’t recover much. The S&P 500 finished the day lower by around 15 bps.

The index was able to fill the morning’s opening gap by midday, and once that gap was filled, the rally stalled out.

That was about as exciting as it seemed on the surface. We will get the 10-year auction today, and tomorrow will be the CPI and 30-year auction.

So, let’s take this quiet day to look at something different.

S&P 500 - 15-Minute Chart

Asian markets continue to trade poorly, especially China, trading near its 2019 lows.

There have been a lot of key levels broken in the CSI 300, which makes one wonder just how much lower this index could go and how bad the economic conditions in China are.CSI 300 Index-Weekly Chart

We don’t talk much about China inflation, but the CPI report is due on January 11, and the CPI is expected to fall by 0.4% y/y, which would be better than the decline of 0.5% y/y in November.

We aren’t talking about disinflation here, we are talking about deflation, like where prices are falling.

China CPI

When the China “impulse” is strong, it tends to lead to a strong US economy, and perhaps one reason why the manufacturing and services ISM PMI here in the US has been in contraction for months is because the China impulse has stalled out.

China ISM

Oil prices seem to be suffering as a result of this weak environment in China as well.WTI Crude Oil-Daily Chart

So China is one market we need to continue to be mindful of, and more importantly, be aware that their economic struggles could become the rest of the world’s struggles.

The weakness seemed to show up in Nike’s results, and I suspect that Nike (NYSE:NKE) won’t be the only company to see these struggles when earnings come out over the next few weeks.

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