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17 Jan 2023

What’s driving markets: Chinese GDP, U.S. bank profitability, and the recovery in the Eurozone

China’s economy grew at the slowest rate since the death of Mao Zedong last year (with the exception of 2020), as its population shrank for the first time since the 1960s. Goldman Sachs (NYSE: GS) And Morgan Stanley (NYSE: MS) Report earnings, as does crypto-exposed silver gate (NYSE: SI). Stocks are set to reopen lower after the Martin Luther King Day holiday. There’s a big turnaround in a key sentiment indicator in Germany and the ECB warns it will have to keep raising rates for a while yet. Oil prices nudge higher ahead of OPEC’s monthly report. Here’s what you need to know in financial markets on Tuesday, 17th January. 

1. Chinese growth slows to 3%, as the population falls for the first time in 60 years

China’s economy performed slightly better than expected at the end of last year, but growth was still weaker (with the exception of the first pandemic year) than at any time since the death of Mao Zedong.

 GDP rose 3.0% in 2022, coming in fractionally above some heavily-downgraded forecasts thanks to an uptick in industrial production and retail sales in December, as the ruling Communist Party backed away from its restrictive “Zero-COVID” policies.

Among the data dump, one striking statistic stood out: China’s population shrank for the first time since the 1960s, by 850,000 to 1.412 billion. The figures underline the rapid deterioration in China’s demographic situation, with births extending a decline that has steepened sharply since the start of the pandemic. China’s working-age population has already been in decline for some years, shrinking by an average of 0.4% a year in the seven years prior to the pandemic.

2. Goldman, Morgan Stanley to report earnings

Goldman Sachs and Morgan Stanley will round off what has been a broadly disappointing round of quarterly earnings from the U.S.’s largest banks.

Earnings are expected to fall by around one-third at Morgan Stanley and by nearly half at Goldman, both of whom are more dependent on the performance of global markets and dealmaking than rivals Citigroup (NYSE:C) And Bank of America (NYSE: BAC) This year. That didn’t stop them from outperforming their universal banking rivals over the last 12 months though.

Goldman is likely to quantify what reports suggest is its largest round of job cuts since the 2008 crisis, while investors will want to see whether Morgan Stanley adds to the 2,000 or so cuts that it made in December.

3. Stocks set to open lower as Cohen goes Chinese

U.S. stock markets are set to reopen in a relatively downbeat mood later, with gloom about the outlook for the global economy not lightened much, if at all, by the Chinese data.

By 06:10 ET (11:10 GMT), Dow Jones futures were down 69 points, or 0.2%, while S&P 500 futures and Nasdaq 100 futures were both down 0.3%. The three main cash indices have gained between 3% and 5% this year as hopes for an end to rate hikes from the Federal Reserve have strengthened.

Stocks likely to be in focus later include Alibaba (NYSE: BABA), where activist investor and Chewy (NYSE: CHWY) Founder Ryan Cohen has taken a small stake as part of a campaign for accelerated stock buybacks.

United Airlines will report earnings after the bell, while Silverglate – bankers too much of the U.S. cryptocurrency universe – will report early.

4. A brighter outlook in Europe

The mood has turned for the better in the Eurozone. The ZEW economic sentiment index for Germany, the region’s largest economy, swung back to 16.9 in January, its highest in 11 months, from -23.3 in December.

The index, which is better at marking turning points in sentiment than at measuring actual activity, rebounded thanks to the sharp decline in energy prices over the last month, which has greatly improved the outlook for Germany’s energy-intensive factories.

At the World Economic Forum in Davos, Bank of Portugal Governor Mario Centeno – who formerly chaired the group of Eurozone finance ministers – also noted that the Eurozone economy has been surprisingly strong over the last year. Meanwhile, the ECB’s chief economist Philip Lane – a noted inflation ‘dove’ – told the FT that the ECB will have to move interest rates into the restrictive territory to bring inflation under control, adding that the problem is “going to be an issue for the next year or two.”

The euro, which has risen over 2% in the last month against the dollar, was flat.

5. Oil edges higher ahead of OPEC report

Crude oil prices tested a one-week high after the Secretary General of OPEC, Haitham al-Ghais, said the organization will do ‘whatever its takes’ to keep the oil market balanced this year. He added that the group is “cautiously optimistic” about the outlook for the world economy, balancing an expected slowdown in western countries against a rebound in demand from China.

OPEC will publish its monthly report on the oil market at 07:00 ET, but the release of U.S. inventory data from the American Petroleum Institute is pushed back to Wednesday this week owing to the U.S. holiday on Monday. By 06:30 ET, U.S. crude futures were up 0.2% at $80.28 a barrel, while Brent crude was up 1.0% at $85.27 a barrel.