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Slowing Disinflation

October 12, 2024
5 min read

Here are some of the biggest stories from last week:

  • US inflation cooled by less than expected.
  • Chinese shares jumped after reopening from a weeklong holiday.
  • The World Bank expects China’s economy to weaken further in 2025.
  • Analysts have cut third-quarter S&P 500 earnings estimates more than normal.
  • The world’s biggest chipmaker reported surging sales, signaling continued strong demand for AI semiconductors.

Dig deeper into these stories in this week’s review.

Macro

New data this week showed consumer prices in the US rose by 2.4% in September from a year ago, marking a small step down from August’s 2.5% pace. While this marks the sixth consecutive month of declining inflation, it came in slightly above economist forecasts of 2.3%. Adding slightly to the bad news, core inflation, which strips out volatile food and energy items to give a better idea of underlying price pressures, ticked up to 3.3%. Economists had expected the rate to remain unchanged from August’s 3.2%. The higher-than-expected inflation, combined with last week’s strong US jobs report, will likely intensify the debate over whether the Fed should opt for a modest interest-rate cut or pause after September's larger reduction. For now, traders are betting on a quarter-point cut at the Fed’s November meeting.

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US headline inflation cooled for a sixth consecutive month in September, but core inflation unexpectedly accelerated. Source: CNBC

China

Chinese shares surged after reopening on Tuesday following a weeklong holiday, continuing a strong rally sparked by last month's announcement of a broad stimulus package aimed at boosting the economy. The blue-chip CSI 300 index of Shanghai- and Shenzhen-listed stocks opened 10.8% higher on Tuesday but later pared gains, closing up 5.9%, with trading volumes hitting a record 2.6 trillion yuan ($368 billion). The loss of momentum throughout the day came as a government briefing expected to unveil more economic stimulus measures underwhelmed investors.

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The CSI 300 opened 10.8% higher on Tuesday but later pared gains, closing up 5.9%. Source: Bloomberg

In contrast, the Hang Seng China Enterprises Index, which tracks Chinese stocks trading in Hong Kong, dropped 9.4% on Tuesday – wiping out all the gains from the previous five sessions. However, some convergence between the two markets was expected, as investors shifted away from Hong Kong stocks, which had rallied while Chinese onshore markets were closed for the Golden Week, and moved toward mainland-listed shares – the primary beneficiaries of last month’s stimulus package.

The CSI 300's surge on Tuesday marked its tenth consecutive session of gains, leaving some investors divided on where it goes from here. On one hand, some Wall Street heavyweights including Goldman Sach, HSBC, and BlackRock have turned optimistic on the once-beaten down index, and are predicting further gains ahead. Goldman Sachs, for example, said in a research note last week (i.e. before Tuesday’s big jump) that Chinese shares may rise another 15-20% if authorities deliver on their promises, citing factors such as below-average valuations, improving earnings, and low global investor positioning.

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Chinese stocks are not expensive compared to previous bull runs. Source: Bloomberg

On the other hand, some investors are arguing that the rally has gone too far. Case in point: a day after Tuesday’s strong rally, the CSI 300 tumbled 7%, snapping its 10-day winning streak. Part of investors’ skepticism stems from the fact that authorities have yet to introduce aggressive measures to boost consumer demand, which is seen as a crucial missing element for the economy. After all, making money cheaper won’t stimulate growth if Chinese consumers remain hesitant to spend.

Still, authorities said this week that they’re confident in meeting their economic targets, pledging additional future support to drive growth. But not everyone shares their optimism. For example, the World Bank said just this week that it expects China’s economy to weaken further in 2025 – even when factoring in a temporary boost from the recent stimulus measures. More specifically, the institution expects the world’s second-biggest economy to expand by 4.3% next year, down from an estimated 4.8% in 2024. For reference, the Chinese government has set an official growth target of about 5% for this year.

Earnings season

This week marked the official start of the third-quarter earnings season in the US, with major companies like PepsiCo, Delta Air Lines, BlackRock, JPMorgan, and Wells Fargo releasing their latest updates. Investors are closely watching this reporting period to see if corporate earnings can sustain the S&P 500’s roughly 20% rally in 2024, which has added over $8 trillion to the index’s market capitalization. These gains have largely been driven by expectations of easing monetary policy and resilient profit outlooks, despite uncertainties around interest rates, geopolitical tensions, stock valuations, and the upcoming US presidential election.

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The S&P 500 Index has soared roughly 20% in 2024, adding more than $8 trillion to its market capitalization. Source: Bloomberg

However, analysts appear less optimistic and have been lowering their earnings estimates more than normal. On June 30, the estimated year-over-year S&P 500 earnings growth rate for the third quarter was 7.8%, but that’s fallen to 4.2% today. That means the third-quarter earnings-per-share (EPS) estimate for the S&P 500 has declined by 3.9% over the past three months – larger than the 5-year and 10-year averages of 3.3% (analysts typically lower their forecasts during a quarter). At the sector level, nine of the eleven sectors saw a decrease in their EPS estimates over the third quarter, led by the energy (19.2%) and materials (9.4%) sectors. On the other hand, the information technology sector is the only one that saw an increase in its EPS estimate during this period.

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The third-quarter earnings-per-share (EPS) estimate for the S&P 500 has declined by 3.9% over the past three months. Source: FactSet

Still, it’s not all bad news. If the 4.2% growth rate holds, it will mark the fifth consecutive quarter of year-over-year earnings growth for the S&P 500. Analysts also still believe the index will report double-digit profit growth from the fourth quarter onwards. All in all, they see the index delivering year-over-year earnings growth of 9.8% in 2024 and 14.9% in 2025.

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Analysts expect the S&P 500 to deliver year-over-year profit growth of 9.8% in 2024. Source: FactSet

Semiconductors

Taiwan Semiconductor Manufacturing Company (TSMC), the world’s biggest contract chipmaker with a 60% market share, plays a critical role in the AI industry. While companies like Nvidia and AMD focus on designing high-end chips needed to train AI models, they outsource most of their manufacturing to TSMC. That explains why the firm’s stock price has more than doubled since the launch of ChatGPT. And this week, TSMC announced that its third-quarter revenue rose by a more-than-expected 39% from a year ago. (The firm typically provides a revenue update before officially releasing its earnings).

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TSMC's sales surged 39% last quarter, driven by strong AI demand. Source: Bloomberg

This strong performance supports some investors' belief that AI spending will remain elevated as businesses and governments compete for an edge in the emerging technology. However, not all investors are convinced, with some warning that Big Tech firms may struggle to sustain their current pace of infrastructure investment without a clear, monetizable AI use case. Time will tell who turns out to be correct…

Next week

  • Monday: China trade balance (September).
  • Tuesday: UK labor market report (August), eurozone industrial production (August)Earnings: Bank of America, Citigroup, Goldman Sachs, Johnson & Johnson, UnitedHealth Group.
  • Wednesday: UK inflation (September). Earnings: Abbott Laboratories.
  • Thursday: China foreign direct investment (September), Japan trade balance (September), European Central Bank interest rate announcement, US retail sales (September), US industrial production (September). Earnings: Blackstone, Morgan Stanley, TSMC, Netflix, Intuitive Surgical.
  • Friday: Japan inflation (September), China GDP (Q3), China industrial production and retail sales (September), UK retail sales (September). Earnings: American Express, Procter & Gamble, Schlumberger.
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General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.

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