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For U.S. businesses, COVID risks in China won’t go away anytime soon: Morning Brief

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Tuesday, April 26, 2022

Today’s newsletter is from Emily McCormickreporter for Yahoo Finance. Follow her on Twitter.

China’s latest struggles to bring COVID-19 under control present ongoing risks not only to its own growth, but also to already struggling global supply chains.

Shares traded choppy yesterday amid the specter of escalating restrictions in the Chinese capital. Area media reports detailed how Beijing residents were stockpiling essential goods over the weekend in anticipation of strict stay-in-place orders. These would be in addition to week-long closures in Shanghai, which began in late March and are just beginning to ease in some areas.

Reduced mobility in the world’s second largest economy will continue to spread across the world, according to a number of analysts. According to data from Interosmore than 20,000 US entities have direct relationships with Tier 1 suppliers in and around Shanghai.

“The supply networks have not yet fully recovered from the pandemic. If China remains engaged in severe shutdowns to combat virus outbreaks, production and distribution chains are likely to see further disruption from business shutdowns, as much of the population shelters at home” , said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. in a note on Monday. “Shortages of goods and parts are the most likely outcome of these disruptions, which will undoubtedly have implications for assembly lines and industrial production across the world.”

And for China in particular, these lockdowns are about to translate into an even more pronounced deceleration in economic activity. Bank of America Chinese economist Helen Qiao cut her forecast for China’s gross domestic product (GDP) growth to 4.2% from 4.8% last week, even before Beijing’s latest concerns did not emerge. China’s economy grew at an estimated 4.8% year-on-year in the first quarter, although before the 2019 pandemic, China’s GDP had grown at a rate of 6.0%.

People line up to be tested for the Covid-19 coronavirus at a makeshift testing site outside office buildings in Beijing on April 25, 2022. (Photo by Jade GAO / AFP) (Photo by JADE GAO /AFP via Getty Images)

While China’s growth beat expectations in the first quarter, bigger impacts from the shutdowns in Shanghai are expected to emerge in the second — both inside and outside the country, Qiao said.

“A more serious impact on production and supply chains is expected to manifest from April, given that the Yangtze River Delta region around Shanghai accounts for 21% of China’s industrial output and 36% of exports,” Qiao said. “These supply chain disruptions will likely surface and reverberate across the globe in 3-6 weeks and last through at least the end of Q2.”

In other words, the full effect of the latest lockdown-related disruptions from China has yet to fully materialize here in the United States.

But even before that, some individual companies have already reported that their operations in China have been affected by the outbreaks.

“The shutdowns have had two impacts in China for us,” Procter & Gamble (PG) chief financial officer Andre Schulten said during the company’s earnings call last week. “First, on the supply side, we have two factories in the Shanghai area and the subcontractor – obviously those have been closed for a long time.”

“And we’re certainly seeing a significant impact in terms of consumer demand,” Schulten added. “About 25%, I think, was Wall Street’s estimate of consumers [who] are somehow affected by the closures. It impacts the ability of our consumers to get to stores, grocery stores, department stores. Even online purchases are significantly limited due to the inability to deliver. »

Similarly, Coca-Cola (KO) CEO James Quincey said on the company’s earnings call on Monday that momentum in China had “reversed” in February and March due to shutdowns. and reduced consumer mobility. The beverage company ultimately ended the quarter with lower unit case volumes in the region.

“The key factor will be the degree of mobility,” Quincey said. “Depending on the size, it will make a huge difference in results. I don’t think there is anything to call since the first days of April, it’s different from what was happening at the end of March.

And while many agree there will be an impact from the COVID outbreak in China, questions about depth and duration remain to be seen.

“The big X-factor is, again, the duration of these lockdowns. If you have 1-2 week lockdowns and they move on because they’ve eased COVID zero significantly, then you’ll have less stress,” Leland Miller, CEO of China Beige Book, told Yahoo. Finance Live Monday. “If you shut down these big metropolises, if you shut down the biggest ports in China for several weeks or even months, then yes, you are going to have a supply chain disaster on your hands.”

“That doesn’t mean it’s going to happen,” he added. “But that just means we have to watch things so closely right now, in April data, early May, because that’s going to dictate the state of the global economy for the first half of the year. C is really very important.”

What to watch today

Economy

  • 8:30 a.m. ET: Durable Goods OrdersMarch Preliminary (1.0% expected, -2.1% in prior month)

  • 8:30 a.m. ET: Durable goods orders excluding transportMarch Preliminary (0.6% expected, -0.6% in previous month)

  • 8:30 a.m. ET: Non-defence capital goods orders excluding aircraftMarch Preliminary (0.5% expected, -0.2% in prior month)

  • 9:00 a.m. ET: Shipments of non-defense capital goods excluding aircraftMarch Preliminary (0.5% expected, 0.3% in previous month)

  • 9:00 a.m. ET: FHFA Home Price Indexmonth-over-month, February (1.5% expected, 1.6% in prior month)

  • 9:00 a.m. ET: Composite S&P CoreLogic Case-Shiller 20 citiesmonth-over-month, February (1.50% expected, 1.79% in prior month)

  • 9:00 a.m. ET: Composite S&P CoreLogic Case-Shiller 20 citiesYoY, Feb (19.20% expected, 19.10% in prior month)

  • 9:00 a.m. ET: US National S&P CoreLogic Case-Shiller House Price Indexyear-on-year, February (19.17% in prior month)

  • 10:00 a.m. ET: Conference Board Consumer ConfidenceApril (108.2 expected, 107.2 in previous month)

  • 10:00 a.m. ET: Current status of the Conference BoardApril (153.0 in previous month)

  • 10:00 a.m. ET: Conference Board ExpectationsApril (76.6 in previous reading)

  • 10:00 a.m. ET: Richmond Fed Manufacturing IndexApril (9 expected, 13 in previous month)

  • 10:00 a.m. ET: Sales of new homesMarch (768,000 expected, 772,000 in previous month)

  • 10:00 a.m. ET: Sales of new homesmonth-over-month, March (-0.6% expected, -2.0% in prior month)

Earnings

Pre-marketing

  • 6:00 a.m. ET: UPS (UPS) is expected to report adjusted earnings of $2.88 per share on revenue of $23.80 billion

  • 6:00 a.m. ET: PepsiCo (PEP) is expected to report adjusted earnings of $1.23 per share on revenue of $15.57 billion

  • 6:00 a.m. ET: centene (CNC) expected to report adjusted earnings of $1.69 per share on revenue of $34.30 billion

  • 7:00 a.m. ET: Discovery of Warner Bros. (WBD) expected to report adjusted earnings of $0.57 per share on revenue of $3.17 billion

  • General Electric (GE) expected to report adjusted earnings of $0.20 per share on revenue of $17.04 billion

Post-marketing

  • 4:00 p.m. ET: General Motors (GM) expected to report adjusted earnings of $1.69 per share on revenue of $37.39 billion

  • 4:10 p.m. ET: Chipotle (CMG) expected to report adjusted earnings of $5.67 per share on revenue of $2.01 billion

  • 4:05 p.m. ET: Capital one (COF) expected to report adjusted earnings of $5.46 per share on revenue of $8.03 billion

  • Alphabet (GOOG, GOOGL) expected to report adjusted earnings of $25.71 per share on revenue of $56.66 billion

  • Microsoft (MSFT) expected to report adjusted earnings of $2.19 per share on revenue of $49.04 billion

  • Visa (V) is expected to report adjusted earnings of $1.66 per share on revenue of $6.84 billion

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