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Is High-frequency macro the puppeteer? US stocks became the 'puppet market'.

Hi, everyone. I’m Dolphin Analyst, and it’s time for our weekly market portfolio strategy update. Key information is as follows:

  1. Without any historical experience to draw from, in the US stock market, there is no firm belief no matter if it is a weak recession, stubborn stagflation, or deep recession, short-term predicting the changes in US Federal Reserve policy has become the trading logic. When the Fed makes decisions frequently, market trading becomes a game of staring at high-frequency data to gamble on Fed policy.

  2. In the current situation where there is still a large gap between employment supply and demand, when trading strategies on the market, it is especially important to pay attention to the risk of releasing data on new jobs, job vacancies and hourly wages, and to realize profits in real time under reasonable income.

In terms of overall trends, Dolphin believes that while the US stock market is experiencing fluctuating declines, it is still possible to focus on opportunities in faith-related stock. From the performance of the CPI in the past few months, it can be seen that in terms of the impact on core service inflation excluding housing, labor costs are not the most important cost component. The decline in other cost components, coupled with structural changes in employment (white-collar unemployment, blue-collar employment), may not result in an increase in average wage costs that are synchonous with employment. The US stock market has been frightened by employment to a certain extent, for example, when the yield of the 10-year US Treasury bond returns to the 3.8-3.9% level, it is worth reconsidering the opportunity to focus on the US stock market.

  1. In this week starting February 5th, the Alpha Dolphin portfolio decreased by 2.4%, clearly underperforming the S&P 500 (+1.6%), mainly because Dolphin realized that Hong Kong stocks need to be adjusted but did not make much change to the portfolio. Since the start of the test of the portfolio to the end of last week, the absolute return of the portfolio was 19%, and the excess return compared to the benchmark S&P 500 index was 24%.

  2. Companies that released their earnings reports this week include the US stock market vertical giants Uber and Disney, and domestic semiconductor giant SMIC. These two to C service consumer-oriented companies need to closely follow the relationship between quarterly revenue, profit and labor costs, as well as their judgments on future service consumption as representative giants. For SMIC, the focus is on finding a turning point in the cycle through price, capacity utilization rate, inventory changes and company guidance content.

Here are the details:

I. Earnings Week for Giants: Do US Stock Market Giants’ Results Really Perform Well in Stock Prices?

According to the Dolphin's summary of the overall revenue of the five giants, the total year-on-year decrease was further reduced to 1%, and the operating profit decreased directly by 18%, with the contraction rate increasing.

Among these giants, Meta, which has a large account, is not because its current performance is particularly good, but because it is the first to compromise in the competition after the competitive landscape deteriorates, with the largest scale of downsizing, restructuring of operations, and repurchasing among several giants.

(PS: In the following season's summary of the US stock market, Dolphin will further analyze this part in depth. Please stay tuned.)

However, after several US stock market giants released their performance, no matter what their performance was, the stock price underperformed at most, merely remaining sluggish, especially for giants like Microsoft, whose core valuation Azure remained unchanged and whose currency's growth rate guidance was downgraded from 38% in the previous few quarters to 30% in the new quarter, but their stock prices continued to rise. And here's the rise, just performance week meets macro week, the latter being more critical.

Secnd, The Central Bank's Super Week: A "Puppet Market" That Appears to Be Running Ahead of the Fed's Expectations

After compiling this time's high-frequency tracking of US macroeconomic data, it can be seen that the core high-frequency variables that currently dominate macro are roughly as follows:

(1) GDP growth power-related - (1) goods and services consumption, and (2) PMI;

(2) Price-related - (3) CPI, and (4) CPE;

(3) Labor cost-related - (4) hourly wage growth rate; and (5) wage cost growth rate;

(4) Employment-related - (6) new non-farm employment, (7) non-farm job vacancies;

(5) Pivot in the attitude of the Fed

Faced with rare inflation with no reference and historically rare inverted interest rates, although the views on the US economy are quite distinct from bullish to bearish, the opinions are obviously not unified, and the trading side has no obvious directional faith, with US stocks almost becoming a "puppet" of these macro high-frequency data.

Moreover, at the macro inflection point, US stocks have been hijacked by macro factors, and even in the earnings weeks of individual stocks, they are overshadowed by the impact of super central bank weeks and non-farm employment weeks on their stock prices.

Let's take a look at how these three "super weeks" combined affect the market:

As the current Fed is clearly walking along and watching, focusing on high-frequency macro data to determine interest rate hike strategies, the opportunity tips play. Therefore, market trading has become a speculative market for anticipating the Fed's decision/attitude change by focusing on macro data, and no one has too much faith in longer-term economic predictions.

In the previous few weeks, the rapid repair of US stocks was clearly along this line. Therefore, when the Fed policy meeting arrived, the key became to see whether the Fed's statement would soften, in other words, to seek the Fed's "comfort" to verify the previous trading logic. And this time, Powell's statement did give enough comfort.

Dolphin Analyst has listened to the press conference in its entirety and sorted out the attitude changes in key areas:

a. Excluding core service inflation related to housing: Previously, this part was always emphasized as having a weight of over 50% in PCE and being closely related to upward human wage trends. It is the main risk of downward "trends" in inflation to the 2% inflation target in the future. This time Powell said, "We think this inflation in this area will come down relatively quickly (fairly soon), and our anti-inflation work is not done yet (because we haven't actually seen this happening yet)."

b. A big talk on the "win-win of inflation and the economy": Unlike in the past, when he said the window for an economic soft landing was very small, this time Powell began to use various reasons to explain why the Fed feels that the US economy can achieve a soft landing without a significant rise in the unemployment rate while achieving controlled inflation. The reasons he gave include:

(a) So far, employment, new jobs, and wage growth are still present; (b) Once inflation falls, consumer sentiment will improve; (c) Currently, localities are super well-funded, and many are considering tax cuts; (d) In the field of engineering and construction, there are many planned projects, both public and private, that will be implemented. c. New term proposed: "The United States enters the disinflation process for the first time."

In addition to this, the Fed also provided clarification on changes in the CPI and rate hike expectations:

a. From the annualized core PCE rate in the latest month-on-month rate, it is actually below the Fed's forecast target of 3.5% for this year. So why raise interest rates?

Short-term inflation appears to be low mainly because of the rapid downward trend in commodity price growth, which is only a temporary problem. After this stage, it will return to the normal medium-term trajectory.

Currently, in PCE, with the exception of goods inflation and housing inflation, the proportion of core services inflation without housing, which accounts for about 56%, has not yet seen a downturn.

There are seven or eight categories here, some of which are strongly related to human resources, and some weakly related, such as catering, which is strongly related, transportation is related to petroleum, and financial services have a low degree of association with human resources.

Now we only expect it to slow down in the coming months, but we still need to wait for the expectations to be realized, otherwise the work will not be completed.

b. The market only expects one interest rate hike in March, but the Fed stated that there will be "a couple of times" in the future, so why this difference?

The main reason for the difference between the Fed and the market expectation is that the market believes that inflation will decline at a faster rate. Ultimately, the difference depends on the performance of the economic data in the future (if the actual data is consistent with market expectations, the Fed will adjust in real time). At the Fed's meeting on March 22, the economic forecast will be updated in March based on new data (including two employment reports, CPI/PCE, and ECI data for employment costs).

Overall, Powell's statement at the press conference was basically a "win-win" for the market. Therefore, although there were still leading economic indicators such as PMI on that day, which showed that service consumption was still hot (showing that the US service industry plummeted below the boom-bust line in December with no trend and service consumption was still hot), the market interpreted the information more as evidence of good US resilience and low risk of recession.

III. Super Employment Week: Good news turns into bad news, and a wave of cold water pours on the market

The employment market is probably the biggest risk factor in the current bullish logic for US stocks, and last week, this variable directly derailed. Currently, there are two major problems with the employment market data in the past two months:

First, in December last year, the demand for new jobs in the United States once again surged, and there was a situation where new employment could not cover the demand for new jobs, exacerbating the shortage of labor supply in the labor market.

The second key point is that in January of this year, the number of new jobs exploded to nearly 520,000, far exceeding the average level of around 300,000 for several months. Even if the 74,000 new government workers added by the strike are subtracted, there are still 440,000 new jobs added in the private sector, which is an exaggerated increase.

Looking at the details, the majority of the newly added jobs are in three blue-collar intensive areas: (1) the food and beverage industry in leisure/hotel with a high concentration of blue-collar workers; (2) medical and social assistance, which also saw significant growth; (3) professional business services also increased significantly, driven mainly by administrative and recruiting services, especially temporary recruitment services. It should be noted that the third type of job demand is a logistical support job under strong demand. Once the service consumption deteriorates, this type of demand may collapse non-linearly.

When Dolphin Analyst looked specifically at the detailed breakdown of new job additions in each sector, there is a significant category that stands out with net layoffs - information technology in the service sector (the bleak giants of the Internet, there will be more to come), as well as financial activities. The retail commodity industry and construction, home decoration, drugstore/personal care retail in the retail industry, and the durable goods manufacturing industry in automobiles and communication equipment are also sectors with significant net layoffs.

From the structure, it can be seen that the structural friction in the U.S. labor force is very apparent: the sectors with significant layoffs, such as information technology and finance, do not match the labor-intensive capacity demand with many labor shortages.

In addition to the service industry itself recovering job vacancies, the labor market supply-demand situation also requires industries such as warehousing and transportation to continuously optimize labor costs.

c. The follow-up of the labor market: Can it only be pushed back by a "man-made recession"?

In the December job market, one unemployed person was pulled up to 1.9 "desperately waiting" positions. However, from the absolute value of the unemployed, except for a few special months, the absolute value of the unemployed does not change much, so we can only hope that the number of non-agricultural vacancies will return to normal levels. The corresponding gap still falls between 3-4 million people as calculated by Dolphin Analyst, which is basically no progress from last year's shortfall calculation in the second half of the year.

This may also mean that the solution to labor and commodity prices requires:

a. On the side of labor employment: high-interest rates penetrate various industries and freeze most industry recruitment (no longer adding new jobs), making the net layoffs in another part of high-interest sensitive industries. In the case of structural labor shortages, this process is likely to be long and repetitive. b. At the same time, in terms of labor pricing: by structurally reducing employment in high-salary industries such as information technology and finance, the average salary in society is prevented from rising in sync with the increase in new employment.

The most likely result is that for this kind of structural labor shortage that cannot be quickly resolved in a few months, the ups and downs in new employment will continue to be seen in the future.

Four: Macro strategies after the ups and downs of the Chinese and American markets: US bond yields and the US dollar rise, and the renminbi depreciates relatively

Last week, as evidenced by trading in bonds and exchange rates between China and the United States, the results were very clear:

a. The US dollar index rose, while the renminbi exchange rate fell, and the Hong Kong stock market fell in response, with net outflows of northbound funds.

b. The yields on US bonds climbed: in the past week, the ten-year US bond yields fluctuated greatly under the influence of macroeconomic events. They first crossed below 3.4% due to the optimistic statements of the US Federal Reserve, and then rose sharply to 3.53% due to robust employment data, experiencing ups and downs.

On the spread between long-term and short-term bonds, this kind of data means that market traders must trade short-term interest rates again because they are expected to stay at high levels for longer periods of time, causing short-term yields, which are sensitive to interest rate hikes, to soar even faster. The inverted warning indicator of long and short-term bond yields is further worsened.

Overall, under the current situation where the disparity between employment demand and supply is still very large, when investing in US stocks, market traders should pay special attention to the risks associated with the release of new employment data, job vacancies, and hourly wage data, and close positions in a timely manner once reasonable returns are obtained.

However, in terms of overall trends, Dolphin Analyst believes that during the volatile and downward trend of the US stock market, there are still opportunities to focus on faith-based stocks. Based on the performance of CPI in recent months, some sub-items that affect the core service inflation of housing and cost elements of labor factors are not the main costs, and the cost of other elements is declining. In addition, structural changes in employment (white-collar unemployment, blue-collar employment) may lead to average wage costs that are not necessarily synchronized with the market's increase in employment, so the US stock market can avoid being scared by employment to a certain extent (such as when the ten-year US bond yields return to the level of 3.8-3.9%, it is reasonable to consider refocusing on opportunities in the US stock market). V. Market Performance Last Week: Hong Kong Stocks Fell, U.S. Stocks Rose

Based on last week's overall market trend as judged by the Dolphin Analyst's strategy weekly report "Did One Candlestick Change Our Faith and Did Tesla Lead the U.S. Stock Market Recovery?"(https://longbridgeapp.com/topics/3898831?channel=t3898831&invite-code=032064), the Nasdaq rose significantly, but the Dolphin Analyst overlooked the risks associated with the release of employment reports after warning of excessive increases. In addition, although it was recognized that Chinese concept stocks needed to correct, the reduction was not sufficient, and last week's significant decline was in KWEB and the Hong Kong stock market.

VI. Alpha Dolphin Portfolio Rebalancing

No rebalancing was done last week. However, due to the Dolphin Analyst's previous trade opportunities-oriented rebalancing of U.S. stocks, it is believed from the valuation perspective that individual stocks such as Tesla that have already broken through performance neutrality with an optimistic tilt will be adjusted out or have their positions reduced this week.

VII. Alpha Dolphin Portfolio Returns

During the week of February 5, the Alpha Dolphin Portfolio fell by 2.4%, significantly underperforming the S&P 500 (+1.6%).

Since the start of the portfolio testing to last weekend, the absolute return of the portfolio was 19%, with excess returns compared to the benchmark S&P 500 index of 24%.

V. Individual Stock Performance: Chinese Concepts Fall Again

Whether it is the holdings or observation portfolios, last week indicated a relatively clear trend of rising U.S. stocks and falling Chinese concepts. Moreover, among Chinese assets, offline economies such as catering and social services, which had undergone more stock price repairs, exhibited more significant declines.

For companies with large increases or decreases, the Dolphin Analyst has compiled the reasons for the driving forces as follows for reference:

VI. Portfolio Asset Distribution

Currently, the Alpha Dolphin Portfolio contains 33 stocks, including standard shares (9), low allocation shares (24), and the rest is allocated to gold and U.S. bonds to increase cash utilization. As of last weekend, the asset allocation and equity asset holding weights of Alpha Dolphin are as follows:

Seventh, Key events next week:

After the end of the earnings season for major US stocks this week, vertically leading, Uber, and Disney, two consumer-oriented service companies, begin to disclose their financial reports. Pay close attention to the relationship between quarterly revenue, profit, and labor costs, as well as the judgment of such industries for the future quarter.

In addition, the domestic semiconductor leader, SMIC, released its financial report. The key is to look for cycle inflection points through price, inventory, and conference calls.

Please refer to the following articles in the recent weekly report of Dolphin Investment Research:

"A Yang line changes my beliefs, and Tesla leads US stocks to fight back?" (https://longbridgeapp.com/topics/3898831?channel=t3898831&invite-code=032064)"

"How far will the change of the US stock “danger” still be?" (https://longbridgeapp.com/topics/3868857?channel=t3868857&invite-code=032064)"

"The US stock market did not have a happy Chinese New Year, but the performance is coming to fruition?"(https://longbridgeapp.com/topics/3821632?channel=t3821632&invite-code=276530)"

"Uncovering the root of the stagnant growth of US stocks"(https://longbridgeapp.com/topics/3795485?channel=t3795485&invite-code=276530)"

"Why is the Fed still stubborn despite falling CPI?"(https://longbridgeapp.com/topics/3771676)

"Is service inflation really that easy to eliminate? Beware of the market overreacting"(https://longbridgeapp.com/topics/3747034)

"Has Hong Kong stocks finally stood up? Independent market still has some way to go"(https://longbridgeapp.com/topics/3722254)

"Darkness before dawn: Mental focus on darkness or dawn"(https://longbridgeapp.com/topics/3697346?channel=t3697346&invite-code=276530) 《 US stock market "hit back" with reality, can emerging markets bounce for how long?

《Global Valuation Repair? There is also a hurdle of Performance Inspection》

《Chinese Asset Violence Boosts, Why Are China and the United States Different?》

《Amazon, Google, Microsoft and other stars falling? US stock market "meteor shower" still have to fall》

《Policy turnaround expectations: unreliable "Strong USD funds" GDP growth?》

《Southward takeover vs. Northward crazy run, it's time to test "determination" again》

《Slow down and raise interest rates? The American dream was shattered again》

Reacquaint with an "Iron-blooded" Fed

Sad Second Quarter: "Eagle Sound" Loud, Collective Crossing Difficulties

《Falling into doubt about life, is there still hope for despair and reversal?》

The Fed's Violent Hammering of Inflation, Domestic Consumer Opportunities are Coming Instead?》 《Global Falls Again, US Labor Shortage is the Root of the Problem》

《The Federal Reserve is the Top Bear, and Global Markets are Falling Down》

《A Bloodbath Triggered by a Rumor: Risks Have Never Been Cleared, and Sugar is Found in the Broken Glass》

《The US is Moving Left, China is Moving Right, and the Cost Performance of US Assets is Back Again》

《Layoffs are Too Slow and Not Enough to Pick Up the Pieces. The US Must Continue to "Decline"》

《US Stocks Celebrate "Funeral" Style: Recession is Good News, and Raising Interest Rates the Most Fiercely is Called Negative》

《The Interest Rate Enters the Second Half, and the "Performance Thunder" Opens》

《The Epidemic Will Fight Back, the US Will Decline, and Funds Will Change》

《China's Assets Now: "No News is Good News" for US Stocks》

《Growth is Already in a Carnival, But Will the US Definitely Decline?》

《Will the US in 2023 Experience Recession or Stagnation?》 《US oil inflation, can China's new energy vehicles expand and become stronger?》

《As the Fed speeds up interest rate hikes, China's asset opportunities arise》

《US stock inflation hits the roof again, how far can the rebound go?》

《The most grounded portfolio, Dolphin Investment is launched》

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