Did the service consumption collapse while the US stock market celebrated wildly?
Hello everyone, the following is the core content of Dolphin's weekly portfolio strategy:
1) With the short-term relief of risk in the banking industry, personal consumption and PCE prices in February fell in tandem, indicating that inflation risks driven by demand continued to fall and did not overturn or even to some extent confirm the interest rate cut transactions that had previously been rushed;
2) However, there is still a tendency for trading to be rushed overall, and in the short term, it is not suitable to chase high in a high-volatility market, given that the latest high-risk macro data on employment in the United States in March is still to be released and the medium-term hidden reefs in the banking industry have not been resolved.
3) Therefore, overall, Dolphin still maintains a relatively high net short position, with equity assets accounting for less than 60%. Last week, mainly on the day when Alibaba announced its organizational adjustment, Dolphin added a low position in Alibaba, and at the same time, based on the judgment of the previous week's strategy weekly report on Hong Kong stock valuation repair, Dolphin added the Hang Seng technology index. However, given the slow fundamental repair of Chinese assets, the overall action is more short-term, and the holding time may be quickly adjusted in the future.
The details are as follows:
I. Is U.S. tax cuts releasing consumption? It's just the last gasp of a dying man
The main sources of income for U.S. residents are employee compensation (63%), business income (8%), rental income (4%), property income (15%), and transfer payments (10%). Disposable income is the total income minus personal income tax, and the main distribution directions of disposable income are consumption expenditure, interest payments and deposits.
The market should be impressed with the comprehensive rebound of U.S. January employment, CPI and consumption. Looking back at the changes in personal income and expenditure clearly shows that:
In January, the marginal growth of personal total income of U.S. residents was relatively large, which was indeed closely related to the better employment that month, as the income growth rate related to wages was very fast;
The amount of money flowing to consumption in disposable income in January was particularly high - an absolute month-on-month increase of 360 billion, almost unheard of since the last fiscal stimulus in April 2021. The more important reason is not that the total income was higher that month, but that the U.S. individual tax reduction in January was very obvious, and almost all of the reduced tax was converted into consumption, not thicker savings.
However, this consumption potential brought about by tax cuts is not sustainable: by February, the tax cut effect had diminished and total income growth had returned to normal, with the amount of money flowing to consumption in new disposable income (seasonally adjusted annual rate) falling rapidly from 361 billion last month to 28 billion.
The sum of last month's figure and this month's marginal increase is the personal consumption expenditure of U.S. residents in February (which contributes 70% of U.S. GDP), indicating that the core driving force for U.S. GDP growth in February has completely softened.
II. A milestone turning point: service consumption also couldn't hold up
In the post-epidemic economic cycle, service consumption in the United States has always been the backbone of GDP growth. However, in February, there was a directional turning point in service consumption:
====== In the composition of GDP, service consumption, which accounts for nearly 45% (excluding inflation and calculated on a yearly basis), experienced a negative growth rate of 0.1% this February, compared to the positive growth rate of nearly 0.7% the previous month. As a result, overall personal consumption declined by 0.11%, indicating a 1.3% year-on-year contraction rate when adjusted for inflation.
Looking at the trend of the past few months, excluding the abnormal increase in consumption due to tax reductions in January, personal consumption expenditure in the US has been in a state of negative growth on a monthly basis since November last year. In February, the decline in consumption again confirmed the exhaustion of consumption growth momentum. Given that the subsequent wage growth rate is not significant and that excess savings have been exhausted, coupled with high-interest rate and over-easy credit consumption sentiments, there is a high probability that consumption will continue on a downward trend on a month-on-month basis.
III. "Inflation" of the Federal Reserve: Decline in Consumption and Cooling of PCE
Given that personal consumption expenditure is marginally decreasing, the cooling of PCE in February is significant. The core service PCE, excluding housing, is holding steady at a year-on-year rate of 4.6%. At present, policy interest rates after the interest rate hike have reached 4.83%, which is capable of covering the core service PCE without housing, which fluctuates around 4.6%.
From the marginal change perspective, the month-on-month growth rate of core PCE in February was 0.3%, corresponding to the yearly change rate of 3.6% when adjusted for inflation. This aligns with the Federal Reserve's latest economic forecast of 3.6% for core PCE in 2023, which is still some distance away from the target long-term inflation rate of 2% set by the Federal Reserve.
IV. Where is the Banking Crisis going?
However, even with the slower month-on-month growth rate of core PCE adjusted for inflation, it is still insufficient to reach the 2% inflation target in the long run. This implies that if the Federal Reserve wants to achieve this goal, it still needs to maintain high interest rates for some time, especially with the latest prospective reduction in production by Saudi Arabia and other OPEC countries, which is a response to a possible US banking crisis. Supply-side inflationary factors may reappear.
Last week, the Dolphin mentioned in the article "Federal Reserve Interest Rate Cuts: Is it Just a Matter of Time Before the American Version of Yu'E Bao Emerges?" that the problem with the banking industry is a moving target. Looking at the assets and liabilities of the US banking industry up to the 22nd of March, it appears that the rate of deposit outflows has eased up a bit, but there is still a decrease of 0.7% in bank deposits compared to the previous week. It is particularly noteworthy that if depositors are simply mistrustful of small banks and are moving their money to large banks, this could have an impact on small banks.
The outflow at this speed is likely to mean that American depositors, after experiencing SVB's liquidity crisis, are beginning to gradually recognize that the Treasury bill-based monetary fund is equally low-risk and has a much higher yield than deposits. The outflow of deposit scale from the bank system has occurred. This also means that the days when banks lay on the interest rate differential are coming to an end.
The rapid outflow of liabilities deposits, from both assets and liabilities perspectives, Bank's assets and securities assets with severe floating losses were reduced rapidly, while liabilities had larger borrowing and net assets shrunk rapidly. The bank's balance sheet reduction has begun.
Overall, the bank crisis seems to have been resolved in the short term, and inflation has eased in the data of falling employment, consumption and inflation, with markets easing interest rates + light recession equities.
However, the risk of deep deposit outflows and rising financing costs brought about by raising interest rates still exists in the banking industry. It is just a vague question of which month this reef will cause the US economy to run aground.
Up to last weekend, looking at the performance of different term government bond yields, after the expected interest rate cut, the expected interest rate hike that had outstripped it had already begun to wage back, but it still implied that after an interest rate hike in May, there would be an expectation of a subsequent interest rate cut within a year.
The ten-year US Treasury bond yield, which is related to the pricing of equity assets, has returned to the expectation of light recession trading following a small-scale rebound after outrunning expectations due to last week's PCE and consumption falling as scheduled, easing inflation pressures. It has driven the overall asset performance of US stocks.
However, overall, Dolphin believes that the bank crisis still looms ahead and under the circumstances where the market has already taken into account reasonable interest rate expectations, pay attention to position control, especially when the latest employment data for the newest month is coming, and OPEC's non-reduction operations will also raise short-term inflation expectations.
Moreover, global assets have entered an asset carnival under the trading of interest rate cut and light recession after the short-term resolution of the US banking crisis. V. Combination Adjustment
Last week, based on the logical judgment of the valuation repair of Hong Kong stocks in the previous week's combination strategy, Alpha Dolphin adjusted the portfolio and invested in the Hang Seng Tech Index. However, this is a short-term logic. Due to the slow realization of fundamentals, there is still a risk of Hong Kong stocks falling back after valuation repair, and positions may be quickly adjusted in the future.
In addition, based on the financial report interpretation, Alpha Dolphin believes that after the continuous weak fundamentals, Alibaba has finally started to tell the story of asset-independent financing and listing to release the value of on-balance sheet assets. At the same time, the repair of Alibaba's core assets, Taobao and Tmall, is still weak and will remain underweight for now.
IV. Alpha Dolphin Portfolio Returns
During the week of March 31, Alpha Dolphin's portfolio rose by 0.6%, significantly lower than the S&P 500 (+3.5%) and Hang Seng Tech Index (1.9%), but consistent with the CSI 300 (0.6%).
Since the start of the portfolio's testing until the end of last week, the absolute return of the portfolio was 18%, with an excess return of 24% compared to the benchmark S&P 500 Index.
V. Short-term resolution of banking crisis, growth stocks in the U.S. stage a rally
Last week, the Hang Seng Tech Index was mainly driven by the independent listing financing of assets owned by Alibaba and JD.com. In the meantime, the U.S. stock market had the last wave of growth led by new energy vehicles under the favorable expectations of inflation brought about by the short-term resolution of the banking crisis, PCE and consumption decline.
Considering that even the slowest-growing companies in this round of downward shift in yield-to-valuation repair, which are related to new energy, have risen, Alpha Dolphin tends to believe that the valuation repair has come to an end.
The reasons for the exaggerated rise and fall of specific stocks are summarized as follows:
VI. Distribution of Combined Assets
There was no adjustment made to the portfolio this week. 23 stocks or ETFs were configured this time, with 6 stocks as standard allocation and 15 of lower rating and the rest were gold, US bonds, and US dollar cash. As of last weekend, the distribution and equity asset holdings of Alpha Dolphin are as follows:
Please refer to the following articles from recent Dolphin Invest research portfolio weekly reports:
Risk Disclosure and Statement of this Article: Dolphin Research Disclaimer and General Disclosure