The decline of the United States is a forgone conclusion, with minor setbacks only causing slight distress while major ones inflict great harm.
Hello everyone, here is a summary of the core information on portfolio strategies by Dolphin this week:
Detailed breakdown of employment data shows that the cooling of service employment in the United States has begun, which is confirmed by the recent decline in non-manufacturing PMI and service consumption.
With signs of a cooling service industry, a decline in service PMI, and controllable wage growth risks, the question is whether to increase the policy rate by another 25 basis points currently, bringing it to above 5%, to proactively meet market expectations and prevent unexpected stops which may lead to suspicion about the bank’s problems being even larger than anticipated.
Corresponding to the current macro situation in the United States, the US economy will likely go in two directions:
a. Small recessionary sentiment: Mild recession is beneficial for inflation control, but under a weak recession, America's cyclical industries will face pressure. However, growth stock sectors such as US semiconductors and SaaS still have opportunities after volatility rebounds.
In this environment, the RMB exchange rate can stabilize or even appreciate slightly, and there are still opportunities for Hong Kong stocks, especially in the first quarter earnings announcements, where performance prospects can be seen, especially during the second quarter when the year-on-year base is already low. From the current valuation percentile of the PE, the Hang Seng Tech Index has already fallen back to a relatively safe state.
b. Significant damage in a large recession: However, if the US banking industry cannot withstand another shock, and there is a significant recession on a large scale that leads to the sudden shift of the Federal Reserve, as in the past, it will be difficult for global markets to maintain an independent trend.
c. As inflation can already be seen to trend lower, gold and US Treasury bonds will have short-term fluctuations, but long-term perspectives should still have considerable returns.
Here are the details:
I. Behind Good Employment: Has Layoffs in Blue-collar and Construction Industries Begun?
Up until now, service inflation and employment stress are the only two supports that remain for the stubborn Federal Reserve. Although the new employment in March did not explode as it did in January, the performance is still good.
In March, non-farm employment increased by 236,000, slightly exceeding the market expectation of 230,000. As non-farm areas such as agriculture, unregistered self-employment, NGOs and military service have good employment development, the US unemployment rate has fallen back to 3.5% from 3.6% last month.
However, looking closely at the sub-industries of new employment, the rigid ones are still concentrated in leisure, hotel catering and offline entertainment such as amusement parks and casinos, as well as all subcategories of education and health care, including health care, hospitals, nursing, and social assistance.
Industries that are now entering layoff status are showing a further trend of expansion, as there are two sub-industries with obvious turning points. (1) After continuous layoffs in the retail industries of building materials, home decoration, furniture, and home appliances, the construction and real estate leasing industries have also entered a state of layoffs. This means that under high interest rates, after the sharp decline in new construction and the gradual completion of existing projects, the layoff of the construction industry finally began in March.
Due to the large number of employment populations corresponding to the entire real estate and related upstream and downstream industries, for example, the entire construction industry has nearly 8 million employees. Once continuous layoffs begin, they will continuously send a large number of unemployed people.
(3) Originally, the blue-collar service industry was very strong in professional and business services, especially the employment demand for temporary support service industries under employment services. This industry currently bears 3 million employees and the employment volume was huge in the previous months. However, net layoffs appeared for the first time in March.
** The softening of the service industry employment is closely related to the rapid decline of non-manufacturing PMI: ** Except for inventory related indicators, other sub-PMI indicators in non-manufacturing have turned into a declining state. Even the price index that was previously expanded quite exaggeratedly has gradually fallen back, and other key sub-items such as commercial activities and new orders are also falling back.
(4) Generally speaking, if we observe the trend of the past few months, we can see that except for the industries that have not yet returned to the employment level before the epidemic, such as leisure hotels and government employees, most industries have undergone structural employment adjustments. Among them, layoffs of some white-collar positions in the information, retail, finance, and part of professional business services have been continuously in progress for several months.
(5) Currently, in terms of vacancies by industry, although professional business services, education and health care, and leisure accommodation are still the three industries with the highest absolute values and vacancy rates, the sector of professional business services (which absorbs the most employment with a population of up to 23 million) besides employment vacancy, It's also a very probable event that the industry will cut job offers.
** Especially through job vacancies in February, ** through the two-way flood discharge of January and February (the explosive growth of new jobs + corporate self-cutting job demand), the employment tension in the United States has begun to ease significantly: When it was most tense last year, there were two vacancies waiting for each job seeker, but now it has reduced to 1.66.
(6) Due to the obvious structural problem of employment contradiction this time: lacking blue-collar, surplus white-collar, and layoffs have begun to spread in some blue-collar sectors. The hourly wage increase in the US private sector is still within a controllable range in March, with a month-on-month increase of 0.3% after seasonal adjustment, falling within the inflation target range of 0.2%-0.3%.
Note that the growth rate of 0.2% corresponds to an annualized growth rate of 2.5%, and 0.3% corresponds to 3.7%. In the first three months of this year, hourly wage fluctuations have remained between 0.2% and 0.3%. If the monthly hourly wage growth rate remains in this range for the rest of the year, the corresponding annual wage growth rate will be about 3%, which is just within the normal range compared to the roughly 2% inflation and 3.5% hourly wage growth rate of the US economy before this inflation cycle.
II. The Credit Contraction in the United States Has Officially Begun
From the latest US banking industry balance sheet as of March 29th, it can be seen that deposits in the US banking industry have been continuously flowing out for the fourth consecutive week, but the outflow rate has slowed down a lot and the short-term crisis has been stabilized.
However, with the arrival of the US banking earnings season this week, it is worth noting the information on the expected increase in financing costs of banks. After all, in a high-interest environment, there are only two choices - either raise deposit rates or wait for depositors to move to money market funds.
Deposits and net assets of the banking industry are shrinking. On the asset side, in addition to fixed-income securities assets with serious floating losses, loans to enterprises for industrial and commercial use and commercial real estate loans are still decreasing, even loans to individuals for mortgages and consumer loans (except for credit card loans) have also turned to contraction. After the withdrawal crisis, the latest data shows that cash assets have recovered somewhat.
III. How About the Prospects of Interest Rate Hikes and Cuts?
From the latest macroeconomic data, whether it is the PMI of non-manufacturing industries, the job vacancies in February, the newly added employment in March, or the marginal changes in the balance sheet of the banking industry, the current real policy interest rate is 4.83%, which has been able to cover the core PCE inflation index (about 4.6%) that the Federal Reserve is most concerned about.
In the current situation where the service industry employment has seen signs of cooling, the service PMI has fallen, and the risk of wage growth is controllable, whether to increase another 25 basis points to make the policy interest rate exceed 5% is more of an attitude to cater to or express the market's consistent expectations, so as not to stop unexpectedly and make the market doubt whether the problems in the banking industry are bigger than expected. From the expected transactions of short-term debt in the six-month and one-year periods, most people still believe that there will be another rate hike in May, but there will be a rate cut within a year, and if it is cut by at least 50 basis points, it will correspond exactly to the current core PCE inflation rate of 4.6%. From a year-on-year perspective, the core PCE is expected to continue to decline, and the market currently expects a rate cut to 4.6% one year later. In the view of Alpha Dolphin, after the rebound, it will basically meet reasonable expectations.
Due to the better employment data on Friday night, the yield on 10-year US Treasuries has rebounded from the recent low point of 3.3%. However, overall, given the status of high-frequency economic data and bank statements currently displayed by the US, the yield on 10-year US Treasuries is already difficult to touch 4% and is likely to hover within 3.5%.
Combining the above<1>-<3>, Alpha Dolphin believes that there are two possible tendencies in the future, which can be summarized as "small decline for joy, big decline for sorrow" in the US.
- Small decline for joy: a small recession is conducive to inflation governance, but under economic weakness and recession, the US's cyclical industries will face pressure, but growth stocks such as US semiconductor and SaaS stocks still have opportunities after volatility and callback.
In this kind of background, the RMB exchange rate can stabilize or even appreciate slightly, and Hong Kong stocks still have opportunities under the repair of Chinese asset fundamentals, especially after the first-quarter financial reports. With the gradual warming of the weather and the recovery of consumption, the pressure on the year-on-year base in the second quarter will also be greatly reduced. It is worth looking forward to various industry companies' performance outlook for the second quarter in the next quarter's financial report. Judging from the current PE valuation percentile, the Hang Seng Technology has fallen back to a relatively safe state.
Big decline for sorrow: If the US banking industry cannot hold on and collapses again in an unexpected way, causing a large-scale recession and causing the Federal Reserve to turn sharply, every time there has been a relatively large problem in the US economy, global markets will be difficult to break out of independent trends.
With the trend of inflation already showing a downward trend, gold and US Treasuries have flattened short-term fluctuations, and there should be relatively certain returns in the medium term and low.
Alpha Dolphin's portfolio rose 0.6% during the week of April 7th, outperforming the S&P 500 (-0.1%) and Hang Seng Technology (-1.5%), but not as much as the CSI 300 (1.8%).
From the start of the self-assembly test to last week, the absolute return of the combination was 18.4%, and the excess return compared with the benchmark S&P 500 index was 24.6%.
V. The shadow of recession is coming, and it's another week of "useless work" after the rise and fall.
Last week, the high-growth stocks in the Dolphin combination were all related to semiconductors, such as SMIC, Hikvision, Times Electric and GoerTek, but overall, A shares have entered a correction phase along with the US stock market.
In addition, Hikvision will release its annual report this week. Pay attention to whether the PBG business, which is mainly based on government procurement before the end of the year, can pick up; 2) whether the enterprise business can see signs of improvement; 3) how the overseas business growth is; 4) the company's outlook.
The companies with particularly exaggerated stock price fluctuations are summarized by Dolphin Jun as follows:
VI. Combination asset allocation
There was no adjustment in the combination this week, a total of 23 stocks or ETFs were selected, of which 6 were rated as standard and 15 were rated as low-end. The rest were gold, US bonds and US dollars cash. As of the end of last week, Alpha Dolphin's asset allocation and equity holding weights were as follows:
Please refer to the recent weekly reports of the Dolphins Investment Research combination:
"Is the US stock market going to decline and lower interest rates? Trading has already run ahead anyway" app_id=longbridge&channel=t4444430&invite-code=032064)
Risk Disclosure and Statement of This Article: Dolphin Investment Research Disclaimer and General Disclosure