High interest rates and another bank failure? The chances of a soft landing in the United States have actually increased.
Hello everyone, here is the core information of the combination strategy summarized by Dolphin Analyst this week:
- After two weeks of observation, Dolphin Analyst's judgment on the US stock market has begun to adjust towards the positive direction: the problems in the US small and medium-sized banking industry are within Dolphin Analyst's expectations, but the problems have not exceeded the previous logic. On the contrary, the outflow of deposits from the United States has slowed significantly for two consecutive weeks. Although it is not known how much financing costs the banking industry has used to increase the cost to retain these deposits, the outflow of deposits is not as fast as Dolphin Analyst previously estimated.
The outflow of deposits is not fast, and the problems encountered by the banking industry so far have not been from the physical to the virtual, and the crisis has no signs of spreading to systematically important banks, which means that the Federal Reserve does not need to excessively shift its policy goals towards financial stability.
At the same time, in this wave of economic cycles in the United States, strong employment resilience brings stronger anti-fall ability at the entity level; at the current speed, Dolphin Analyst estimates that the employment market is expected to enter a relatively balanced state around October, while inflation is basically falling back as expected.
In the case of resonance between the two, the Federal Reserve may cut interest rates at the end of this year, such as 25-50 basis points, but when the market has too many expectations, it may be time to short the yield of government bonds. At least 70-80 basis points of interest rate cuts are expected during the holiday trading period.
At present, when the interest rate has reached its peak and the pace of interest rate cuts dominates market expectations, Dolphin Analyst believes that the money that US stocks have earned through the decline in risk-free returns through games has basically ended, and excessive expectations of interest rate cuts will instead imply that the EPS of equity assets will decline too quickly. This means that if subsequent economic data exceeds expectations (except for significant CPI growth), it will be a positive factor for the stock market.
5) The probability of a "mild recession" in the overall US stock market is increasing, unless a systematically important financial institution appears in the underlying assets (such as credit assets) of the banking industry, a deep recession expectation will appear, and Dolphin Analyst will closely monitor the erosion of financing costs on asset yields in the banking industry. If it is a mild recession, the performance bottom of the US stock market giants that Dolphin Analyst is concerned about is approaching, such as the second quarter of this year.
For the summary of the giants, Dolphin Analyst will write a separate article, please stay tuned.
Here are the details:
I. Is the promised US entity recession still there?
On the eve of May Day, the year-on-year growth rate of US GDP in the first quarter was 1.1%. Due to the relatively strong resident consumption expenditure in January, the first quarter is still growing positively and has not experienced a recession.
However, the biggest marginal increment information provided by this GDP is not optimistic: domestic demand has always been the pillar of US GDP, accounting for 90% of US GDP. There are two key branches of domestic demand: first, private consumption (70%), and second, corporate investment (20%, including fixed asset investment and inventory investment).
Through monthly data tracking, especially the consumption boom brought by tax cuts in January, the strong consumption in the first quarter has been fully anticipated by the market. The real weakness of this GDP is the continued weakness of corporate investment, and inventory investment in this quarter is particularly weak: wholesale trade of machinery and equipment and manufacturing of fossil energy and other upstream industries have started to actively reduce inventory.
The Q1 performance of residents' consumption, which accounts for more than 70% of GDP, was quite good, but its sustainability seems to be in doubt:
- The high growth rate in Q1 was driven by locomotives and parts, but considering the current reduction in car loan balances at commercial banks across the United States, as well as the weakening of used car prices, it is difficult to say how sustainable the growth of commodity consumption driven by durable goods consumption is.
Moreover, the marginal evolution of consumption in March also confirmed Dolphin Analyst's judgment: durable goods consumption was exceptionally strong in January (possibly related to Tesla's nationwide price reduction leading to pre-sales of cars), but its momentum was very poor. In March, durable goods consumption fell by 0.8% on a month-on-month basis, while the month-on-month growth rate of service consumption had slipped to 0.15%, and March's consumption expenditure was basically flat.
- Since the savings rate is only 5% (equivalent to only saving or investing 5 yuan out of every 100 yuan of disposable income each month), Americans have always been a group that spends as much as they earn. Therefore, the source of incremental consumption is the growth of residents' disposable income and their expectations of future income stability.
Looking at the sources of annualized total income for American residents in March, after excluding the exceptional increase in January, there was little change in wage compensation in February.
At the same time, the direction of income has continued to change: the boost to disposable income from tax cuts has ended, and the monthly increase in interest payments has stabilized and increased. More importantly, the newly added income has begun to flow into savings rather than consumption.
The ultimate resonance of the two is that while disposable income growth is slowing down, the proportion of newly added income flowing into consumption each month is becoming lower and lower due to the continuous rise in the savings rate.
And this newly added flow of consumption, after removing the impact of inflation, is directly the incremental value of residents' consumption, which accounts for 70% of GDP. The proportion of newly added income flowing into consumption is becoming less and less, which means that the biggest driving force for US GDP growth is gradually drying up.
3) The employment rate is booming, and the growth rate of average hourly wages is basically stable. Why is there an increase in savings and a decrease in consumption in the direction of new income? Perhaps another important data can provide reference:
Excluding the anomaly in January, there was a very obvious change in February and March: non-farm employment was booming, but at the same time, there was a continuous net reduction in job demand by enterprises.
Taking March as an example: at the beginning of the month, there were still 9.97 million job vacancies in the United States, but in addition to the 165,000 newly employed people who filled the corresponding number of job vacancies that month, enterprises also reduced job demand by 220,000 by layoffs or taking down vacant positions. The final number of vacancies at the end of the month quickly fell to 9.6 million.
Therefore, Dolphin Analyst's judgment is: after the tightness of the labor force is relieved, the employment market is no longer difficult to find, and the industry that has started to lay off workers has begun to gradually spread, making consumers aware that they cannot earn and spend, and need to increase the proportion of savings, resulting in a balance between consumption and savings in the new monthly income. And the current savings ratio has just passed 5%, and it will take time to reach the pre-epidemic 8-9%.
- In the first month of the second quarter, employment is booming again. Is the recession that everyone is talking about really coming?
Consumption was strong in January, supporting the growth of GDP in the first quarter. Judging from the incremental information of consumption expenditure in March, GDP growth in the second quarter is probably "cooling down".
But when the April employment data came out, the market had already emerged from the shadow of the collapse of small banks in the United States, and even led to the rebound of global stock markets. So is the recession really coming?
First of all, Dolphin Analyst's judgment on April employment data: In Dolphin Analyst's view, all new employment of more than 200,000 in a single month is strong employment, so 250,000 new employment in April is indeed good:
a) Is manufacturing employment reviving? Judging from the distribution of new employment by industry, the biggest change is that the construction (third-party contracting) and manufacturing (metal processing in durable goods manufacturing) that just entered the net layoff status last month have re-entered the net new employment status. In the service sector, gas stations have also started to recruit again.
b) White-collar services are recovering: In April, the white-collar sector of professional business services, which had been continuously net layoffs, such as IT design and enterprise management talents, increased significantly; even in the information sector, IT infrastructure and data processing sectors are increasing their recruitment efforts, seemingly short-term development of ChatGPT technology has increased the recruitment efforts of related talents.
Other service industries, such as healthcare (especially the demand for specialist doctors and social assistance for individuals and families), continue to have rigid new employment.
c) Blue-collar services are declining: Since March, new employment related to blue-collar workers has been on a downward trend, and it has become more obvious in April. The number of new recruits in leisure, catering, and accommodation continues to decrease; temporary positions in professional business services are accelerating net layoffs.
Overall, the employment situation has seen explosive growth in new jobs, a bottoming out and rebound in high-paying white-collar layoffs, and a peak and downward trend in low-paying blue-collar recruitment. This has resulted in a change from the "explosive growth in employment increment and controllable hourly wage growth" scenario in Dolphin Analyst's preset route: the month-on-month hourly wage growth rate in April was 0.5%, touching the high-growth warning point, equivalent to a growth of 6% per year, indicating that consumer spending may rebound month-on-month in April, and the risk of recession in the second quarter seems to have decreased significantly.
However, the actual growth in resident consumption in April still depends on whether enterprises are still net job demand reducers in April. If so, most of the newly added income may still flow into savings, and there may not be too much new consumption. However, the structural changes in the employment market, as well as the financial reports of US stock market giants after May Day (which will be analyzed separately), imply that the resilience of the employment market brought about by the structural decline in labor participation rate is particularly strong, and the resilience of the real economy is also particularly strong.
Second, another small bank has collapsed. Can the US small bank "deposit and debt" crisis shake the stubborn Federal Reserve?
The deposit relocation caused by interest rate hikes and the floating losses caused by the mismatch of asset duration are basically consistent with Dolphin Analyst's previous judgment. It is fully foreseeable that if high interest rates are maintained this year, when deposit information is disclosed again in the third quarter financial reports, more small and medium-sized banks will be acquired.
However, so far, this wave of bank failures is not due to problems with real credit assets (the crisis contagion from borrowers in the non-real economy from the bottom up), but more due to the liquidity crisis brought about by the rapid rise in interest rates after a long period of low interest rates. Moreover, the current crisis is mainly at the level of small and medium-sized banks, not systemically important financial institutions.
Moreover, the trend of deposit outflow in the past two weeks has begun to ease: after the two weeks of April 19th and 26th were added up, deposits basically did not flow in or out; because the problem of deposit outflow has eased, the assets of the banking industry have continued to expand for two consecutive weeks.
a.) The fixed-income securities assets that have been shrinking in the assets are no longer shrinking;
b.) In the bank-to-business lending, the weekly growth of mortgage loans has also turned positive, even including commercial real estate mortgage loans that the market is currently more worried about; only corporate loans are still negative, implying that the overall credit demand of general enterprises is weak under high interest rates;
c.) Consumer loans from banks to consumers have resumed full growth, and even the net reduction of car loans for eight weeks has turned into positive weekly growth.
The outflow of deposits in the past few weeks has not been as rapid as Dolphin Analyst originally expected, but it is unclear how much financing cost the banking industry has paid to retain deposits during this period.
By combining the information from <一——二>, we can roughly see the following scenario:
Inflation, employment, and an implicit systemic financial stability are the three major roles and goals in balance. Currently, inflation is showing a downward trend, the tight employment situation is easing through high employment and high turnover, corporate and personal asset quality is good, and there is no major default risk in the real economy (even for commercial real estate, which is currently the most worrying market). As finance reflects the real economy, the current problem is mainly a duration mismatch.
Based on the current rate of new job creation and the reduction in corporate recruitment demand (20,000 new jobs per month and a net reduction of 100,000 positions), Dolphin Analyst estimates that the supply and demand in the job market will return to pre-epidemic levels by September or October, gradually eliminating the root cause of service inflation expectations. The financial reports of the banking industry for the third quarter will be released in October. As long as deposits do not flow out of the entire banking system rapidly (but it also depends on whether the financing costs of the banking industry rise too quickly in the future), the Federal Reserve can use time to exchange space and achieve the goal of "releasing birds from cages".
In this scenario, Dolphin Analyst believes that the market can predict a possible interest rate cut before the end of this year (November or December). Once the prediction of a large-scale banking crisis is made, it is believed that the Federal Reserve will be forced to cut interest rates quickly. However, if too many interest rate cut expectations are incorporated into trading, it is likely that the yield of government bonds will need to recover before the previous decline, and the yield of 10-year government bonds is likely to fluctuate between 3.2% and 3.6% in the short term.
Before the employment data was released, the market had already begun to anticipate an interest rate cut of nearly 80 basis points by the end of December, with a policy interest rate of 4-4.25% at the end of the year, significantly exceeding Dolphin Analyst's judgment of 25-50 basis points. However, as soon as the strong employment data is released, the market will have to return the yield of government bonds that were previously oversold.
Looking at the market performance in reverse: Currently, the risk-free interest rate is not corresponding to valuation repair due to economic recession and banking crisis, but to the decline in stock prices under EPS concerns. Moreover, the more cyclical the valuation, the greater the decline. The core behind this is that interest rate hikes have reached their peak, and the more interest rate cut expectations there are, the more likely it is that EPS will collapse later.
Obviously, now that interest rate hikes have reached their peak, the market has turned to the game of when to cut interest rates, that is, when to expect a deep recession in trading. The latest employment and wage growth rates are good, which means that economic performance is relatively good and the probability of a deep recession is reduced. Good economic data means better market performance. On the key macro data this week, CPI and PPI data will be released. You can pay attention to the trend of inflation slowing down. However, as long as the CPI growth rate is not abnormally higher than expected, the probability of the Fed adding 25 basis points is very, very small in the context of the unresolved banking crisis. There is no need to worry excessively about inflation causing a sharp market downturn again.
III. Alpha Dolphin Portfolio Returns
During the weeks of April 29th and May 6th, the Alpha Dolphin virtual portfolio did not adjust its positions. The portfolio declined by -0.1% and -0.3% respectively, which was consistent with the performance of the CSI 300, but slightly worse than the S&P 500.
Since the start of the portfolio testing until the end of last week, the relative return of the portfolio was 15%, and the excess return compared to the S&P 500 was 21%.
IV. Individual Stock Profit and Loss Contribution
Looking at the performance of the stocks covered by Dolphin in the past two weeks, the previously high-growth semiconductor sector has begun to decline significantly, while the new energy sector has stabilized, especially the vehicle sector, after Tesla used price increases to temporarily suspend the price war and the lithium mines that have been declining all the way stabilized at 180,000 yuan/ton. In addition, Dolphin observed that the two e-commerce stocks, JD.com and Meituan, which have been adjusting to relatively cheap levels, have also begun to gradually rebound.
The specific companies with the highest increase and decrease, Dolphin summarized the reasons as follows:
V. Portfolio Asset Distribution
The portfolio did not adjust its positions this week, with a total of 21 stocks or ETFs allocated, including 4 standard-rated stocks and 17 low-rated stocks, as well as gold, US bonds, and US dollar cash. As of the end of last week, the asset allocation and equity asset holding weights of Alpha Dolphin were as follows:
Six. Key events next week
Next week, the US stock earnings season is coming to an end, while the Chinese concept stock earnings season is starting. In the US stock earnings, the performance of two service-oriented consumer assets, Airbnb and Disney, will be closely watched to see if they can have a super-expected current income and performance guidance for the next quarter, similar to Uber.
Chinese asset management companies focus on JD.com and SMIC. JD.com has already indicated that its performance is very poor, and in the case of a low stock price, it is mainly to see if there can be any improvement and prospects for the 618 shopping festival. SMIC mainly looks at the length of the semiconductor cycle through capacity utilization information.
Please refer to the following articles in the recent Dolphin Research Portfolio Weekly:
Risk Disclosure and Statement of this Article: Dolphin Analyst Disclaimer and General Disclosure