Is the relief of inflation pressure in the US stock market benefiting Chinese concept stocks and Meme stocks?

As of last week, the dramatic rise in the yield of the U.S. 10-year Treasury bond has come to an end. During this period of increase, the highest point reached was a 4.7% yield on the 10-year Treasury bond.

However, as we entered May, starting from the non-farm employment data in April, economic indicators have finally begun to show a downward trend. Correspondingly, the yield on the 10-year Treasury bond has dropped from the high of 4.7% to 4.4%.

The current question is, at the 4.4% level, how much further can the yield drop? Dolphin Jun attempts to find an answer from some of the new data from last week:

I. CPI: Slowing Rise in Insurance Costs is the Main Reason

In April, the core CPI increased by 0.29% month-on-month, a slight slowdown compared to the previous month's 0.36%. Looking closely at the sub-items:

a. In core goods, the downward trend in costs for core categories such as new cars and used cars has accelerated.

In fact, in the two most interest-sensitive consumer categories of housing and cars, the rapid increase in interest rates from 0% to 5% has greatly reduced the supply of second-hand houses. The post-pandemic high-interest environment has made cars the most affected category.

b. In core services, insurance costs have finally stopped soaring dramatically.

The two factors that caused the core services to skyrocket in the previous quarter: the month-on-month price increase in motor vehicle insurance, which accounts for nearly 3% of the total CPI weight, dropped from 2.6% to 1.8% from the previous month, and the cost of health insurance also dropped from 1.2% to 0.3%.

These two key sub-items have led to significant declines in their respective transportation and medical sub-items, especially transportation, which slowed down from 1.5% last month to 0.9%.

In the service sector where labor costs account for a relatively high proportion of input factors, it seems to be stable at around 0.3%-0.4%. So far, in the United States, with continuous immigration inflows and a severe shortage of labor supply, job growth has been significantly stronger than wage growth, and there has been no spiral of labor-cost inflation.

In other words, the market seems to have been frightened by the economic data from the first three months of this year - signals of continuous inflation in indicators such as employment, wages, CPI/PPI, and the expansion of price sub-items in PMI. Even though last month's excess inflation in the CPI came from high-volatility items like insurance, the market is hesitant to believe that CPI will immediately drop However, if we combine the continuous expansion of price sub-items in the PMI, we cannot take this year's inflation control task lightly. The dovish turn of the Federal Reserve at the end of last year has had a significant impact on this year's financial easing, which in turn has backfired on the inflation control process.

II. Is the U.S. retail suddenly changing its face?

Compared to the high decline in CPI, the month-on-month growth rate of retail sales is even more severe. Previously, high-weight items with high growth rates, such as non-store retail and daily goods stores, suddenly weakened. It is estimated that this change may be related to seasonality.

Projects that were previously weak and highly interest rate-sensitive, such as automotive and auto parts retail stores, have seen significant declines. It can be said that both the decline in automotive CPI and the decline in automotive retail sales are pointing to increasing sales pressure on automobiles in a high-interest environment.

Subsequently, real estate consumption - terminal retail sales of building materials, gardening equipment, electronics, and home appliances - started to rebound in April, while the negative growth of furniture and decoration stores narrowed. This indicates that with the recovery of real estate construction started last year, this part of the terminal retail sales slump has gradually come to an end.

Overall, behind the sudden change in U.S. retail in April, there may be some noise, mostly due to the overshoot in the previous month and the undershoot in April, especially in essential categories like daily goods retail, which seems to have more noise information.

Therefore, with the poor performance of retail sales this month, but considering that the major items in household consumption are still in services, the actual household consumption in April is probably not as bad as reflected in retail sales. For the weaker individual items in retail sales, Dolphin will continue to follow up.

By looking at these two sets of data, it is true that inflation in the United States is not as terrifying as the surge in the 10-year Treasury yield to 4.7% in the previous decade. However, from the continuous expansion of prices in the PMI data after the Chinese New Year, the rise in PPI prices, and the explosion in consumption, all indicate that once financial conditions start to guide expectations towards easing, given the current economic situation, turning into loose monetary policy may lead to a resurgence of inflation.

In this scenario, it is likely that the Federal Reserve will be much more cautious in easing expectations in the future, and the bottom line and top line of the 10-year Treasury yield may return to around 4%-4.5%.

III. With two financial gods guarding the U.S. stock market, liquidity issues are no longer significant

In last week's strategy weekly report "The Financialization of the U.S. Economy, Yellen and Powell as the Guardians of the U.S. Stock Market?" mentioned by Dolphin, in the increasingly financialized economy, with two financial gods guarding, it is highly probable that the current liquidity situation in the United States will not affect the appreciation effect of financial assets for U.S. residents After the tax season in April, funds were transferred from bank reserve balances to the TGA account in one go. In the past week, both TGA and reverse repurchase operations have been used to offset the balance sheet contraction caused by the Fed's bond selling.

In reality, the bank reserve balances, which truly represent market liquidity, have accelerated their recovery last week. With loose liquidity and expectations of high interest rates, the spirit of the US stock market has returned.

However, unlike in the past, the impact on the Hong Kong stock market was minimal this time. With EM funds balancing their own allocations, Hong Kong stocks continued to rise due to undervaluation and improving fundamentals. They also benefited from the decline in US bond yields.

At the same time, liquidity overflowed into cryptocurrencies, and meme stocks like AMC, GME, and FFIE, which are popular among retail investors, also started to rally.

Last week, Dolphin Jun had previously announced that as the earnings season progressed, based on fundamentals, some individual stocks would continue to be adjusted. After adjusting out Uber and Luckin Coffee the previous week, last week focused on increasing positions for specific reasons.

By the end of last week, the portfolio's returns had increased by 3.2%, outperforming the Shanghai and Shenzhen 300 Index (+0.3%) and the S&P 500 Index (+1.5%). However, it underperformed the MSCI China Index (+4.1%) and the Hang Seng Tech Index (+3.8%) mainly due to the relatively high allocation to US bonds and cash in the portfolio, resulting in slower growth in a rising environment. Equity assets rose by 4.2%, basically outperforming the major benchmark indices.

Since the start of the portfolio testing until the end of last week, the absolute return of the portfolio was 41%, with an excess return compared to the MSCI China Index of 52.6%. From the perspective of asset net value, Dolphin Jun's initial virtual assets of $100 million have now risen to $142 million.

Last week, due to easing inflation concerns, leading technology stocks in Dolphin Jun's focus and holdings generally rebounded, but the real rebound was seen in Chinese concept assets. The rebound had a certain level of alpha, mainly driven by two factors a. In the middle of the financial report season, companies with good performance or showing marginal improvement expectations in their performance, such as Tencent, Tencent Music, Alibaba, etc.;

b. Event-driven: For example, Bilibili is scheduled to release "Three Kingdoms: Resolute Under Heaven" in June due to being undervalued; Beike is benefiting from the relaxation of real estate policies on May 20.

For the companies with significant price changes in Alpha Dolphin's holding and watchlist last week, as well as possible reasons, Alpha Dolphin's analysis is as follows:

VI. Portfolio Asset Allocation

After increasing positions in Alibaba and SMIC this week, Alpha Dolphin also added positions in KWEB, Bilibili, and Boss Zhipin, holding a total of 22 individual stocks and equity-type ETFs in the virtual portfolio, with 5 core holdings and the rest being underweighted equity assets, with the remaining in gold, US bonds, and US dollar cash. Currently, there is still a significant amount of cash and cash-like assets, and equity assets will continue to be added in the coming weeks.

As of the end of last week, the asset allocation and equity asset weightings of Alpha Dolphin are as follows:

VII. Key Events This Week

Following Tencent and Alibaba, this week's financial report season is mainly focused on the second-tier Chinese concept stocks led by Pinduoduo, as well as the heavyweight financial report of the last stock in the US stock market - NVIDIA. Key events monitored by Alpha Dolphin are as follows:

For these companies, Alpha Dolphin will promptly release quick performance reviews, in-depth analysis, conference call summaries, and breakdown of key performance factors affecting valuation. Interested users can view detailed content through Longbridge - Dynamic - Investment Research, or Longbridge - Individual Stocks - In-depth, view detailed content.

Risk Disclosure and Disclaimer of this article: Dolphin Research Disclaimer and General Disclosure Please refer to the recent Dolphin Research Portfolio Weekly Report articles:

"The Financialization of the U.S. Economy, Yellen and Powell as the Gatekeepers of the U.S. Stock Market?"

"Simultaneous Correction of U.S.-Listed Chinese Stocks, Who Will Seize the Opportunity?"

"2024 in the U.S., Soft Landing or No Landing?"

"Earn More, Spend More: Why Are U.S. Residents Spending So Much?"

"Hoping for a Major Correction in U.S. Stocks? Not Likely." 《Low and steady inflation in the United States, can Chinese concept stocks still rise?》

《Afraid to chase after the rise of the seven tech sisters? Chinese concept stocks unexpectedly benefit》

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