As the policy heavy period approaches, will there be a miracle?

Last week, the key driver of U.S. economic growth—the October personal income and spending data was released, along with the PCE data, which is of utmost concern to the Federal Reserve. The short-term combination presented by these two figures is not optimistic—marginal consumption is slowing down, and there is no substantial improvement in PCE inflation.

At the same time, as the year-end approaches, the domestic December Politburo meeting and the Central Economic Work Conference at the end of the month are about to convene. The external dollar has retreated, and domestic policy expectations are brewing again, creating a year-end "soup-drinking" market.

1. Declining Household Consumption: Is it saving for Christmas, or is there really not enough surplus?

In October, the seasonally adjusted real personal consumption expenditures in the U.S. grew by only 0.12% month-on-month, showing a significant slowdown. In terms of categories, service consumption remained stable, with a month-on-month growth of 0.17%. The main issue lies in the weak consumption of non-durable goods, which turned into a month-on-month negative growth of 0.12%, while durable goods consumption remained basically stable.

If we look at the source of the slowdown in consumption expenditures again, we can see that the problem does not lie in income. In October, the annualized income of U.S. residents increased by $147 billion month-on-month, with a stable source—employee compensation increasing by $75 billion, which is not considered good in past months.

The main issue is in the expenditure direction of the incremental income: in October, household savings increased by $74 billion, while in the previous eight months, the amount allocated to savings by residents had been decreasing, and the savings rate continued to decline. By October, the household savings rate was pulled back from 4% to 4.4%.

However, based on the performance of household income and expenditure in the past few months, as long as there are no major issues with residents' income sources (mainly in employment), it is difficult for the savings rate to continue to squeeze consumption; instead, consumption is more likely to squeeze savings. Therefore, although consumption weakened in October, there is no essential problem.

In addition, regarding the price indicators that the Federal Reserve is concerned about, both PCE and core PCE have seen a slight increase compared to last month, and inflation has not weakened, especially core inflation, which has consistently run at over 0.25% month-on-month, possibly indicating an inflation rate of over 3% a year later, continuing to exceed the Federal Reserve's 2% inflation target

When these two numbers are viewed together, it suggests a slowing economy while inflation remains persistent: this can be seen in bond trading, where under expectations of economic slowdown, the yield on 10-year government bonds decreases more rapidly, while the 2-year yield slows down slightly due to the lack of signals indicating easing inflation, resulting in a significant narrowing of the yield spread.

At the same time, the US dollar index has passed the strong dollar expectations during Trump's administration, and after seeing weak economic data, the dollar has begun to rapidly retreat from its high position.

II. Dollar Retreat + Policy Expectations, Is There a Breathing Opportunity for Chinese Concepts?

With the dollar weakening and the domestic market in the year-end policy expectation cycle, especially with the upcoming December Politburo meeting and the Central Economic Work Conference at the end of the month, the market is anticipating whether there will be more substantial policy measures.

Currently, according to Goldman Sachs, the market's baseline expectations for core economic data in 2025 are: an official fiscal deficit of 3.6%, a special central government bond quota of 2.5 trillion, and a local special bond quota of 4.7 trillion (with a deficit rate of 3% in 2024, 1 trillion in central bonds, and 3.6 trillion in local bonds). Additionally, there is a general expectation that the GDP target will be set at 5% to anchor expectations, but many foreign banks have already lowered their GDP growth expectations for China in 2025 to the range of 3-4%, reflecting a relatively pessimistic outlook.

However, the two meetings at the end of the year are more focused on qualitative goals rather than quantitative ones; quantitative data will need to wait for next year's Two Sessions. Unless there is an intentional effort to boost confidence this year by disclosing some data and targets in advance.

From a fundamental perspective, through the third-quarter financial reports, we have already seen that very few Chinese assets have truly impressive performance, aside from companies like Pop Mart, which Dolphin covers.

In this situation, the short-term opportunities for speculation still lie in the policy signals released at the end of the year, ideally combined with the external weakening of the dollar.

III. Portfolio Adjustment and Returns

There was no adjustment to the portfolio last week. The Alpha Dolphin portfolio's return fluctuated at 0.3% last week, significantly underperforming the Hang Seng Tech (2.5%), MSCI China (0.7%), CSI 300 (1/3%), and S&P 500 (+1.3%).

Since the portfolio began testing (March 25, 2022) until last weekend, the absolute return of the portfolio is 64%, with an excess return of 77.8% compared to MSCI China From the perspective of net asset value, Dolphin's initial virtual assets of 100 million USD have exceeded 167 million USD as of last weekend.

IV. Contribution of Individual Stocks to Profit and Loss

Last week, Chinese concept stocks showed a significant recovery, with small and mid-cap stocks performing even better. The core reason for the portfolio underperforming the index is the high weight of gold in the holdings. For equity assets, Dolphin's specific analysis is as follows:

V. Asset Allocation Distribution

The Alpha Dolphin virtual portfolio holds a total of 14 individual stocks and equity ETFs, including 3 standard allocations and 8 low-weight equity assets. The remainder is distributed among gold, U.S. Treasury bonds, and USD cash. As of last weekend, the asset allocation and equity asset holding weights of Alpha Dolphin are as follows:

Risk Disclosure and Statement of this Article: Dolphin Investment Research Disclaimer and General Disclosure

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