Dolphin Jun just mentioned in last week's strategy report that the "imperfection" in the U.S. perfect deleveraging is the slow and repetitive inflation leak. As a result, last week's Federal Reserve staged a "hawkish rate cut"—interest rates did decrease, but the guidance significantly lowered the future rate cut space.

The market was already worried about the impact of new policies on the inflation curve after Trump took office, and this time Powell has also lowered the short-term rate cut space. Moreover, in the past two days, the U.S. has re-entered the policy game phase. Since Trump took office, from the Dow Jones to small-cap stocks and then to Nasdaq, U.S. stocks have already rotated through.

1. The Federal Reserve is hawkish again!

After the latest round of rate cuts in December, the U.S. federal benchmark interest rate has fallen by 100 basis points to 4.25%-4.5%. At this time, the core CPI in the U.S. is still 3.3% year-on-year, which seems to indicate there is still considerable room for rate cuts.

However, the problem here is that the implied annual core CPI over the past three months is not further declining but is expected to rise to 3.6%. If the future CPI stabilizes around 3.5%, apart from the Federal Reserve's guidance of a 50 basis point rate cut next year (3.75%-4%), the CPI of 3.5%-3.6% vs. the actual policy interest rate of 3.8% will be basically similar.

In other words, if the inflation path in the coming period does not differ from the past quarter, then the remaining rate cut options will indeed enter "Hard" mode, making it difficult to cut rates "recklessly" like the previous 100 basis points.

However, the main expectation gap here is that the market believes the Federal Reserve will wait until the first quarter of next year to cut rates twice (with meetings on January 25 and March 29) before carefully considering the extent and speed of rate cuts. But from the wording this time, it seems that after this cut, it may enter the "cautious zone" for rate cuts earlier, and future policy adjustments will consider "extent and timing."

Moreover, the latest updated economic forecasts have become more optimistic about economic numbers—the expected unemployment rate for 2025 has decreased, GDP growth has increased, policy rates have been raised, and inflation expectations have also been raised, but the long-term inflation expectation remains firmly anchored at 2%.

2. Difficult to lower interest rates, can the American proletariat still wait?

However, there is a very awkward point here: although the inflation leak is progressing step by step, causing the speed and extent of the Federal Reserve's rate cuts to be dragged down, it is also questionable how long the economy can withstand relatively high interest rates The current situation faced by the American public is quite awkward:

Starting in September, the Federal Reserve first cut interest rates by 50 basis points, but after a total cut of 100 basis points, the actual market interest rates, taking mortgages as an example, initially decreased and then increased. Since the beginning of the rate cuts, the decline in real market interest rates seems to be not significant.

If we say that the transmission of interest rates takes time, the pressure on the cash payment ability of some residents is still quite evident. By the end of the third quarter, the 90-day delinquency rate (serious delinquency) for credit card loans in the entire household sector has exceeded the peak during the pandemic, and the delinquency rate for auto loans is also climbing to the peak during the pandemic.

Moreover, the conversion rate of 30-day to 90-day delinquencies for credit cards and auto loans is rising, indicating a weakening of residents' cash flow payment ability.

The good news is that despite the rapid rise in delinquency rates, the overall delinquency rate, especially when excluding 30-day and 60-day delinquencies, is still significantly lower than the pre-pandemic levels in 2019.

However, last week in the article “AI Returns to the Fore, Are Chinese Concepts Quickly Taking a Break?”, there was another set of data — it seems that the entire household sector in the U.S. is spending more and appearing wealthier, with savings and assets all appreciating, which seems inconsistent with the rising credit card delinquency rates.

But if we consider micro individual stocks, such as the declining sales of some low-priced retail stores, it can be easily inferred: the savings rate has been repeatedly squeezed after the pandemic, and this year the increase in American residents' wealth is largely due to the appreciation of assets and wealth.

Having assets is the basis for asset appreciation, and for the "proletarian blue-collar" at the other end of the olive-shaped society, once cash flow is exhausted and interest rates remain high, the result can only be a continuous rise in delinquency rates Fortunately, the latest PCE price data from the United States has been released. After two consecutive months of rising PCE prices in November, the month-on-month growth has finally dropped to 0.11%.

Moreover, looking at the consumption expenditure of U.S. residents in November, the core driving force for economic growth from domestic demand remains strong— the increase in consumption by U.S. residents in November was primarily driven by increased employee compensation income, with an annualized nominal consumption growth rate of 5%, which is still a commendable performance.

Additionally, by category, after the post-pandemic recovery of goods and services consumption to historical proportion trends, the month-on-month growth rate of resident consumption (seasonally adjusted and inflation-adjusted) in November was 0.28%, with durable goods continuing to grow significantly. It may be necessary to consider whether there will truly be opportunities for goods consumption recovery in 2025.

IV. After extreme pulling, is it an opportunity or a risk?

From the perspective of market trading last week, the Federal Reserve's hawkish interest rate cuts raised short-term U.S. Treasury yields, while the extreme tug-of-war over the debt ceiling in the U.S. Congress increased the risk of U.S. Treasuries, which in turn raised the medium- and long-term yields of U.S. Treasuries, resulting in rising yields across various maturities.

The rise in short-term U.S. Treasury yields will inevitably suppress equity assets, but given the relatively stable trajectory of the U.S. economy, the risk has actually decreased after the pullback in U.S. stocks. Dolphin Jun still maintains that U.S. stocks are more about rotation rather than a true pullback— with the current industrial logic of AI and a solid economic fundamental, there are still opportunities after the adjustment.

However, this external environment will put greater pressure on Chinese assets. The expectation of interest rate cuts domestically (the yield on the domestic ten-year government bond has already dropped to 1.7%) contrasts with the rising U.S. Treasury yields, leading to an expansion of the yield spread between the two countries' ten-year government bonds.

With the external U.S. dollar index rising and Chinese assets being in a policy-driven market phase, currently in a policy window period, unless there is significant improvement in fundamental data, Chinese assets are likely to pull back to release risks. Only after the pullback can we discuss the investment opportunities brought by "Spring Festival domestic demand." 5. Portfolio Adjustment and Returns

There were no adjustments to the portfolio last week. The Alpha Dolphin portfolio had a return fluctuation of -0.7%, slightly underperforming the CSI 300 (-0.1%), but slightly outperforming MSCI China (-0.9%), Hang Seng Tech (-0.8%), and S&P 500 (-2%).

Since the portfolio began testing (March 25, 2022) until last weekend, the absolute return of the portfolio is 66%, with an excess return of 78% compared to MSCI China. From the perspective of net asset value, Dolphin's initial virtual asset of 100 million USD has exceeded 168.5 million USD as of last weekend.

6. Individual Stock Profit and Loss Contribution

Last week, the stocks that fell significantly in the U.S. market were either interest rate-sensitive assets or had high valuation premiums. The rising assets were mostly event-driven, whether it was the capital expenditure story of ByteDance leading to movements in the semiconductor supply chain like SMIC, or the market fluctuations of various related companies driven by Tencent's small store. Overall, the current performance of Chinese concept stocks remains weak, while the U.S. market is digesting the Federal Reserve's hawkish rate cuts.

For specific stocks covered and tracked by Dolphin, the analysis of the reasons for significant fluctuations last week can be referenced in the chart below:

7. Asset Allocation Distribution

The Alpha Dolphin virtual portfolio holds a total of 14 stocks and equity ETFs, with a standard allocation of 3 stocks and 8 equity assets being underweight. The remainder is distributed in gold, U.S. Treasury bonds, and U.S. dollar cash. As of last weekend, the asset allocation and equity asset holding weights of Alpha Dolphin are as follows: