In last week's strategy report, Dolphin reminded us to be cautious of the pressure that the recovery of the U.S. economy may bring to inflation expectations and U.S. Treasury yields as the year-end approaches.

The newly released economic data last week seems to have completely unsettled the market. So, will re-inflation in the U.S. really come in 2025? Has the U.S. rate-cutting cycle already ended?

1. U.S. Employment: We said there was no labor shortage, so why is the labor market tight again?

What truly unsettled the market last week was the non-farm employment data for December. Non-farm employment in December surged to 256,000, reaching a new high since April of last year.

To explain, in the current relatively balanced U.S. labor market (where each unemployed person corresponds to 1.1-1.2 job vacancies, similar to pre-pandemic 2019), with the current monthly increase in the labor pool of 170,000 to 180,000 people, a reasonable monthly non-farm employment increase should be around 100,000 to 150,000. Meanwhile, the implied monthly job demand from job vacancies is ideally also between 100,000 and 150,000.

Last November's figures were distorted by the October hurricane and strikes, so the market was not concerned about the 210,000 increase in non-farm employment for November.

The 470,000 increase in job demand for November, released in early December, indeed made the market anxious. With Trump's immigration expulsion policy imminent, there were only 210,000 new jobs in November, but at the same time, there was an additional 470,000 job demand, which inevitably raised the number of positions that needed to be filled in the market, likely indicating that future employment increases would also rise.

As expected, the subsequent announcement of the December non-farm employment figures rose to 256,000. From an industry perspective, the entire manufacturing sector is still undergoing layoffs.

Aside from the consistently strong professional services and healthcare sectors, the retail industry, boosted by year-end shopping, has seen a return along with the transportation sector, and even the restaurant industry has rebounded at the end of the year.

Overall, the employment data for December shows that, apart from the relatively low employment in manufacturing, other sectors have basically stabilized. Due to Thanksgiving on the 24th (November 28), which was later this year, there may be some positive impact on December's employment, but the cross-industry employment recovery still points to a U.S. economy that is not landing

Due to the employment structure mainly consisting of retail and catering industries, the growth of non-farm average wages in December did not significantly increase, but instead slightly fell back to a month-on-month increase of 0.3%.

II. Will inflation rise again in the spring of 2025?

Ideally, the best scenario is employment growth, slow wage increases, and no inflation. The current data on non-farm employment in December indeed shows employment growth and slow wage increases.

However, such data clearly cannot anchor inflation expectations, as the latest manufacturing and services PMI for January both indicate a return of prices—although the employment index has not further expanded, and manufacturing has even contracted further, the price index has expanded in both sectors.

In the U.S. December PMI, not only did the manufacturing PMI's commodity prices re-enter the expansion zone; the services PMI's price index directly rose to 64. Such data is clearly not a good sign for the price trend in the U.S. at the beginning of 2025.

However, an interesting point is that the employment index in U.S. domestic manufacturing is still contracting further, indicating that the trend of layoffs in U.S. domestic manufacturing has not improved, and even the employment index in the services sector has not further increased.

One possibility to consider is that the rise in PMI in the services sector may be related to seasonal disturbances at the end of the year, while in manufacturing, due to continued contraction of customer inventories, ongoing contraction of their own order inventories, and an intensified trend of layoffs in manufacturing, it cannot be ruled out that some preemptive stockpiling actions are being taken in anticipation of Trump tariffs. These actions may indeed raise short-term inflation expectations.

This week, the December CPI data is also pending release, which will be a risk point. If the core commodity prices and service prices in December are still running at a month-on-month growth of 0.3%, it will further undermine interest rate cut expectations.

III. Where is the market trading now?

Currently, the 10-year U.S. Treasury yield is under multiple pressures, as the market is concerned that the newly appointed Treasury Secretary may increase the supply of long-term bonds; the short-term rise in employment and stubborn core inflation have also weighed down interest rate cut expectations; it can be seen that during this round of rising 10-year inflation, although mainly contributed by long-term economic growth expectations, the rise in inflation expectations also has a certain contribution

The key issue at present is that when the 10-year U.S. Treasury yield and the U.S. dollar index rise too high, it will naturally put pressure on risk assets. In this process, equity assets are being compressed. Of course, in terms of the degree of compression, assets like Hong Kong stocks, which rely on U.S. dollar liquidity but have underlying assets in RMB, face a double blow due to exchange rate losses.

Whether it is the overvalued Nasdaq or the Hong Kong stocks facing liquidity pressure, both are under adjustment pressure during the process of rising risk-free yields.

From a timing perspective, Chinese assets may have to wait for opportunities catalyzed by the Spring Festival and the Two Sessions from February to April, while U.S. stocks still face valuation compression risks. After this valuation adjustment, combined with the upcoming earnings season for verification, U.S. stocks may hope to welcome the next step of an upward trend.

4. Portfolio Adjustment and Returns

There was no adjustment to the portfolio last week. The Alpha Dolphin portfolio had a floating return of -0.7%, outperforming the CSI 300 (-1.1%), MSCI China (-4.4%), Hang Seng Tech (-3.2%), and S&P 500 (-1.9%).

Since the portfolio began testing (March 25, 2022) until last weekend, the absolute return of the portfolio is 65%, with an excess return of 82% compared to MSCI China. From the perspective of net asset value, Dolphin's initial virtual asset of 100 million USD has exceeded 167 million USD as of last weekend.

5. Individual Stock Profit and Loss Contribution

Last week, assets were still in a state of broad decline, but the Alpha Dolphin portfolio had been in a defensive position since the beginning of this round, with heavy positions in cash and gold, which hedged against the decline in stock assets. The decline last week was mainly due to the drag from Chinese concept stocks like Tencent and Trip.com.

Overall, the assets that fell significantly are those that are sensitive to interest rates during the process of rising risk-free yields, or those Chinese concept stocks with relatively higher valuations.

6. Asset Allocation Distribution

The Alpha Dolphin virtual portfolio holds a total of 14 individual stocks and equity ETFs, with a standard allocation of 3 and 8 equity assets being under-allocated. 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:

7. Key Events This Week:

Starting this week, U.S. stocks gradually enter a new earnings season, kicking off with the semiconductor cornerstone—Taiwan Semiconductor Manufacturing Company (TSMC). The specific focus points for the earnings report are as follows: