Inflation risk takes a break, are you ready for the New Year red envelope market?

Inflation risk temporarily eases, are you ready for the New Year red envelope market?

Due to the increase in new employment in December, the trend of rising prices in the PMI, and Trump's clearly "re-inflationary" policy proposals, the market has been trading on expectations of a second wave of inflation in the economy since the beginning of the year.

Therefore, the CPI data for December is crucial, and fortunately, the price data did not scare people. But does this mean that the music will continue? Let's take a look at the detailed data:

1. CPI has eased, but it is difficult to influence the Federal Reserve's interest rate decision

The core CPI rose 0.23% month-on-month in December, which is a relief compared to the previous four months' increases of 0.28% to 0.31%. The tense market finally took a breath. The overall CPI rose 0.38% month-on-month in December, but the surge was mainly due to rising oil prices, while energy and food are not included in the core CPI statistics.

The improvement in the core CPI is mainly because the prices of core goods fell to a growth of 0.1%, and core services have maintained a growth of 0.3% for three consecutive months without significant changes. The decline in core goods prices is mainly due to the price increases of used cars, alcoholic beverages, and clothing all easing in December.

In terms of core services, although housing costs have continued to decline month-on-month, the rise in energy costs has led to a month-on-month increase in transportation service prices to a positive growth of 0.5%, with the key item of airfare prices soaring by 3.9% month-on-month.

The core price decline in December is mainly because the prices of goods did not continue to rise, and there was no significant improvement in core services. Even so, while the market may gain some comfort, it is still difficult to change the Federal Reserve's decision-making path: a month-on-month increase of 0.23% corresponds to an annual increase of 2.7%, which is still a certain distance from the Federal Reserve's inflation target of 2%.

The return of goods prices has also alerted the Federal Reserve to the difficult journey of inflation management in the second half (returning inflation from 3% to 2%). Especially now that housing inflation has already declined month-on-month, the second half still faces the situation of exhausted benefits from goods deflation.

At the same time, with energy inflation rising again, the probability of a 25 basis point rate cut for the whole year remains, and the possibility of a rate cut in the first quarter is basically very low, after all, the Federal Reserve needs to leave some policy space as a bargaining chip in the game with the Trump administration II. The U.S. Economy Remains "Thriving"

Not only have prices fallen, but the performance of U.S. retail sales in December was also good. Retail sales including dining increased by 0.45% month-on-month, and after excluding dining, it reached as high as 0.56%.

Looking at the components, there was generally good growth month-on-month in motor vehicle parts, furniture, groceries, clothing, and sports, while dining services, building materials, and health and personal care performed slightly worse.

Overall, the core retail sales excluding dining, motor vehicle parts, gas stations, and building materials achieved a month-on-month growth of 0.67%, marking a visibly high growth month.

When looking at the year-on-year retail sales, aside from online retail, the main contributors to high growth were healthcare, automobiles, furniture, and 3C home appliances, with durable goods consumption performing well. This also indirectly confirms that the consumption momentum of American residents remains relatively strong in this round.

III. Is the Red Envelope Market Coming for the New Year?

Inflation is not out of control, employment remains strong, and consumption is still not landing, seemingly painting a perfect economic picture. Therefore, last week's trading was actually very good:

The 2-year U.S. Treasury yield, which is very sensitive to short-term inflation, quickly fell after the CPI dropped, while the decline in the 10-year Treasury yield was much smaller. The U.S. dollar, on the other hand, remained high due to strong economic data.

So, compared to the last round of trading, the only expectation that has truly reset in the market is the number of interest rate cuts— the economy is still good, employment is also decent, and inflation is moving too slowly, so throughout the process, only the expectations for interest rate cuts were hurt.

High interest rates, high growth expectations + Trump in office, so last week's trading naturally first boosted traditional industries— the Dow Jones + small-cap stocks— Russell 2000, while the Nasdaq's gains were relatively sluggish.

Meanwhile, Chinese assets, with the spring consumption approaching and consumption vouchers on the way, have started to rebound as external inflation pressures have slightly eased.

As this week comes to an end, China will officially enter the Spring Festival season, the U.S. stock market will also officially enter earnings season, Trump's three major initiatives, and the Federal Reserve's interest rate decision will unfold during the Chinese New Year period, which may lead to significant market volatility.

However, one hopeful situation is that consumer spending during the Spring Festival is generally a time when China's domestic demand shows signs of recovery. Coupled with the already clear consumption stimulus, if inflationary pressures in external markets ease, Chinese assets may have the potential to issue a red envelope.

But considering the uncertainty of policy announcements since Trump's administration, there may still be considerable variables during the Spring Festival. In the U.S. stock market, traditional industries may still have opportunities, but opportunities in new economy and technology sectors may need to wait for better chances based on earnings performance during the earnings season.

IV. Portfolio Adjustment and Returns

Last week, there were no adjustments to the portfolio, and the Alpha Dolphin portfolio's return fluctuated at 2.2%, slightly outperforming the CSI 300 (2.1%), but underperforming MSCI China (3.3%), Hang Seng Tech (5.1%), and S&P 500 (2.9%).

Since the portfolio began testing (March 25, 2022) until last weekend, the absolute return of the portfolio is 68.3%, 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 171 million USD as of last weekend.

V. Individual Stock Profit and Loss Contribution

Last week, due to favorable U.S. CPI data, Chinese assets showed significant recovery, especially in consumer-related platform economic assets, and U.S. stock assets also experienced some recovery.

Dolphin focuses on companies with significant price fluctuations, explained as follows:

VI. Asset Portfolio Distribution

The Alpha Dolphin virtual portfolio holds a total of 14 individual stocks and equity ETFs, with a standard allocation of 3 stocks and 8 equity assets being underweight. The remainder is distributed among 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:

VII. Key Events This Week:

The U.S. earnings season continues, with a focus this week on the star stock Netflix for 2024, paying attention to whether it can continue to exceed expectations after the competitive landscape improves