The labor market shows resilience, expectations for interest rate cuts cool down

Last week, our products achieved excellent returns, with the USD class NAV rising by 16 bps and the HKD class rising by 26 bps. The gains were mainly driven by the strong performance of the investment-grade bond market, while high-beta bonds also performed well last week.

Macro data released last week showed a co-existence of cooling US inflation and resilient employment, further dampening expectations of rate cuts and pushing US Treasury yields higher. The US core CPI data released last Tuesday showed that core CPI remained at a low level in recent years, with a clear downward trajectory in inflation. Meanwhile, the number of initial jobless claims released last Tuesday fell back below 200K, significantly better than the expected 215K, demonstrating the resilience of the US labor market. Several Fed presidents (Chicago, Philadelphia, St. Louis, etc.) made hawkish statements, suggesting that current interest rates are appropriate and that no further rate cuts or easing are needed. Finally, in a public speech at the White House last Friday, Donald Trump expressed his hope that Kevin Hassett would remain in his position as Director of the National Economic Council, significantly reducing Hassett's chances of becoming the next Fed chair. Kevin Warsh's odds of being elected surged to over 60% on prediction websites. Compared to Hassett, who is closer to Trump, Warsh is more independent and focused on long-term inflation control. The above factors led to a bear flattening of the US Treasury curve last week, with the 2-year yield rising by 5 bps to 3.59%, the 10-year yield rising by 4 bps to 4.22%, and the 30-year yield rising by 1 bp to 4.84%, while the USD index stabilized at 99.30.

Facing the current market full of uncertainties, we will closely monitor macro data and individual bond credit. We will maintain a flexible strategy and adjust as needed. In the new year, our goal remains to focus on relatively certain returns, deploying carefully selected credit targets to seek returns within relatively certain parameters.
Here’s a review of last week’s macro data:

Core annualized CPI– 2.60%, previous 2.60%, expected 2.70%
Initial jobless claims– 198K, previous 208K, expected 215K
New home sales – 737K, previous 738K, expected 715K
Next week’s focus: GDP (Jan 22), initial jobless claims (Jan 22), University of Michigan Consumer Sentiment Index (Jan 23)

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