Guosheng: The game of resilience growth and inflation stickiness continues. After May, there may be a turning point in the policy space of the Federal Reserve.

Guosheng released a research report stating that the US "strong" non-farm payrolls and "weak" CPI were released successively, causing significant disturbances in asset prices, and the market's expectation of a Fed rate cut cooled down before heating up again. Looking at the two sets of data together, the weaker CPI to a certain extent offset the hawkish pressure brought by the stronger non-farm payrolls. The bank believes that the Fed may still have difficulty in sending a clear signal of easing in the short term, and asset prices will continue to fluctuate around the game between growth resilience and inflation stickiness. The real change in policy space is likely to occur after the Chairman transition in May. If there is a marginal adjustment in the Fed's policy stance under Chairman Warsh's leadership, combined with the gradual slowdown in economic momentum in the first half of the year, the space for rate cuts in the second half of the year may open up significantly. Guosheng's main points are as follows: 1. CPI: The January CPI was lower than expected, while core CPI was in line with expectations, indicating strong service inflation stickiness. Overall performance: In January 2026, the non-seasonally adjusted CPI in the United States was 2.4% year-on-year, lower than expectations and the previous value, and has been declining for three consecutive months since September 2025; core CPI was 2.5% year-on-year, in line with expectations, but lower than the previous value. Seasonally adjusted CPI was 0.2% month-on-month, lower than expectations and in line with the 12-month average of 0.2%; core CPI was 0.3% month-on-month, in line with expectations, higher than the 12-month average of 0.2%. Performance by sub-items: In terms of major sub-items of the US CPI in January, the year-on-year food sub-item decreased from 3.1% in December 2025 to 2.9%; the energy sub-item decreased from 2.3% in December 2025 to -0.1%; the year-on-year core goods sub-item decreased from 1.4% in December 2025 to 1.1%; the core services sub-item decreased from 3.0% in December 2025 to 2.9%, with the housing sub-item decreasing from 3.2% to 3.0%, indicating that non-housing core service inflation stickiness remains strong, with the healthcare services sub-item increasing from 3.5% to 3.9% year-on-year. It is worth noting that in January, the super-core CPI recorded a month-on-month increase of 0.59%, significantly higher than the previous month's 0.23%, marking the second highest point since January 2025. In summary, the decrease in energy prices (gasoline, fuel oil, etc.) was one of the important reasons why overall inflation did not meet expectations this time, while the decline in prices of used cars, housing, and food slightly slowed down the overall CPI. However, considering that the core month-on-month is still at 0.3% and the super-core month-on-month is close to 0.6%, it shows that service inflation stickiness is still present in the US, indicating that inflation has not completely returned to a stable low level. 2. Non-farm payrolls: Employment exceeded expectations, while the unemployment rate was lower than expected, with the data showing significant noise. Overall performance: In January, the US added 130,000 non-farm payrolls, significantly higher than the expected 65,000, reaching a new high since April 2025. The unemployment rate in January was 4.3%, lower than the expected and previous value of 4.4%, hitting a new low since September 2025. The labor force participation rate in January was 62.5%, higher than the expected and previous value of 62.4%. The average weekly hours in January were 34.3 hours, higher than the expected and previous value of 34.2 hours, showing little change since early 2024. The average hourly wage in January increased by 0.4% month-on-month, higher than the expected and previous value of 0.3%. Overall, this is a strong non-farm payroll report with employment exceeding expectations and the unemployment rate lower than expected. The unexpected increase in hourly wages and hours worked is also worth noting, as it is related to the spending power of US residents. Performance by industries: Looking at the employment in various industries in January in the US, government employment (-42,000) remained weak, while private sector employment (+172,000) showed significant improvement, although the improvement was too narrow. The education and health services industry (+137,000) contributed nearly 80% of new employment, followed by the professional and business services sector (+34,000), construction sector (+33,000), information sector (-12,000), and financial sector (-22,000), while the manufacturing industry (+5,000) returned to positive growth after 13 months. In terms of structure, the new employment was mainly concentrated in relatively rigid demand sectors such as education and healthcare, while information and financial industries, which are sensitive to economic cycles, continued to decline, and although the manufacturing sector saw a slight return to positive growth, the extent of recovery was limited. This indicates that the current improvement in US non-farm employment relies more on a few industries, and a widespread recovery in employment has yet to form, but overall, there is still some resilience. Data revisions: After annual data revisions, the total number of non-seasonally adjusted non-farm payroll employees as of March 2025 was revised down by 862,000 people, a decline of 0.5%; the absolute average revision of the benchmark for the past 10 years was 0.2%. After seasonally adjusting, the change in the total number of non-farm payroll employees in 2025 was revised from an increase of 584,000 people to an increase of 181,000 people. It is worth noting that in the business survey of January's non-farm employment, the BLS updated its use of the business birth-death model to incorporate the latest sample information each month. This adjustment of the CES method to incorporate new sample information on a monthly basis may make the model more sensitive to changes in employment in the current period, potentially amplifying estimates of new positions during periods of strong employment growth. Therefore, the bank believes that the strong non-farm payroll data in January may have been influenced not only by fundamental factors but also by some technical upward pressure, and its reflection of the actual momentum in the labor market needs further validation. 3. "Strong" non-farm payrolls and "weak" CPI taking turns, causing disturbances in asset prices and fluctuations in rate cut expectations. Performance of major asset classes: 1) After the non-farm payrolls were released, US stocks, US bond yields, and the US dollar index rose initially and then fell, while gold fell initially and then rose. As of February 12th closing, the S&P 500, Nasdaq, and Dow Jones indices fell by 0.00%, 0.16%, and 0.13% respectively, while the 10-year US bond yield rose by 2.77 basis points to 4.17%, the US dollar index rose by 0.06% to 96.92, and spot gold rose by 1.22% to $5082.86 per ounce; 2) After the CPI was released, US stocks initially rose and then pulled back, while the US bond yields and the US dollar index fell, and gold rose. As of the closing on February 14th, the S&P 500, Nasdaq, and Dow Jones indices were up by 0.05%, -0.22%, and 0.10% respectively, the 10-year US bond yield fell by 4.79 basis points to 4.05%, the US dollar index fell by 0.05% to 96.86, and spot gold rose by 2.41% to $5042.81 per ounce. Changes in rate cut expectations: 1) After the release of the non-farm payroll data, the market's expectation of a Fed rate cut cooled down. The implied number of rate cuts in March by the interest rate futures market dropped to almost zero (from 0.22 to 0.06 times), the number of rate cuts in June was less than one (from 1.05 to 0.71 times), and the number of rate cuts for the whole year of 2026 decreased from 2.4 times to 2.12 times; 2) After the CPI was released, the market's expectation of a Fed rate cut slightly warmed up again. The implied number of rate cuts in March by the interest rate futures market remained basically the same (from 0.09 to 0.10 times), the number of rate cuts in June increased from 0.81 times to 0.86 times, and the number of rate cuts for the whole year of 2026 increased from 2.36 times to 2.53 times. 4. Rate cut game continues, with potential turning point after May. Looking at the combined data of the US non-farm payrolls and CPI data for January, the US economy shows characteristics of remaining resilient in employment and with persistent service inflation stickiness. While non-farm employment showed stronger growth than expected and wages and hours increased simultaneously, providing short-term support for household income and consumption, the improvement in employment was concentrated in a few service industries, with limited diffusion and technical disturbances in the data. Regarding inflation, the overall CPI decline was mainly due to the drag from energy, while the core month-on-month remained at 0.3%, and super-core inflation remained significantly stronger, indicating that service inflation pressure persisted. Looking at the two sets of data together, the weaker CPI to some extent offset the hawkish pressure brought by the strong non-farm payrolls, but the bank believes that the Fed may still have difficulty in sending a clear signal of easing in the short term, and asset prices will continue to fluctuate around the game between growth resilience and inflation stickiness. The real change in policy space is likely to occur after the Chairman transition in May. After the completion of the Chairman transition, if there is a marginal adjustment in the Fed's policy stance under Chairman Warsh's leadership, combined with the gradual slowdown in economic momentum in the first half of the year, the space for rate cuts in the second half of the year may open up significantly. The US economy in 2026 does not require a significant rate cut, but against the background of the Chairman transition in May and the midterm elections in November, the Fed's independence is being challenged. The current market expectation of about 2.5 rate cuts for the entire year of 2026 is in line with economic fundamentals, but it falls short in pricing the loss of Fed independence. In addition to the rate cut path, the liquidity of the US dollar remains a focus of attention. Since 2022, due to the expansion of money market fund sizes and the high volume of the Fed's overnight reverse repurchase agreement (ON RRP) tool, combined with AI narrative reinforcement and the flow of funds back to US dollar assets in a high-interest rate environment, US stocks have risen, and the size of neutral strategies and hedge funds has continued to expand. However, since the second half of 2025, the "excess liquidity" formed earlier has significantly retreated, and the ON RRP balance has continued to decline. The RRP operation started in December is expected to provide some protection to reserve demand during phased fluctuations, but it is still difficult to fundamentally match the expanding non-bank sector and offshore US dollar funding demand. Concerns about a "Warsh balance sheet shock" in the market can be seen as a pressure test on the constraints of US dollar liquidity. Without a substantial expansion of the balance sheet in 2026, basic US dollar liquidity is unlikely to expand again, leaving the US non-bank sector and offshore US dollar system facing periodic liquidity risks, and the central volatility of risk assets such as the NASDAQ and commodities may also be difficult to significantly decline. Risk warning: US economic trends and inflation, Fed monetary policy, geopolitical conflicts, etc., continue to exceed expectations.