In recent weeks, we have witnessed a noteworthy decline in asset performance across multiple markets, including Chinese equities, domestic bonds, and the renminbiThe weakness has not been limited to Chinese assets; U.S. stocks and treasuries have also dampened their previous momentum, reflecting a broader trend of uncertainty in the global financial landscape.

One critical factor contributing to this downturn in China has been a noticeable policy vacuumWith the absence of distinct policy signals coming from the Chinese government, risk-sensitive assets have entered into a phase of volatility and adjustmentCompounded by this, the recent economic data released from the United States has consistently surpassed expectationsThese statistics highlight a tightening liquidity scenario as the global valuation of the U.S. dollar continues to show resilience.

But how do we precisely gauge the liquidity of the dollar? To fully apprehend the trajectory of both the U.S. economy and its asset markets, it is vital to incorporate an understanding of the narrative surrounding the AI industryThis sector, with its extensive integration into various economic processes and technological advancements, has become a central narrative driving investor sentiment and market valuations.

The potential for a turnaround in U.S. assets, characterized by falling stock prices, declining treasury yields, and a softening dollar, beckons further scrutinyThere is no need to overanalyze cycles of inventory or credit in the context of this transformation; instead, we should recognize that the U.S. is amid a revolutionary wave resembling the industrial transformations of the 1980s and 1990sDuring these periods, technology played a decisive role in reshaping economic landscapes, mirroring the current era characterized by AI advancements.

As long as the narrative surrounding the AI industry remains compelling and sustained, the prospects for a strong dollar and robust performance of U.S. stocks can continue

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Furthermore, it is premature to declare the end of declining treasury yieldsConversely, should this narrative falter or face disproof, we might see a significant correction in asset pricing trends in the United States.

This week brings events and data of critical importance to market performance, policy adjustments, and macroeconomic developments:

1. An uptick in U.S. treasury yields has been observed as stock indices retractRecent economic indicators from the U.S. marked an unwavering resilience, especially within the labor market, where nonfarm payrolls exceeded forecasts, and unemployment rates fellThe liquidity expectations in the U.S. remain tight, contributing to the upward movement in treasury yields, with the 10-year note yield climbing to 4.77%—a 17 basis point rise from the previous week.

2. The exchange rate of the dollar against the renminbi is currently fluctuating above 7.3. Following a surge past 109, the dollar index has consistently risen, nearing 110 at the end of the weekThe Fed's meeting minutes have indicated potential upward risks to inflation, with multiple officials suggesting a cautious approach to interest rate cutsThe dollar in relation to the renminbi has retreated beyond the 7.3 mark, now standing at 7.33, indicating significant depreciation pressures as compared to the fourth quarter of 2023. This rate represents one of the weakest valuations of the dollar against the renminbi since 2008.

3. The central bank has suspended its purchases of treasury bonds in the open marketA report from the Financial Times highlighted a need to avoid misinterpretations regarding the appropriate moderation of loose monetary policyOn Friday, the central bank announced the cessation of open market treasury buying operations set to begin in January 2025, with intentions to resume based on the supply and demand conditions of the treasury market

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This week, active yields on the 10-year treasury notes climbed 1.75 basis points to 1.62%, while 30-year notes edged up 1 basis point to 1.87%.

Last week, the tightening liquidity in Chinese asset pricing became apparentChinese equities slipped below the 3200 mark, while bond yields rebounded with 10-year treasury yields unable to breach the 1.6% thresholdThe continued depreciation of the renminbi in relation to the dollar saw it approach 7.33, reminiscent of the considerable depreciation pressures experienced in late 2023. This latest depreciation is significant, marking almost a historic weakness against the dollar.

This recent downturn in Chinese assets can be directly linked to liquidity issues evidenced particularly within the bond marketThe ongoing bullish trend in the bond market has persisted for nearly two months; however, the announcement from the central bank to hold off on treasury market purchases has tempered the downward trajectory of bond yieldsThis essentially illustrates the market’s responsiveness to central bank liquidity control measures.

Simultaneously, the surging dollar index has induced liquidity challenges for non-U.S. assets, creating ripple effects that contradict positive trends anticipated from the AI-driven dialoguesThis interplay reflects severe liquidity pressures on foreign assets, ultimately leading to ups and downs dictated in part by the dollar's robust standing.

Moreover, the release of key economic data from the United States has intensified the ongoing global liquidity tightening—shaping a principal conflict in asset pricing within recent weeksDecember has seen the publication of crucial metrics, such as the manufacturing PMI, non-farm employment figures, and wage growth statistics, all indicating persistent resilience within the U.S. economic landscape.

These observations surround the Federal Reserve's tempered outlook toward future rate cuts, highlighted in their meeting minutes, where officials noted that "almost all" attendees recognized upside risks to inflation

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This sentiment corresponds somewhat with the anticipation of changes in trade and immigration policies, coupled with warnings about prolonged inflationary pressures moving forwardIn particular, officials expressed concerns that inflation might stagnate or even bounce back against expectations.

Broadly, as the U.S. continues to present strong economic indicators, the expectation for a reduction in interest rates diminishes, further empowering the dollar to maintain upward momentum against a backdrop of tightening liquidity pressuresSuch market conditions necessitate global liquidity to be reassessed continuously, with the view that the impact of U.S. monetary policy ripples through to economies globally, particularly in emerging markets like China.

In looking forward, the sustainability of consumer recovery remains on precarious groundAlthough there have been signs of revitalization in consumer spending this year, we have yet to see a return to pre-pandemic growth ratesThe uncertainty looms large over whether this consumer recovery can maintain its pace, and if it falters, it would substantially affect overall economic recovery mechanisms.

Additionally, the prospect for sustained improvements within the real estate market remains uncertainThe current downtrend in this sector has lasted considerably longer, leading to minor signs of recoveryHowever, many metrics still indicate negative growth, calling for close monitoring of whether this trend can continue positively.

Furthermore, unexpected consequences stemming from strict monetary policies instituted by Western economies could significantly diminish global economic growth and dampen asset performanceContinuing geopolitical conflicts add an additional layer of uncertainty, which continues to challenge market risk appetites and economic outlooks worldwide.

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