Guosheng Securities Inc. stated that following the release of stronger-than-expected U.S. non-farm payrolls and weaker-than-expected CPI data, asset prices experienced significant volatility, with market expectations for Federal Reserve rate cuts first cooling then reheating. When considered together, the weaker CPI figures partially offset the hawkish pressure generated by the strong jobs report. The firm believes the Fed may continue to refrain from sending clear easing signals in the near term, with asset prices likely to remain volatile as markets weigh economic resilience against persistent inflation. A genuine shift in policy flexibility will likely occur after the Fed chair transition in May. Should the Federal Reserve under incoming Chair Warsh implement marginal policy adjustments, combined with an expected gradual slowdown in economic momentum during the first half of the year, the potential for interest rate cuts in the second half could increase substantially.

Key views from Guosheng Securities are as follows:

1. CPI Analysis: January's CPI came in below expectations while core CPI met expectations, with service inflation remaining notably persistent. Overall performance: The unadjusted U.S. CPI for January rose 2.4% year-over-year, lower than expectations and the previous reading, marking the third consecutive monthly decline since September 2025. Core CPI increased 2.5% year-over-year, matching expectations but lower than the prior figure. On a seasonally adjusted monthly basis, CPI rose 0.2%, below expectations but in line with the 12-month average of 0.2%. Core CPI increased 0.3% month-over-month, matching expectations and exceeding the 12-month average of 0.2%. Component breakdown: Within the major CPI components for January, the food category rose 2.9% year-over-year, down from 3.1% in December 2025. Energy prices declined 0.1% year-over-year, compared to a 2.3% increase in December. Core goods inflation eased to 1.1% from 1.4%. Core services inflation moderated slightly to 2.9% from 3.0%, with the housing component dipping to 3.0% from 3.2%. However, non-housing core services inflation remained strong, with medical care services accelerating to 3.9% from 3.5%. Notably, the super-core CPI (excluding food, energy, and housing) rose 0.59% month-over-month, significantly higher than the previous month's 0.23% and marking the second-highest reading since January 2025. Overall, declining energy prices (including gasoline and fuel oil) were a key factor behind the lower-than-expected headline inflation, while falling used car prices and slightly slower housing and food inflation also contributed. Nevertheless, with core monthly inflation still at 0.3% and super-core inflation near 0.6%, U.S. service inflation demonstrates continued stickiness, indicating that inflation has not yet fully returned to a stable, low level.

2. Non-Farm Payrolls: Employment exceeded expectations while the unemployment rate was better than anticipated, though the January jobs report contained considerable statistical noise. Overall performance: U.S. non-farm payrolls increased by 130,000 in January, significantly above the consensus forecast of 65,000 and reaching the highest level since April 2025. The unemployment rate fell to 4.3%, below expectations and the previous reading of 4.4%, hitting the lowest level since September 2025. The labor force participation rate edged up to 62.5% from 62.4%. Average weekly hours worked increased to 34.3 hours, above expectations and the prior reading of 34.2 hours, remaining relatively stable since early 2024. Average hourly earnings rose 0.4% month-over-month, exceeding expectations and the previous increase of 0.3%. Overall, this was a report showing stronger-than-expected job growth and a lower-than-expected unemployment rate, with the upside surprises in wages and hours worked also noteworthy due to their connection to U.S. household spending power. Sector breakdown: By industry, government employment declined by 42,000, while private sector employment improved significantly, adding 172,000 jobs. However, the improvement was narrowly concentrated, with the education and health services sector contributing nearly 80% of the net job gains (+137,000). Other gains were seen in professional and business services (+34,000) and construction (+33,000). The information sector (-12,000) and financial activities sector (-22,000) continued to contract. Manufacturing employment increased by 5,000, turning positive for the first time in 13 months. Structurally, job gains were primarily concentrated in relatively inelastic service sectors like education and healthcare, while cyclically sensitive industries such as information and finance continued to shrink. Although manufacturing employment turned slightly positive, the recovery remains limited. This suggests that the current improvement in U.S. employment relies heavily on a few sectors, with a broad-based recovery yet to materialize, though the labor market overall still demonstrates resilience. Data revisions: After annual revisions, the unadjusted total non-farm employment level as of March 2025 was downwardly revised by 862,000 jobs, a reduction of 0.5%. The average absolute revision over the past decade has been 0.2%. On a seasonally adjusted basis, the change in total non-farm employment for 2025 was revised down from +584,000 to +181,000. It is important to note that in the January establishment survey, the Bureau of Labor Statistics updated its birth-death model to incorporate the latest sample information monthly. This CES methodology change, which now integrates new sample data each month, may make the model more sensitive to current employment changes, potentially amplifying estimates of new job creation during periods of labor market strength. Therefore, Guosheng Securities believes that the stronger-than-expected January jobs figure may reflect not only fundamental factors but also some technical uplift, and its accuracy in reflecting the labor market's true momentum requires further verification.

3. Impact of Strong Jobs and Weak CPI Data: Asset prices experienced volatility as rate cut expectations fluctuated. Performance of major assets: 1) Following the non-farm payrolls release, U.S. stocks, Treasury yields, and the U.S. dollar index initially rose then fell, while gold initially declined then rallied. As of the close on February 12, the S&P 500, Nasdaq, and Dow Jones indices changed by -0.00%, -0.16%, and -0.13% respectively. The 10-year Treasury yield increased by 2.77 basis points to 4.17%. The U.S. dollar index rose 0.06% to 96.92. Spot gold climbed 1.22% to $5,082.86 per ounce. 2) After the CPI release, U.S. stocks initially advanced then pulled back, while Treasury yields and the dollar declined, and gold rose. As of the close on February 14, the S&P 500, Nasdaq, and Dow Jones changed by +0.05%, -0.22%, and +0.10% respectively. The 10-year yield fell 4.79 basis points to 4.05%. The dollar index dipped 0.05% to 96.86. Spot gold advanced 2.41% to $5,042.81 per ounce. Changes in rate cut expectations: 1) After the jobs report, market expectations for Fed rate cuts cooled. Interest rate futures implied nearly zero probability of a March rate cut (declining from 0.22 to 0.06 cuts priced in), less than one cut by June (falling from 1.05 to 0.71 cuts), and total 2026 rate cuts reduced from 2.4 to 2.12 cuts. 2) Following the CPI report, rate cut expectations modestly reheated. The implied probability of a March cut remained nearly unchanged (from 0.09 to 0.10 cuts), June cuts increased from 0.81 to 0.86 cuts, and total 2026 cuts rose from 2.36 to 2.53 cuts.

4. Continued Rate Cut Uncertainty, Potential Shift After May: Considering the January non-farm payrolls and CPI data together, the U.S. economy exhibits continued labor market resilience alongside persistent service inflation. Stronger-than-expected job growth, coupled with rising wages and hours worked, supports household income and consumption in the near term. However, employment gains are concentrated in a few service sectors with limited breadth, and the data may contain technical distortions. On inflation, the decline in headline CPI was primarily driven by energy, while core monthly inflation held at 0.3% and super-core inflation remained notably strong, indicating ongoing service price pressures. While the weaker CPI data partially alleviated hawkish pressure from the strong jobs report, Guosheng Securities believes the Fed is unlikely to signal clear policy easing in the short term. Asset prices will likely continue fluctuating as the market grapples with the interplay between growth resilience and inflation persistence. A genuine turning point for policy flexibility will probably occur after the Fed chair transition in May. If the Federal Reserve under incoming Chair Warsh implements marginal policy adjustments, combined with an expected gradual economic slowdown in the first half, the scope for interest rate cuts in the second half could expand significantly. The U.S. economic fundamentals in 2026 do not necessitate substantial rate cuts. However, against the backdrop of the Fed leadership change in May and the Congressional midterm elections in November, the Fed's independence faces challenges. Current market expectations for approximately 2.5 rate cuts in 2026 align with economic fundamentals but may not fully account for risks to Fed independence. Beyond the rate cut path, U.S. dollar liquidity remains a key focus. Since 2022, supported by money fund expansion, a previously high level of the Fed's overnight reverse repo facility (ON RRP), reinforced AI narratives, and capital inflows to dollar assets amid high interest rates, U.S. equities rallied and the scale of neutral strategies and hedge funds expanded. However, since the second half of 2025, this previously abundant liquidity has noticeably receded, with ON RRP balances declining persistently. The Reserve Management Purchases (RMP) operations initiated in December are expected to provide some support for reserve demand amid periodic volatility but are unlikely to fundamentally match the expanding non-bank sector and offshore dollar funding needs. Market concerns about a potential "Warsh Shock" related to balance sheet reduction essentially represent a stress test for dollar liquidity constraints. Without substantial balance sheet expansion in 2026, the base level of dollar liquidity is unlikely to re-expand significantly. The U.S. non-bank sector and offshore dollar system may still face periodic liquidity risks, and volatility for risk assets such as the Nasdaq and commodities may remain elevated.

Risk warnings include potential ongoing surprises in U.S. economic growth and inflation, Federal Reserve monetary policy, and geopolitical conflicts.