Hello there,

A wonderful Wednesday to you as stocks wind lower in Asia ahead of key U.S. inflation data.

In brief (TL:DR)

• U.S. stocks were lower on Tuesday with the Dow Jones Industrial Average (-0.18%), the S&P 500 (-0.42%) and the Nasdaq Composite (-1.19%) all down on concerns over the upcoming inflation print.

• Asian stocks dipped on Wednesday following a Wall Street retreat and caution ahead of U.S. inflation data that will shape investor expectations for further U.S. Federal Reserve interest-rate hikes.

• Benchmark U.S. 10-year Treasury yields advanced one basis point to 2.78% (yields rise when bond prices fall).

• The dollar was steady.

• Oil hovered above US$90 a barrel with September 2022 contracts for WTI Crude Oil (Nymex) (-0.18%) at US$90.34, reversing earlier losses.

• Gold was little changed with December 2022 contracts for Gold (Comex) (-0.09%) at US$1,810.70.

• Bitcoin (-3.66%) fell to US$22,878 as traders sat on the sidelines and took some money off the table after the fastest rebound in the benchmark cryptocurrency since October 2021, with all eyes on the crucial U.S. inflation print due out later today.

In today's issue...

1. How long can the Big Tech rally last?

2. Chinese Pork Prices Soar in Growing List of Economic Woes

3. Bitcoin Erases Recent Gains Ahead of Key U.S. Inflation Data

Market Overview

A report Wednesday is expected to show headline U.S. consumer-price inflation cooled but stayed elevated in July, while the core reading may have quickened on an annual basis. How the figures affect views on U.S. Federal Reserve policy tightening will be key for risk sentiment and appetite.

Chinese shares wavered as traders evaluated slower-than-anticipated consumer and factory inflation in the world’s second-largest economy.

Asian markets fell on Wednesday with Tokyo's Nikkei 225 (-0.70%), Sydney’s ASX 200 (-0.46%), Seoul's Kospi Index (-0.94%) and Hong Kong's Hang Seng Index (-2.24%) all down.

1. How long can the Big Tech rally last?

• A robust jobs report last Friday and a U.S. Federal Reserve determined to tackle searing inflation could threaten to put the kibosh on the summer of tech.

• And despite recent gains, tech is still trading at just 21.2 times forward earnings.

Investors who bought the dip on some of the world’s biggest tech companies are now wondering if a recent rally is durable, or simply more evidence of a dead cat bounce.

Having rebounded remarkably in recent weeks from the bruising falls in the first half of the year, tech titans such as Apple (+0.03%), Microsoft (+0.71%), Alphabet (-0.57%), Amazon (-1.13%) and Tesla (-2.44%) have added some US$1.3 billion to their combined market cap since the start of July.

But a robust jobs report last Friday and a U.S. Federal Reserve determined to tackle searing inflation could threaten to put the kibosh on the summer of tech.

And bear market monthly rebounds of 10% or more were common during the Nasdaq Composite’s bear market in the aftermath of the dotcom bubble bursting, between 2000 to 2003.

Earnings reports for the second quarter have led to significant downward adjustments to profit forecasts for the Nasdaq 100, including a 5.5% cut for this year and a 6.5% reduction for 2023, which could translate to billions being wiped off earnings for U.S. tech giants.

But the narrative may have already shifted, from fears over inflation, to concerns over recession as evidenced by the sharp pullback in more economically exposed sectors such as consumer discretionary stocks, which have been underperforming.

If nothing else, global spending on technology is likely to remain healthy even if companies delay or cancel some projects or scale back on hiring.

Some of the biggest names in tech are already scaling down previously ambitious hiring plans, which ought to help profitability, especially given that demand for specific sectors in tech remains robust, especially cloud computing services.

But allocations to tech-focused ETFs, a closely watched bellwether of appetite for the sector, suggest that flows remain somewhat subdued.

The US$173.7 billion Invesco ETF QQQ, which tracks the Nasdaq 100, has only seen net inflows of US$99 million since the start of July, whereas ETFs that track the wider S&P information technology sector saw net outflows of US$112 million over the same period.

Cathie Wood’s Ark Innovation ETF, a darling of the pandemic and tip of the spear when it comes to investing in the tech sector, saw net outflows of around US$385 million.

But these near-term hurdles shouldn’t bog down the long-term investors looking to double down on technology stocks, because tech spending globally is likely to increase by 2% to 4% this year alone.

And persistent themes including AI, automation, cybersecurity and cloud services are likely to remain relevant for decades to come.

Valuations are also looking plenty attractive, with the S&P tech sector trading at a forward price-to-earnings multiple of 28 times at the start of January, but falling to just 19.2 by the end of June, according to Refinitiv.

And despite recent gains, tech is still trading at just 21.2 times forward earnings.

2. Chinese Pork Prices Soar in Growing List of Economic Woes

• Pork prices surged an eye-watering 20.2% according to the National Bureau of Statistics, even as producer price inflation slowed to 4.2% in July, from 6.1% in June, on the back of weaker commodity prices.

• Rising pork prices, the staple meat of Chinese, is likely to lead to growing discontent with Chinese policymakers, and Chinese who are becoming increasingly vocal about the social compact that they had maintained with the Communist Party for decades.

A moribund economy is not a good backdrop as inflation ticks higher in China, with the Consumer Price Index up by 2.7% in July and prices at their highest level in two years.

Just as Beijing is struggling to manage a real estate implosion that threatens to take down 29% of GDP along with it, growing protests against banks freezing withdrawals and refusal to pay mortgages on uncompleted projects, pork buns are now more expensive than ever.

Pork prices surged an eye-watering 20.2% according to the National Bureau of Statistics, even as producer price inflation slowed to 4.2% in July, from 6.1% in June, on the back of weaker commodity prices.

Unlike Europe and the U.S., consumer inflation in China has been relatively benign this year as strict Covid restrictions and sporadic outbreaks curbed consumer and business spending.

Zero-Covid lockdown policies, sparked by sporadic virus flare-ups, along with slowing global demand and an ongoing real estate crisis have kept China’s economic recovery fragile, with factory activity unexpectedly shrinking last month and appetite for property continuing to wane.

Rising pork prices, the staple meat of Chinese, is likely to lead to growing discontent with Chinese policymakers, and Chinese who are becoming increasingly vocal about the social compact that they had maintained with the Communist Party for decades.

With inflation likely to rise past 3% in the coming months, thanks to a low base and a lift from pork prices, Beijing will be hopeful that weak domestic demand will provide plenty of headroom for more accommodative policy to cater for a rapidly slowing economy.

With economic prospects declining, a growing number of unemployed and underemployed graduates putting pressure on Beijing to act, July’s inflation, driven largely by gains in the price of pork, fresh vegetables and other food items, is likely to make matters worse as the Communist Party looks to usher in an unprecedented third term for President Xi Jinping.

In contrast, the median estimate for inflation in the U.S. suggests softer headline inflation of 8.7% in July, compared with the 9.1% recorded in June, but still well above the U.S. Federal Reserve’s target and putting continued pressure on policymakers to tighten.

China on the other hand has some room to continue loosening conditions and the divergent monetary policies of the world’s two largest economies could see the yuan weaken further versus the dollar.

3. Bitcoin Erases Recent Gains Ahead of Key U.S. Inflation Data

• Bitcoin pulled back to trade at just a hair over US$23,000 into the week, taking along a slew of other cryptocurrencies with it, including Ether, Solana and Cardano.

• If inflation is higher than forecast, or worse, more than 9.1%, then Bitcoin bulls should brace themselves for a bout of battering.

Traders are taking some money off the table as they sit on the sidelines ahead of a key U.S. inflation data report due out later today, and which will likely set expectations for rate hikes next month by the U.S. Federal Reserve.

After soaring to as high as US$24,200 last week, Bitcoin pulled back to trade at just a hair over US$23,000 into the week, taking along a slew of other cryptocurrencies with it, including Ether, Solana and Cardano.

Bitcoin’s rally stalled ahead of CPI data being released by the U.S. Department of Labor, but if price pressures are showing signs of easing, the benchmark cryptocurrency could possibly sustain a push over US$24,000, a key level of resistance.

Media economist estimates for July inflation suggest that CPI data is likely to come in at 8.7%, down from the 9.1% printed in June, but still well off the Fed’s 2% target.

If inflation is higher than forecast, or worse, more than 9.1%, then Bitcoin bulls should brace themselves for a bout of battering.

However, that outcome seems unlikely.

There are signs in the U.S. that inflation may already have peaked, with benchmark oil prices having traded durably below US$100 for weeks now and a gallon of gasoline well below US$5, which should help price pressures.

Wheat futures have also fallen significantly, as have a slew of other commodity prices, now down from their all-time-highs.

At least part of Bitcoin’s ascent can be put down to excessive levels of liquidity in the system as well as depressed yields, and the Fed flooding the markets with money may have caused cryptocurrencies to surge a lot more than deserved.

Nevertheless, Bitcoin continues to trade above several closely-watched price levels and July was the best month for the cryptocurrency since October 2021.