Dow: Futures higher after US government shutdown averted

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Data digest

There was plenty of pricing data to digest last Friday, with the US PCE (Personal Consumption Expenditures) price index for August showing year-on-year (y/y) growth of 3.5% for its headline. The month-on-month (m/m) growth of 0.4% was slightly below estimates. The y/y core reading (which excludes food and energy) fell to 3.9%, as expected, with m/m growth also slightly below forecasts at 0.1%.

The revised figures for consumer inflation expectations from UoM (University of Michigan) showed the 12-month and five-year expectations failing to meet preliminary prints. Consumer sentiment was also slightly better but still well below pre-pandemic averages.

Fed speak and rate hike likelihoods

There was more central bank discussion late last week, with Federal Reserve’s (Fed) Williams stating that the peak level had been reached and a restrictive monetary policy stance was needed for some time. Goolsbee cautioned against relying on historical correlations to avoid overshooting and causing an unnecessary downturn.

Market pricing (CME’s FedWatch) remains close to the middle, with a significant minority expecting another rate hike from the Fed in December. There is a slight majority favoring a rate cut in July of next year from current levels, all aligning with the Fed’s ‘higher for longer’ narrative.

Government shutdown averted... again

Over the weekend, a government shutdown in the US was avoided with a 45-day stopgap bill, although this move has potential implications for Speaker McCarthy from members of his own party. This helped key US stock indices gap higher this morning, although concerns about rising bond market yields persist.

Week ahead

Looking ahead to the coming week, we have PMIs (Purchasing Managers’ Index) releases from various regions, following China’s release over the weekend. The US is also expected to report PMI data, which is likely to remain in contracting sub-50 territory.

Services PMIs on Wednesday will be closely watched, with some uncertainty as the preliminary print was just 50.2. There are a few other low-impact items on the US economic calendar, including weekly readings.

However, the focus will mainly be on the US labor market, with job openings data due tomorrow, ADP’s non-farm estimate on Wednesday, weekly claims, Challenger’s job cuts, and finally, Non-Farm Payrolls on Friday. Expectations are for slower growth in September, along with a slight drop in the unemployment rate to 3.7%, mainly due to a higher labor force participation rate.

Dow technical analysis, overview, strategies, and levels

The previous weekly 1st Support level held, and with the current overview still 'cautious consolidation' in this time frame, conformist buy-after-significant reversals are favored.

On the daily time frame, where the overview is a 'bear average,' Thursday's 1st Resistance level was reached, but there was no trigger for conformist sell-after-significant reversals until Friday's intraday highs. The pullback favored conformists over contrarians in this scenario.

IG client* and CoT** sentiment for the Dow

Retail traders start off the week with a push closer to heavy buy territory, from 55% last Monday to 63%. CoT speculators are still on the other side, and have raised their sell bias to a heavy 69% (longs dropping 779 lots, shorts up 3,070).

Dow chart with retail and institutional sentiment

• _{*The percentage of IG client accounts with positions in this market that are currently long or short. Calculated to the nearest 1%, as of the start of this week for the outer circle. Inner circle is from the start of the previous week.}
• _{**CoT sentiment taken from the CFTC’s Commitment of Traders report, outer circle is latest report released on Friday with the positions as of last Tuesday, inner circle from the report prior.}