Dow: Futures lower after suffering a red week

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Digesting significant labour data

There was plenty of labour data to digest late last week.

Here are some highlights:

Friday’s Non-Farm Payrolls (NFP) finally showed a miss with a 209K reading for June after fourteen consecutive beats. It also suffered lower revisions and the unemployment rate dropped to 3.6% from 3.7%, but the underemployment rate rose from 6.7% to 6.9%. Wage growth month-on-month (m/m) was slightly above estimates at 0.4%, and year-on-year (y/y) it stood at 4.4%. Labour force participation remained unchanged at 62.6%, as did the employment-population at 60.3%.

The day before, Challenger’s job cuts for the same month were a much smaller 25.2% after seven months of relatively heavy readings. The weekly claims were nearly as anticipated for initial at 248K, while continuous dropped to 1.72m. ISM’s services data showed its employment component going above 50 to a healthier 53.1 after falling into contraction back in May. ADP's estimate shocker of 497K vs. 226K expectations sent bond yields surging.

Market reaction to labour data and outlook for Federal Reserve rate hike

This sent the 2-year intraday above 5% on Thursday but later fell back beneath and more so after the NFP release. Overall, Treasury yields finished the week higher except for a couple parts on the shorter end. They were stronger in real terms, inversions improved off recent lows, and breakeven inflation rates changed little. Markets are now close to fully pricing in a 25bp (basis point) rate hike from the US Federal Reserve (Fed) when it meets later this month.

Weekly performance of key stock indices and volatility index

Key stock indices finished the week in the red with the losses lighter for tech and harsher for Europe. The VIX ended sub-15 after experiencing intraweek volatility but the MOVE had a bigger change, ending above 130.

Expectations for upcoming CPI readings and other economic data

The week ahead holds significant US data. The real standout is this Wednesday’s CPI (Consumer Price Index) readings for June. Expectations from the Cleveland Fed's inflation 'nowcasts' predict a y/y drop in the headline reading from 4% to 3.2%, and m/m growth of 0.4% with its core at 5.1% and 0.4% respectively. However, these numbers are expected to rise in August to a 3.6% headline y/y when July’s figures are released.

Focus on producer prices, trade pricing data, and consumer sentiment

More pricing will be on offer thereafter with producer prices for the same month. The last reading showed a lower y/y figure both headline and core. Trade pricing data on Friday will also be important, as last month's readings were negative for both import and export prices. The preliminary numbers from the University of Michigan (UoM) will be closely watched, given the significant decline in consumer inflation expectations a month ago that has yet to translate into significantly improved consumer sentiment.

Earnings reports and other economic indicators

In other news, we’ve got consumer credit data for May. This has been hovering closer to pre-pandemic highs recently. NFIB’s small business index will be of interest to those trading small-cap companies. We will also get the usual weekly readings on energy, mortgage applications, and claims. Furthermore, there’s the second quarter's earnings, with plenty of financial heavyweights like JPMorgan Chase, Citigroup, Wells Fargo, and BlackRock releasing reports this Friday.

Dow technical analysis, overview, strategies, and levels

Consecutive declines once more are blurring the overview on the daily time frame. It's been shifting between 'bull average' and 'cautious consolidation'. In the shorter-term time frame, contrarian sell-breakouts have been winning out. Lack of a trigger for conformist buy-after-significant reversals off Thursday's 1st Support level shows the lack of a reversal.

For this longer-term weekly time frame, prices closed beneath its previous weekly 1st Support level. This provided offerings for conformist buy-fade strategies. The technical bias remains positive despite a couple of at-risk technical indicators shifting.

IG client* and CoT** sentiment for the Dow

As for sentiment, the heavy sell 72% amongst retail traders at the start of last week has since dropped to 55% at the start of this week suggesting a bit of range-trading at these levels for a decent portion. There’s also been a drop in the sell bias amongst CoT speculators, from 66% to 61% according to the latest release on an increase in long positions by 3,194 lots and a simultaneous drop in shorts by 2,646.

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 today morning 8am for the outer circle. Inner circle is from the previous trading day.
**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.