Dow: Gaps lower following weekend geopolitical tension

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US labor market still showing strength

Late last week, several key developments unfolded in the US labour market, with the standout being the non-farm payrolls (NFP) report for September. The data revealed a remarkable growth of 334,000 jobs, nearly double what was anticipated, accompanied by substantial upward revisions totaling 119,000 jobs.

However, the household survey indicated weaker growth, leading to the unemployment rate holding steady at 3.8% instead of the expected drop to 3.7%. Additionally, the labour force participation rate remained at 62.8%, as did the employment-population ratio at 60.4%.

On the downside, wage growth fell short of expectations, with a mere 0.2% increase both month-on-month and year-on-year, resulting in a 4.2% figure. Notably, the previous day's figures for weekly claims exceeded estimates, with initial claims at 207,000 and continuous claims at 1.664 million, both lower than anticipated.

Fed members keeping the door open

Regarding central bank commentary late last week, Jerome Powell, the chair of the Federal Reserve Bank, observed that "wage growth is tempering a bit," while still emphasizing "a strong labor market." He emphasized the Fed's reliance on data but clarified that it's not solely dependent on individual data points.

In the same vein, Bowman stated that it would "likely be appropriate...to raise rates further." Daly advocated for "keeping an open mind" regarding a rate hike if there is a "deceleration of growth and inflation stall, activity begins to reaccelerate, or financial conditions reverse some of this tightening and loosen too much." Goolsbee expressed no surprise at "long rates coming up," and Barkin attributed it to stronger data and supply.

The week ahead

Looking ahead to the week, it's clear that we'll be focused on processing the geopolitical developments from the weekend, which have already caused oil prices to surge and equities to dip. We'll be closely monitoring any further escalations and their potential implications for ongoing conflicts.

The week starts with a US holiday today, although the stock market remains open while the bond market is closed. Tomorrow, we anticipate mostly low-impact data unless there are significant remarks from Fed members before the release of minutes from the latest FOMC (Federal Open Market Committee) meeting on Wednesday. The current narrative has revolved around emphasizing a 'higher for longer' stance on interest rates, with the peak of the current rate-hiking cycle not too far off.

Looking at the economic calendar, we have our eyes on pricing data for September. This begins with the Producer Price Index (PPI) on Wednesday, where last month's surprising monthly headline growth will be a focal point, while the core PPI has been closer to forecasts recently. Thursday brings the significant release of the Consumer Price Index (CPI) for the same period. Expectations are for 0.3% monthly growth in both headline and core CPI, with the year-on-year figure expected to dip slightly to 3.6%.

On Friday, we will receive trade pricing data and preliminary consumer inflation expectations from the University of Michigan (UoM). Consumer inflation expectations have been trending lower over the past year but remain not far from pre-pandemic averages.

Additionally, the financial sector will come into focus on Friday, with major players like JPMorgan Chase, Citigroup, Wells Fargo, and BlackRock set to report earnings. On the political front, a vote in the House for a new speaker is anticipated during the week.

Dow technical analysis, overview, strategies, and levels

We commence with the weekly timeframe, where the current perspective remains one of 'cautious consolidation.' Notably, the prior weekly 1st Support level effectively held, lending preference to prudent conformist buy-after-significant reversals. However, the situation differs on the daily timeframe observed late last week.

The 1st Support level on Thursday remained intact, while Friday's price action, following the release of the NFP report, witnessed highs reaching the 2nd Resistance level. Consequently, this favoured contrarian buy-after-reversals and buy-breakouts. Conversely, conformist sell-breakouts did not yield results.

In this context, the daily overview remains 'bear average,' yet the proximity between price and indicators could swiftly modify this narrative.

IG client* and CoT** sentiment for the Dow

As for sentiment, CoT speculators are pushing further into heavy sell territory, with an increase in longs by 1,243 lots easily outdone by a larger increase in shorts by 12,072. Retail trader buy bias starts off weaker at 58% despite the negative finish in price that usually causes long bias to increase. This may be due to buys wanting to close out on the lift off the lows from last Wednesday through Friday in the event its shorter-term bearish technicals gain more weight.

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 last 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.}