Dow: little changed as markets await debt ceiling updates

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There’s been plenty of central bank speak to digest as of late.

1. The Federal Reserve’s Jefferson on inflation too high even if slowing though citing the monetary lag effect
2. Logan that it’ll be down to upcoming data releases on whether it’s “appropriate to skip a meeting” and that as of yet “we aren’t there yet.”
3. Bullard that slow progress on inflation “may warrant taking out some insurance by raising rates somewhat to make sure that we really do get inflation under control.”
4. Kashkari “open to the idea” of pausing in June and moving “a little bit more slowly from here.”
5. Chairman Powell avoiding any hints regarding the June decision and saying that what has occurred in the banking sector “are contributing to tighter credit conditions and are likely to weigh on economic growth, hiring and inflation” and rates “may not need to rise as much as it would have otherwise to achieve our goals.”

The debt ceiling and US home sales

On the fiscal front it was the halting and resumption of negotiations on raising the debt ceiling that kept market participants nervous, with a meeting between US President Biden and House Speaker McCarthy expected today after their call yesterday.

In terms of economic data late last week, there was more housing data to digest.

Existing home sales for April showed a month-on-month (m/m) contraction again, worsening to -3.4% with a 4.28m print. This figure is approximately a million off the pre-pandemic average. Additionally, the latest manufacturing survey out of the Philadelphia Fed for this month remained in the red but showed improvement, moving from -31.1 to -10.4.

Furthermore, weekly claims surpassed estimates, coming in at 242K, and there was a drop in continuous claims to beneath 1.8m.

Key indices

Key indices finished the week higher with clear outperformance for the tech-heavy Nasdaq 100 (US Tech 100), and banking ETFs undoing losses from the week before.

Treasury yields were in for an increase week-on-week (save for the one-month) and taking real yields higher with them, market pricing (Refinitiv) showing an ongoing minority on one last 25bp (basis point) rate hike over the next three meetings out of the US Federal Reserve, and via slight majority the first rate cut from November onwards.

The week ahead

As for the week ahead, we'll have to go in reverse if we're looking for impacting economic data out of the US (as always, any updates on the debt ceiling drama are a key factor for risk and more so if a vote can be held).

Friday's PCE (Personal Consumption Expenditures) pricing readings for April are expected to show m/m growth of 0.4% both overall and at its core, and a drop in the year-on-year (y/y) headline to beneath 4%, but where its core is expected to remain a problem and could be in for an increase from the 4.6% figure for March.

Durables for the same month will be released at the same time after strong headline growth last time around while gains at its core that weren't notable. There's also personal spending forecast to rise 0.4%, and personal income by the same amount.

First quarter GDP (Gross Domestic Product) will be released the day before, but the downside surprise of 1.1% (roughly half expectations) in its advance reading at the end of last month has already occurred (Atlanta Fed's GDPNow estimate for this quarter at 2.9%), with more housing data only this time anticipating slight growth in pending home sales after a big drop of 5.2% last time around, and the weekly claims.

Minutes from the latest FOMC (Federal Open Market Committee) meeting will be released Wednesday night for any further hints of whether we’re at the peak as markets have been consistently trying to price in.

Preliminary PMIs (Purchasing Managers’ Index) will be released tomorrow where expansion is expected for the services sector but less optimistic for the manufacturing sector, a similar theme expected for most globally.

Dow technical analysis, overview, strategies, and levels

Last week was relatively calm with the action within its previous weekly 1st levels failure to trigger a play for both conformist and contrarian strategies.

Zooming into the daily time frame and Thursday's 1st Resistance level held but only after incorporating Friday's intraday highs, conformist sell-after-reversals winning out there on the pullback thereafter (overview there consolidatory so conformist on reversal, here conformist on significant reversal).

IG client* and CoT** sentiment for the Dow

As for sentiment, CoT speculators are still majority to the sell side here and have raised that short bias to a heavy sell 65% (longs -389, shorts +1,767). They are majority short S&P 500 (74%) and Russell 2000 (66%) while majority buy the tech-heavy Nasdaq 100 (58%).

Retail traders are also majority short but in slight sell territory at 54%, moving away from the middle given they were at short 51% at the start of last week.

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.}