Dow: Strong weekly finish thanks to last Thursday’s US CPI release

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There have been plenty of technical shifts on the shorter-term daily time frames for key indices following the moves late last week but translating into lighter shifts on the weekly time frame for some, in all though positive for those priced against what has been a retreating greenback with crypto the obvious exception following the FTX fallout.

It’s been about digesting a few items chief amongst them the latest pricing data out of the US, where last Thursday’s CPI (Consumer Price Index) readings were all below estimates, y/y (year-on-year) growth of 7.7% for the month of October beneath 8% expectation and from September’s 8.2%, m/m (month-on-month) 0.4% instead of 0.6% estimates, and removing food and energy showing a rise of 0.3% m/m, and y/y 6.3% with both also lighter than expected.

The response even if just a data point that has yet to show a consistent trend to cause a US Federal Reserve (Fed) pivot resulted in serious risk-on moves with indices in this report (save one) enjoying strong gains, bond market yields were in for a clear finish lower that took real yields lower with it by the close, market pricing for future Fed rate hikes (CME’s FedWatch) now pricing in by a healthier majority a 50bp rate hike in December from what was roughly a coin toss between it and 75bp, no longer a majority on 50bp for February, and no longer anticipating a 5%+ terminal range.

Making the latest gains on the risk front stick will prove to be another matter especially if it forces the US central bank into more hawkish talk to prevent the dollar from weakening and price gains in commodities that could push future CPI prints higher, in central bank speak the Fed’s Waller saying they’re still “a ways off” when it comes to the peak, that “we’re not softening…and start paying attention to where the endpoint is going to be” with the current annualized inflation rate “enormous”, and markets “way out in front”.

Other data to digest wasn’t as positive, as Friday’s preliminary consumer inflation expectations from UoM (University of Michigan) for this month showed a slight rise to 5% for the 12-month horizon with the five-year horizon also a notch higher at 3%, consumer sentiment dropping to 54.7 from 59.9.

As for the week ahead, we get more pricing data out of the US with the Producer Price Index (PPI) tomorrow where the headline reading for the month of October is expected to show y/y growth of 8.3% from 8.5%, with m/m growth 0.5%, and its core to experience a 0.4% increase for the same period and 7.2% y/y.

Export prices declined for the month of September and to larger extent import prices, last month’s figures for both were on offer on Wednesday where ongoing m/m contractions are expected.

Retail sales will be on offer that day, and hopes are it can rise after failing to offer growth last time around (it isn’t adjusted for inflation so in real terms has been in decline). And speaking of sales, earnings from US retail giants such as Walmart and Target over the next two days, and so too home improvement companies with Home Depot and Lowe’s.

There’s been an additional focus on the latter due to what’s been occurring in the housing sector.

There are several items on offer in terms of data with NAHB’s (National Association of Home Builders) housing market index that’s suffered four consecutive worse-than-expected readings and well below 50, building permits that avoided contraction in September.

But the same couldn’t be said for housing starts, existing home sales that have suffered eight successive months of retreat, and the weekly mortgage applications out of MBA where negative readings have been the norm due to the spike in mortgage rates.

Dow Technical analysis, overview, strategies, and levels

We're just out of the long-term bear trend channel, with prices not far off the upper end of the weekly band, while the daily time frame is a contrasting stalling bull trend where all its daily technical boxes are flashing green.

Such a difference in technical overviews between the two-time frames rarely persists for long, with little needed to shift it in this time frame.

Last week it was conformist sell-after-significant-reversal initially winning out earlier in the week when its weekly 1st Resistance level held before Thursday's CPI release caused prices to break past it giving contrarian buy-breakouts the win.

On the daily time frame, conformist buy-breakouts won out as Thursday's 1st and 2nd Resistance levels were breached as the overview shows a stalling bull trend.

IG client* and CoT** sentiment for the Dow

As for sentiment, still heavy to the sell side for retail traders and starting off at 70% this week from 66% at the start of last week. The CoT report has been delayed until tonight and as a result, institutional sentiment figures will be updated in tomorrow’s Daily Market Report.

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.