Dow: technical overview shifts for the shorter-term

Central banks mostly at the peak

The US Federal Reserve (Fed) and People’s Bank of China (PBoC) keeping rates on hold last Wednesday might not have come as a surprise, but it sure did for most of the others who took that route late last week.

Among the G10 announcing there was the Swiss National Bank (SNB) with a surprise ‘hawkish pause’ holding at 1.75% instead of raising to 2%, while the Bank of England also against forecasts with a split 5-4 decision to hold at 5.25% even if reiterating the “sufficiently restrictive for sufficiently long” narrative.

The Bank of Japan (BoJ) on hold of little surprise but not the dovish talk that came with it; Norge Bank raising it 25bp to 4.25% with a hawkish tilt adding in a “likely” additional one “most probably in December”, and Sweden’s Riksbank raising by the same amount to 4%.

In all, the theme was one of generally at or near peak rates, with the story mixed when it came to emerging markets as there was a hike from the Central Bank of the Republic of Turkey from 25% to 30%, a cut out of Brazil by 50bp to 12.75% as expected and signaling more, and a hold for South Africa at 8.25%.

Tested economic data, yields near the highs

Economic data last Friday was largely about global preliminary purchasing managers’ indexes (PMIs) for the month of September.

Data out of S&P Global showed manufacturing still in contraction even if improving to 48.9 for the US with an eye on services that managed to avoid a sub-50 reading but not too far off it at 50.2, and where it was still a story of ongoing contraction for both when it came to the Euro Zone and the UK.

As for Treasury yields, they finished the week higher, and market pricing (CME's FedWatch) keeping probabilities near the middle but slight minority on a hike out of the Fed in December/January, and the first rate cut from current levels in play in July of next year.

The week ahead

As for the week ahead, it’s empty in terms of central bank announcements among the majors, but has quite a bit in terms of data.

Approaching the end of it absent a positive update on the US fiscal policy front will keep market participants nervous on whether a government shutdown can be avoided even if with a band-aid (via short-term stopgap bill to buy more time to get an agreement).

There will be plenty of manufacturing data out of the Fed branches including out of Dallas today where consistent negative prints have been in store for the latter, out of its Richmond branch tomorrow where it has also been a long-term struggle to get back above zero, and out of Kansas on Thursday where its reading last month managed to emerge from contraction.

More housing data after last week’s mixed readings, with housing price data tomorrow out of Federal Housing Finance Agency (FHFA) and S&P/CS (S&P/Case-Shiller) and new home sales near pre-pandemic averages, the weekly mortgage applications the day after, and pending home sales on Thursday where it has managed to beat forecasts twice in a row and post positive m/m readings.

Final gross domestic product (GDP) figures for the second quarter will be released that day, though no one is worried about growth in the past nor current quarter.

Friday’s pricing data is expected to be the significant one, expectations that the personal consumption expenditures (PCE) price index will show strong m/m headline growth than core but year-on-year core dropping beneath 4%, and out of the University of Michigan (UoM) on whether the notable drop in inflation expectations for both 12-month and five-year in its preliminary release can hold.

Its consumer sentiment reading has been suffering as of late, though was less of a surprise given the price-sensitive survey, with the real worry any further significant disappointments when it comes to Conference Board's (CB’s) consumer confidence tomorrow.

Dow technical analysis

We got a close beneath its previous weekly first support level with little on offer for cautious conformist buys and more for contrarian sell-breakouts, the overview remaining a cautious one here on the weekly time frame with a negative Directional Movement Index (DMI) cross occurring.

It’s a tougher overview on the daily time frame with a shift from ‘cautious consolidation’ to 'bear average' following the moves late last week that caused a negative DMI cross there as well (follow-through in the past mixed on -DI to +DI proximity and oscillatory moves prior), though price-indicator proximity in the shorter-term can easily shift that narrative.

IG client* and CoT** sentiment for the Dow

IG client* and CoT** sentiment for the Dow

As for sentiment, there’s been a shift in retail trader bias week-on-week from majority short 58% at the start of last week to majority buy 55% at the start of this week.

But that hasn’t been the case for CoT speculators, as they are still in majority short territory and have raised their bias from 61% to heavy sell 66%, long positions dropping 3,772 lots and a simultaneous increase in shorts by 1,097.

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% at 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.}