Dow: US inflation expectations surge as tech stocks soar

Rising inflation expectations

There was little economic data out of the US to digest late last week. Preliminary figures from the University of Michigan showed consumer inflation expectations rising further, reaching 4.4% for the 12-month period and edging up to 3.2% for the five-year period. However, consumer sentiment dropped to 60.4, reflecting a pessimistic outlook.

Tech outperforms, small and mid-cap stocks decline

Key large-cap stock indices finished the week slightly higher, with the tech-heavy Nasdaq 100 posting better gains. In contrast, the small-cap Russell 2000, which had outperformed the previous week, retreated, as did the mid-cap S&P 400.

In the bond market, Treasury yields remained relatively stable week-on-week, with a slight upward trend in real terms. Yields saw a notable increase last Thursday following hawkish comments from Federal Reserve (Fed) Chairman Powell and a weak 30-year auction.

Insights from other Fed members

Following Chairman Powell's comments, other Fed members expressed their views. Logan discussed the primary economic challenge, emphasizing high inflation rather than a deep recession. He highlighted the need to reduce economic stimulus gradually. Daly commented on monetary policy, stating that it was in a favorable position, with positive news regarding pricing, although it was too early to declare victory.

Market pricing, as per CME's FedWatch, suggests a roughly 50/50 chance of a rate cut from current levels in June of next year, with a clearer possibility in July.

The week ahead: key data releases

The week ahead starts with relatively light economic data from the US but quickly gains momentum with the release of the Consumer Price Index (CPI) for September. Expectations indicate a year-on-year (y/y) increase of 3.3%, down from 3.7% in September, and a month-on-month (m/m) growth of just 0.1%, with the core CPI (excluding food and energy) up 0.3%. Producer price data for the same period will be released on Wednesday, following a pattern of relatively modest y/y prints and volatile m/m figures. Additionally, trade pricing data is scheduled for Thursday.

Retail sector and housing focus

Retail sales data, which has shown consistent strength in recent reports, may indicate a contraction this time. The retail sector remains in focus with earnings reports from retail giants like Walmart and Target. Housing data from NAHB's housing market index, which has been increasingly negative, is also due on Thursday. On Friday, building permits and housing starts will be released, with both indicators hovering near pre-pandemic levels.

Fiscal front: averting a government shutdown

On the fiscal front, as we approach Friday's deadline to avert a government shutdown, market participants are closely watching for indications of a continuing resolution that would temporarily extend the budget battle. This comes as Moody's recently revised its outlook from stable to negative.

Dow technical analysis, overview, strategies and levels

On the weekly time frame, the lack of a clear play is evident, with price action within the previous weekly 1st levels, keeping both conformist and contrarian strategies restrained and key technical indicators unchanged. On the daily time frame, the overview aligns with the weekly analysis, but the issue of price-indicator proximity becomes more prominent.

Late last week, price action remained within Thursday's daily 1st levels, adding complexity to the shorter-term technical phase due to the indicators' susceptibility to shifts.

IG client* and CoT** sentiment for the Dow

As for sentiment, little change in price usually means little change in bias, and they’ve raised their heavy sell sentiment a couple notches higher to 67% at the start of this week from 65% from the start of last week. The latest CoT report hasn’t been released yet, and as a result the figures for institutional sentiment are from the week before.

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 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.}