Dow 30: Futures rise after a difficult week for risk appetite

NFP miss, tech in retreat, and FOMC members speak

The financial markets were already twitchy prior to the release of impacting labour data last Friday, and with fears of a slowdown rising and moving to engulf the labour market after July’s miss meant the figures carried extra weight. US Non-Farm Payrolls (NFP) for the month of August showed growth of 142K suffering another miss against roughly 160K expectations (as well as suffering lower revisions for both July and especially June), the unemployment rate though dropping a notch to 4.2% as expected while the U6 rose to 7.9%, while wage growth was slightly hotter than anticipated up 0.4% month-on-month (m/m) and 3.8% year-on-year (y/y). Other items included the participation rate holding at 62.7% and so too the employment-population rate at 60%.

Key equity indices were in for a pullback and the losses were led by tech. Treasury yields also fell though less so in real terms, and market pricing (CME’s FedWatch) fully pricing in a 25bp (basis point) rate cut out of the Federal Reserve (Fed) next week with a falling minority on the start being a larger reduction, but where the odds are better on a 50bp cut in November (via majority) and December (roughly a coin toss). There was the Fed’s Waller in favor of consecutive cuts if "the data supports" and so too if it "suggests the need for larger cuts", and Williams that it's "now appropriate to dial down the degree of restrictiveness in the stance of policy".

Week Ahead: CPI, PPI, and a couple key auctions

As for the week ahead, the notable one is the obvious one situated in the middle with CPI (Consumer Price Index) for the month of August expected to show headline growth of 2.6% y/y from 2.9%, but a struggle to move its core (which excludes food and energy) from 3.2%. As for the monthly figures, 0.2% for both. Producer prices will release on Thursday after what were contained m/m increases in July, while trade pricing and UoM’s (University of Michigan) preliminary figures for consumer inflation expectations will be on offer this Friday. Otherwise, it’s mostly low to mid-impacting items to digest, for the bond traders a couple key auctions and on the political front the presidential debate Tuesday night in the US.

Dow Technical analysis, overview, strategies, and levels

A tough week for risk appetite with price in retreat, with its previous weekly 1^st Support level initially holding favoring conformist buy-after-significant reversals before another move lower late last week that gave contrarian sell-breakouts the eventual win.

Most of its key technical indicators are neutral in the longer-term weekly time frame with price still above its main long-term weekly moving averages but not the case for all its main short-term ones, on the DMI (Directional Movement Index) front the +DI still above its -DI, and an ADX (Average Directional Movement Index) not in trending territory. The technical story is a struggle on the daily time frame but where it must contend with price-indicator proximity combined with the relative ease with which short-term technical indicators can shift, the overview there ‘consolidation – volatile’ compared to the weekly’s ’bull average’ where it’s still working within a rough wide bull channel.

IG client* and CoT** sentiment for the Dow

A significant pullback in price has led to a significant reduction in IG client sentiment, falling from an extreme buy 84% at the start of last week to a heavy 66% with the largest percentage moves occurring after last Tuesday and Friday’s price drops.

CoT speculators are still an opposite majority buy, and they’ve raised that net long bias in percentage terms by a couple notches to 61% due to a larger reduction in shorts (by 2,439 lots) over longs (by 2,227), though any further pullback in price will likely result in a drop in net long bias based on historic momentum correlation.

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.