Dow consolidates prior to US CPI tomorrow

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In terms of economic data out of the US, there were preliminary readings out of UoM (University of Michigan), and it showed consumer sentiment improve from 64.9 to 66.4, a level unseen since the start of last year. Of importance were consumer inflation expectations that remained unchanged for the longer-term five-year horizon but not so for the 12-month rising noticeably from 3.9% to 4.2%.

The weekly unemployment claims showed initial claims a slight miss but still sub-200K in what are yet to digest layoffs that’ll take time to translate into higher claims, continuing claims also a miss and edging a bit higher.

In central bank speak, a couple of FOMC (Federal Open Market Committee) members whereby Harker said 25bp can “get inflation under control without doing undue damage to the labor market” and not expecting rate cuts this year, Waller warning on cryptocurrencies.

Key indices out of the US finished lower with the tech-heavy Nasdaq 100 underperforming this time around (and more so both small-cap Russell 2000 and mid-cap S&P 400).

Over in the bond market, Treasury yields finished the week notably higher after weeks of successive losses/limited gains, naturally taking them higher in real terms, and so too breakeven inflation rates, with market pricing (CME’s FedWatch) for future rate hikes out of the US Federal Reserve (Fed) fully priced in on 25 basis points (bp) from their March meeting with a tiny minority venturing into 50bp, with focus more on their May meeting where it’s heavy majority on another hike of the same magnitude.

As for the week ahead, the big one is tomorrow with US Consumer Price Index (CPI) readings for the month of January where expectations are it’ll be growth in its month-on-month (m/m) reading of 0.5% after a -0.1% print last time around for December. Its core is expected to rise by 0.4% from 0.3%, and year-on-year (y/y) readings both headline and core are expected to drop but remain well above the central bank’s target.

Should it be higher than expected and/or ignite fears of reacceleration in pricing and we can expect changes in market pricing of central bank hawkishness especially given what has been strong data out of the labor market giving them the margin to do so.

Producer prices will be released on Thursday where it too is expected to show m/m growth after the contraction prior, and trade pricing data will be released on Friday where import prices suffered a surprise and unwelcome m/m increase last time around. Pricing aside, we’ve got retail sales on Wednesday after a 1.1% contraction prior, industrial production where it’s been three consecutive negative readings and the usual weekly oil inventory figures after last week’s surplus.

Expect some attention to be on housing, not due to the weekly Wednesday mortgage applications out of MBA after growth last time around, but the items released thereafter including NAHB’s housing market index which managed to improve off the lows but remain well beneath 50 signifying a negative outlook, and Thursday’s building permits and housing starts where it’s generally been a story of consecutive lower m/m prints.

Dow Technical analysis, overview, strategies, and levels

Another week where prices finished not far off from where they started and failed to reach their previous weekly 1st levels keeping both conformist and contrarian strategies lacking a trigger. Prices are no longer above all its main short-term moving averages in both weekly and daily time frames, and there’s been a negative DMI (Directional Movement Index) cross occurring in the latter.

As for strategies on the daily time frame (where the overview is consolidatory but lacking most of the weekly’s positive technical bias), Thursday's highs were beneath its daily 1st Resistance level, and Friday's lows went past its 1st Support level's S/L offering more for contrarian sell-breakouts before the recovery gave conformists another chance.

But while some technical indicators might say consolidatory, a technical triangle is forming pointing to a break meaning contrarian breakout strategies shouldn’t be ruled out, especially with a fundamental item tomorrow that could be the trigger.

IG client* and CoT** sentiment for the Dow

In sentiment, retail trader bias starts off heavy sell at 65%, but intraweek got closer to the middle. It’s majority short amongst them when it comes to most of the main indices, the exception being the Nasdaq 100 where it’s slight buy 53%. Institutional sentiment is from two weeks prior as the latest CoT reports out of the CFTC have been delayed.

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.