Dow futures dip, looks to CPI and earnings in the week ahead

Hawkish central bank policy and rising fears on the economic front usually translate into dented economic data, and the labour market had been seen as the last bastion following tested readings in manufacturing with services by one estimate proving to be more resilient.

Friday’s Non-Farm Payrolls (NFP) reading for the month of September showed a decent 263K increase that wasn’t far off estimates with small revisions for past readings. The unemployment rate dropped from 3.7% to 3.5% (labor force participation dropping from 62.4% to 62.3%), the U6 underemployment rate dropping from 7% to 6.7%, the employment-population ratio unchanged at 60.1%, and wage growth up 0.3% m/m (month-on-month) as expected and a slight miss y/y (year-on-year) at 5%.

Also released later that day was consumer credit change for the month of August showing a sizable $32.2billion increase with its previous revised higher to $26.1billion, in all still above pre-pandemic averages. As for central bank speak, we heard from the Federal Reserve’s (Fed) Williams on the need to raise rates “above where inflation is” and sees inflation “coming down pretty significantly next year”.

For the stock market, hopes of a central bank pivot from dismal manufacturing and job openings earlier last week were dashed with a finish for key indices that witnessed a sizable pullback off intraweek highs, in all failing to undo current bearish technical overviews and where higher oil prices will only reinforce sticky inflation narratives.

Bond market yields finished the week higher across the curve, in real terms ending further in positive territory with the 5Y higher than those of longer duration, yield inversions little changed, and breakeven inflation rates slightly higher. The next FOMC (Federal Open Market Committee) meeting is at the beginning of November, and market pricing following the latest labour data has shown it’s well into the majority for a 75bp (basis point) hike, and also a majority on reaching 4.5-4.75% by early next year.

As for the week ahead, little is on offer today with a holiday for the US that’ll keep the bond market closed. It’ll pick up slightly tomorrow with several usually low-impacting items out of the US, a notable item business plans for raising prices in the near future. It starts to pick up on Wednesday onwards, and not just because of minutes out of the latest FOMC meeting but because attention will shift towards crucial pricing data.

Producer prices will be released the same day with expectations we’ll see its y/y figure for September show growth of 8.3% from 8.7% in its previous reading, and m/m 0.2%. The big one will be on Thursday, with Consumer Price Index (CPI) that disappointed for August expected to show a 0.2% increase m/m for September, and y/y to drop to 8.1%, with its core which excludes energy and food at 0.5% and 6.5% respectively.

Trade pricing data will be on Friday and so too preliminary consumer inflation expectations out of UoM (University of Michigan), otherwise retail sales are a significant one to note though given it doesn’t adjust for inflation means any drop overall would carry greater consequence, expectat

Dow Technical analysis, overview, strategies, and levels

Its previous weekly 1st Resistance level might have initially held to offer a little to conformist sell-on-reversals, but the moves thereafter took it past its previous weekly 2nd Resistance aiding contrarian buy-breakouts and stopping out conformist reversals, with the notable drop last Friday putting daily conformist sell-breakouts in the driver's seat after contrarian buys got some returns on the initial partial lift-off of Thursday's lows.

The technical overview hasn't changed in either time frame, the large channel (and smaller one for the daily time frame) keeping it bear average for both.

IG client* and CoT** sentiment for the Dow

CoT speculators remain heavy sell here and have taken it a notch higher to 70% on a drop in longs by 561 lots and a larger drop in shorts by 1,926 lots, and are also short S&P 500 (36%), Russell 2000 (75%) and Nasdaq 100 (51%). As for retail trader bias, slightly higher since the start of last week and in heavy buy territory at 66%.

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 last Monday.
**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.