Dow futures point lower following Friday’s lack of a Fed pivot

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There were items updated on multiple fronts last week, in central bank speak the US Federal Reserve (Fed) Chairman Powell in his Jackson Hole speech saying that the restoration of price stability “will likely require maintaining a restrictive policy stance for some time” with history cautioning “strongly against prematurely loosening policy” reinforcing the ‘higher for longer’ narrative and forcing markets to reprice 2023 rate cuts, and sending equities into reverse with key indices suffering losses that undid gains made since the start of the month.

Pricing data was another crucial item, PCE (Personal Consumption Expenditures) for July showing an increase y/y (year-on-year) of 6.3% that fell well short of 7.4% estimates, with m/m (month-on-month) down -0.1% from 0.6% growth prior. Its closely watched core slowed to 4.6% y/y from 4.8% in its previous reading for the month of June, and so too m/m from 0.6% to 0.1% with both lighter than expected.

Expectations were for growth in personal income to best that of personal spending, and the net result showed that to be the case but both dropped to 0.2% and 0.1% respectively from 0.7% and 1% prior. We also got the revised figures out of UoM (University of Michigan), whereby consumer inflation expectations dropped to 4.8% for the 12-month and five-year unchanged at 2.9%.

We did get preliminary second quarter GDP (Gross Domestic Product) the day before that, with a contracting reading of -0.6% (price index at 9%) even if officials have been trying to avoid classifying consecutive contractions as a recession.

In all, it was a week of red for the stock market, and bond market yields finished mostly higher save on the further end meaning worsening yield spreads, in real terms the 5Y, 7Y and 10Y yields finished at the same level. There are still a couple of key items to contend with between now and the September Fed meet, and thus far post-Jackson Hole we’ve seen market pricing of rate hikes majority on 75bp (basis points) when they do meet next month and a higher likelihood of getting a peak 3.75-4% target.

As for the week ahead, it’s packed with more items, and as is usually the case isn’t on offer today in what is another light start from the economic calendar with a few items out of the US that includes Fed speak. Employment will continue to take a big chunk of the attention, with job openings tomorrow, ADP’s non-farm estimate returning this Wednesday, Challenger’s job cuts and unemployment claims on Thursday, and leading up to the market-impacting Friday’s Non-Farm Payrolls for the month of August.

Expectations are for a roughly 300K increase, though it’ll be interesting to see what the household survey has to say and the composition of any increase between full and part-time workers. The unemployment rate is forecast to remain at 3.5% and wage growth to rise m/m by 0.4%. Manufacturing PMIs will be released on Thursday.

Dow Technical analysis, overview, strategies, and levels

Its previous weekly 1st Support level initially held aiding contrarian buy-on-reversals in this time frame where the overview is 'consolidation - volatile' (though with the upper end of its very wide bear trend channel holding can also be taken for bear average), but Friday's plummet took it past the level giving conformist sell-breakouts the edge, with it shifting the overview on the daily time frame where a negative DMI (Directional Movement Index) cross occurred there again and shifting a couple technical boxes in the shorter-term time frame into the red (conformist winning on Thursday, would have failed Friday).

IG client* and CoT** sentiment for the Dow

CoT speculator bias has moved closer to the middle and at slight sell 54% (longs up 1,131 lots, shorts declining by 54), while retail traders have shifted from heavy sell 70% to the middle.

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.