Dow futures recover from gap lower ahead of elections and CPI

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Friday’s NFP (Non-Farm Payrolls) print showed a 261K increase for the month of October that bested expectations of roughly 200K (and a higher revision for September), but that reading aside.

There were more worrying items to contend with its household survey showing:

• a contraction of 328K
• the unemployment rate rose to 3.7% from 3.5%
• the underemployment rate rose to 6.8%
• labour force participation dropped to 62.2%
• the employment-population ratio also fell slightly at 60% (with a larger 0.4% decline unseen since the start of the pandemic for the 25-54 group to 79.8%)
• and y/y (year-on-year) wage growth fell to 4.7% from 5% last time around even as m/m bested estimates at 0.4%.

Trade prior showed its deficit worsen for September to -$73.3 billion, ISM’s (Institute for Supply Management) services a miss but still expansionary at 54.4 (new orders dropping to 56.5 but prices paid rising to 70.7 from 68.7 even if a miss, and employment a contracting 49.1).

In central bank speak there were Federal Reserve (Fed) policymakers taking into consideration smaller rate hikes here on out with a focus not on size but “how high”.

While it was a positive session on Friday for risk appetite, it was a red finish for the week for key US indices, and gaps lower this morning on key commodities on confirmation negating prior reports of China reopening.

Treasury yields finished the week higher across the curve with a pullback off intraweek highs more noticeable on the front end of the curve, December’s Fed meet the remaining majority 50bp (basis points) according to the latest probabilities and a terminal rate majority 5%+ next year.

As for the week ahead, the key item in terms of data is Consumer Price Index (CPI) readings for the US released this Thursday, and the one that has the power to falsify or reinforce any narratives financial market participants have been formulating on where central bank policy will go.

Expectations are we’ll get a y/y reading of 8% for the month of October from 8.2% prior, with a headline m/m (month-on-month) figure showing growth of 0.7% from 0.4%.

Removing both food and energy to focus on its core, and expectations are we’ll still see monthly growth to the tune of 0.5% not far off September’s reading, and so too core y/y at 6.5%, an added worry should the figure come close or worse (i.e., higher than expected).

We’ll also get preliminary consumer inflation expectations out of UoM (University of Michigan) the day after that, with a consumer sentiment number that while has improved from June’s lows, remains near worrying levels. And speaking of the consumer, September’s figure regarding consumer credit will be released tonight where it has continued to average above pre-pandemic levels sizably. Business and economic optimism reading from a couple of sources will be released tomorrow.

Expect the attention to be political though with Tuesday’s midterm elections in focus, and the implications should the results either in the House and/or Senate fall in line with forecasts that’ll result in difficulty passing legislation for the next two years (though hasn’t translated into a negative for stocks based on historical data).

Dow Technical analysis, overview, strategies, and levels

There might have been some on offer for weekly conformist sell-breakout strategies to move past its previous weekly 1st Support level, but it eventually holding meant more for contrarian buy-on-reversals.

On the daily time frame, Thursday's lows didn't reach its 1st Support level, but Friday's gains briefly went past its 1st Resistance which held offering more for contrarian sell-on-reversals than conformist buy-breakouts where the overview is 'consolidation - volatile' there.

IG client* and CoT** sentiment for the Dow

CoT speculators remain majority short here, but a rise in longs by 2,181 lots and a simultaneous drop in shorts by 655 lots has taken it from heavy sell at 65% to more moderate short territory at 58% (S&P 500 sell bias dropping from 66% to 62%, Russell 2000 to 63%, and Nasdaq 100 shifting from slight buy to majority short 55%).

Retail traders are still heavy on the sell side dropping week-on-week from 77% to 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 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.