Dow hardly swayed ahead of more central bank speak this week

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There was plenty of central bank speak late last week to digest.

With members out of the US Federal Reserve (Fed) including Bostic believing “that 75 to 100 basis points of additional tightening will be warranted” but ready to “move away” from 75bp this December.

Collins citing monetary policy in a “different phase”, Bullard that “the policy rate is not yet in a zone that may be considered sufficiently restrictive” with “only limited effects on observed inflation” thus far but where “market pricing suggests disinflation is expected in 2023”, and Kashkari wanting evidence “inflation has at least stopped climbing” before halting rate hikes.

But otherwise, there was plenty of economic data out of the housing sector.

It showed building permits for the month of October beat estimates with a 1.526m reading but falling by 2.4%. Housing starts for the same period were also better than expected but it too (once more) suffering month-on-month (m/m) contraction of 4.2%, and existing home sales in for its ninth consecutive drop, this time from 4.71m to 4.43m in what was a -5.9% m/m change.

Manufacturing data didn’t impress, Philly Fed dropping from -8.7 to -19.4 and that of the Kansas Fed rising but still negative at -10.

In all, key US indices were in for a slight red weekly finish, and over in the bond market saw Treasury yields mixed by the end of the week with a higher finish on the shorter end and a red one for the further end.

In real terms little changed for the 20 and 30Y while closing higher for those beneath it, breakeven inflation rates enjoyed a noticeable drop, and market pricing (CME’s FedWatch) is still set for a 50bp (basis point) rate hike with a small minority venturing into 75bp territory in the Fed’s December meeting.

It is a close coin toss for February on 25 to 50bp, but a terminal range above 5% winning out thus far.

As for the week ahead, there isn’t much to brag about early on, with the bulk of the items on Wednesday where plenty of preliminary manufacturing and services PMIs (Purchasing Managers’ Index) will be on offer.

Expectations are we’ll see contraction for both sectors for plenty of regions, and for the US manufacturing to potentially fall out of expansionary territory even if not hit as hard as services.

Durables have been disappointing as of late and estimates for the month of October are pointing to small growth once more but for its core which excludes autos to contract.

There will also be more housing data that day with new home sales and the weekly mortgage applications, and the revised figures for UoM’s (University of Michigan) consumer sentiment and inflation expectation readings, both suffering in preliminary readings with a drop for the former and slightly higher for the latter in both one-year and five-year horizons.

Thursday is a holiday but expect the attention the day after to be on the status of the consumer as retailers launch their “Black Friday” sales and its implication for what has been a battered consumer discretionary sector.

Fed member speak has been relatively cautious as of late though doesn’t come as a surprise given they wouldn’t want any serious positive risk-related moves that might give future inflationary readings a push, and we’ll get minutes from the latest FOMC meeting on Wednesday.

Dow Technical analysis, overview, strategies, and levels

The moves last week lacked enough action to get prices to weekly 1st levels and failed to trigger a play here, while on the daily time frame Thursday's 1st Support level managed to hold offering far more for conformist buy-on-reversals there than contrarian sell-breakouts with the overview conflicting between the two time frames as stalling bull on the short-term daily and on-the-verge-of-shifting bear average here.

IG client* and CoT** sentiment for the Dow

In sentiment, CoT speculators reduced longs by 3,124 lots and was larger than shorts down by 1,991 and pushing majority short bias amongst them from 58% to 63%.

They are also majority short in the S&P 500 (64%), Russell 2000 (71%), and Nasdaq (52%).

Retail trader bias is still heavy to the sell side here and starts off this week at a higher 72% compared to last week's 70%.

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.