Market update: Dow consolidates again despite hotter pricing data last week

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There was more pricing data out of the US to digest last week, with January export prices rising month-on-month (m/m) by 0.8% defying expectations of contraction while import prices were in line with forecasts at -0.2% (core imports up 0.2% from 0.4% prior), with year-on-year (y/y) readings that both dropped sizably from 5% and 3.5% to 2.3% and 0.8% respectively.

As for producer prices the day before, hotter readings with m/m growth overall at 0.7% instead of 0.4% and so too at its core with a 0.5% print instead of 0.3%, y/y drops for both (even if well above expectations) to 6% and 5.4% respectively. As for the housing sector, more data was released for the same month where building permits rising slightly to 1.34m but not housing starts down 4.5% to 1.3m, and NAHB’s (National Association of Home Builders) housing market index for this month still well below 50 even after improving to 42 from 35 prior.

Central bank speak included the Federal Reserve’s (Fed) Mester on “more work to do” in terms of restrictive monetary policy and that “above 5% and hold it there for some time” an unchanged view with a “compelling economic case” for 50bp (basis point) in its previous meet, continuity from Bullard on getting “sufficiently restrictive as soon as we could”, Bowman wanting “a lot more progress” in terms of reaching their objective, and Barkin that more rate increases will be required as “what you see is progress, but slow progress, you don’t see victory”.

When it came to key indices, it was largely about positioning after last week’s CPI (Consumer Price Index), and they finished little changed, the VIX closing near 20 and the MOVE index little changed week-on-week.

Over in the bond market, Treasury yields finished the week higher across the curve (with the two-year not far off November’s highs) and so too in real terms even if barely changed on the further end, and breakeven inflation rates averaging higher.

Market pricing (CME’s FedWatch) with regards to future rate hikes out of the US Federal Reserve are still fully priced in on a 25bp rate hike for March, nearly fully priced in on another of the same magnitude for May, and majority (but not heavily) pricing in one more thereafter.

As for the week ahead, a US holiday today means markets will be closed there and makes for what would have already been a relatively quieter session.

Preliminary manufacturing and services PMIs (Purchasing Managers’ Index) will be released tomorrow where both sectors have been suffering sub-50 contracting readings, and expectations are it’ll remain that way. More housing data will be on offer with existing home sales that have suffered eleven consecutive declining readings on the same day.

We’re expecting earnings from Home Depot and retail giant Walmart that’ll provide further insight into how the consumer is faring, new home sales hovering not far off pre-pandemic averages, and the weekly mortgage applications that last week suffered a drop.

Speaking of weekly data, the inventory readings out of API (American Petroleum Institute) and EIA (Energy Information Administration) will be pushed out a day due to today’s holiday.

Other items include preliminary GDP (Gross Domestic Product) for the fourth quarter after a respectable advance reading (and for this quarter Atlanta Fed’s GDPNow estimate at a healthy 2.5% in its latest reading) but of considerable interest both minutes from the latest FOMC (Federal Open Market Committee) meeting this Wednesday, and Friday’s Personal Consumption Expenditures (PCE) price indices, with expectations that the latter’s m/m core will increase by 0.4%, overall by a larger amount, and y/y to decline but remain well above the Fed’s target.

Dow Technical analysis, overview, strategies, and levels

Prices failed to reach their previous weekly 1st levels and meant a lack of a play for both weekly conformist and contrarian strategies, though keeping prices just above a key moving average in this time frame.

For the daily time frame, we saw moves where Thursday's 1st Support level held aiding conformist buy-after-reversal strategies (the overview in the shorter-term is consolidatory with prices above all its daily main long-term moving averages but beneath its main short-term ones and neutral key technical indicators otherwise), but Friday's intraday lows going past it and its S/L (Stop-Loss) offering limited profit-taking for contrarian sell-breakouts before prices closed above its daily 1st Support.

IG client* and CoT** sentiment for the Dow

And in sentiment, retail trader sell bias has fallen out of heavy sell territory despite the small change in price, at 62% at the start of this week from 65% last Monday. Institutional sentiment is from positioning late last month until the delayed CoT reports are released**.

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 but has been delayed for a few weeks and likely to start catching up this Friday which would result in updated institutional sentiment figures next Monday, and hence outer circle is from positions as of January 24, inner circle as of January 17.