Market update: Dow futures hold on to most of Friday’s gains

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A week without another bank failing was seen as a positive for the financial markets, and it also helped that last Friday there were a couple of data points of optimism, with the narrative shifting to energy early this morning.

That’s because of the surprise production cut from OPEC+ that’ll reduce output (aside from the 2m already in place) by over 1.1m barrels per day (bpd) starting from May until the end of the year, and that Russia’s previous voluntary cut of 500K bpd will also remain in place until the end of 2023, for a total drop of 3.6m+ bpd.

This comes at a time when the US can’t tap into its Strategic Petroleum Reserve as easily as before and thus far missing a chance to begin refilling within the intended $67-72 WTI range.

Futures are pointing slightly lower for key indices after what was a strong finish for the first quarter, the VIX back beneath 20 and a notable drop in the MOVE index from over 170 to under 140. Speaking of the bond market, Treasury yields finished the week little changed with losses on Friday before gapping higher this morning, but about the same in real terms with breakeven inflation rates moving higher.

Market pricing (Refinitiv) is moving from near the middle at the end of the week on getting one more 25bp (basis point) rate hike out of the US Federal Reserve (Fed) in their May meeting to a healthier majority, but should that occur and the majority on rate cuts starting from July onwards and more so towards the end of this year. That’s in defiance of FOMC (Federal Open Market Committee) member expectations that there won’t be a drop in interest rates in 2023.

In terms of data late last week, it was largely about pricing with the US PCE (Personal Consumption Expenditures) price index for February showing a month-on-month (m/m) increase of 0.3% with its core rising by the same amount, the latter slightly lighter than expected a positive for financial markets to latch onto.

The year-on-year (y/y) headline print dropped to 5% and from 4.7% to 4.6% when excluding food and energy both also beneath estimates a welcoming sight.

Revised figures out of UoM (University of Michigan) for March showed five-year consumer inflation expectations a notch higher at 2.9% but a 12-month fall to 3.6%, otherwise its sentiment reading falling to 62 is the obvious negative.

Personal income and spending showed small m/m growth, and the day before saw the final GDP (Gross Domestic Product) reading for the final quarter of last year a slight miss at 2.6% (Atlanta Fed’s GDPNow estimate for the first quarter of this year dropping from 3.2% to 2.5%). Initial claims remained sub-200K and roughly in line with estimates, continuous claims higher but beneath estimates and below 1.7m.

As for the week ahead, expect PMIs (Purchasing Managers’ Index) to initially take the attention, and for the US includes figures out of ISM (Institute for Supply Management) where expectations are it’ll be a sub-50 print for manufacturing when it releases later today, and on Wednesday to show an ongoing expansionary reading for services.

A few items in between, the attention on the data front generally shifting towards the US labour market:

1. Job openings tomorrow which have remained stubbornly high and besting estimates five times in a row
2. ADP’s non-farm estimate on Wednesday
3. The weekly claims on Thursday that’s anticipated to eventually start rising as it incorporates more layoffs from larger firms which involve a delay between announcement and filing
4. Preceded by Challenger’s job cuts averaging far higher over the past four readings
5. Leading up to the market-impacting Non-Farm Payrolls (NFP) on Friday. Expectations are it’ll be roughly 240K, and that the unemployment rate to stay at 3.6%.

Dow technical analysis, overview, strategies, and levels

Prices closed above its previous weekly 1st Resistance level with gains for contrarian buy-breakouts and a lack of a trigger for conformist sell-after-reversals on the lack of a reversal, with prices not far off the last of its main weekly moving averages and pretty much averaging back.

For the daily time frame, it's nearly above the last its main daily moving averages and an overview there turning more positive in terms of technical bias, daily conformist sell-after-reversals stopped out with big gains for contrarian buy-breakouts when factoring Friday's follow-through.

IG client* and CoT** sentiment for the Dow

And in sentiment, pushing further into heavy sell territory and not far off the extremes when it comes to CoT speculators, from 71% to 75% (longs -1,707, shorts -996). Retail traders were in the middle at the start of last week, since then shifting to majority sell 64%.

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.