Market update: Positive close for Dow as weak labour data raises Fed peak rate optimism

Labour market tightness finally starting to ease

There is plenty to digest out of the labour market late last week. Firstly, the non-farm payrolls for the month of August beat at 187K but came with revisions worth 110K of losses for June and July. Next, the unemployment rate rising from 3.5% to 3.8% and a larger increase for the underemployment rate to 7.1% and the wage growth month-on-month (m/m) up a weaker 0.2% while year-on-year (y/y) falling back to 4.3%.

In addition, the labour force participation rate went up a couple of notches to 62.8%, and the employment-population ratio remained unchanged at 60.4%. The employment component of the Institute for Supply Management's (ISM's) manufacturing purchasing managers’ index (PMI) is still showing contraction, even though it improved to 48.5. This was alongside the main print that remained below 50, rising to 47.6 the day before that.

Lastly, the weekly claims with initial lighter at 228K but continuous an easy miss at 1.725m, and a sizable increase in layoffs according to Challenger.

Pricing data as anticipated

As for pricing data for the month of July released last Thursday, it didn’t surprise and showed the personal consumption expenditures (PCEs) price index rise to 3.3% y/y headline and a notch higher at its core to 4.2%, while showing ongoing m/m growth of 0.2% for both.

Rate hike likelihoods showing we’re at the peak

It was a positive weekly finish for stocks but not for the month of August, and over in the bond market saw Treasury yields enjoy notable gains on Friday and a drop in the MOVE to lows unseen since February. Market rate hike likelihoods (Refinitiv) are backing off any further increases out of the US Federal Reserve (Fed) following the latest employment data, and the first rate cut a coin toss for May of next year.

Week ahead

As for the week ahead, it starts off lightly with a US holiday today and will remain relatively light until Wednesday’s services PMI out of ISM for the month of August. This report missed expectations but remained in expansionary territory. It's sandwiched in between factory orders for the month of July and economic optimism out of IBD/TIPP (Investor’s Business Daily/TechnoMetrica Institute of Policy and Politics) for September.

These readings follow two years of consecutive sub-50 readings, signifying pessimism. At the end of the week, there's consumer credit data for July, which will provide a better idea of the extent to which credit is being offered and taken by consumers, who are expected to face more significant challenges in the coming quarter.

Otherwise, the weekly readings include claims on Thursday and rig count data out of Baker Hughes on Friday, with the holiday today pushing out energy inventory readings by a day for the American Petroleum Institute (API) and Energy Information Administration (EIA) to Wednesday and Thursday respectively.

Dow technical analysis, overview, strategies, and levels

The close wasn't too far off its previous weekly 1st Resistance level, with similar opportunities for both contrarian buy-breakouts and conformist sell-after-significant reversals. As for the shorter-term daily time frame late last week, there was a lack of a play, with the action on both Thursday and Friday staying within the 1st levels of the former despite the fundamental updates.

Key technical indicators are somewhat aligned in both time frames, with the price above key moving averages but generally neutral elsewhere. Typically, a positive technical bias corresponds with a positive technical overview. However, in this case, it would require more to shift from the current state of 'cautious consolidation'.

IG client* and CoT** sentiment for the Dow

As for sentiment, an increase in price for the week has taken majority sell bias from 59% for retail traders at the start of last week to just shy of heavy short territory. CoT speculators have been pulling back instead, from 62% to 58% according to the latest report released last Friday, with an increase in longs by 2,299 lots and a simultaneous drop in shorts by 2,419.

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 start of last week.
**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.}