Unlikely Fed pause puts Dow and key indices into retreat

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Labor data was the focus in the financial markets late last week, with a string of items from job openings that remained near the highs at 11.4m to weekly unemployment claims besting estimates at 200K and ending with Non-Farm Payrolls out of the Bureau of Labor Statistics. The reading managed to beat expectations arriving at 390K (opposite ADP’s estimate missing the day before at 128K) with (net) small revisions for the past two months. As for the other metrics, the unemployment rate failed to drop though remained at a healthy 3.6%, the labour force participation rate up as expected to 62.3%, and the employment-population ratio at 60.1%.

Wage growth was an interesting item with m/m (month-on-month) failing to rise ten basis points from 0.3% and y/y (year-on-year) dropping to 5.2%. In all, slowing job growth came as no surprise, but it hasn’t been slow enough to derail the Federal Reserve (Fed) in its fight against its top priority and make a pause less likely after July, as wage growth potentially peaking a positive, but y/y still needs more to come back to levels seen as providing less stickiness to inflation.

In Fed member speak, Brainard said 'it’s very hard to see the cause for a pause' and Mester said 'the funds rate will probably need to go above its longer-run neutral level to rein in inflation.' Over in the bond market, yields were in for gains by the end of the week across the curve, in real terms the five-year is still negative but not far off tilting should nominal yields continue their ascent. Market pricing of rate hikes is showing we’re still on for fully priced in consecutive 50bp rate hikes out of the US central bank over the next two meetings while mixed on the degree of an increase for September, and breakeven inflation rates rising with the five-year back above 3% and the ten-year close to 2.75%.

Other economic data showed factory orders a clear miss but avoiding contraction and a similar story for services PMI out of ISM with a 55.9 expansionary reading below 56.5 estimates.

As for economic data out of the US in the week ahead, inflation (and the Fed’s aggression in tackling it) is all that seems to matter. CPI (Consumer Price Index) this Friday makes it the big one by a healthy margin with hopes the y/y reading will subside a bit from its previous 8.3% figure and noting m/m to see if price growth is slowing similar to the story painted by PCE (Personal Consumption Expenditures) at the end of last month, estimates point to 8.2% and 0.7% respectively.

Preliminary consumer sentiment out of UoM will also be on offer the same day after what has been relatively miserable readings offering a different narrative than CB’s (Conference Board) consumer confidence as the latter focuses more on the stronger jobs market while the former is more price centric. Otherwise, we’ve got the usual weekly employment, mortgage and oil inventory items, with a couple of auctions, trade, and what has been ballooning consumer credit.

Dow Technical analysis, overview, strategies, and levels

The Dow’s previous weekly 1st Support level managed to hold and meant it was contrarian buy-fades outperforming while conformist sell-breakouts failed, with price action unable to reach Thursday's daily 1st levels, prices oscillating above its bear trend channel in what has been more sideways movement as of late.

Nearly all US sectors finished Friday's session in the red, energy the only exception, and where the losses were heaviest for consumer discretionary, tech, and communication services, a clear underperforming session for the Nasdaq while the Dow outperformed.

Most of its components finished Friday's session in the red, with Apple (research note from Morgan Stanley on slowing growth from its app store) and Intel suffering most, with only a few finishing higher led by Caterpillar and Chevron, the latter thanks to rising energy prices.

IG client* and CoT** sentiment for the Dow

Dow chart with retail and institutional sentiment

CoT speculators reduced longs by 578 lots while raising shorts simultaneously by 445, sending heavy sell bias in this index a couple notch higher to 74%. For the remaining key indices, they are heavy sell Russell 2000 at 74%, while slight buy S&P and Nasdaq both at 52%.

As for retail traders, what was majority short 55% at the start of last week has shifted to slight buy 53% at the start of this week.

*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.