Dow: Underperforms ahead of impacting data this week

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Likelier rate hike after Fed’s Powell at Jackson Hole

Central bank speak took the attention last Friday. US Federal Reserve (Fed) Chairman Powell, at Jackson Hole, stated that inflation remained “too high” and stuck with the 2% target. He mentioned that they were “prepared to raise rates further if appropriate” and would hold rates “at a restrictive level”, proceeding cautiously at upcoming meetings. The Fed’s Mester also spoke about the likelihood of needing one more rate hike.

Market pricing (Refinitiv) for future Fed action has shifted to a slight majority favouring a 25bp (basis point) rate hike in November as the central bank pauses in September. A rate cut from current levels has been pushed out to July of next year, further supporting the ‘higher for longer’ narrative.

Data digest

Moving on, there was a significant amount of economic data late last week. Firstly, durables for July experienced contraction, although its core was up. Secondly, claims were below estimates for both initial and continuous, indicating a tight labour market. Lastly, revised figures from the University of Michigan (UoM) revealed a drop in its consumer sentiment reading to 69.5, and inflation expectations worsened to 3.5% for the 12-month and 3% for the five-year period.

The week ahead

Looking ahead to the coming week, there is a substantial amount of economic data, especially towards the end of the week. The week begins with the Dallas Fed manufacturing business index. This index has shown consecutive contracting readings for well over a year now. The pace picks up on the following day with housing price data.

Although there has been month-on-month (m/m) growth out of FHFA, there have been ongoing year-on-year (y/y) declines in the figure from Standard & Poor’s/Case-Shiller. Additionally, the Conference Board (CB) consumer confidence data will be released, which has been strengthening lately. Attention will then shift to labour market data.

Labour market

Tuesday will bring the release of job openings for July. Although it has suffered consecutive drops, it is still about 2.5 million more than pre-pandemic averages. ADP’s non-farm estimate, which has consistently beaten expectations, will be released on Wednesday. Thursday brings both the weekly claims and Challenger’s job cuts data. The latter has been lighter over the past two readings due to seasonality. The week culminates with Friday’s Non-Farm Payrolls (NFP) release. After two successive misses following fourteen consecutive beats, growth is expected to continue slowing to about 170K, with the unemployment rate holding at 3.5%.

Pricing still hot, GDP not a worry, and manufacturing in contraction

Pricing data will be released a day before data from the Bureau of Economic Analysis. The PCE (Personal Consumption Expenditures) price index is forecasted to show year-on-year (y/y) growth and an increase from prior readings, with month-on-month (m/m) growth of 0.2%.

Preliminary GDP (Gross Domestic Product) for the second quarter on Wednesday isn’t expected to cause any worry (more so for the current quarter, with the Atlanta Fed’s GDPNow estimate at 5.9%). Manufacturing PMI (Purchasing Managers’ Index) is expected to show ongoing sub-50 readings signifying contraction, from both S&P Global and ISM (Institute for Supply Management).

Dow technical analysis, overview, strategies, and levels

We're closer to the averages seen prior to the July boost, and the moves last week were within its previous weekly 1st levels lacking a play for conformist and contrarian strategies. It’s been a bit trickier on the daily time frame with the excess volatility late last week, Thursday's 1st Resistance level holding but not its 1st Support with a move to its 2nd Support giving daily contrarian sell-breakout strategies the initial win and struggles for even cautious conformist buy-after-significant reversals.

The technical overview remains a cautious one for both weekly and daily time frames.

IG client* and CoT** sentiment for the Dow

Retail traders continue to hold a majority sell sentiment at the beginning of this week, though there has been a marginal decline from 61% to 59% compared to the previous week. CoT speculators maintain a majority short position, with the bias intensifying from a slight sell at 52% to a notable 62%. This shift is evident in the reduction of long positions by 9,331 lots and a simultaneous increase of 2,166 lots in short positions, bringing them closer to a heavily short stance.

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.}