Dow futures gap higher after weekend debt ceiling agreement

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Agreement on debt ceiling suspension through 2025

The weekend was focused on the debt ceiling. An agreement was made to suspend it through 2025. Discretionary spending, excluding defence, will be mostly unchanged during the period. However, expect a potential tussle in getting it passed and a vote is expected as soon as this Wednesday.

Economic data indicates rising prices

Looking at the economic data from late last week, it was largely about rising prices. The PCE (Personal Consumption Expenditures) Price Index for April was up by 4.4% year-on-year (y/y), up from 4.2% prior. Month-on-month (m/m) growth was at 0.4%. When removing food and energy, the growth failed to drop y/y from 4.6%. Instead, it rose to 4.7% and m/m growth was hotter than anticipated at 0.4%.

Consumer inflation expectations and personal income update

Consumer inflation expectations have been revised. According to the University of Michigan (UoM), this month's 12-month drop went from a worrying 4.5% to 4.2%. The five-year inflation expectation was a notch lower at 3.1%. The sentiment reading, a closely watched measure, is still very much near tested territory, even if revised higher to 59.2.

Positive economic indicators defy negative forecasts

April's personal income and spending showed m/m increases of 0.4% and 0.8% respectively. Durables for the same period showed surprise growth of 1.1%, defying negative forecasts. However, when excluding transportation, there was a slight negative print. Preliminary GDP (Gross Domestic Product) for the first quarter was released the day before. It showed a slightly healthier growth of 1.3%, up from the significant miss from the advance reading.

Fed's stance on interest rates and market reaction

In central bank speak, there was the Federal Reserve’s (Fed) Collins. Prior to the PCE release, he mentioned potentially being “at, or near, the point where monetary policy can pause raising interest rates”.

Barkin added that some businesses still say they’ll need to hike prices. As of now, market pricing (CME’s FedWatch) is showing a change. A majority is in favour of a 25bp (basis point) rate hike to 5.25-5.5% in the June meeting. There is no longer an anticipation of getting beneath 5% this year.

Market performance and the week ahead

The S&P 500 finished positively, and more so for the tech-heavy Nasdaq 100. The latest inflows attempted to get in on the AI action. The Dow 30 was slightly lower. Meanwhile, there were heavier losses week-on-week for key European indices.

The week ahead is expected to start light. This is especially true this week due to the holiday that’ll keep trading at a minimum. The Conference Board’s (CB) consumer confidence for May will be released tomorrow. So far, the readings have been mostly rangebound. They are less price-centric than UoM’s survey and more jobs-related. This helps it stay around 100 given the relatively tight labour market. Additionally, housing price data and the Dallas Fed manufacturing business index will be released.

Anticipated changes in the job market and manufacturing sectors

The weekly inventory figures out of the American Petroleum Institute (API) and the Energy Information Administration (EIA) will be pushed out a day to Wednesday and Thursday respectively. This is due to today’s holiday. Job openings data from JOLTS will be on Wednesday instead.

The ADP’s non-farm estimate is moved to Thursday. This will be preceded by Challenger’s job cuts and followed by the weekly claims. The market-impacting Non-Farm Payrolls from the Bureau of Labor Statistics will be the key event. Expectations are for a roughly 180K print for May. The unemployment rate is expected to rise a notch to 3.5%.

Wage growth is expected to be below its previous 0.5% reading.

Final manufacturing PMIs and Fed speaks on the horizon

Final manufacturing PMIs (Purchasing Managers’ Index) will be on Thursday. The US includes both ISM (Institute for Supply Management) and S&P Global. There will also be plenty of Fed speak on Wednesday.

Dow technical analysis, overview, strategies, and levels

Looking at the Dow from the weekly time frame, its previous weekly 1st Support level managed to hold. This initially favoured contrarian sell-breakouts on the move lower. However, the recovery gave conformist buy-fades in this time frame the win.

The daily time frame showed action shy of Thursday's daily levels. But, Friday's boost went past its 1st Resistance level. This created ample opportunities for contrarian buy-breakouts in that time frame. It also shifted three at-risk daily technical indicators in the process.

IG client* and CoT** sentiment for the Dow

As for sentiment, a shift for retail traders from majority short 54% at the start of last week to a near exact opposite slight buy 53%, with the larger buy bias intraweek undone on Friday’s price gains.

CoT speculator net short bias has been pushing further into heavy sell territory on a larger reduction in longs than shorts. They also remain net short in both S&P 500 and Russell 2000, while still net long in the Nasdaq 100.

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.}