Dow little changed after Friday’s NFP; traders eye Wednesday’s CPI

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US Non-Farm Payrolls showed an increase of 528K for July. That was more than double the 250K expectation with upward revisions in store for both June and May, and in all taking the level of employment above pre-pandemic figures. That was the establishment survey, as the household survey showed a smaller 179K that wasn’t as optimistic with gains for part-time and those holding multiple jobs.

Other figures out of the Bureau of Labor Statistics included the unemployment rate that dropped a notch to 3.5%, wage growth up 5.2% y/y and 0.5% m/m both besting estimates. The labour force participation rate is slightly lower at 61.1%, and the employment-population ratio at 60%. Unemployment claims the day before out of the Department of Labor showed a weekly increase that continued to trend higher, while Challenger’s job cut announcements y/y rose for the second time in a row by a smaller 36% from a year earlier.

Consumer credit for June showed an increase of $40.2bn, much higher than the pre-pandemic average. The previous revised high was $23.8bn, a generally worrying sign for sustainable purchases.

In all, the results weren’t in line with what the US Federal Reserve (Fed) was hoping for with the Fed’s Bowman saying that 'similarly-sized' 75bp
(basis point) 'increases should be on the table until we see inflation declining in a consistent, meaningful, and lasting way.' The VIX closed out beneath 22, the VVIX stable within the 84 handle, the MOVE at 122+, and the Atlanta Fed’s GDPNow estimate for this quarter is at 1.4% growth.

As for bond market yields, they finished the week higher but more so for the front end of the curve with less to cheer about on the further end even when factoring Friday’s moves. In real terms, the 5Y and above are back in positive territory, and still, very much an inverted picture between nominal yield spreads that only worsened for the 10Y-2Y to levels unseen since the dot com bubble.

As for market pricing with regards to future Fed rate hikes, there’s now a majority venturing into 75bp territory for September and thereafter peak within a slightly higher 3.5-3.75% range.

As for the week ahead, it’s really about pricing data.

We get US CPI (Consumer Price Index) readings this Wednesday where expectations are for a y/y reading of 8.7% (from 9.1% prior) and m/m 0.2% (from 1.3% in June). Investors and traders are looking for any hints that peak inflation has passed be it overall, or at its core which excludes food and energy with estimates pointing to an annual increase of 6.1% and a monthly rise of 0.5%.

Producer prices will be the day after where price increases have been larger after registering an 11.3% y/y reading last time around and a high core at 8.2%. Import and export prices are to be released the day before preliminary consumer inflation expectations in what have been notable reductions for the longer-term horizon, as sentiment remains beneath ‘08 crisis lows.

The remaining items out of the US aren’t expected to be as impacting with sentiment figures tomorrow for small businesses, wholesale inventories, and mortgage applications and delinquencies. On the fiscal policy front, we had the passage in the Senate of the $430bn bill which includes an excise tax on share buybacks, with the House expected to address it at the end of this week.

Dow Technical analysis, overview, strategies, and levels

Sedate moves last week for the Dow fell well within weekly levels, failing to offer a play in this longer-term time frame, and still within a very wide long-term bear channel that's wide enough to put it more 'consolidation - volatile' than bear average.
The daily moves late last week needed Friday's session to reach Thursday's 1st Support level that held where the overview there is consolidatory.

Friday's US sector performance was mixed with big gains for energy and financials and put JPMorgan Chase and Chevron on top amongst the Dow’s components by the close, with limited losses on the other end where Disney and Boeing were at the very bottom.

IG client* and CoT** sentiment for the Dow

As for sentiment amongst CoT speculators: still heavy sell but dropping from 70% to 68% on a rise in longs by 103 and a simultaneous drop in shorts by 1,279 lots. For the remaining key US indices, they are majority short S&P (66%), and Russell (83%) while majority buy Nasdaq (60%).

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.