The June Consumer Price Index (CPI) fell 0.4% month-on-month against the consensus estimate of a 0.1% decline following a 0.5% gain in May, and the annual rate fell to 3.5% from 4.2%, well below the forecast of 3.8%. Core prices remained unchanged m/m and fell to 2.6% y/y against the expected 2.8%. Most of the work was done by the June drop in energy costs that followed last month’s ceasefire.
The broader market accepted the gift at par, with the S&P 500 index rising 0.5% and the Nasdaq Composite rising 1% as the semiconductor market rebounded. The Dow Jones Industrial Average is at 52,356, down 0.29% on the session, after reaching 52,006 in early trading. The blue chip average received its friendliest inflation report in months and quickly went nowhere, with the explanation lying in its own membership.
Price-weighted arithmetic cuts both ways
Goldman Sachs (GS) gained 8% after reporting an earnings beat, and since it ranks among the stocks with the highest average price, that single move is worth several hundred Dow points on its own. International Business Machines (IBM) tumbled 25% after warning that second-quarter profit was lower than expected due to supple demand in its software and infrastructure businesses.
The Dow is not so much the market as the sum of thirty stock prices, and today that sum is bullshit; one warning on legacy technology profits cancels a banking quarter. The rally in semiconductor prices driving the Nasdaq, with Lam Research (LRCX) up 4% and Micron (MU) up more than 2%, is almost entirely happening elsewhere, leaving IBM as the biggest tech story of the day on the index.
A hawk chair meets a genial print
Interest rate futures tell the story of a market that has cleared July and kept September. The odds of a hike at this month’s meeting fell to 17% from 42% the day before, while September’s pricing still gives a 63% chance the target rate will be at least a quarter of a point higher by the fall. Print bought the Federal Reserve room; he didn’t buy the axle.
The Fed chair gives his first half-yearly testimony to the House committee during hearings at 12:30 and 14:00 GMT, reiterating his commitment to the 2% target while dwindling to do anything resembling forward-looking guidance. One buy-side chief investment officer notes that almost every announcement regarding the chairman’s compact term has been hawkish and that today’s relief is more likely to keep the commission in limbo than to open a path down. There will be a Fed speaker series until 18:55 GMT, followed by a Senate runoff on Wednesday.
The barrel votes against the print
President Donald Trump said Monday that the United States would restore a naval blockade on Iranian shipping through the Strait of Hormuz, with the cordon resuming slow Tuesday, after a week of renewed strikes and Iranian attacks on merchant ships that left last month’s peace framework in tatters. West Texas Intermediate (WTI) crude earlier hit $80 a barrel and is trading above $78, up 1%, while Brent crude is up 2% above $85, its highest level in a month.
The tension between print and tape is not subtle: the disinflation recorded in the June report was almost entirely due to energy prices, which fell during the ceasefire, and the ceasefire is no longer in effect. If the blockade and tanker attacks continue into July, the next CPI report sounds very different and this is exactly the scenario that prices do not want to let go of in September.
The data doesn’t let up
The June Producer Price Index (PPI) will be released at 12:30 GMT on Wednesday, showing the base annual rate accelerating to 5.2% from 4.9%; An incorrect pipeline pressure shift would undercut today’s relief at the consumer level before even a day has passed. The President sits before the Senate committee at 14:00 GMT and the Beige Book lands at 18:00 GMT.
Thursday’s June retail sales report at 12:30 GMT has the headline consensus at 0.2% and the control group at 0.5%, and Friday’s flash Michigan July sentiment survey at 14:00 GMT is expected to be 51, alongside recently published inflation expectations for the coming year of 4.6%. A high PPI and stiff expectations compared to a recovering oil premium would exacerbate the issue of a September hike, no matter how supple today’s print was.
Levels to watch
Resistance: Session high at 52,686 ends the first attempt at a rebound before reaching the 53,000 level; otherwise, last week’s cycle high of 53,333 is the level that makes this pullback a trend again.
Support: The 52,000 level has absorbed the early probe at 52,006, and below, the 50-day exponential moving average (EMA) at 51,227, untested since mid-June, protects the 51,000 level.
Deviation: lower; the daily Stochastic Relative Strength Index is moving from an overbought level near 74, while the index is bottoming below 53,333. The drift towards the 50-day EMA at 51,227 is favored, while the price remains below 52,686 and only a daily close above 53,333 resets the uptrend.
Dow Jones 5-minute chart
Dow Jones FAQs
The Dow Jones Industrial Average, one of the oldest stock indexes in the world, consists of the 30 stocks most frequently traded in the United States. The index is price-weighted, not capitalization-weighted. It is calculated by summing the prices of the company’s shares and dividing them by the coefficient, currently 0.152. The index was founded by Charles Dow, who also founded the Wall Street Journal. In later years, it was criticized for not being representative enough because it only tracks 30 conglomerates, as opposed to broader indexes such as the S&P 500.
Many different factors influence the Dow Jones Industrial Average (DJIA). The most crucial are the total results of the companies included in the group, disclosed in quarterly reports on the companies’ results. Macroeconomic data from the United States and around the world also matters because it influences investor sentiment. The level of interest rates set by the Federal Reserve (Fed) also affects the DJIA because it influences the cost of borrowing, on which many corporations depend heavily. Therefore, inflation may be a major factor, along with other indicators, that influence Fed decisions.
Dow Theory is a method of identifying the main trend in the stock market developed by Charles Dow. A key step is to compare the direction of the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) and only track trends where both are heading in the same direction. Volume is a confirmatory criterion. The theory uses elements of peak and trough analysis. Dow Theory assumes three phases of a trend: accumulation, when clever money starts buying or selling; public participation when wider society is involved; and distribution when the clever money comes out.
There are many ways to trade the DJIA. One is the apply of ETFs, which allow investors to trade the DJIA as a single security rather than having to buy shares in all 30 of the companies that comprise it. A leading example is the SPDR Dow Jones Industrial Average ETF (DIA). DJIA futures contracts allow investors to speculate on the future value of the index, and Options give the right, but not the obligation, to buy or sell the index at a predetermined price in the future. Mutual funds allow investors to purchase a portion of a diversified portfolio of DJIA stocks, thereby providing exposure to the entire index.
