- The Dow Jones Industrial Average gained 2% last week.
- DJIA index retreats 0.2% on Wednesday morning.
- FOMC minutes for June 13-14 meeting arrive Wednesday afternoon.
- 35,500 remains the primary Dow target for bulls.
- US June jobs report out on Friday with 225K the consensus.
The Dow Jones Industrial Average (DJIA) edged down on Wednesday as trading volumes normalized after the July 4 holiday. S&P 500 and NASDAQ 100 trade mostly flat.
The DJIA rebounded about 2% last week on positive economic data, and gains extended into Monday in a thinly traded session ahead of the holiday.
The US market is largely focused on the Friday release of the June Nonfarm Payrolls report. At the moment, the market appears to be trending lower due to poor services sector data out of China. The Caixin Services Purchasing Managers Index for June gave a reading early Wednesday of 53.9. While that number is above 50 and thus shows an expansion, it was much lower than the previous month’s reading of 57.1. This is affecting the US market as it is viewed as another sign that the Chinese economy is failing to work its way out of last year’s pandemic-induced recession.
AllianceBernstein argues in a client note on Wednesday that the market will likely find it difficult to find a definite direction in the third quarter. “From a market perspective, as we have observed in past quarters, a sustained period of below-trend growth argues for caution but not panic. Absent a hard landing, markets may struggle to sustain momentum in either direction.”
Dow Jones news: FOMC minutes on Wednesday could direct Dow price action
The minutes for the Federal Open Market Committee meeting – in which Federal Reserve governors chose to keep US interest rates unchanged on June 14 – will be released at 18:00 GMT on Wednesday. These notes will allow outsiders to parse the discussion between members about how they arrived at the decision in mid-June to keep the fed funds rate stationed in a range between 5% to 5.25%. That was the first meeting that rates remained stable since the central bank began raising interest rates in the prior ten consecutive meetings.
Economist Derek Tang from LH Meyer expects the minutes to backstop the impression that the Fed will raise the fed funds rate at its July 26 meeting.
“A July hike is not a given but pretty close, since it gets harder for [the Fed] to claim the hiking cycle is still alive if they don’t hike two meetings in a row,” Tang told Bloomberg.
The much-followed CME FedWatch Tool currently gives an 87% chance that the central bank raises the fed funds rate by 25 basis points later this month. That expectation should have a sobering effect on equities due to the ability of higher interest rates to slow economic growth by raising financing costs.
Dow Jones news: Nonfarm payrolls on tap for Friday
The June Nonfarm payrolls report is the largest focus on the economic indicator schedule this week for the US market. Analyst consensus expects a net 225,000 new jobs in June – a fairly large drop from May’s 339,000-job upside surprise. Consensus for May had initially been 190,000.
With US Q1 annualized GDP growth being revised up from 1.3% to 2% late last week, another beat on the June jobs report seems somewhat likely. ADP will give the market a hint on Thursday ahead of Friday’s Nonfarm Payrolls release. The ADP Employment Change report for June has been revised higher this week. The consensus forecast was recently at 180,000, but it has since risen to 228,000. In May, ADP reported a positive gain of 278,000 jobs.
The Institute for Supply Management (ISM) will also release its US Services PMI for June on Thursday. May’s 50.3 reading is expected to trend up to 51 for June.
Thursday will also see the release of Initial Jobless Claims for the US in the week ending June 30. This figure is forecast at 245,000, up from the previous week’s 239,000.
What they said about the market – Alex King
Alex King, an investment strategist at Cestrian Capital Research, expects the Dow to advance this week with some rotation toward legacy names in the index. He spoke about his market stance with Seeking Alpha at the end of June.
“There are a great many single-stock names in the financial and other sectors that are forming accumulation patterns at the lows just as did tech stocks in Q3/Q4 2022 – we anticipate Big Money pushing these stocks into their markup zones in the next 2-3 quarters, dragging up the indices further as it happens.”
Dow Jones forecast
The Dow Jones index begins Wednesday inside a resistance zone stretching from 34,200 to 34,600. This region has pushed prices lower at least seven times in the past seven months.
A break of 34,600 will allow bulls to move on to the next target at 35,500. That level is the top of a resistance range extending from 35,350 that blocked upward price action in March and April of 2022. The Moving Average Convergence Divergence (MACD) indicator shows a slight bullish crossover that may predict an imminent move higher.
In the meantime, medium to longer-term support exists from 32,600 to 32,800 and from 31,430 to 31,805.
DJIA daily chart
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.