Dow Jones Supported by Earnings Season, But Inflation a Risk

The stock market declined after the US published producer inflation significantly higher than expectations. However, all US indices increased to a new high for October after falling 0.50%. Economists advise buyers are still active regardless of the higher inflation data for two reasons. First, many investors believe the Federal Reverse is unlikely to hike interest rates, and the second is the upcoming earning season. Market participants are mainly focused on the Dow Jones due to earnings data from the banking sector scheduled for tomorrow. Investors should note that the previous eight earnings seasons have improved stock market performance. 

A positive factor for the stock market is the decline in the price of Oil, bond yields and the US Dollar. The US Dollar and the British Pound are the worst-performing currency of the day. The US Dollar Index is trading 0.22% lower this morning, while the best performing currencies are the Euro and Swiss Franc, which is increasing in value against all currencies. The decline in the US Dollar is due to the higher risk appetite and lack of hawkishness from the Federal Reserve. A particular driver for the “Dollar Bears” was the dovish tone within the Federal Open Market Committee’s Meeting Minutes. The CM Exchange Fed Watch Tool fell from 15.7% to 11.8% for November 2023. However, investors should remember that consumer inflation this afternoon may have a more substantial effect than the PPI. 

Furthermore, the price of Crude Oil significantly declined on Wednesday, bringing the price back to the previous lows. Statements by Saudi Arabian government members confirmed that the country is working with regional and international partners to prevent further escalation of the Arab-Israeli conflict and promised to make every effort to stabilize the oil market. The statements reassured investors and avoided supply disruption concerns. In addition, some technical analysts indicated the price was above its intrinsic value and OPEC’s $80 per barrel target.

Dow Jones - Inflation Still a Risk

The Dow Jones has risen in value for eight consecutive days and rose to a new high this morning. The index ended with significantly higher buy orders than sell orders on the CM Exchange but fewer bulls than on Monday, where the index rose by 1.18%. Investors were mainly concentrating on two releases: the Producer Price Index and FOMC Meeting Minutes. This morning, a positive indication for the US stock market is the bullish sentiment within the European Cash Open. 

The Producer Price Index was significantly higher than expectations. The PPI read 0.5%, higher than the expected 0.3%, and the Core PPI read 0.1%, higher than expectations. After the announcement, the index fell 0.69%. However,  it was supported for technical reasons, as the price was significantly discounted from the Meeting Minutes. The issue with the Minutes Meetings was it gave no clear indication of another rate hike, and members also gave signs of “uncertainty”. In other words, they are uncertain if a further rate hike is required. 

Yesterday, Mr. Waller, a well-respected member of the central bank’s governing board, said that higher long-term bond rates make many loans more expensive for consumers and businesses. According to Mr. Weller, the higher bond yields are doing “some of the work for us". Investors saw this as a dovish signal and indicated another hike was unnecessary. A similar position is being taken by previously very hawkish members, such as the Atlanta Fed President, Raphael Bostic, and Minneapolis head, Neel Kashkari. However, investors should note that the Meeting Minutes are one month behind. Producer inflation reads significantly higher; if consumer inflation reads much higher, the scenario can quickly change. 

Analysts expect the Consumer Price Index and Core Consumer Index to read 0.3%, bringing inflation down from 3.7% to 3.6%. Suppose the Consumer Price Index also reads higher than expected. In that case, the Dow Jones can witness a downward impulse wave again, particularly if the US inflation rate rises above the current 3.7%. In addition to this, investors will also be monitoring the Weekly Unemployment Claims. This will have a lesser impact on the index, but if lower again, paired with higher inflation, the effect can significantly pressure the Dow Jones. 

From the above, we can see the index is being potentially pulled into two directions. The FOMC Meeting Minutes and upcoming earnings season proved positive for the Dow Jones. However, Producer inflation and employment data are a negative factor. Another concern for investors is that yesterday's index only saw 13 components, from 30, increase in value. This is less than 50%, and the index ended higher only due to “higher weight” stocks performing well. Amgen rose 4.55%, and Microsoft rose 1.23% (both are in the top five influential stocks). Chevron, the 13th most influential stock, saw the most substantial decline, falling 3.27%.

Dow Jones 3-Hour Chart on October 12th 

At the moment, technical analysis indicates a potential correction back to previous price ranges. However, this cannot be certain unless the price falls below $33,839.7. This is also likely if the Dollar increases in value as it has in the first 30 minutes of the EU trading session. However, medium to longer-term indications indicate a bullish impulse wave to form a correction. The main driver of the buyers and sellers is likely to be the Consumer Price Index at the beginning of the US Trading Session.

Dow Jones 30-Minutes Chart on October 12th 

Summary:

• The Dow Jones has risen in value for eight consecutive days and rose to a new high this morning.
• The Producer Price Index was significantly higher than expectations. The PPI read 0.5%, higher than the expected 0.3%, and the Core PPI read 0.1%, higher than expectations.
• The Dow Jones is partially supported by the start of tomorrow’s earnings releases. However, if consumer inflation exceeds expectations, the market can quickly change. 
• A concern for investors is that yesterday's index only saw 13 components, from 30, increase in value. This is less than 50%, and the index rose higher only due to “higher weight” stocks performing well.
• Analysts saw the FOMC Meeting Minutes as positive for the stock market due to the Fed’s uncertainty and soft tone.