Dow outperforms S&P 500, NASDAQ at start of Friday trading
- The Dow Jones Industrial Average has dropped for four straight sessions.
- DJIA futures are down 0.35% again on Friday.
- Powell’s call for two more rate hikes this year has caused investors to reassess the market.
- Dow set a six-month high on June 16.
The Dow Jones Industrial Average (DJIA) looks set for a fifth session of losses on Friday as the Dow declined 0.5% in its first half hour. The Dow began pulling back last Friday after reaching a six-month high at 34,588 and has continued through this week as Fed Chair Jerome Powell testified on Capitol Hill that two more rate hikes were likely to be needed sometime later this year.
The Dow is outperforming both the S&P 500 (0.7%) and the NASDAQ (-1.2%) however.
Dow Jones news: Powell’s hawkishness weighs on DJIA
Powell testified at both the House of Representatives and the US Senate on Wednesday and Thursday, respectively. Through questioning from a number of legislators over two sessions, the market has now begun to grasp that the Chair’s speech at the June 14 FOMC meeting might not have bee a lot of hot air.
Instead, the market is beginning to rebuff its prior skepticism that more rate hikes were likely and starting to believe that the Fed has more rate hikes to come. Powell was adamant that the Fed would most likely raise the fed funds rate twice in the second half of the year, while analysts up until now have for the most part being leaning toward a complete end to hikes or maybe just one more.
The Consumer Price Index (CPI) in May dropped from April’s 4.9% yearly read to 4%. With inflation appearing to move toward the Fed’s 2% mandate, the Fed decided to end its 10 consecutive rate hikes earlier in June, but Chair Powell confused the market by professing that two more hikes would come later in the year.
The threat of future hikes appears to be weighing much stronger on growth stocks in the NASDAQ, however, rather than the Dow’s blue chips. The NASDAQ 100 futures were nearly down twice the level of the Dow in Friday’s premarket at -0.64%.
Inflation FAQs
What is inflation?
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
What is the Consumer Price Index (CPI)?
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
What is the impact of inflation on foreign exchange?
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
How does inflation influence the price of Gold?
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Market Quote
Win Thin, head of securities strategy at Brown Brothers Harriman, said he does not believe the Fed Chair is bluffing and markets should expect this higher rate environment to last awhile.
“When all the dust settles, I think the Fed is going to go higher for longer. The market still doesn’t quite believe the Fed. They have one hike priced in, but the Fed has signaled there will be two. There are a lot of analysts who don’t think it will hike again. I wholeheartedly disagree.”
Dow Jones forecast
The Dow Jones index ricocheted lower off of the top of a resistance zone last Friday. Now it has broken through the bottom of that resistance region and blown through the 9-day moving average (blue). This signals that a sell-offf is in motion that is not likely to halt here.
If the index breaks below the 21-day moving average (purple), expect the DJIA to at least drop back to the 32,600 to 32,800 support range. That support zone held up price action in late May and early June. If it too fails, then the Dow will descend all the way back to March’s support range between 31,430 and 31,805. A fall to there would entail a 6% to 7% sell-off.
Any close above 34,600, however, and especially on the weekly chart, would put this rally back in motion. Despite the Moving Average Convergence Divergence (MACD) drifting above the zero threshold, the indicator looks likely to cross over bearishly in the next several sessions.
DJIA daily chart