Dow Jones Industrial Average Forecast: Fed remains positive despite FOMC jitters
- Dow Jones rose sheepishly on Tuesday following mixed earnings results.
- DJIA advanced 0.52% on Monday, breaking above a significant trendline.
- Plenty of Dow Jones components report Q2 earnings this week.
- FOMC rate decision on Wednesday afternoon will bias market.
The Dow Jones Industrial Average (DJIA) is the only one of the three major US indices showing a gain on Wednesday, albeit small. The Wednesday open saw the Dow rise 0.05%, while the NASDAQ fell 0.43% and the S&P 500 declined 0.15%. The market is on its backfoot ahead of the Federal Reserve’s (Fed) interest rate decision scheduled for later in the day.
Dow component Coca-Cola (KO) bested Wall Street consensus with its second-quarter results early Wednesday, but shares of the soft drink maker slid regardless.
The US central bank will release its decision on the fed funds rate at 2:00 EST (18:00 GMT) on Wednesday, followed a half-hour later by Chair Jerome Powell’s press conference. The market is nearly certain the Fed will raise the benchmark rate by 25 basis points, so much of the midweek volatility will turn on Powell’s outlook.
The Dow jumped 0.52% on Monday but barely budged on Tuesday following mixed earnings results from components Verizon (VZ) and Visa (V). Boeing (BA) releases results on Wednesday before McDonald’s (MCD) and Intel (INTC) announce on Thursday. On Friday, Chevron (CVX) and Procter & Gamble (PG) finish off the week.
Dow Jones Industrial Average News: FOMC gets the spotlight
Fed Chair Jerome Powell will follow up the central bank’s decision on interest rates Wednesday afternoon with further details on the state of the US economy in a press conference. Since the market is nearly certain the central bank will raise the fed funds rate by 25 basis points, much of the nervousness is centered on how hawkish Powell’s rhetoric will be.
For the July meeting, the CME FedWatch Tool gives a 99.8% probability of a 25 bps rate hike. This would push the fed funds rate up to a 5.25% to 5.5% range.
After June’s FOMC meeting, Powell said the consensus among central bank governors was for two more rate hikes this year.
Inflation data has clearly been dropping incrementally in 2023. June’s core CPI inflation rate declined to 4.8% YoY, falling well under consensus, and some observers think the July hike could be the last for the central bank. Any sense that the hiking cycle is over will lead the DJIA to rally, although hawkish or careful statements from Powell may lead likewise to a sell-off.
Earnings news: Results rather mixed so far
Major Dow components have already released second-quarter earnings this week. Microsoft (MSFT) easily surpassed Wall Street consensus on Tuesday, but a decline in cloud revenue growth hurt the share price. MSFT stock sold off 3.6% in Wednesday’s premarket.
Likewise, both Visa and Verizon offered up mixed results on Tuesday. Both companies beat adjusted earnings forecasts but missed on GAAP results. Verizon also underperformed the consensus expectation for revenue.
- Coca-Cola is expected to deliver $0.72 in EPS on $11.75 billion.
- Boeing is expected to lose $0.89 in adjusted EPS on $18.57 billion in sales.
- McDonald’s is expected to earn $2.79 in GAAP EPS on $6.29 billion in revenue.
- Intel is expected to lose $0.51 in GAAP EPS on $12.14 billion in sales.
- Procter & Gamble is expected to earn $1.33 in GAAP EPS on $19.99 billion in sales.
- Chevron is expected to earn $3.16 per share on $49.98 billion in sales.
Fed FAQs
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.
Earnings of the week
Tuesday, July 25 – Microsoft (MSFT) beats on top and bottom lines, Visa (V) misses on GAAP EPS but beats revenue consensus, Verizon (VZ) misses both GAAP EPS and revenue forecast
Wednesday, July 26 – Coca-Cola (KO), Boeing (BA)
Thursday, July 27 – McDonald’s (MCD), Intel (INTC)
Friday, July 28 – Procter & Gamble (PG), Chevron (CVX)
What they said about the market – Jerome Powell
A number of pundits continue to point to Jerome Powell’s statements at an economic forum he attended in Portugal in late June. The Federal Reserve Chair appears in the following quote to be less impressed by the US economy’s disinflationary turn than most investors.
“If you look at the data over the last quarter, what you see is stronger than expected growth, a tighter than expected labor market, and higher than expected inflation. So that tells us that although policy is restrictive, it may not be restrictive enough, and it has not been restricted for long enough.”
Dow Jones chart forecast
The weekly chart below shows the Dow Jones index breaking above an ascending wedge structure this week. This places the DJIA firmly in the 35,200 to 35,750 resistance zone. That top trendline, shown in black, was of uncertain significance to begin with, but the break does make it more likely that the DJIA will rally to the 36,500 to 36,952 range.
Dow 36,000 — long nod to Kevin Hassett — is not too far off now. In fact, the index only needs to rally another 1.6% to get there.
Levels of support rest nearby at 34,712 and 34,590.
Dow Jones Industrial Average weekly chart