Dow Jones, Nasdaq 100, S&P 500 Forecasts for the Week Forward

Courtesy of TradingView

Shares Basic Forecast: Bullish

• Dow Jones, S&P 500 push greater as Nasdaq 100 consolidates
• Cyclically-oriented shares following the climb in Treasury yields
• Key occasion dangers: Jerome Powell, FOMC Minutes, US retail gross sales

Cyclical Shares to Proceed Shining with Tech at Threat?

Final week, the Dow Jones Industrial Common managed to increase good points into new all-time highs after having spent the higher a part of the previous three months buying and selling sideways. The S&P 500 additionally climbed into file territory. It was the tech sector that fell comparatively behind, with the Nasdaq 100 buying and selling largely flat. Might this be a significant turning level for the cyclical sector, which tends to intently observe the swings of the economic system?

On the chart beneath, a ratio of the Nasdaq 100 to the Dow Jones will be seen inversely monitoring the US 10-year Treasury yield. The latter is commonly considered as a gauge of Fed financial coverage expectations and total financial development bets. Because the Dow Jones consolidated, the 10-year yield trended decrease, reversing a lot of the upside progress from the primary quarter.

Dimming international development prospects could have been fueling this pattern, particularly amid rising Covid-19 circumstances brought on by the extra contagious Delta variant. A deluge of “Fed-speak” this previous week appeared to indicate that the central financial institution continues to be assured within the restoration. Speeches from presidents of the Richmond, Atlanta, Kansas and San Francisco Fed branches alluded to tapering quantitative easing this 12 months.

Nasdaq 100 – Dow Jones Futures Ratio Versus 10-Yr Treasury Yield

Chart Created in TradingView

Occasion Threat within the Week Forward: Fed Chair Jerome Powell, FOMC Minutes, US Retail Gross sales

That is as US shopper inflation expectations touched an 8-year excessive whereas July’s CPI report appeared to strengthen the transitory inflationary narrative. Fed Chair Jerome Powell is slated to talk on Tuesday, the place he may reiterate his extra cautious method on the economic system. Dallas Fed President Robert Kaplan may even be talking in the course of the week, discussing native and international financial points.

An important financial occasion threat for Wall Avenue is prone to be the FOMC Minutes launch on Wednesday. The markets cheered the end result of July’s coverage announcement because it appeared that tapering was not across the nook simply but. Since then, a stable non-farm payrolls report and Fed-speak about lowering quantitative easing appear to have been inflicting some repricing.

The FOMC Minutes doc may proceed reinforcing the central financial institution’s broad confidence within the medium-term financial outlook. Which may be extra gas for the Dow Jones to outperform the Nasdaq 100, with QE nonetheless going robust at $120 billion per thirty days. Nonetheless, with US financial knowledge tending to underperform relative to economists’ expectations these days, a softer retail gross sales report dangers derailing this narrative.

Total, the elemental forecast for equities is bullish. On the chart beneath is a comparability of in a single day Fed reverse repo volumes and the Chicago Fed Adjusted Nationwide Monetary Situations Index. The file surge within the former represents the central financial institution draining extra liquidity, suggesting that markets could also be prepared for tapering. That is because the latter continues to indicate straightforward credit score circumstances within the economic system.

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Fed RRR Volumes Versus Monetary Situations

Chart Created in TradingView

— Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the feedback part beneath or @ddubrovskyFX on Twitter