Dow Jones futures trade higher ahead of US inflation data
- US futures advance ahead of the release of US CPI data for August.
- The US headline CPI is expected to have grown at a faster pace of 2.9%.
- The Fed is almost certain to cut interest rates in the policy meeting next week.
Dow Jones futures gain 0.13% to near 45,550 during the European trading session on Thursday. United States (US) equities demonstrate strength ahead of the release of the Consumer Price Index (CPI) data for August at 12:30 GMT.
US markets have already been outperforming from a past few weeks amid firm expectations that the Federal Reserve (Fed) will start the monetary-easing campaign in the September policy meeting.
The adaptation of a monetary expansion approach by the Fed bodes well for US equities, given that lower borrowing costs boosts consumption and business investment.
Still, investors will closely monitor the US inflation data to gauge about the likely size of interest rate cut by the Fed in its policy meeting next week.
Economists expect the US headline CPI to have grown at an annualized pace of 2.9%, faster than 2.7% in July. In the same period, the core CPI – which excludes volatile food and energy items 0 is estimated to have risen steadily by 3.1%. On a monthly basis, both headline and the core CPI are expected to have grown by 0.3%.
According to the CME FedWatch tool, traders see an 8% chance that the Fed will cut interest rates by 50 basis points (bps) to 3.75%-4.00% on September 17, while the rest point a standard 25-bps interest rate reduction.
Fed dovish expectations have been intensifying due to growing labor market concerns. The US Nonfarm Payrolls (NFP) report for August showed last week that economy added 22K fresh workers, significantly lower than the prior reading of 79K.
Lately, Federal Open Market Committee (FOMC) members, including Chair Jerome Powell, have argued in favor of lowering interest rates, citing downside labor market risks.
Dow Jones FAQs
The Dow Jones Industrial Average, one of the oldest stock market indices in the world, is compiled of the 30 most traded stocks in the US. The index is price-weighted rather than weighted by capitalization. It is calculated by summing the prices of the constituent stocks and dividing them by a factor, currently 0.152. The index was founded by Charles Dow, who also founded the Wall Street Journal. In later years it has been criticized for not being broadly representative enough because it only tracks 30 conglomerates, unlike broader indices such as the S&P 500.
Many different factors drive the Dow Jones Industrial Average (DJIA). The aggregate performance of the component companies revealed in quarterly company earnings reports is the main one. US and global macroeconomic data also contributes as it impacts on investor sentiment. The level of interest rates, set by the Federal Reserve (Fed), also influences the DJIA as it affects the cost of credit, on which many corporations are heavily reliant. Therefore, inflation can be a major driver as well as other metrics which impact the Fed decisions.
Dow Theory is a method for identifying the primary trend of the stock market developed by Charles Dow. A key step is to compare the direction of the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) and only follow trends where both are moving in the same direction. Volume is a confirmatory criteria. The theory uses elements of peak and trough analysis. Dow’s theory posits three trend phases: accumulation, when smart money starts buying or selling; public participation, when the wider public joins in; and distribution, when the smart money exits.
There are a number of ways to trade the DJIA. One is to use ETFs which allow investors to trade the DJIA as a single security, rather than having to buy shares in all 30 constituent companies. A leading example is the SPDR Dow Jones Industrial Average ETF (DIA). DJIA futures contracts enable traders to speculate on the future value of the index and Options provide the right, but not the obligation, to buy or sell the index at a predetermined price in the future. Mutual funds enable investors to buy a share of a diversified portfolio of DJIA stocks thus providing exposure to the overall index.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
