Dow Jones outlook: CPI, oil and yields put the rally to the test

US index futures rebounded in the first half of Wednesday’s session, along with European indices ahead of the release of US CPI. Some slightly dovish remarks from the Fed’s Williams seem to have helped sentiment a little, but whether those comments will be backed by data remains to be seen. While slightly hotter than expected inflation data shouldn’t be enough for markets to price in an October Fed hike with more than a coin flip probability, it can nonetheless reinforce expectations of further tightening later in the year. As well as boosting the dollar, it could undermine equities which are already having to come to terms with the recent upsurge in bond yields and elevated oil prices. We maintain a cautious Dow Jones outlook for now.

 

US indices have had mixed performances of late

 

The abovementioned macro factors are making life increasingly difficult for US equity bulls to justify continued dip buying near record levels.

 

The S&P 500 and Nasdaq have remained remarkably resilient until a few days ago, but much of that strength has been concentrated in a relatively small group of mega-cap technology and AI stocks. Elsewhere, the picture is less convincing.

 

The Dow Jones and Russell 2000 are particularly worth watching in this respect. Their recent weakness points to a broader deterioration in risk appetite that is becoming harder for investors to dismiss.

 

Crude oil continues to apply pressure

 

Oil is at the centre of the problem. Prices have now risen for the third consecutive week to near their range highs, with Brent now comfortably above $100 a barrel, at around $105-A$106 area.

 

Rising oil prices matter not just because of the direct hit to consumers and businesses, but because of what it means for inflation and interest rates. Higher energy prices risk keeping inflation elevated for longer, while Treasury yields have already moved sharply higher in recent weeks as markets reassessed the outlook for monetary policy.

 

The 10-year Treasury yield has recent highs reached its highest levels since the early 2000s. At these levels, bonds are also becoming a more credible alternative to equities, potentially making investors less willing to pay the high valuations that have supported the stock market.

 

That makes today’s US inflation report particularly important.

 

CPI takes centre stage

 

Markets expect core CPI to rise 0.2% month-on-month, taking the annual rate to 2.5%, while headline inflation is expected to accelerate to 3.6%.

 

The problem for anyone looking for a major market move is that expectations are already fairly well established. Unless the numbers deliver a meaningful surprise, the initial reaction could prove relatively muted. That said, with oil prices elevated and Treasury yields already putting pressure on equities, even a modest upside surprise could reinforce concerns about the inflation outlook.

 

For the Dow, the more interesting question is whether CPI provides the catalyst for the next decisive move.

 

Dow Jones outlook: technical analysis and key levels

 

The Dow’s recent price action suggests that the market is becoming less comfortable at these elevated levels.

 

 

Tuesday’s session produced an inverted hammer after the Dow Jones index reversed sharply from the bearish trend line and resistance around 52,300 area. That is hardly an encouraging signal, particularly with CPI looming.

 

That said, we have not yet seen any meaningful downside follow-through. Key support around 51,600 has held firm for now.

 

But if that changes later, then the index could drop to test the next important support area around 51,330, below which there is nothing significant until the recent lows near 50,500 – 50,600 area.

 

On the upside, a potential move above 52,300 would improve the technical picture and potentially open the way towards 52,700 or even 53,000. But the risk is that Tuesday’s reversal proves to be the start of something more significant.

 

For now, the bulls are still hanging on. But with Brent oil back above $105+, Treasury yields remaining elevated and the Dow struggling to regain momentum, the technical picture is becoming increasingly fragile. Today’s CPI report could determine whether this is simply another pause in the broader rally or the beginning of a more meaningful correction.