Dow Jones winning streak continues as US CPI decelerates, reaches new YTD peak

DJIA futures rallies to new highs on Wednesday following the June CPI release.
US CPI data came out lower than expected and stock market rallied across the board.
DJIA trades within a symmetrical triangle pattern with bullish price target of 35,378.
NASDAQ 100 rebalance could affect Dow Jones negatively.

The Dow Jones Industrial Average (DJIA) has risen to new year-to-date highs on Wednesday, following a lower-than-expected June inflation release. The NASDAQ is doing even better, surging 1.22% at the open, to new 17-month highs.

The June core CPI came out at 4.8% YoY on Wednesday – below the 5% forecast and was bullish for the stock market as a whole. Both core CPI and headline CPI rose 0.2% MoM, which was below the 0.3% consensus for both. YoY headline inflation of 3% arrived below the 3.1% consensus. Dow futures spiked from 0.1% to 0.5% on the news.

The NASDAQ 100 rebalancing announced this week may negatively affect the DJIA, however, and it appears that traders are not yet factoring that headwind into their trading view. The weighting of Microsoft (MSFT) and Apple (AAPL) – both Dow holdings – will be reduced in the NASDAQ 100, which should lead to increased selling pressure over the next two weeks.

Dow Jones news: June core CPI at 4.8% YoY, below expectations, stock markets celebrate

US CPI ex Food & Energy printed a 4.8% rise YoY in June, below 5.0% expectations. All inflation release numbers came below the consensus numbers, with both headline and Core CPI monthly at 0.2% below 0.3% expected and headline US CPI YoY at 3%, below 3.1% expected.

The result is unlikely to lead to a change of view on whether the central bank raises interest rates on July 26. The market is near certain at this point that the Fed will raise the fed funds rate by 25 basis points to a 5.25% to 5.5% range at the FOMC meeting exactly two weeks from now.

On Monday, the Federal Reserve Bank of New York's monthly Survey of Consumer Expectations reported that US consumers' one-year inflation expectation fell to 3.8% in June from 4.1% in May. This was the lowest result from the survey in more than two years.

Dow Jones Industrials and the whole stock market are rallying on the back of this release. This is because it lowers the chances that the Fed will go forward with another rate hike after July’s FOMC meeting. In recent Congressional testimony, Fed Chair Jerome Powell stated that two more rate hikes were the most likely event following June’s pause. Last Friday’s Nonfarm Payrolls figure was greeted warmly by the market since new hiring fell below consensus for June. However, continued growth in hourly wages concerned those rooting for an immediate solution to the wage-price spiral.

Dow Jones news: NASDAQ 100 rebalancing bodes poorly for Dow outlook

Earlier this week, the leadership behind the NASDAQ 100 decided that the growth-oriented index had become too top-heavy. The so-called Magnificent Seven stocks – Apple, Microsoft, Alphabet (GOOGL), Amazon (AMZN), Meta Platforms (META), Tesla (TSLA) and Nvidia (NVDA) – exploded in the first half of the year to comprise 48% of the index. Market pundits believe this rebalancing will push these seven outliers back down to 40% of the total weighting.

This means that Dow holdings Microsoft and Apple will both be sold off by a number of NASDAQ 100-following ETFs and funds like the $200 billion Invesco QQQ Trust (QQQ). Wells Fargo put out a research note saying that these two mega-cap stocks lead its “top up-sizers” list.

Thus far, the NASDAQ 100 leadership have not released the precise weighting of the new index, but those figures will be released on Friday, July 14. The new weighting will take effect on Friday, July 21 before its trading debut on Monday, July 24.

"The upcoming NDX rebalance is reducing concentration risk but creating uber-cap selling pressure," Wells Fargo equity analyst Chris Harvey wrote on Tuesday.

Wells Fargo forecasts that Microsoft stock will have its weighting reduced by 1.8 percentage points and that Apple’s weighting should decline by about 1.7 percentage points. Currently, Microsoft makes up 6.44% of the Dow Jones weighting, while Apple makes up 3.44%.

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.

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