Dow Jones Industrial Average Forecast: Fall in US Treasury yields helps equities rise

• After three consecutive down weeks, Dow Jones Industrial Average rises 1% in first two sessions this week.
• US Producer Price Index data shows a higher inflation reading than expected.
• Israel-Hamas conflict is sure to cause a humanitarian crisis in Gaza, but Oil prices surprisingly continue to tick lower.
• Treasury yields are collapsing at the longer-dated part of the curve.
• Dow component JPMorgan is scheduled to release Q3 earnings on Friday at the outset of earnings season.

The Dow Jones Industrial Average (DJIA) appears to be enacting a bullish reversal on the daily chart as last week’s consolidation has given way to this week’s advance. Beginning last Friday, the index has returned 0.87%, 0.59% and 0.40%, respectively, over the past three trading sessions. This followed three weeks of declines for the Dow Jones index.

Thought over the weekend to be the instigator of a further equity market sell-off, the Israel-Hamas conflict has proven to be a boon to US stocks. After Saudi Arabia released statements seeking to quell wider regional tensions, oil has reversed its immediate spike. West Texas Intermediate (WTI) futures have even dropped below $85 per barrel on Wednesday.

Another strange facet of the Israel-Palestine conflict is that it has engendered safe-haven flows into US Treasuries. This has reduced yields as heavier buying leads to higher bond prices, which are inversely correlated with yields. Since higher Treasury yields have been a primary reason for the Dow Jones and other stock indices recent decline, the drop in yields is helping to boost demand for equities.

US Federal Reserve officials this week have also been downplaying the need for further rate hikes this year. These statements are only adding to the belief that Treasury yields have risen high enough.

Playing against this positive tide for stocks is Wednesday’s release of the Producer Price Index (PPI), which showed higher core inflation than analysts had expected. Traders will likely wait, however, to see if Thursday’s Consumer Price Index (CPI) confirms rising core inflation among the consumer class.

Lastly, the Dow Jones Industrial Average will either benefit or retract based on index component JPMorgan’s (JPM) third-quarter earnings, which kick off earnings season on Friday.

Dow Jones News: Treasuries hold the key to equity market

Both the 10-year and 30-year US Treasuries have seen their yields decline by as much as 2% in Wednesday’s premarket, while 3-month and 6-month Treasury bills have yields that are slightly rising. This development is causing the yield curve to invert further after a move toward parity in recent weeks. 

Back in September, the 30-year Treasury reached a yield of 5% for the first time since 2007. On Wednesday, the 30-year has trended down to 1.71%.

On Tuesday, San Francisco Fed Bank President Mary Daly said that the higher treasury yields that have emerged of late can be treated as a substitute for higher rates since it should lead to lower spending and investment. This means that Daly is less inclined to favor the central bank raising rates any further, which is a good sign for the Dow Jones.

This week, Dallas Fed Bank President Lorie Logan said that raising interest rates any further might be completely unnecessary to combat inflation if long-term Treasury yields remain elevated. Fed Vice Chair Philip Jefferson also warned that the central bank needs to be very careful with more tightening.

Atlanta Federal Reserve Bank President Raphael Bostic, who until recently was promoting more rate hikes, said on Tuesday that current monetary policy is sufficiently restrictive and inflation will come down to 2% without triggering a recession.

Based on data from the CME FedWatch Tool, traders place the odds at 84% and 71% that the Fed will keep interest rates unchanged at the November and December meetings, respectively. This fact is boosting prospects for dip buyers, who believe that the onset of rate cuts next year will engender a steep rise in stock prices based on improved profits and valuations. JPMorgan’s Stephen Parker is already calling for new highs in the equity market by mid-2024.

Inflation stays on traders’ radar

One hour before the market opened on Wednesday, the US Bureau of Labor Statistics released its monthly Producer Price Index, this time for September. In a worrying sign for stick inflation, the Core PPI rose 0.3% MoM and 2.7% on an annualized basis. Economists had a prior expectation of 0.2% monthly growth and 2.3% annual growth. 

The bad reading may provoke at least some market participants to predict this as the beginning of a revival of inflation that will cause the US central bank to resort to higher interest rates – a move that could trigger another downturn in the stock market.

Now investors will look to Thursday’s CPI data to see if the higher inflation seen in the Core PPI translates to the broader consumer market. Consensus expects core CPI to drop from 4.3% annual growth in August to 4.1% in September, as well as September monthly core CPI to rise 0.3% in line with August.

JPMorgan launches earnings season

October brings the return of earnings to the fore, and Dow-member JPMorgan is the most prominent on the list this Friday. Alongside Wells Fargo and Citigroup, the largest bank in the US by assets will report Q3 results before the market opens.

Every Wall Street analyst who has revised his or her earnings outlook for Q3 on JPMorgan has raised it. Consensus is now at $3.87 in earnings per share (EPS) on $39.3 billion in revenue. Both the top and bottom lines are expected to grow more than 20% from a year ago.

Excitement for the big banks is more prevalent now that Pepsico (PEP) released solid results on Tuesday despite predictions that new weight-loss drugs might weigh on the junk food maven.

As one of the largest stocks in the US market, with a market cap above $420 billion, a major beat on the results by JPMorgan could spur a broad market rally that will help the Dow Jones. That was pretty much the case with the Q2 results as well. JPMorgan is such an extensive banking giant that it is sometimes treated as a proxy for how earnings season is trending.

Before that, on Thursday the down-and-out Dow component known as Walgreens Boots Alliance (WBA) will also release its results from the third quarter. The convenience chain and pharmacy is expected to report another drop in earnings to $0.69 per share on an adjusted basis. This should come on top of $34.8 billion in revenue. This earnings call will be particularly interesting since Walgreens just signed on a new CEO, former Cigna executive Tim Wentworth, at a time when the stock has fallen 40% year to date.