DJIA retracts on hotter inflation print from December CPI – Crypto News – Crypto News
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CPI shocks again, so is it time for a 100bps rate hike? CPI shocks again, so is it time for a 100bps rate hike?

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DJIA retracts on hotter inflation print from December CPI – Crypto News

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  • Dow Jones Industrial Index opened lower on Thursday as December US CPI print arrived above consensus.
  • Core inflation for December fell, but headline annual CPI rose to 3.4%.
  • DJIA rests just below its all-time high of 37,790 despite Thursday pullback.
  • UnitedHealth Group, the Dow’s largest holding, reports earnings before the open on Friday.

 

The Dow Jones Industrial Average (DJIA) dipped on Thursday after the US Consumer Price Index (CPI) release for December showed headline inflation drifting higher. The market had been hoping for another drop in inflation, which would have substantiated its belief in a 2024 awash in Federal Reserve (Fed) rate cutting. Now the rate cutting outlook is less clear.

The Dow Jones index fell 0.3% in Thursday’s morning session, while the NASDAQ Composite and S&P 500 backtracked in a similar fashion.

More significant for the Dow Jones index, however, will be Friday’s earnings release for UnitedHealth Group (UNH). UNH stock is the largest of its 30 holdings, so any major volatility associated with the fourth-quarter figures has the power to bend the entire index in its direction.

Dow Jones News: Headline inflation in CPI comes in hot

The consensus among economists heading into Thursday’s December CPI print was already calling for annual headline inflation to rise and for annual core inflation to drop. That is what took place in the data overall, but inflation appeared more sticky than projected.

Annual headline inflation in December arrived at 3.4%. This was much higher than the 3.1% reading for November or the December consensus of 3.2%. The report largely blamed housing costs, which amounted to about half of the increase in inflation.

Annual core inflation did fall in December but by less than expected. December’s core CPI was 3.9%, below the 4% print in November but above the expected 3.8% consensus.

On a monthly basis, inflation rose 0.3% from November for both headline and core readings. 

“This print is aligned with our view that disinflation ahead will be gradual,” wrote Morgan Stanley chief US economist Ellen Zentner in a client note

The problem for markets is that stickier inflation may force the Federal Reserve (Fed) to become more careful about cutting interest rates. The Fed Dot Plot in December showed that voting governors expected three interest rate cuts in 2024 at 25 basis points apiece.

Interestingly, the CME Group’s FedWatch Tool shows that bets on a March 25-basis-point rate cut actually rose Thursday morning by 2 percentage points to 67%, though predictions for a cut of 50 basis points fell by 1 percentage point. Likewise, the odds grew for a further 25-basis-point cut at the Fed’s May meeting.

Dow Jones News: UnitedHealth reports Q4 results before Friday open

As the United States’ largest health insurer, UnitedHealth Group has been a steady compounder for decades and now represents the largest holding in the Dow Jones index at nearly 9.5%. This means that the volatility normally associated with earnings releases is large enough to take the whole index with it.

UnitedHealth has not missed Wall Street’s quarterly consensus on either the top line or bottom line since the second quarter of 2020, so the odds favor yet another beat early Friday. Current estimates place the fourth quarter’s consensus at $5.98 in adjusted earnings per share (EPS) on revenue of $92.16 billion.

Of the 18 analysts to issue earnings revisions in the runup to the fourth-quarter unveiling, 16 of them revised their estimates lower. This is largely a product of an overwhelming rise in healthcare costs in 2023. CVS Health (CVS), which owns Aetna, warned investors on Monday that healthcare costs were pinching margins, although it doesn’t report quarterly earnings until early February.

“We’ve continued to see pressure [within our healthcare benefits segment],” said newly appointed CFO Tom Cowhey at a healthcare conference in San Francisco sponsored by JPMorgan. Cowhey said that CVS would likely exceed the 86% guidance it had given for its medical costs as a proportion of its healthcare premiums.

Additionally, JPMorgan (JPM) will also report quarterly results on Friday. The nation’s largest bank makes up about 3% of the Dow Jones index and is its fifteenth largest holding.

 

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.

Dow Jones Industrial Average forecast: Overbought after November rally

The Dow Jones index has been cresting since the end of 2023, largely moving sideways after marking a new all-time high at 37,790 on January 2, 2024. The hotter inflation print on Thursday pushed the index down to test the 21-day Simple Moving Average (SMA), but the DJIA was able to bounce back higher off that plunge.

A break of the 21-day SMA should send the DJIA back to the 36,500 to 36,952 former resistance zone that stems from highs formed in January of 2022. If the area turns into an area of support, the DJIA could recoup there before its next leg higher. Both the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) indicator show that further downside is likely to come.

Dow Jones Industrial Average daily chart
 

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