Dow Jones Industrial Average ignores a revision made of inflation

The Dow Jones Industrial Average was observed trading just below 53,500, roughly 100 points lower on the day, following a 12:30 GMT data release that was considered routine. Official figures revealed that July core Personal Consumption Expenditures (PCE) prices increased by 0.2% month-over-month and 3.3% year-over-year, both aligning with expectations.

These percentages were the ones that key rate forecasts. However, revisions made to the second quarter data, which were released concurrently, did not follow the same pattern. The revised second-quarter Gross Domestic Product (GDP) real output remained unchanged from the initial advance reading, standing at an annualized 1.5%. All price-related metrics associated with this output experienced an upward trend.

The GDP price index rose to 6.4% from 6.3%, quarterly headline PCE prices to 5.3% from 5.1%, and quarterly core PCE prices to 3.7% from 3.4%, with all figures surpassing the market's expectations. This revision primarily impacted the deflator, a 0.3 percentage point upward movement that, while significant, received minimal attention compared to the monthly core print.

The household side of the release indicated that personal income grew by 0.4% in July, exceeding the 0.3% consensus, while personal spending rose by 0.2%. However, the monthly PCE price index also increased by 0.2%, resulting in nominal spending growing exactly in line with price increases, leaving real consumer spending flat for the month.

The fact that income surpassed spending by 0.2 percentage points, with prices absorbing all the spending that transpired, suggests that households retained the difference rather than consuming it. This behavior is atypical for a consumer that appears confident about the coming months. The early release of August consumer sentiment data showed a decline in optimism, contrasting the positive July numbers.

Durable goods orders were initially reported as strong at 1.1% versus a 0.7% expectation, but the transportation sector's figure brought the reading down to 0.4%, missing the mark. Nondefense capital goods orders excluding aircraft slowed to 0.2% in July from 1.2% in June, a decline that further weakened the business investment outlook.

The Fed chair's argument for maintaining the current stance was supported by business investment strength, but a 1 percentage point deceleration in core orders marks the first sign of weakness in this area. The combination of rising prices, flat real spending, and slowing capital orders creates a stagflationary scenario. Despite this, the market seems to view these developments as benign.

The upcoming events that could influence the market's direction are not scheduled for Friday, as Nvidia (NVDA) is set to release earnings after the market closes, with an expected earnings per share of $2.09 on revenue near $92.28 billion. These figures are anticipated to provide insights into the artificial intelligence sector's capital cycle rather than serving as a substantial indicator for the index.

On Friday, Fed Chair Jerome Powell will deliver his first keynote at the annual Jackson Hole symposium, with the theme of financial innovation and payments, focusing on the academic aspects rather than the keynote itself. Market participants have spent the week speculating on the potential impact of Powell's speech, which has avoided explicitly discussing September's monetary policy decisions.

The 30-year Treasury rate reached its highest level in nearly two decades last week, standing at 5.23% on the Federal Reserve constant maturity series on Monday. It has since eased slightly. Currently, the index is trading around 2.3% away from a record high, while borrowing costs for 30-year debt have risen to levels not seen since before the financial crisis.

This presents a persistent challenge for investors. The session's high was 53,700, which the tape had already retreated from during the day. The resistance level of 53,800, established since mid-August, proved significant. Beyond this point, the 54,100 area from early August and the record high near 54,750 would be the next objectives.

Failure to surpass 53,800 would open up the 53,200 support level, with the 53,000 area and the 50-day Exponential Moving Average (EMA) near 52,600 as crucial levels to watch. The overall market sentiment was bearish, as the 53,800 level acted as a cap, and the Stochastic Relative Strength Index (Stoch RSI) had entered the lower band, indicating a potential recovery losing its momentum.

The next target for traders is the 53,200 area, followed by the 53,000 handle, with a breach of the 53,800 mark invalidating the bearish bias.