Dow Futures Climb but Fed Could Detonate 5% Implosion This Week

Ben Brown
October 28, 2019 11:10 UTC
  • Dow Jones Industrial Average (DJIA) futures rose 75 points (0.28%) in pre-market trading Monday.
  • The Federal Reserve is widely expected to cut the base interest rate for the third time running on Wednesday.
  • If Powell and the Fed disappoint, the Dow Jones could fall 3-5% according to IAA analyst.

Dow Jones Industrial Average (DJIA) futures popped 68 points higher in early trading Monday, pointing to a strong stock market open. It comes as US Federal Reserve chairman Jerome Powell readies his third-straight interest rate cut.

Traders are pricing in a 94% chance of a rate cut on Wednesday, but disappoint may lie ahead. If Powell stands pat or indicates the end of this easing cycle, the stock market could drop precipitously.

“If the Fed were to disappoint the markets by not cutting next week, I think we could see a pullback of anywhere from 3-5%, but it all depends on how the Fed communicates their decision” – Chris Zaccarelli, Chief Investment Officer, Independent Advisor Alliance.

Dow futures climb 75 points

Dow futures contracts point to strong bounce at the start of the week, pushing the stock market within touching distance of its all time high.

Dow Jones Industrial Average (DJIA) futures climbed higher on Monday as trader anticipate a juicy rate cut at the Federal Reserve. Source: Yahoo Finance

S&P 500 futures and Nasdaq Composite futures rose 0.22% and 0.3% respectively.

Fed poised for historic third-straight interest rate cut

According to CME’s FedWatch tool, investors are pricing in a 94% chance of a quarter-point rate cut at the Federal Reserve at Wednesday’s FOMC. It would mark the third-straight cut at the hands of Powell in 2019, bringing the target rate down to 1.5-1.75%.

The move, which investors hope will lower chances of a recession, would certainly please President Donald Trump who once again pushed for Powell to cut rates and even begin a new round of quantitative easing.

“The Federal Reserve is derelict in its duties if it doesn’t lower the Rate and even, ideally, stimulate. Take a look around the World at our competitors. Germany and others are actually GETTING PAID to borrow money. Fed was way too fast to raise, and way too slow to cut!”

Brace for a 5% Dow Jones drop if Fed disappoints

While the consensus among traders points to a rate cut on Wednesday, there’s no guarantee the Fed will act. Voting members of the central bank remain split on whether to cut rates again. As the Wall Street Journal reported:

“Seven of 17 officials penciled in one more rate cut this year. The other 10 were split evenly between those who thought the new level of rates, after Wednesday’s cut, would be appropriate through the rest of 2019 and those who thought rates shouldn’t have been cut.”

Even if the Fed does cut, traders will be eagerly watching the comments of chairman Powell for future direction. He has repeatedly said this current round of easing is just a “mid-cycle adjustment,” which is consistent with three cuts. In other words, there might not be much appetite for further easing.

This article was edited by Samburaj Das.

Ben Brown

Ben is a journalist with a decade of experience covering financial markets. Based in London, UK, his writing has appeared in The Huffington Post and he was Chief Editor at Block Explorer, the world's longest-running source of Blockchain data. Reach him at benjamin-brown.uk or on Twitter at _Ben_Brown. Email ben @ benjamin-brown.uk.