Dow Jones futures are steady at around 46,850 during European trading on Thursday. S&P 500 futures sit at about 6,800, while Nasdaq 100 futures rose slightly by 0.03% to 25,350.

Federal Reserve Policy Expectations

Traders are being careful as they wait for Federal Reserve Chair Jerome Powell to speak. The stock indices have recently hit record highs, driven by strong performance in technology stocks. Recent minutes from the last FOMC meeting suggest that policymakers may adopt a more relaxed approach later this year. According to the CME FedWatch Tool, there’s a 92.5% chance of a 25-basis-point rate cut from the Fed in October, with a 78% chance of an additional cut in December. Fed members believe that easing policy might be appropriate by the end of the year. Meanwhile, the US government shutdown has now lasted nine days, with no progress made. On Wednesday, the Dow Jones changed little, but the S&P 500 rose by 0.58%, and the Nasdaq 100 gained 1.12%. This rally was boosted by gains in major tech and semiconductor stocks. AMD jumped 11.4%, and Nvidia increased by 2.2%, thanks to high demand for computing power. The Dow Jones Industrial Average consists of 30 well-known US stocks and is price-weighted. Factors that influence the DJIA include company earnings, economic data, and Federal Reserve interest rates.

Market Holding Pattern

With futures trading flat, we remain in a holding pattern ahead of Powell’s speech. The market has already priced in a significant chance of a rate cut this month, with the CME FedWatch Tool indicating over 90% likelihood. This expectation is backed by the recent September Consumer Price Index report, which revealed that inflation has cooled to 2.8%, allowing the Fed more flexibility to ease policies. The Fed’s cautious approach responds to a softening labor market. Last week’s jobs report showed that the economy added only 95,000 jobs, falling short of expectations. This slowdown supports the argument for more rate cuts by year’s end but also suggests potential economic weaknesses. For traders in derivatives, this means preparing for the expected rate cut while using options to protect against any unexpected tough talk from Powell that could upset the market. The ongoing government shutdown, currently in its ninth day, poses some risks, but it’s unlikely to change the market’s overall direction. Looking back at the extended shutdown from late 2018 to early 2019, the S&P 500 actually rose more than 10% during that political uncertainty. So, any market drops triggered by shutdown news may present buying opportunities, especially with the Fed’s supportive stance. Market leadership is still narrow, primarily in the technology sector, which has driven the Nasdaq 100 to new highs. With the CBOE Volatility Index (VIX) low at around 14, there’s a feeling of complacency that could leave the market open to sudden changes in sentiment. We should look for chances to utilize call spreads on tech leaders like Nvidia, while remaining cautious of the rally’s limited base. Create your live VT Markets account and start trading now.

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