They have an awesome track record for handicapping the
. In the week before a monetary policy meeting, they've correctly predicted the Fed's action on short-term interest rates more than 98% of the time.
Who are these soothsayers of one of the world's most potent economic policy tools? Fed funds futures traders.
Traders of the contracts at the Chicago Mercantile Exchange are putting their money where their mouths are Tuesday, betting we'll go into December with another quarter-point rate cut.
After this morning's
dismal consumer confidence reading, the worst in nearly a decade, December
fed funds futures
(FFZ2:CME) went beyond forecasting a sure-thing rate cut from 1.75% to 1.50%, pricing in a 30% chance of a 50-basis-point cut to 1.25%.
If the Fed does cut rates at its Nov. 6 meeting, and this is what the best handicappers are unequivocally pricing in, let's look at how markets might react.
Although the market is selling off on the consumer confidence report early Tuesday, rate cuts are usually supportive in the near term for stock index futures. With a reduced cost of capital trickling down to corporations, a quarter-point Fed ease next week would be a shot in the arm to many blue-chip stocks. Big firms are among the biggest beneficiaries of lower borrowing costs. A rate cut would likely work to perpetuate the October rally among capital-intensive
Tuesday's pullback in stock index futures is healthy in that it helps work off an overbought situation. The strongest Fibonacci chart support for
S&P 500 index futures
(SPZ2:CME) that I see -- and a location to consider entering on the dip -- comes in the 848.00 to 851.50 area.
(DJZ2:CBOT) could magnetize to and find support at the 8030.0 level before continuing their northbound trajectory.
The dollar would likely suffer should the Fed cut rates. Currencies generally flow to countries paying the highest real interest rates. A 25-basis-point rate cut in the U.S. means short-term Europe rates would be about 1.75% higher than in the U.S., enticing more institutions to convert dollars to euros and park funds where they receive the higher rate.
dollar index futures
(DXZ2:NYBOT) and the
euro FX contract
(ECZ2:CME) have been coiling within a multimonth consolidation. The contracts may just now be yielding clues as to which direction they might break. As I've pointed out in
previous columns, big moves often follow the volatility differentials observed in such coiling behavior.
Although one bar does not make a rally, there were expansion bars Monday -- the biggest rallies in two weeks -- in all of the major currencies paired against the buck. The euro FX,
(CDZ2:CME) also hit fresh 10-day highs Monday in signs of nascent momentum.
Conversely, dollar index futures forged a new 10-day low and are breaking down below the support line of their well-defined triangle. In short, the collective strength of currencies paired against the buck -- their expansion bars and 10-day highs -- should be dollar-index negative.
Also in the currencies, notice how the
(ADZ2:CME) followed through nicely after breaking out of its triangle
last week. Short-term rates in Australia currently stand at 4.75%. If the Fed cuts rates by a quarter-point next week, that will leave the Australian risk-free rate about 3.25% higher than that available in the U.S.
Finally, the market will likely view a rate cut to new 40-year lows as inflationary. Gold is the primary hedge in an inflationary environment. The February 2003
(GCG3:COMEX) is tilting higher after leaving a tail at its 200-day exponential moving average in August in a sequence of higher highs and higher lows.
A test of 325.0 appears inevitable. A break above 330.0 would be in the spirit of a Cooper Rule of Four Breakout, a pattern that preceded huge runs in
Marc Dupee is an independent trader and co-author of the book
The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to
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