How Traders Can Prepare For A Fed Announcement

At a Glance

  • Will they or won’t they? CME’s popular FedWatch tool monitors interest rate positions ahead of Federal Reserve meetings
  • New Micro E-mini Equity futures contracts may help traders position for upcoming Fed meetings

After Fed Chairman Jerome Powell and other Federal Reserve officials recently suggested a path for easier monetary policy, rate-cut expectations have accelerated.  Trader and investor anticipation of lower rates has been sparked by signs of a slowing economy, even with the markets approaching their all-time highs.

Just a week ago the market was not only pricing in a 100 percent probability of a 25 basis point cut but also a chance of a 50 basis point cut.  However, that has changed as the CME FedWatch Tool is now targeting a 47 percent chance of a 25 basis point cut and a 53 percent chance of no cut at all.  All eyes will certainly be on Jerome Powell and the Fed to see what their next move may be.

Lower Economic Data

Recent U.S. Factory Activity Growth, which measures the state of manufacturing, recorded its lowest pace of expansion since September 2009.  Also, the ISM Manufacturing Index for August registered 49.1 percent following a 51.2 percent reading for July.  The reading in August is the first sub-50 percent reading in three years and the lowest since January 2016.  The dividing line between expansion and contraction is 50 percent.

The IHS Markit U.S. Manufacturing PMI was revised higher to 50.3 in August from 49.9 yet this number also pointed to the weakest pace of expansion in the manufacturing sector since September 2009.  New export orders fell at the quickest pace since August 2009. On the other hand, the consumer is doing well.  U.S. Retail Sales rose 0.4 percent in August and were up 4.1 percent from a year earlier, the fifth straight monthly increase in sales.  This reinforces the fact that domestic consumption has not been hurt by the slowdown in the manufacturing sector.

This adds another dimension of complexity to Fed decisions as it contemplates whether to lower its short-term rate target.  This metric is extremely important to the Fed because it believes that where the public sees inflation going in the future has a strong influence on where it is now.

Tariffs Still A Threat

And… of course, the red herring to the Fed’s decisions may just be the ongoing tariff threat.  Even with President Trump’s decision to postpone a planned October 1 tariff hike on Chinese imports to October 15, and China deciding to lift punitive tariffs imposed on U.S. soybeans and pork, there is still growing concern for the future of the global economy.  How the Fed may balance this threat with the recent economic reports has traders positioning for upcoming announcements.

Positioning for A Fed Announcement

The recent launch of the CME Micro E-mini Equity futures has been a major success and may be one of the best opportunities for a trader to take advantage of a volatile Fed situation. More than 72 million contracts have traded since their launch in May 2019.  They allow traders a simple way to access the equity index futures markets and also offer traders the flexibility to scale into and out of (futures?) positions on the E-mini S&P 500, Nasdaq-100, Russell 2000 and Dow indexes.

Regardless of the next Fed decision, it is likely that equity markets will move, either to potential new highs or retreat from current levels. Active traders can prepare with tools like Micro E-mini Equity futures. And anyone can get a sense of where the market is positioned at any time with the FedWatch tool.

Scott Bauer graduated with honors from the University of Illinois Business School, Urbana Champaign, in 1988 with a B.S. in Finance. Bauer began floor trading in 1991 and formed BOTTA Capital Management in 1995. Scott traded equity options, S&P options at CME and was employed by Goldman, Sachs & Co. as Vice-President, Equities Division. He is currently CEO of Prosper Trading Academy and appears regularly on CNBC, Bloomberg Financial and Fox Business as a guest commentator.

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