Dow Jones & Nasdaq 100 Fall on BoJ Hike Bets, US Gridlock

Japanese Household Spending Fuels Bets on a BoJ Policy Shift

US stock futures were on the back foot in early trading on Tuesday, October 7. Japanese economic data raised expectations of a Bank of Japan rate hike, weighing on US stock futures. Household spending rose 2.3% year-on-year in August, up from 1.4% in July. Economists expected household spending to increase 1.2%.

The larger-than-expected increase in spending could fuel demand-driven inflation, supporting a more hawkish BoJ rate path. BoJ rate hikes could unwind yen carry trades, pressuring risk assets such as US futures.

However, Sanae Takaichi’s victory in the Liberal Democratic Party election limited the impact of the numbers on sentiment. Takaichi’s support for ultra-loose monetary policy had dampened bets on an October BoJ rate hike, sending USD/JPY to a morning session high of 150.618. The pair eased back from the early highs after the data.

US Politics Adds to Market Uncertainty

While Takaichi’s victory could signal a return to Abenomics, the US government shutdown has raised concerns about the economic impact. Overnight, the Republicans’ and the Democrats’ bills fell short of the 60 votes needed, extending the shutdown.

A prolonged shutdown could negatively impact the US economy amid elevated inflation, raising stagflation risks. Traders face a period of uncertainty as Fed rate cut expectations clash with fears of an economic slowdown.

Nevertheless, US stock futures faced modest selling pressure as markets bet on October and December Fed rate cuts.

How Are US Stock Futures Responding to Politics and Central Bank Shifts?

US stock futures posted losses in morning trading. The Dow Jones E-mini fell 76 points after snapping a six-day winning streak on Monday, October 6. Meanwhile, the Nasdaq 100 E-mini dropped 40 points, and the S&P 500 E-mini declined 10 points.

Later today, traders should continue monitoring developments on Capitol Hill. President Trump signaled a willingness to work with the Democrats to end the shutdown, stating:

“I am happy to work with the Democrats on their Failed Healthcare Policies, or anything else, but first they must allow our Government to reopen. In fact, they should open our Government tonight!!”

A stopgap funding bill and reopening could limit the damage to the US economy, potentially lifting sentiment. On the other hand, more failed votes may weigh on risk assets.

While Capitol Hill remains the focal point, traders should also consider Fed speakers. Raphael Bostic, Michelle Bowman, Neil Kashkari, and Stephen Miran are scheduled to speak. Their views on the economic outlook, inflation, and the monetary policy outlook will likely influence risk appetite. FOMC voting members Michelle Bowman and Stephen Miran will likely face intense scrutiny.

Notably, Bowman endorsed three rate cuts for the year in August, citing weak jobs data despite analysts considering her a hawk. Stephen Miran has called for aggressive rate cuts despite higher inflation. Any deviation from previous guidance could significantly influence market sentiment.

Key Technical Levels for Dow Jones, Nasdaq 100, and S&P 500

Despite the morning losses, US stock futures remain comfortably above the 50-day and 200-day Exponential Moving Averages (EMAs), reaffirming a short-term bullish bias.

However, the near-term outlook hinges on US Senate votes, Fed commentary, and incoming economic data. Key levels traders are monitoring include:

Dow Jones

• Resistance: 47,000, the October 3 record high of 47,323, 47,500.
• Support: 46,500, 46,000, the 50-day EMA (45,714).

Nasdaq 100

• Resistance: October 6 record high of 25,253, 25,500.
• Support: 25,000, 24,500, the 50-day EMA (24,065).

S&P 500

• Resistance: October 3 record high of 6,800, 7,000.
• Support: 6,600, the 50-day EMA (6,552).

October Market Outlook: Key Drivers for Traders to Watch

US stock futures face a challenging session. Japanese data raised the threat of a BoJ rate hike, while a lengthy US government shutdown could affect the US economy.

With US labor market data delayed, central bank guidance and Senate votes on funding bills will dictate market trends.

Follow our live coverage and consult our economic calendar.