Dow falls for third straight day as Wall Street mulls chance of rate cut

“When the next episode of financial instability presents itself, it may do so in a messy and unexpected way,” Federal Reserve Chairman Jerome Powell warned Tuesday.
Image: Traders work on the floor of the New York Stock Exchange
Traders work on the floor of the New York Stock Exchange on July 2, 2019.Spencer Platt / Getty Images file

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By Lucy Bayly

Wall Street took a tumble Tuesday, as traders continued to seek out clues that the Federal Reserve will cut the nation's benchmark interest rate later this month.

The Dow Jones Industrial Average fell by 118 points at the opening bell, a third straight day of declines. The S&P 500 and the Nasdaq Composite were both down around 0.4 percent by midday.

“When the next episode of financial instability presents itself, it may do so in a messy and unexpected way,” Fed Chairman Jerome Powell told the Boston Fed early Tuesday in prepared remarks on the topic of bank stress tests. “Banks will need to be ready not just for expected risks, but for unexpected ones,” he added.

While traders had already priced in a July rate cut, an unexpectedly strong jobs report for the month of June, released Friday, threw cold water on investor notions that the economy is entering a period of slowdown. That thickens the plot for Powell, ahead of the July 30-31 meeting of the Federal Open Market Committee.

However, some investors have started to pull back on their positions, with Morgan Stanley noting Monday that it was cutting its global equities allocations, after signs of "weaker growth" in the broader economy. "We forecast an aggressive Fed and European Central Bank action because we think growth concerns are material,” Morgan Stanley analyst Michael Sheets wrote in a note to clients.

Also weighing on investor sentiment is the lack of progress on trade talks with China, even after President Donald Trump and his Chinese counterpart Xi Jinping met on the sidelines of the G-20 economic summit in Osaka, Japan, last month. Although the two sides agreed on a trade war truce, sources familiar with the talks told Reuters on Tuesday the meeting did little to clear the path for top negotiators to resolve an impasse that caused trade deal talks to break down in early May.

“The pressure for one side to give in to the other is diffused right now," Derek Scissors, a China expert at the American Enterprise Institute, a business-oriented Washington think tank, told Reuters. "I expect this to drag out for months."

Powell testifies on Capitol Hill this week for his twice-yearly report, where traders will be listening for any sign that the central bank is not shifting its monetary policy outlook, which Powell described last month would be to "act as appropriate to sustain the expansion."

Markets are currently forecasting a rate cut of 0.25 percent, or 25 basis points, at the FOMC meeting.