Dow Jones futures decline due to cautious Fed policy tone

• Dow Jones futures fall as risk aversion increases amid decreasing odds of Fed rate cut bets.
• The CME FedWatch Tool suggests pricing in a 65% probability of a Fed rate cut in December.
• US stock indices decline amid mixed small-cap earnings and delayed US data due to the prolonged government shutdown.

Dow Jones futures move down by 0.72% to trade below 47,150 during European hours, with the S&P 500 futures and Nasdaq 100 futures declining 0.92% and 1.25%, trading below 6,850 and 26,000, respectively, during the European hours ahead of the United States (US) regular opening on Tuesday.

US index futures fell sharply due to increased risk aversion amid a cautious tone surrounding the Federal Reserve's (Fed) policy outlook. Fed funds futures traders are now pricing in a 65% chance of a cut in December, down from 94% a week ago, according to the CME FedWatch Tool.

The probability of a Fed rate cut in December decreased after cautious remarks from the Fed Chair Jerome Powell last week during the post-meeting press conference. Powell noted that another rate cut in December is far from certain and also cautioned that policymakers may need to take a wait-and-see approach until official data reporting resumes.

Additionally, market sentiment worsens following a weak ISM Manufacturing Purchasing Managers' Index (PMI). The index dropped to 48.7 from 49.1 in September. This reading came in weaker than the market expectation of 49.5. Factory Orders and JOLTS Job Openings data for September will be eyed later in the day.

In Monday's regular US session, the Dow Jones slipped 0.48%, weighed down by declines in traditional industrial and financial stocks. In contrast, the S&P 500 and Nasdaq 100 gained 0.17% and 0.46%, respectively, driven by strength in AI-related technology shares.

Market participants remain cautious as mixed earnings from smaller firms and the continued delay of key US economic data, stemming from the prolonged government shutdown, add to uncertainty. Investors are now eyeing upcoming earnings reports from AMD, Uber, Spotify, Pfizer, and Super Micro Computer, among others, for further market direction.