Markets now price a 67% probability the Fed raises rates by a quarter point in September, up from 37% a week ago, as oil above $90 and US-Iran tensions stoke inflation fears ahead of Friday's payrolls and September 11 CPI reports.
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Fed rate-hike odds jump to 67% as oil tops $90
Traders have swung to pricing a two-thirds chance the Federal Reserve tightens this month, a near-doubling of hike odds in seven days as crude's hold above $90 and fresh US-Iran strikes revive inflation worries.
"Long-term bond yields are a reflection of a solid economy," John Williams, president of the Federal Reserve Bank of New York, said Wednesday, adding he wanted to see more data before deciding on rates.
The comments offered marginal relief to a battered bond market, with US 10-year yields edging lower Thursday and Japan's benchmark JGB yield retreating from a 30-year peak of 3.015 percent. Brent crude rose $2.22, or 2.5 percent, to $90.32 a barrel after US forces struck two Iranian launchers on Larak Island in the Strait of Hormuz, while West Texas Intermediate gained $2.01, or 2.4 percent, to $85.41.
The repricing sets up a decisive test this week. Friday's nonfarm payrolls report and the September 11 consumer price index will determine whether the hike is locked in, while Fed Governor Christopher Waller — who said in July that higher rates may be needed — speaks Thursday at 1230 GMT in Washington.
Hike Odds Swing 30 Points in a Week
The jump in hike odds, tracked by CME Group's FedWatch tool, reflects a market that swung from expecting a pause to bracing for tightening within a week. Oil holding above $90 a barrel has revived second-round inflation concerns, and the direct US-Iran exchange of fire — Washington's first strike on Iranian territory since late July, followed by Tehran's missile salvo at a US base in Jordan — has kept a geopolitical premium embedded in crude.
Williams' remarks were read as pushing back on the most aggressive pricing. By framing the rise in long-term yields as a function of economic strength rather than unanchored inflation expectations, he suggested the Fed is not locked into a hike path before the data arrive. That interpretation helped US and Japanese bonds steady Thursday, though traders cautioned the relief was shallow.
ADP labor figures released Wednesday came in below expectations, but the more closely watched nonfarm payrolls report on Friday carries greater weight for the September decision. A strong print would reinforce the case for a hike; a soft one could pull odds back toward the 37 percent level seen a week earlier. The CPI release on September 11 follows as the second half of the test.
The tightening repricing is rippling across assets. The yen climbed to a three-week high as Japan's services sector expanded at its fastest pace in five months in August, adding to evidence the economy can absorb a Bank of Japan rate increase. In equities, Broadcom shares fell more than 3 percent in extended trading even after the chipmaker forecast strong AI sales for the next two years, a sign that higher discount rates are weighing on high-valuation growth names. S&P 500 e-minis were up 0.07 percent at 7,682.8 in early trading, with Euro Stoxx 50 futures little changed at 6,373.
For bond investors, the uncertainty is far from resolved. Oil prices above $90, sticky inflation expectations and a hike probability still near two-thirds leave little room for error, and the next two data points will set the tone for the September Federal Open Market Committee meeting. If payrolls and CPI both come in hot, the 67 percent odds could move toward a near-certainty; if they disappoint, Williams' caution suggests the market may have priced too much, too fast.
This article is for informational purposes only and does not constitute investment advice.
[1] Rate-hike probability jumps from 37% to 67% in one week; New York Fed President: Rise in long-term bond yields reflects a robust economy[2] Oil Price Forecast: Will Brent Continue to Rise After Topping $90 as US-Iran Conflict Escalates Again?[3] US-Iran Hormuz Conflict Drives Oil Past $90: Global Markets Plunge, Fed Rate Hike Expectations Rekindled[4] Oil surges above $90 as US strikes Iranian targets near Strait of Hormuz[5] Morning Bid: Bonds breathe sigh of relief | 93.3 The Drive
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