Wall Street Split on September Fed Rate Hike; Inflation Report Seen as Decisive
Wall Street is deeply divided over whether the Federal Reserve will raise interest rates next month. One point is not in dispute: Wednesday’s inflation report is expected to heavily influence the Fed’s next move. Based on trading in the swaps market, traders currently see about a 50% chance of a 25-basis-point Fed rate hike. Molly Brooks, a U.S. rates strategist at TD Securities, said the odds could rise sharply if inflation comes in above expectations. Another weak reading, she said, would give policymakers room to keep waiting. “We think this data is critical to the September decision,” Brooks said. She added that the market reaction may be asymmetric: An above-expectations inflation reading could have a much greater effect on the odds of a rate hike than a below-expectations reading would have in reducing them. As investors awaited the inflation report, U.S. Treasuries were little changed Wednesday. The benchmark 10-year Treasury yield fell 1 basis point to 4.68%, while the 30-year yield declined to 5.23%. Some U.S. Treasury traders believe the market has priced in a more hawkish Federal Reserve than economic fundamentals can support, and are betting that the data due soon will force investors to reassess their expectations. Ruben Hovhannisyan, a fixed-income portfolio manager at TCW Group, said: “We expect a bull steepening as the very hawkish pricing at the front end of the yield curve is unwound. Our overweight is concentrated at the front end.” Recent data, however, also suggest that the economic picture could change quickly. Last month’s CPI report showed inflation falling for the first time since 2020, sending the two-year Treasury yield down as much as 14 basis points. Last week’s employment report showed that U.S. employers unexpectedly reduced employment in July, prompting traders to further lower their expectations for a rate hike. Goldman Sachs rates strategists said in a report Friday that slower job growth “may raise the threshold that core CPI needs to reach” before the market clearly views a September rate hike as the most likely outcome.
Based on trading in the swaps market, traders currently see about a 50% chance of a 25-basis-point Fed rate hike. Molly Brooks, a U.S. rates strategist at TD Securities, said the odds could rise sharply if inflation comes in above expectations. Another weak reading, she said, would give policymakers room to keep waiting.
“We think this data is critical to the September decision,” Brooks said. She added that the market reaction may be asymmetric: An above-expectations inflation reading could have a much greater effect on the odds of a rate hike than a below-expectations reading would have in reducing them.
As investors awaited the inflation report, U.S. Treasuries were little changed Wednesday. The benchmark 10-year Treasury yield fell 1 basis point to 4.68%, while the 30-year yield declined to 5.23%.
Some U.S. Treasury traders believe the market has priced in a more hawkish Federal Reserve than economic fundamentals can support, and are betting that the data due soon will force investors to reassess their expectations.
Ruben Hovhannisyan, a fixed-income portfolio manager at TCW Group, said: “We expect a bull steepening as the very hawkish pricing at the front end of the yield curve is unwound. Our overweight is concentrated at the front end.”
Recent data, however, also suggest that the economic picture could change quickly. Last month’s CPI report showed inflation falling for the first time since 2020, sending the two-year Treasury yield down as much as 14 basis points. Last week’s employment report showed that U.S. employers unexpectedly reduced employment in July, prompting traders to further lower their expectations for a rate hike.
Goldman Sachs rates strategists said in a report Friday that slower job growth “may raise the threshold that core CPI needs to reach” before the market clearly views a September rate hike as the most likely outcome.