Recently, against the backdrop of the Federal Reserve still being in a tightening cycle to combat high inflation, the United States suddenly threw out a cold employment report: in August, ADP employment numbers increased by only 38,000, significantly lower than the market expectation of 48,000 and the previous value of 44,000. This marks the smallest increase since January of this year, sending a signal to the outside world about a marginal weakening in the labor market. According to traditional macro logic, such “weak employment” should have dampened interest rate hike expectations, but rate futures traders monitoring the CME's “FedWatch” screen saw a completely different story — after the data was released, the probability of maintaining rates in September was only 37.8%, while the probability of raising rates by 25 basis points was as high as 62.2%; looking ahead to October, the probability of maintaining rates decreased to 26.9%, while the cumulative probability of raising rates by 25 basis points was 55.2%, and the probability of a cumulative 50 basis points hike was also 17.9%. The mainstream bets clearly pointed to “at least one more hike.” Almost simultaneously, Fed official Williams emphasized that inflation remains the central bank's top priority, with the ultimate goal of bringing the inflation rate back to 2%. The current interest rate level is considered appropriate, and the recent rise in bond yields is interpreted as a sign of a strong economy rather than uncontrolled inflation expectations. The Fed also reiterated that it would not change its path based on a single report, but would make decisions based on all economic data. Behind this unusual picture of “employment data cooling and rate hike probability warming” is a consensus reached in the market among rate futures and various derivatives: at this stage, concerns about inflation still outweigh worries about economic slowdown and labor market weakness.

Employment Data Suddenly Cools: Why ADP Didn't Dismiss Rate Hike Thoughts

According to conventional macro textbooks, the August ADP employment number of only 38,000 added, significantly weaker than the market expectation of 48,000, and also below the previous value of 44,000, creates the smallest increase since January this year. Such a combination should have pressed the “decompress” button in traders' minds. A decline in employment growth to a new low for the year indicates that marginal weakness is emerging in the labor market, and against the backdrop of the Fed being in an anti-inflation tightening cycle, a cooling job market should typically lower the urgency for further policy tightening — what the central bank fears is not only overheating prices but also the cost of crushing employment and growth due to excessive rate hikes.

However, this time, the data and expectations did not align smoothly. Following the weak ADP numbers, the rate futures market through CME's “FedWatch” provided a different narrative: the probability of maintaining rates in September was only 37.8%, while the probability of raising rates by 25 basis points was as high as 62.2%; looking ahead, the probability of maintaining rates in October decreased to 26.9%, while the cumulative probability of raising rates by 25 basis points rose to 55.2%, and even 17.9% of funds were betting on a cumulative 50 basis points hike. The historically low increase did not noticeably diminish the market's confidence in at least one rate hike of 25 basis points; rather, the aforementioned probability distribution forms a superficial divergence of “weak employment but rising rate hike expectations.” The reason lies in the fact that, at a stage where inflation has not returned to the 2% target, the Fed repeatedly emphasizes that it will not change its path due to a single report. The ADP, as a private employment indicator, is merely a forward reference for official non-farm payrolls, not a decisive basis. Traders are well aware that this report is just one piece of a vast data puzzle, not the final card that could overturn the interest rate trajectory.

Rate Hike Probability Exceeds 60%: Collective Bet in CME Pricing

A few hours after the data release, the real sentiment was reflected in the probability table of CME's “FedWatch.” In the September column, the option to maintain rates received only 37.8% of the votes, while the rate hike of 25 basis points soared to 62.2%. In traditional macro textbooks, weak employment should lower rate hike expectations, but the actual bets in futures and rate derivatives were quite direct: most traders still believe the Fed will at least hit the brakes one more time, rather than stopping at the current rate range. In other words, in their models and on their screens, “raising by 25 basis points again” is the default path, while “holding steady” has instead become a minority scenario.

Extending the timeline to October, the layers of betting became clearer on the screen. By October, the probability of maintaining rates decreased further to 26.9%, while the cumulative probability of raising rates by only 25 basis points rose to 55.2%, and the probability of a cumulative 50 basis points hike was also 17.9%. This means that, in addition to mainstream funds betting on at least one 25 basis point hike, there is still a small group of traders reserving positions for a more aggressive cumulative 50 basis points tightening, clearly worried that inflation risks may continue to dominate in the upcoming meetings. Weak employment did not overturn the basic shape of this probability distribution; these figures on CME reflect that, before inflation returns to the 2% target and official rhetoric continues to emphasize “price stability,” the concern about uncontrollable inflation still outweighs worries about marginal weakness in the labor market. At this moment, the percentages on the CME screen signify the market's clear stance between inflation and growth.

Williams Goes Hawkish: Inflation Priority Over Employment Concerns

At the same time that rate futures wrote “at least raise once by 25 basis points” into the probability distribution, Williams provided an explanation almost completely aligned with the screen numbers. He repeatedly emphasized that the Fed's final duty is to achieve price stability and bring the inflation rate back to 2%, which is the central bank's “top priority,” not one of many goals, but the overarching goal that overrides other considerations. In this narrative, the labor market, which has just begun to show signs of fatigue, can only be placed in the lower-weight column. Corresponding to operational levels, his assessment was that the current interest rate level is deemed appropriate, without seeing any urgent need for significant easing in the short term, which essentially informs the market that there is still a distance to discuss “when to cut rates,” while “whether to tighten further” is the pressing topic.

More importantly, Williams did not attribute the recent rise in bond yields to uncontrolled inflation expectations but instead explained it as a sign of continued strong economic performance, with the yields themselves being important information to assess economic conditions. This interpretation reframes high interest rates and high yields from being “driven by inflation” to being “supported by fundamentals”: since the economy can still hold up, so under the background of inflation still being high and the tightening cycle not yet ended, policy has reason to continue siding with anti-inflation measures. He added that the Fed will consider all economic data rather than focusing on a single report when making decisions, further diminishing the immediate impact of the August ADP employment weakness. Hence, the official stance resonates with the elevated rate hike probabilities on CME: before inflation returns to the 2% target, both the central bank and the market are betting on the same side, with inflation risk clearly placed above slowing growth and weak employment, which is why “suddenly weak employment” did not shake the policy logic behind high interest rates and high yields.

Data Becomes Obscure: Traders Bet Between Inflation and Recession

“Data dependence” should mean that each new piece of data could slightly adjust the path, but the weak ADP employment report in August appears to carry limited weight in the face of the inflation target. Under private statistical measures, employment increased by only 38,000, marking the smallest increase since January of this year, and according to traditional macro textbooks, this should be enough to lower rate hike expectations. However, the Fed repeatedly emphasizes that it will not “decide based on one piece of data,” and Williams interpreted the recent rise in yields as “strong economic performance” rather than uncontrolled inflation expectations, which effectively put the weak employment situation back into the framework for reevaluation: a marginal cooling in labor is a signal, but before inflation returns to 2%, it is not enough to overturn the current tightening narrative.

In the rate futures and derivatives markets, this tension is dismantled into different pricing curves of bets. After the announcement of the weak ADP numbers, CME's “FedWatch” still reflected a 62.2% probability for a 25 basis points hike in September and only 37.8% for maintaining rates; by October, the probability of holding steady dropped to 26.9%, while the mainstream bet for raising rates by 25 basis points rose to 55.2%, with 17.9% of funds simply betting on a cumulative 50 basis points increase. The result is that the same set of data, under the narrative of “economy still strong, inflation uncontrolled,” is seen by some traders merely as a shift from an overheated labor market to “normalization,” and they are willing to continue pricing in rate hikes; while another part sees the increase of 38,000 as a prelude to recession, leaning towards positioning for pauses or even an early pivot. In this window period of back-and-forth between data and expectations, the market has not formed a singular story but rather revealed through differentiated rate futures and derivatives positions the real fissures of weighing inflation risks against growth risks.

Viewing Future Games of Monetary Policy Paths From a Single Divergence

With ADP increasing by only 38,000 and marking a new low for the year, yet corresponding to a 62.2% probability of a 25 basis point rate hike in September on CME's “FedWatch,” and the mainstream betting for at least a cumulative 25 basis point hike in October, this divergence of “weak employment – rising rate hike expectation” almost places the priority of inflation within the current decision-making framework on display. With a tone of “inflation remains a top priority, current rate levels are appropriate,” Williams reinforced the Fed's tolerance for continued tightening or maintaining high rates before prices get close to the 2% target, making this event a demonstrative example of the “data vs. narrative” game within the tightening cycle: a single employment report is not enough to swiftly overturn the inflation narrative, and rate futures and derivatives merely adjust bets under different inflation path assumptions. Looking ahead, the policy path will continue to be rewritten in the tug-of-war among inflation, employment, and yield signals, and market pricing will repeatedly make trade-offs between “defending price stability” and “avoiding growth deceleration” with each new data arrival, and this ongoing weighing itself will be the core scene of monetary policy evolution going forward.

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