Oil prices remain steady above 90 dollars, combined with escalating geopolitical tensions between the U.S. and Iran, and persistent inflation concerns are intensifying expectations for the Federal Reserve to continue tightening monetary policy. Williams stated that the rise in long-term bond yields is due to a robust economy and emphasized the need for more data before making decisions, leading to a slight cooling in market rate hike expectations. The non-farm employment report on Friday and the CPI data on September 11 will be critical variables, and the speech by Fed Board member Waller on Thursday is also highly anticipated.

Written by: Dong Jing, Wall Street Insight

Market bets on the Federal Reserve raising rates this month have surged sharply within a week, but a statement from a Fed official provided marginal relief to the stressed bond market.

According to CME Group's FedWatch tool, the market's expectation for a 25 basis point rate hike by the Fed this month has risen significantly from 37% a week ago to about 67%, an increase of nearly 30 percentage points.

This shift in expectation reflects recent persistent inflation pressures and overall strong economic data. New York Fed President Williams spoke on Wednesday, contributing to a certain degree of cooling in the aforementioned rate hike expectations, resulting in slight declines in U.S. Treasury yields on Thursday, giving the bond market a temporary breather.

However, from a broader perspective, the pressure facing bond investors has not fundamentally eased. Oil prices continue to hold steady above 90 dollars per barrel, and the escalating geopolitical tensions between the U.S. and Iran further exacerbate inflation concerns, underlining the necessity for central banks to maintain a tightening stance.

Sudden Surge in Rate Hike Probability: Inflation and Geopolitical Risks Striking Together

The probability of a rate hike this month has jumped from 37% to 67% within just one week due to multiple factors resonating together. Oil prices remain above 90 dollars per barrel, and the increasing tensions between the U.S. and Iran are pushing energy prices further under pressure, thereby raising market concerns about inflation prospects, which reinforces expectations that the Fed needs to continue tightening monetary policy.

At the same time, the upcoming key economic data keeps the market on high alert. The ADP employment data released on Wednesday fell short of expectations, but the market is more focused on the U.S. non-farm employment report set to be released on Friday and the consumer price index (CPI) data on September 11.

These two pieces of data will directly influence the Fed's assessment of its policy path and are crucial variables for determining whether current rate hike expectations can be further reinforced.

Williams' remarks on Wednesday provided some marginal support for market sentiment. He stated that the rise in long-term bond yields reflects the robustness of economic fundamentals rather than an uncontrollable inflation expectation, emphasizing the need to see more data before making rate decisions.

Analysts believe this statement is interpreted by the market as indicating the Fed is not in a rush to lock in a rate hike path, thus providing some space for correction to previously over-anticipated rate hike expectations.

However, Williams' speech only had a marginal soothing effect and did not fundamentally change the market's mainstream expectations for rate hikes. The next Fed official worth noting is Board member Waller, who will speak on Thursday. Waller indicated in July that further rate hikes might be needed soon, and his latest remarks may have a new impact on market expectations.

Additionally, it is noteworthy that with oil prices operating at high levels and inflation expectations remaining sticky, combined with the probability of Fed rate hikes still being high, bond investors continue to face significant uncertainty.

After Waller's speech, the non-farm data on Friday and the subsequent CPI report will be important tests to determine whether current rate hike expectations are sustainable and will largely decide the direction of the bond market in the next phase.