The probability of an interest rate hike rose from 37% to 67% in one week. The New York Fed president said that the rise in long-term bond yields reflects a robust economy.

The probability of an interest rate hike rose from 37% to 67% in one week. The New York Fed president said that the rise in long-term bond yields reflects a robust economy.

Market bets on a Federal Reserve rate hike this month have surged in a week, but a speech by a senior Fed official provided a marginal buffer for the tight bond market.

According to CME Group's FedWatch tool, the market expects the probability of the Federal Reserve raising interest rates by 25 basis points this month to rise sharply from 37% a week ago to about 67%, an increase of nearly 30 percentage points.

This shift in expectations reflects the market's perception of persistently high inflationary pressures and generally strong economic data. A speech by New York Fed President Williams on Wednesday somewhat cooled these expectations of a rate hike, and US Treasury yields fell slightly on Thursday, providing a temporary respite for the bond market.

However, from an overall perspective, the pressure on bond investors has not eased substantially. Oil prices continue to hold above $90 per barrel, and geopolitical tensions between the US and Iran are further exacerbating inflation concerns, highlighting the continued necessity for central banks to maintain a tight stance.

The probability of an interest rate hike has surged: driven by both inflation and geopolitical risks.

The probability of an interest rate hike this month jumped from 37% to 67% in just one week, driven by a confluence of factors. Oil prices remained above $90 per barrel, escalating tensions between the US and Iran further pressured energy prices, and market concerns about the inflation outlook intensified, reinforcing expectations that the Federal Reserve would need to continue tightening monetary policy.

Meanwhile, the upcoming key economic data releases are keeping the market on high alert. Wednesday's ADP employment data came in below expectations, but the market is more focused on Friday's US non-farm payroll report and the Consumer Price Index (CPI) data for September 11.

These two data points will directly influence the Federal Reserve's judgment on the policy path and are also key variables in whether current expectations for interest rate hikes can be further strengthened.

Williams' remarks on Wednesday provided some marginal support for market sentiment. He stated that the rise in long-term bond yields reflects a robust economic fundamentals, rather than simply runaway inflation expectations, and emphasized that more data is needed before making an interest rate decision.

Analysts believe that this statement was interpreted by the market as the Fed not being in a hurry to lock in the path of interest rate hikes, providing some room for correction of previously overpriced interest rate hike expectations.

However, Williams' remarks only had a marginal easing effect and did not fundamentally change the market's mainstream expectations for interest rate hikes. The next Fed official to watch is Governor Waller, who will speak on Thursday. Waller stated in July that further rate hikes might be necessary in the near future, and his latest remarks may have a new impact on market expectations.

In addition, it is worth noting that with oil prices remaining high, inflation expectations sticking, and the probability of a Fed rate hike still high, bond investors face significant uncertainty.

Following Waller's speech, Friday's non-farm payroll data and the subsequent CPI report will be crucial litmus tests for the sustainability of current interest rate hike expectations, and will largely determine the next stage of the bond market's direction.

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