Warsh warning lifts Fed hike odds

Key developments

• Fed reprices hawkishly: Fed Chair Kevin Warsh used Jackson Hole to sharpen the Fed’s inflation message, warning that price growth had become “concerning” and that the FOMC would “have work to do” if it failed to moderate soon. His speech pushed markets to price a materially higher chance of a September hike and odds of a 25bp move rose to 61% from 36.
• Bonds sell off: Treasuries weakened as rate expectations moved higher. The two-year yield rose 4bp, while the ten-year jumped 11bp to 4.72%, a sharper move that points to renewed concern over both inflation persistence and policy duration.
• Equities slip: US stocks gave ground on Friday as yields rose. The Nasdaq fell 0.5% and the S&P 500 lost 0.3%, with higher rates again weighing on duration-sensitive assets.
• Oil risk premium builds: Brent has risen 1.1% to $90.3/b this morning after the US struck Iranian targets linked to potential mining activity near the Strait of Hormuz. Further US secondary sanctions on Iran are also expected, keeping geopolitical risk embedded in energy prices.
• China still soft: China’s manufacturing PMI improved to 49.8, beating forecasts but remaining in contraction. Non-manufacturing PMI data was also weak, strengthening the case for more stimulus.
• Japan surprises: Industrial production rose 0.1% in July, defying expectations for a fall and extending its run of monthly gains despite higher energy costs.

Today’s major data

• There are no major releases today. The week’s focus is Friday’s US payrolls report, where consensus expects a 55,000 gain.