Dovish comments by the Fed’s Waller sent rates lower on Thursday. He was more inclined to keep rates on hold, citing some signs of disinflation, but also pointed to the remaining data ahead in the next two weeks with a nod to the CPI release.
A stronger ISM services report then pulled rates higher again, though not all the way back. Higher-than-expected new orders and prices paid, alongside a weaker employment component gel with the anticipated impact of AI.
Rates will likely continue to be jolted around by the data with Friday’s jobs data being one of two key releases that will help define the next FOMC decision. After Waller’s comments, the market’s implied probability for a rate hike at the September meeting only briefly dropped noticeably below the 50% threshold, highlighting that after the Fed Chair’s comments at Jackson Hole, the decision is better framed as a hike unless the August jobs and CPI data justify a pause. Our economist suspects that now, it will likely require a jobs figure below 25k, possibly even net job losses, with then a core CPI reading below 0.2% month-on-month, to prevent or delay a hike.
Long-end yields are also following the lead of the short end, but the steepening of the curve is a reminder that there are other narratives at play that will keep long-end yields elevated going forward.