Al-Watani: Rising prospects of the Federal Reserve raising interest rates

The National Bank of Kuwait report indicated that global markets spent the week under the influence of two opposing forces, which pushed bond yields higher and affected risk-on sentiment in divergent directions.

On one hand, the speech by Federal Reserve Chair Jerome Powell at Jackson Hole served as a warning that core inflation “has not seen tangible improvement” and that the Fed still has “more work to do.”

The report considered that this combination drove yields on two-year and 30-year U.S. Treasury bonds higher at the start of the week, while the probability of a September interest rate hike approached 60 percent. This occurred alongside weakness in some labor market data: private-sector employment data from the ADP report showed approximately 38,000 jobs added, and job openings remained stable at 7.3 million according to the U.S. Job Openings and Labor Turnover Survey. These factors contributed to a decline in 10-year Treasury yields toward 4.75 percent, allowing equity markets to regain momentum after a shaky start to the week. The S&P 500 index rose by 1 percent on Thursday, following the Dow Jones index’s drop of more than 400 points on Monday.

Friday’s jobs data settled the debate, as the U.S. economy added 162,000 jobs in August—roughly three times market expectations—with July’s data revised upward. Consequently, the rationale for caution linked to weak labor market conditions dissipated, and expectations for a September rate hike rose, pushing short-term bond yields and the U.S. dollar higher.

With the average monthly job growth over the past 12 months remaining at just around 31,000, the data suggests a halt in the deterioration of the labor market rather than a strong return to a robust growth pace. However, it reduces the Federal Reserve’s justification for waiting due to weak labor market conditions ahead of the Federal Open Market Committee meeting in two weeks, leading to a slight increase in the pricing of a September rate hike following the report’s release.

The report also covered other markets, noting that the Bank of Canada kept its overnight interest rate unchanged at 2.25 percent, stating that economic and inflation developments were proceeding “broadly in line with expectations.”