National Bank: Markets Lower Expectations for Near-Term Monetary Tightening
- US inflation rose 0.2 percent month-on-month and 3 percent year-on-year
A report by National Bank of Kuwait indicated that global markets remain influenced by the interplay between inflation-related concerns, rising sovereign bond yields, and geopolitical risks. US 10-year Treasury yields retreated from their highest levels in 24 years, while two-year bond yields fell to 4.82 percent.
The report noted that US economic data presented a mixed picture, combining resilient demand with weak labor market indicators, prompting investors to lower their expectations for near-term monetary policy tightening by the Federal Reserve.
Despite the weakening labor market, consumer activity remained strong. Personal spending, adjusted for inflation, rose 0.6 percent month-on-month in August, marking the strongest increase since March 2025.
It stated that core inflation, as measured by the Personal Consumption Expenditures (PCE) price index, rose 0.2 percent month-on-month and 3 percent year-on-month, coming in below expectations. Meanwhile, second-quarter GDP growth was revised upward to 2.2 percent from 1.5 percent.
The report covered key statements from Federal Reserve officials and diverging views on the monetary policy path. Dallas Fed President Lorie Logan maintained her hawkish stance, while several senior officials called for caution. Logan indicated that the Fed might need to raise interest rates by an additional 50 basis points or more to restore price stability, but clarified that rising term premiums on Treasuries and tightening financial conditions could reduce the need to continue raising rates. Conversely, Federal Reserve Vice Chairman Philip Jefferson, New York Fed President John Williams, and Board of Governors Vice Chair for Supervision Michelle Bowman emphasized the need to allow more time to assess incoming data and underlying economic trends before making any adjustments to monetary policy.
Following the release of the September jobs report, which showed weaker-than-expected data alongside moderating wage growth, markets further lowered their expectations for near-term monetary tightening. The implied probability of a rate hike in October, derived from futures contracts, fell to 23 percent, down from around 70 percent earlier in the week.
At the same time, 30-year Treasury yields rose by 66.8 basis points since June 30, contributing to broader financial tightening.
