Waller's Dovish Pivot Cuts Fed September Hike Odds to 50%

A dovish turn from a senior Federal Reserve official on Thursday pulled September rate-hike odds down to roughly 50 percent and powered a third straight day of gains across global equity benchmarks.

September's meeting "is going to be knife edge and it's going to come down to how the CPI data prints," Joseph Purtell, portfolio manager at Neuberger, said.

Swap markets now assign about a 50 percent probability to a quarter-point hike at the Sept. 15-16 Federal Open Market Committee meeting, down from nearly 70 percent earlier this week after Governor Christopher Waller said he would be "inclined" to keep the benchmark rate unchanged if the next inflation report shows further cooling. The MSCI Asia Pacific index rose 0.8 percent, Seoul's KOSPI climbed 1.64 percent to 6,687.21 and Tokyo's Nikkei 225 gained 1.3 percent to 65,020.94, while the broad MSCI All-Country World index advanced for a third day. The dollar steadied after touching a four-month low, the 10-year Treasury yield held near 4.76 percent and spot gold slipped 0.3 percent to below $4,460 an ounce.

The repricing hands the decisive vote to Friday's nonfarm payrolls print and the Sept. 11 consumer price index release, which Waller said would determine whether he backs a hike or a hold. "I'm willing to sit and wait and be patient" to see if the next inflation report also shows it declining, Waller told Reuters, adding that "if it reverses, then you know it's time to pull the trigger and hike rates." The Fed's preferred gauge, the personal consumption expenditures index, rose 3.7 percent in July from a year earlier, down from 4.1 percent in May but still well above the 2 percent target.

The yen's roughly 2 percent one-day advance to a multi-month high was a second focus, with the currency trading near 156.28 per dollar after touching 155.30. Markets increased bets on a quarter-point Bank of Japan hike in September, with Nomura's Yujiro Goto arguing such a move has rationale and further tightening may follow. Japan's 20-year yield fell 10 basis points to 3.715 percent and the 30-year dropped 10 basis points to 3.975 percent, while the 10-year slipped 6.5 basis points to 2.900 percent.

Brent crude traded near $95.65 a barrel, on pace for its largest weekly gain since July, as renewed US-Iran tensions stoked concern over energy flows through the Strait of Hormuz. West Texas Intermediate rose 0.4 percent to $91.68. The oil-driven climb, combined with Fed Chair Kevin Warsh's hawkish Jackson Hole remarks, had pushed long-term yields to multi-decade highs earlier this week before Waller's comments reversed the move.

The bond selloff also reflects structural pressure: years of heavy government spending, persistent price gains and a wave of corporate borrowing to fund artificial-intelligence buildouts have left investors demanding higher compensation for holding long-dated debt. Warsh has sought to reduce the Fed's forward guidance, arguing it limits policy flexibility, which has left markets more uncertain heading into meetings than in the past. Vice President JD Vance reiterated the Trump administration's view that the Fed should cut rather than hold or hike, a stance at odds with the tightening path markets have been weighing.

Waller's remarks are "very meaningful because it could change or adjust the balance of the Fed's next policy decision," Suresh Tantia, chief investment officer for Asia equity strategy at UBS Global Wealth Management, said. A weak jobs report would likely cement the no-hike case and extend the equity rally, while a hot print could revive the roughly 70 percent hike odds seen earlier this week. With the FOMC decision about two weeks away and US midterm elections about two months out, "downside risk may be slightly larger than upside," Aidan Yao, senior investment strategist at AXA Investment Managers, said, arguing a cautious posture is warranted.

This article is for informational purposes only and does not constitute investment advice.