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[Quick Facts]

1. The market broadly believes that the Fed will leave rates unchanged for the rest of the year.

2. ECB says interest rates have not reached their peak.

3. Bullard says the U.S. economy is forcing the Fed to raise rates again.

4. The UAW nears a strike.

[News Details]

The market broadly believes that the Fed will leave rates unchanged for the rest of the year

U.S. Fed Funds futures traders said there's an increased chance the Fed will not raise rates further in September, November, or December. A day earlier, the U.S. released its August CPI data. According to CME FedWatch data, after taking into account a 97% probability of a pause in rate hikes by the Fed in September, traders now believe that there is a 63.7% chance the Fed will not raise rates in November and a 59.9% probability in December. Despite better-than-expected August PPI and retail sales data released yesterday, traders' current bets on the Fed staying put in November and December remain higher than Wednesday's 57.4% and 53.8%.

ECB says interest rates have not reached the peak

On September 14, the European Central Bank (ECB) raised interest rates by 25 basis points to 4.5% at its latest policy meeting. Based on its current assessment, the ECB's key interest rate has reached a restrictive level, which, if maintained for a sufficiently long period, would make a long-lasting contribution to a timely return of inflation to target, the ECB noted in its rate note. Future decisions by the ECB Governing Council will ensure that the ECB's key interest rate is maintained at a sufficiently restrictive level for a sufficiently long period.

Later in the day, however, Christine Lagarde said that interest rates have not peaked. Most underlying inflation indicators are starting to fall, but rising energy and food costs may put inflation at risk on the upside, and the ECB's headline inflation rate is not expected to return to its 2% target by 2025.

Economic growth is expected to remain subdued in the coming months. The economy will still be weak in the third quarter. Our future decisions will ensure that the ECB's key interest rate will be set at a sufficiently restrictive level for as long as necessary.

The weak economy and stubborn inflation have made this rate hike by the ECB quite controversial. On the one hand, it's difficult for inflation to come down in the euro area. In August, headline inflation in the euro area stagnated at 5.3% due to factors such as the rebound in energy prices. On the other hand, the euro area economic data is generally weak. Sentiment indicators have also deteriorated. Employment surveys showed that the service sector is starting to slow following the manufacturing sector as inflation continues to take its toll. Weak global demand is weighing on exports and construction is shrinking, partly due to higher financing costs.

The market thinks this rate decision is the last rate hike by the ECB. The central bank did signal a pause in its long cycle of rate hikes, but it was a "pause with low confidence" and the ECB could raise rates further if necessary.

Bullard says the U.S. economy is forcing the Fed to raise rates again

Given the unexpectedly strong U.S. economy and the still strong underlying inflation, Fed officials may have to raise their expectations for peak interest rates and raise rates further, said former St. Louis Fed President James Bullard in an interview yesterday.

The problem, according to Bullard, is that the monthly change in the CPI in August was higher than in July, a development that is "a little bit worrisome." Fed officials want inflation to slow down, not accelerate, he added, but the CPI data suggests "it's not going to fall as fast as they thought."

It's not just inflation that makes the Fed inclined to do more. As many policymakers' expectations of weak economic activity this year have not been borne out, they need to revise their growth expectations upward. These increased forecasts may not change officials' monetary policy expectations, but they could open the door to further rate hikes.

The UAW nears a strike

As the Detroit Three automakers (GM, Ford, and Stellantis) and the United Auto Workers (UAW) have not reached an agreement on pay proposals, job security, and pension benefits and have not signed a new deal, more than 97% of UAW members have voted to strike. A strike of nearly 150,000 people seems to be inevitable. The U.S. auto industry is in for an "earthquake." The U.S. economy is facing losses of up to $500 million per day. After all, the auto industry contributes 3% of the U.S. GDP.

The last U.S. auto strike was in 2019, when General Motors workers went on strike for 40 days, resulting in an estimated $3.6 billion in losses for GM and a single-quarter recession in Michigan.

UAW President Shawn Fain said the strike, which begins this week, will not be moderate at first and then gradually expand with more plants joining the strike. The point of this strategy is to keep automakers guessing "which plant will strike next."

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