Interest Rate Expectations Shift After CPI and Trade Tensions

Market pricing for rate hikes through year-end is as follows:

• For the RBNZ: 55 bps, with a 99% probability of a rate hike at the next meeting.
• For the ECB: 41 bps, with a 98% probability of a rate hike at the next meeting.
• For the BoJ: 37 bps, with a 67% probability of a rate hike at the next meeting.
• For the RBA: 27 bps, with a 51% probability of a rate hike at the next meeting.
• For the BoE: 26 bps, with an 84% probability of no change at the next meeting.
• For the Fed: 26 bps, with a 65% probability of no change at the next meeting.
• For the BoC: 13 bps, with a 98% probability of no change at the next meeting.
• For the SNB: 5 bps, with a 97% probability of no change at the next meeting.
• Last week's pricing is available here.

Comparing last week's pricing shows that expectations were mostly unchanged for most central banks, except the RBA and the BoC. The hawkish repricing for the RBA was driven by Australia's monthly CPI report, released on Wednesday. The trimmed mean CPI year-over-year came in at 3.6%, above the expected 3.5% increase. More notably, the monthly measure rose 0.5%, well above the 0.3% forecast.

On the BoC front, the dovish repricing followed the collapse of US-Canada trade talks and the imposition of 50% tariffs on $27.6 billion of Canadian goods. Canada retaliated with dollar-for-dollar tariffs on US goods. The Bank of Canada had previously warned that a trade war would negatively impact economic growth and warrant a less hawkish stance.

Today's main event is Fed Chair Warsh's speech at the Jackson Hole Symposium. After the Treasury buyback announcement and Bessent's verbal intervention to suppress long-term yields, I think traders will focus solely on whether he leans against the recent easing of financial conditions.

If he does not, the current "debasement" trades—such as long precious metals, bitcoin, and short US dollar—are likely to extend further. Conversely, if he pushes back with statements like "recent easing in financial conditions, if sustained, could complicate the process of returning inflation to our target" or "if recent easing threatens progress toward price stability, we will not hesitate to respond appropriately," the market may retighten financial conditions and extend the pullbacks in the "debasement" trades.

Warsh is scheduled to speak at 14:00 GMT/10:00 ET. The prepared remarks are typically released either moments before or simultaneously with his delivery.