On Wednesday (September 23), Federal Reserve Governor Michael Barr signaled a hawkish stance, publicly expressing support for another rate hike in October. Coupled with the latest preliminary PMI readings indicating renewed inflationary pressures, market expectations for a Fed rate hike in October quickly intensified. Simultaneously, several regional Fed presidents stated that continued monetary tightening was still necessary. European Central Bank officials also warned that a second wave of energy price increases could keep inflation high for an extended period. This resonance of tightening expectations from the European and US central banks directly led to a sharp rise in US Treasury yields, triggering a dramatic reaction in global capital markets.

US PMI data strengthened across the board, with inflation and employment rising in tandem.

S&P Global's preliminary manufacturing and services PMI readings were strong, with both indices reaching their highest levels in over four years. The services PMI came in at 58.7, the highest in 59 months, while the manufacturing PMI climbed to 56.7, a 53-month high. The composite PMI reached 58.4, a 62-month high; a PMI reading above 50 indicates economic expansion. Behind these strong economic data, inflationary pressures are rising again. Chris Williamson, chief business economist at S&P Global Market Intelligence, stated that business input costs in September saw their fastest increase in four years, with rising international oil prices pushing up fuel and transportation costs, which will continue to push up commodity prices and overall inflation in the coming months. The employment side also performed strongly, with companies continuing to hire to handle backlogs of orders. The employment growth rate in this PMI survey reached its highest level since June 2022. Services employment expanded at its fastest pace since June 2002, and manufacturing employment growth also rebounded to its highest level since February 2021.

Federal Reserve officials collectively signaled a hawkish stance, causing expectations of an October rate hike to surge.

In prepared remarks at the Chicago housing conference, Federal Reserve Governor Michael Barr stated that even after last week's 25-basis-point rate hike, policymakers still have much work to do. He said, "In my baseline scenario, there is a high probability that further policy adjustments will be needed to ensure that inflation falls back to the target level in a timely manner. We want to support sustainable economic growth to achieve full employment, and price stability is a core prerequisite for achieving this goal." Last week's FOMC meeting raised the benchmark interest rate by 25 basis points, bringing the policy rate range to 3.75% to 4%, with Barr voting in favor. Of the 18 officials who submitted economic projections, only two did not support further rate hikes this year. St. Louis Fed President Alberto Musalem and Boston Fed President Susan Collins also stated that they believe further rate hikes are necessary. On Tuesday (September 22), Susan Collins wrote that the likelihood of inflation persisting above the 2% target has increased, labor market fundamentals are improving, and monetary policy can prioritize stabilizing prices. Maintaining a relatively tight federal funds rate can help inflation continue to fall back to the target. Stimulated by both official speeches and PMI data, the CME FedWatch tool showed that the probability of a rate hike at the October 27-28 FOMC meeting jumped to 73%. US Treasury yields rose rapidly, with the 2-year Treasury yield, most sensitive to policy expectations, rising more than 13 basis points to 4.9%.

The European Central Bank issued a joint warning that a second energy shock could push up inflation, and the outlook remains highly uncertain.

Across the Atlantic, European Central Bank (ECB) Executive Board member Philip R. Lane also warned on Tuesday that a second wave of energy price increases could keep inflation high for a longer period. He stated that food, energy (including electricity), and various commodities are all facing upward pressure. If the energy shock this autumn is larger and lasts longer, it will drag down the eurozone economy. The ECB's benchmark forecast, which references oil and gas futures prices, expects oil and gas prices to ease later this year, with the situation not fully returning to previous levels but improving from the current state. However, Lane emphasized that there is a very high degree of uncertainty behind this benchmark forecast. The successive hawkish views from officials of the two major central banks in Europe and the US have reinforced expectations of tightening global monetary policy, continuing to impact global foreign exchange, bond, and commodity markets.

Conclusion

In summary, strong US PMI data, soaring input costs, and hawkish pronouncements from multiple Federal Reserve officials have significantly increased market pricing in an October rate hike. The US economy is exhibiting a combination of economic expansion, robust employment, and rebounding inflation, forcing the Fed to continue tightening monetary policy, leading to higher US Treasury yields. The European Central Bank is also wary of a second round of inflationary pressures from energy, indicating that the tightening cycle of major central banks globally is not yet over. Investors will need to continue monitoring US CPI and employment data, as well as policy statements from central bank officials in Europe and the US. Marginal changes in central bank policy expectations will continue to disrupt global bond, currency, and precious metal markets, keeping market volatility risks high.