Strong non-farm payrolls ignite hawkish expectations on Wall Street! UBS joins the "hawkish shift" ranks: from predicting "no change for the year" to rate hikes of 25 basis points in September and December.

The U.S. non-farm employment data for August showed a strong performance that exceeded market expectations by nearly three times, prompting major institutions on Wall Street to urgently rewrite their scripts regarding the Federal Reserves policy path. On September 7, UBS officially overturned its previous prediction of "no changes throughout 2026," shifting to expect the Fed will raise interest rates by 25 basis points in September and December, totaling a cumulative increase of 50 basis points for the year. Citigroup and Macquarie also adjusted their interest rate forecasts in tandem, with global financial markets now pricing in a nearly 60% chance of a rate hike in September. UBS's 180-Degree Turn: From No Changes All Year to Two Rate Hikes This Year In its latest report, UBS Global Wealth Management clearly stated that the hawkish signals from Federal Reserve Chairman Kevin Walsh at the Jackson Hole Annual Conference, the continued inflation risks brought by supply bottlenecks, and the robust performance of Augusts non-farm employment data are sufficient to change previous interest rate judgments. Data shows that U.S. non-farm employment increased by 162,000 in August, nearly three times the market expectation of 55,000. The unemployment rate remained low at 4.1%, and July's data was also revised up from a decrease of 23,000 to an increase of 21,000. UBS pointed out that this report has eliminated the "final barrier" of a weak labor market as an obstacle to interest rate hikes. UBS further distinguished between two interest rate hike scenarios in its report: If AI-related capital expenditures, productivity gains, and corporate profit growth keep the U.S. economy strong, the rate hikes could be seen as a relatively "benign" tightening; however, if inflation remains sticky while economic growth begins to slow, it could transform into a more adverse stagflationary tightening. Citigroup and Macquarie Turn Hawkish Simultaneously: Rate Cuts Delayed and Rate Hikes Brought Forward Following the release of the employment data, Citigroup made a more aggressive adjustmentsignificantly delaying the expected timing of rate cuts, now forecasting that the Fed will cut rates by 25 basis points in June, September, and December 2027, compared to its previous predictions of October, December 2026, and January 2027. Citigroup's Chief U.S. Economist Andrew Hollenhorst stated that this report favors a hawkish position for the Fed as it eliminates the presence of a weak labor market as an immediate concern. Macquarie, on the other hand, brought forward its expectation for the first rate hike from December to September, now forecasting that the Fed will raise rates by 25 basis points in September and maintain its judgment of another 25 basis point hike in the first quarter of 2027. Deutsche Bank strategist Henry Allen further warned that investors may be underestimating the extent of rate hikes needed to curb inflationThe shallow rate hike cycle that the market continues to digest does not align with the Fed's past rate hike cycles. Market Pricing: Probability of September Rate Hike Rises to 60%, Waiting for the "Final Hammer" from CPI CMEs FedWatch Tool shows that, as of September 8, the market's probability for a 25 basis point rate hike by the Fed in September has risen to 58%, with a 42% chance of maintaining current rates. This probability has risen significantly from less than 50% before the August employment data release. However, the last piece of the puzzle before the September 16 FOMC meeting will be the Consumer Price Index (CPI) report for August, which will be released this Friday. Bank of America Securities expects the core CPI to rise by 0.22% month-over-month in August, believing that this is sufficient to convince Fed Chairman Walsh that inflation has not yet been adequately controlled, thus supporting another rate hike. Federal Reserve Governor Chris Waller stated that if inflation data improves in the coming weeks, he would prefer to keep borrowing costs unchanged, indicating that there are still divisions within the committee. However, as UBS pointed out, in the face of the August non-farm data, the labor market is no longer a variable obstructing interest rate hikes inflation data will become the final hammer determining whether or not to hike rates in September.