Warsh's Jackson Hole debut tilts the market toward a hike

Good morning. Last night Fed Chair Warsh gave his first Jackson Hole keynote since taking the job, and it was more hawkish than expected. He said inflation is not coming down in a meaningful way, stressed that the 2% goal is firm, and added that it is hard to call current financial conditions tight. It was read as a signal that more rate hikes are possible.

The market reacted at once. The odds of a September hike jumped from 35% the day before to nearly 60% right after the speech. Interestingly, the bond market believed him: real yields rose more than inflation expectations did, which is read as trust in the Fed's commitment to bringing prices down. Warsh still held the line against giving advance guidance on where rates are headed.

Stocks slipped a little on the rate pressure, but the Dow held on to its gain for the week. Chip stocks paused after the Nvidia-fueled rally. Yet the volatility index fell to its lowest level this year, suggesting investors welcomed having a direction. On the other side of the ledger are a revision showing 79,000 fewer jobs than first estimated and a Michigan sentiment reading that sank to 51.7.

Next week brings US jobs data and the Bank of Canada's rate decision. With the September 16 meeting approaching, the question is whether the case for a hike gathers force or weak hiring puts the brakes on.