Global Real Rates Surge as Fed Hawkishness Takes Hold

Investors are closely watching the bond market as Chair Warsh's hawkish words from Friday have had an impact on yields. The probability of a 25bp hike from the September FOMC meeting has flipped to 3:1 in favor, indicating that front-end rates may need to be adjusted higher.

The oil price is driving short-term moves in rates, while the global rise in real rates is the key structural influencer. This trend is not just limited to the US, as implied real rates are testing new highs in Europe as well.

Despite this, inflation expectations remain contained, with the 2Y inflation swap at 2.5% and the 5Y5Y forward inflation swap at 2.15%. However, long-term market measures point to a benign inflation outlook, which may not be entirely accurate.

The US manufacturing ISM is expected to soften marginally to 55.3, while jobs-related data will take center stage with the release of the JOLTs job openings data for July. The Federal Reserve's Barr is scheduled to speak on Tuesday.