October Rate Hike Bets Soar as Business Activity Accelerates

Markets have increased their bets on a Federal Reserve rate hike in October after fresh data showed U.S. business activity accelerating and companies facing their strongest increase in input costs in nearly four years.

The CME Group's FedWatch tool now shows that traders are pricing in about a two-thirds probability of a rate hike at the Fed's Oct. 27-28 meeting, up from roughly 53% earlier.

This shift follows stronger readings from the manufacturing and services sectors, as well as comments from Federal Reserve Governor Michael Barr, who said further policy adjustments were likely to be needed.

The S&P Global's flash U.S. Composite PMI Output Index rose to 58.4 in September from 56.0 in August, its highest level since July 2021, with growth strengthening across both parts of the private sector.

However, companies are dealing with higher costs, including increases in wages, fuel and transportation expenses, while supplier delivery times lengthened as demand put additional pressure on capacity.