September rate-hike expectations have eased following weaker US data, despite a still firm and hawkish tone from Fed officials. The weak payrolls report and fading positive economic surprises shifted market pricing towards no hike at the September FOMC, with the implied probability falling by around 10pp after Friday’s release, to 44%. Future markets continue to expect at least one rate hike by the end of 2026, but the probability of two hikes by the end of the year fell from 40% to 20%.

Still, Fed communication remains cautious, with officials stressing that persistent underlying inflation could require tighter policy. Philadelphia Fed President Anna Paulson kept an open mind, while Jeff Schmid and Neel Kashkari argued that rates may need to rise further to bring inflation back to 2%. Most of the hawkish speakers, however, are non-voting FOMC members. The focus now turns squarely to July CPI on Wednesday, which could prove decisive for September pricing.

Meanwhile, Treasury Secretary Scott Bessent’s unusual public call to expand the Fed’s FIMA Repo Facility adds another dimension, as the facility could support Japan’s efforts to defend the yen. Political pressure surrounding Governor Lisa Cook also raises fresh questions over Fed independence.

The ECB succession race is heating up. The Netherlands has officially backed Klaas Knot, while Spain supports Pablo Hernández de Cos. Germany is also weighing a potential nomination of Joachim Nagel, although his candidacy currently appears less likely. With Lagarde’s term ending in 2027—and several other senior positions also becoming available—the succession could develop into a broader reshuffling of ECB leadership. Future markets price in one additional rate hike by the end of 2026, but the probability of two hikes fell last week from 70% to 50%.

The RBA left rates unchanged, as expected, maintaining its current policy stance.

Credit

Brent crude and European natural gas prices moved higher on Monday after falling last week, as prospects for a deal over the Strait of Hormuz remain uncertain. President Trump sounded prepared to let economic pressure on Iran build rather than launch fresh strikes, while Iran’s demands for lifting sanctions, releasing frozen assets and withdrawing US military will be difficult for Washington to accept.

Credit markets delivered positive total returns across all major segments last week, thanks to both lower government bond yields and tighter credit spreads supported by technicals with limited primary issuance. Year-to-date, US investment grade (IG) was the only major segment with a slight negative total return of -0.2%, driven by US rates volatility.

By sector, following Amazon’s jumbo issuance of $20 billion, hyperscaler spreads underperformed, with weakness extending into technology, telecoms and long-duration IG. Amazon has completed its $50 billion investment in OpenAI, with the later tranches conditional on OpenAI meeting specified conditions, suggesting that those requirements were satisfied. Amazon has also invested at least $13 billion in Anthropic.

Although oversubscription for some recent AI-related bond deals has fallen toward 2 times, down from 3.5 times at the beginning of the year, hyperscalers maintain broad funding access across bonds, loans, private credit, infrastructure funds and project finance. Private markets still hold over $4 trillion of dry powder (capital committed by investors but not yet deployed). Rating agencies retain stable outlook for most hyperscalers, except Oracle.

Looking ahead, markets will remain focused on AI capex, Fed credibility, Jackson Hole, Middle East developments and September’s heavy bond issuance. August’s seasonal slowdown in supply should provide some near-term technical support.