UBS

UBS strategists argue that how the Federal Reserve acts matters more than whether it raises rates in September, as market pricing has swung sharply on recent economic data. With rate-hike odds climbing to 60% for the September meeting, the bank has repositioned client portfolios across equities, bonds, and commodities.

• CME FedWatch data shows September rate-hike probability at 60.4% as of Tuesday, up sharply from earlier consensus forecasts.
• US nonfarm payrolls surged 162,000 in August, well above the 55,000 consensus forecast and marking the strongest monthly total since March.
• UBS withdrew its recommendation to lock in yields in short- to medium-duration bonds as an alternative to cash.

• 60.4% Probability of a Federal Reserve rate hike in September according to CME FedWatch
• 162,000 US nonfarm payrolls added in August, versus consensus forecast of 55,000
• 85.8% Odds of a rate hike by December, according to current CME FedWatch pricing

UBS strategists led by Mark Haefele have outlined a new framework for positioning client money amid rising uncertainty about the Federal Reserve’s path forward. The bank argues that the source of Fed action, not merely the decision itself, should drive portfolio decisions. The Federal Open Market Committee will convene September 15 and 16, with market pricing now assigning a 60.4% probability to a rate increase. That odds jump reflects a dramatic repricing triggered by stronger-than-expected labor market data and persistent inflation concerns flagged by Fed Chair Kevin Warsh at Jackson Hole.

The shift in rate-hike expectations underscores the volatility that has characterized markets since the Fed’s recent pause in its rate-hiking campaign. After raising rates aggressively from near-zero levels in 2022 and early 2023, the central bank held rates steady at its July and August meetings, leading some investors to believe a prolonged pause was ahead. The August employment surprise has fundamentally altered that calculus, with market participants now pricing in potential additional tightening before year-end.

Economic Data Hardening The Case For Fed Action

August’s employment figures delivered a significant shock to market expectations. US nonfarm payrolls rose 162,000 for the month, crushing consensus forecasts of 55,000 and marking the strongest monthly gain since March. Unemployment held steady at 4.1%, signaling a resilient labor market despite broader concerns about economic slowdown.

The strength in hiring data contradicted recent signals of labor market cooling that had emerged in prior months. This resilience matters greatly for Fed policymakers, who have consistently emphasized that they need to see substantial further progress on inflation before cutting rates. While inflation has moderated from its 2022 peaks, it remains above the Fed’s 2% target, creating tension between supporting employment and achieving price stability.

Warsh used his Jackson Hole remarks to emphasize that inflation remained elevated despite stable labor markets and solid output. He noted that Fed colleagues were ready to act as circumstances required, a posture that traders interpreted as hawkish guidance. The combination of strong jobs data and Warsh’s rhetoric moved market pricing decisively higher, with October hike odds now at 70.9% and December odds at 85.8%.

UBS Favors Equities, Longer-Duration Bonds, And Gold Over Cash-Like Positions

UBS withdrew its recommendation that investors lock in yields in short- to medium-duration bonds as an alternative to cash, signaling reduced conviction in defensive positioning. This move reflects the bank’s view that the current environment offers better opportunities in higher-returning assets, despite near-term rate-hike uncertainty.

Instead, the bank has identified three priority areas for client capital. First, equity dips represent opportunities provided earnings prospects remain resilient, with continued preference for artificial intelligence, power infrastructure, resources, and longevity subsectors. These areas offer exposure to secular growth trends that could deliver returns independent of near-term monetary policy shifts.

Second, the medium-to-long part of the yield curve has become more attractive after recent moves higher in yields, offering improved entry points for income and diversification. As longer-dated bond yields have risen, investors can now capture more yield without taking excessive duration risk. Third, gold serves as a portfolio hedge and diversifier, though UBS acknowledges that higher real rates and a firmer dollar present near-term headwinds. Persistent inflation and fiscal credibility concerns could offset those pressures over time, making gold valuable insurance against tail risks.

A Fed responding to US economic strength is very different from a Fed responding to inflation problems. For portfolios, that distinction matters far more than the next policy meeting.

Mark Haefele, UBS Strategist

This framing highlights UBS’s core argument: the fundamental drivers of Fed decisions carry more weight for long-term portfolio construction than the timing of any single rate decision. A Fed tightening cycle driven by strong demand and resilient growth may create different opportunities than one driven primarily by inflation persistence.

Core Inflation Data On September 11 Will Test Market Conviction

August core CPI data arrives on September 11, just four days before the FOMC meeting, providing a final data point that could either reinforce or challenge the current hawkish repricing. Core inflation, which excludes volatile food and energy prices, has been closely watched by Fed officials as a gauge of underlying price pressures.

The timing creates a critical test for market positioning. If core inflation remains sticky above expectations, the case for action will strengthen substantially. Conversely, a surprise to the downside could trigger a rapid repricing lower, potentially pulling back the odds that traders have assigned to a September increase. This data dependency illustrates how data-driven Fed decision-making has created pronounced market volatility in recent months.

UBS also advised clients to reduce excess dollar holdings due to the currency’s recent strength, acknowledging that further Fed tightening could continue to support the greenback. While a stronger dollar can boost US exporters’ valuations, it can also pressure emerging market assets and create headwinds for multinational earnings. Investors should monitor the core CPI print on September 11 as the primary catalyst that could shift positioning before the September 15-16 FOMC decision.