UBS has revised its forecast for the Federal Reserve, now expecting two interest rate hikes in 2026, each by 25 basis points, in September and December. This shift comes after a stronger-than-expected US jobs report for August, showing nonfarm payrolls increased by 162,000, with private payrolls contributing 127,000, significantly above the consensus expectation of 55,000. Additionally, prior months saw an upward revision of 55,000 jobs. The unemployment rate remained at 4.1% as job creation was balanced by increased labor force participation.
This change in UBS's outlook is also influenced by hawkish comments from Fed Chair Kevin Warsh at Jackson Hole, emphasizing that underlying inflation must move towards the Fed’s 2% objective "clearly and at sufficient speed." Rising inflation risks from supply bottlenecks, as indicated by worsening supplier-delivery times in ISM and PMI surveys, and July's personal consumption expenditures (PCE) inflation beating expectations at 3.7% year-on-year, further support the anticipation of tighter monetary policy.
Following the jobs data, market-implied odds of a September rate hike rose from approximately 50% to 60%. UBS previously expected no policy change throughout 2026. The two anticipated hikes would bring the federal funds target range from 3.50-3.75% to 4.00-4.25%. While these hikes are expected to have a modest impact on economic growth, potentially only a few tenths of a percentage point of growth drag, UBS maintains its constructive view on global equities, citing continued tailwinds from AI capital expenditure and strong earnings.
UBS has also adjusted its US Treasury yield forecasts, now expecting 2-year yields to trade at 4.25% by June 2027, a 100 basis point increase from its previous forecast, and 10-year yields to reach 4.5%, up 40 basis points. Despite higher bond yields and increased risk premiums due to AI-related debt issuance and US debt affordability concerns, UBS suggests that the economic backdrop of solid GDP growth, AI investment, employment, and profits could still support risk assets, albeit with potential short-term volatility. They advise against locking in yields in short to medium-duration bonds as an alternative to cash if the Fed embarks on a hiking path.
