Last Friday, stock indices closed lower. The S&P 500 fell by 0.25%, while the Nasdaq 100 dropped by 0.52%. The Dow Jones Industrial Average decreased by 0.02%.

Already today, the yield on two-year Treasury bonds, which are highly sensitive to interest rate changes, has declined by three basis points, partially offsetting the spike on Friday after Kevin Warsh warned that inflation is not significantly slowing down and that the regulator still has a lot of work to do. Today's futures have continued their downward trajectory, with the S&P 500 down 0.2% and Nasdaq 100 contracts falling by 0.05%. Meanwhile, the dollar stabilized after its strongest rise in over two months.

The scale of the re-evaluation of expectations is impressive. According to swaps, traders have increased the probability of a rate hike by the Fed at the September meeting to 62%, up from about 34% prior to Warsh's speech. Let me remind you that just in mid-August, the market assessed the chances of September tightening at around 30%, so a single speech has effectively reshaped the entire expectations curve.

It is worth noting that Warsh himself stopped short of providing a direct signal. He stated that financial conditions are currently not restrictive and called rates the predominant tool for the Fed to achieve its mandate. However, he did not express direct support for a September increase. This ambiguity has led to a disparity between the swaps market pricing in 62% and analysts expecting a pause.

An additional driver today has been geopolitics. Brent crude rose by 2.8%, approaching $91 per barrel, after Washington and Tehran exchanged blows for the first time in about a month. It is worth recalling that just last week, the market was pricing in progress in negotiations between Iran and Oman regarding a temporary maritime corridor, and the current escalation brings back an oil premium, along with the inflation risks that Warsh warned about.

In other markets, the picture is mixed. The yen weakened slightly to about 159.55 per dollar after Tokyo's key inflation indicator accelerated for the third consecutive month. Gold dropped to approximately $4,575 per ounce, Bitcoin fell just below $80,000, while copper approached record highs.