What could trigger a Fed rate hike?

Investing.com -- UBS expects the Federal Reserve to leave rates unchanged at its Sept. 16 meeting, but flagged the conditions that could force a shift.

"A stronger-than-expected labor-market report or renewed inflation pressure would increase the likelihood of a more hawkish Fed outcome," the bank's strategists wrote, adding that investors will also focus on policymakers' assessment of longer-term inflation expectations and financial conditions.

For now, UBS said the evidence does not support tightening.

While inflation remains above target, the bank expects year-over-year readings to ease around the turn of the year as earlier energy price increases drop out of the comparison, giving policymakers reason to wait.

The latest employment report was weaker than expected, including a negative nonfarm payrolls figure, and UBS said a second set of soft readings next week would further reduce the case for a September move.

Markets currently price a Fed hike at roughly 40%, against an almost fully priced European Central Bank increase on Sept. 10. "If the ECB hikes in September and the Fed does not, EURUSD is likely to move higher," UBS said.

The bank also pushed back on the idea that the Fed would act to pull down long-dated yields, noting the term premium there reflects other factors including large debt issuance from hyperscalers.

Kevin Warsh's Jackson Hole keynote on Friday is the near-term catalyst, with UBS cautioning that expectations are so high that even silence could move markets.

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