UBS Names Three Places to Put Money as Fed Rate Hike Odds Reach 60%

UBS has identified three places for investors to put money as volatility builds around the Federal Reserve’s September decision, while withdrawing a bond recommendation.

The bank’s strategists argue that the key question is not whether the Fed hikes or holds, but the conditions it acts against. Market pricing has swung sharply in recent weeks.

Why the Backdrop Matters More Than the Meeting

Fed Chair Kevin Warsh used his Jackson Hole speech to warn about inflation. 

“You may have read in the July minutes…Labor markets were stable, and output was solid. But inflation remained too high. A good majority of my colleagues and I thought the wiser course was to await new information in the intermeeting period…And we expressed our joint readiness to act as circumstances might require,” he said.

August’s labor data then hardened the case. US nonfarm payrolls surged by 162,000 last month, well above consensus forecasts of 55,000, while unemployment held steady at 4.1%.

That marked the strongest monthly total since March. Traders have repriced the path repeatedly over the past month.

CME FedWatch put the probability of a September hike at 60.4% on Tuesday. Odds reach 70.9% by October and 85.8% by December.

The Federal Open Market Committee meets September 15 and 16. It held the target range at 3.50%-3.75% in July, though three members dissented in favor of higher rates.

Strategists led by Mark Haefele separate a hike driven by solid growth from one driven by sticky inflation. 

“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,” they stated.

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Where UBS Wants the Money to Go

Equity dips come first, provided earnings prospects stay strong. The bank continues to favor AI, power, resources, and longevity within its equity positioning.

The medium-to-long part of the yield curve is second. Recent moves higher in yields have improved entry points, therefore offering income and diversification.

Gold is third. UBS treats bullion as a portfolio hedge and diversifier rather than a tactical expression of the next Fed decision.

Higher real rates and a firmer dollar are near-term headwinds for the metal. However, persistent inflation and concerns about fiscal credibility could offset them.

Meanwhile, the bank told clients to reduce excess dollar holdings due to the strength. 

“We would no longer recommend that investors lock in yields in short- to medium-duration bonds as an alternative to cash,” UBS added.

August core CPI data lands on September 11, four days before the FOMC convenes. That print will test whether the hawkish repricing holds.

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