Rates as of 0500 GMT

Market Recap

A stronger dollar and a stronger US stock market. With US growth prospects improving, the widening growth differential between the US and other economies is leading to a supportive environment for both the dollar and US stocks. The stock market has continued to rally despite a steady rise in the markets pricing of the peak fed funds rate, back to the 3.65 level that prevailed before last weeks surprisingly weak US consumer price index CPI.

On Friday, the 1yr ahead inflation expectations in the U of M survey fell but the 5yr10yr inflation estimate rose. This caused an increase in the probability of a larger rate hike in September, as market participants remember that Fed policymakers cited the rise in this figure back in June a key factor that led to them hiking by 75 bps rather than 50 bps as planned at that meeting.

There were also a number of hawkish comments from Richmond Fed President Barkin nonvoter. He said the Fed is trying to bring inflation down on a sustained basis and wants to get to our target for a number of months. However, until there is a period of sustained inflation under control, Barkin said, I think we are going to just have to continue to move rates into restrictive territory. He said hes undecided on what to do in September and will watch the August employment and CPI reports to decide. It appears that the market has adopted a similar stance, with investors also undecided between 50 bps and 75 bps in…