The Fed fund futures market expectations of a rate hike continue to diminish after today's modest rise in the University of Michigan's consumer sentiment index.

Markets are currently pricing in an 88% chance of no rate hike for the Sept. 16 meeting. This is a 2% increase from yesterday's 86% reading and 4% rise from last week's result.

The preliminary consumer sentiment survey from Reuters & the University of Michigan improved half a point to 61.7, following the previous month's near five-point rebound. Also, one-year inflation expectations moved down to 4.8% from July's 5.1% forecast.

"Even with the modest improvement in gasoline prices, the consumer remains in a dour mood, given the ongoing correction in the housing market, the mounting weakness in the labour market and the fact that credit is now tightening at the consumer level. There is still much to be worried about," wrote Charmaine Buskas, senior economics strategist at TD Securities.

Markets are not expecting a rate hike for the Federal Open Market Committee's Oct. 29 meeting. Interest rate futures are factoring in a 75.7% chance that the FOMC will leave rates at 2%. The likelihood of a rate hike is currently at 24.3%, down from 39.2% a month ago.

Also on Friday, U.S. industrial production unexpectedly rose 0.2% in the month of July, against expectations that the report would come in flat. The previous month's gain was downwardly revised one-tenth to 0.4%.

Paul Ferley, an economist at RBC, was encouraged by the stronger-than- expected result in the industrial production report.

"External demand will help some areas of manufacturing and the mining sector going forward, but weakness domestically will likely keep activity flat and vulnerable to a return to negative growth," wrote Ferley. "To ward against any pronounced weakening in activity, we expect that the Fed will continue to keep monetary policy relatively stimulative maintaining Fed funds at 2.00% through the middle of next year."

Fed fund futures are pricing in at a 72.7% chance that the Federal Reserve will maintain rates at 2.00% for the Dec.16 meeting. This is a 7.3% increase from yesterday 65.4% result and a marked contrast from the 49.0% reading one month ago.

By Steve Stecyk and edited by Sarah Sussman