Weekend Update #292
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Markets endured another volatile week as investors navigated higher oil prices, rising Treasury yields and the Federal Reserve’s first rate hike in more than three years. The S&P 500 finished roughly flat on the week and the Dow declined sharply, while the Nasdaq outperformed as strength in semiconductors and other technology stocks helped offset the pressure from higher rates. By Friday, the 10-year Treasury yield had returned to roughly 5%, leaving financial conditions considerably tighter despite a late-week retreat in oil.
The primary macro driver remained the combination of energy prices and inflation expectations. Markets began the week under pressure after attacks forced Saudi Arabia to shut its East-West crude pipeline, an important route that allows exports to bypass the Strait of Hormuz. Brent crude briefly traded near $106/bbl, while the 10-year Treasury yield reached 5.04%, its highest level since 2007, as investors priced the potential inflationary impact of sustained energy disruptions alongside concerns about U.S. government borrowing. Oil subsequently retraced much of the move as expectations grew that Saudi infrastructure could return to service sooner than initially feared.
Against that backdrop, the Federal Reserve raised the federal funds target range by 25 bps to 3.75%–4.00% on Wednesday, its first hike in more than three years. The decision was unanimous, and officials emphasized resilient domestic spending, strong productivity and capital investment alongside inflation that remains above target. More important for markets was the updated rate path: the median year-end 2026 fed funds projection increased to 4.1% from 3.8% in June, consistent with roughly one additional 25 bp hike this year. The Fed also raised its 2026 GDP forecast to 2.3%, lowered its unemployment projection to 4.1% and raised its PCE inflation forecast to 3.7%. Together, the projections reinforced a higher-for-longer policy outlook rather than signaling that this week's hike was a one-off move.
Economic data broadly supported the Fed's view that growth remains resilient despite tighter financial conditions. August retail sales increased 1.2%, their strongest gain in five months, with 12 of 13 categories advancing. Manufacturing was softer, however, as factory production fell 0.3% in August, marking its first decline of the year as business-equipment production cooled and companies dealt with higher input costs. The combination continues to leave the Fed with a difficult mix: consumer demand and the labor market remain relatively firm, while higher energy costs threaten to keep inflation elevated.
Equities initially reacted negatively to the Fed's hawkish message but staged a strong Thursday relief rally as oil prices and Treasury yields retreated. The S&P 500 rose 1.1% Thursday and the Nasdaq gained 1.7%, recovering much of their earlier losses. Friday was more mixed as the 10-year yield moved back toward 5%, although renewed semiconductor strength allowed the S&P 500 and Nasdaq to finish modestly higher. The divergence beneath the surface was notable: the Nasdaq finished the week higher while the Dow posted its worst weekly decline since March, suggesting investors continued to favor secular-growth and AI-related exposure even as higher rates pressured the broader market. Friday's roughly $7 trillion triple-witching expiration also contributed to elevated trading activity and the potential for technical volatility into the close.
AI infrastructure remained a major source of fundamental support for technology. Anthropic reportedly plans to have roughly 5 GW of compute capacity available by year-end and potentially double that again next year, while CoreWeave launched a $3 billion convertible-bond offering alongside an ATM equity program. Huawei is also accelerating its next-generation Ascend AI chips into 2027, highlighting both the continued intensity of AI infrastructure spending and the growing competitive landscape.
Crypto was similarly volatile. The Senate failed to advance the CLARITY Act on Tuesday, leaving the broader market-structure framework stalled and shifting attention toward SEC and CFTC rulemaking under existing authority. The agencies have already begun coordinating on crypto classification and oversight, while the SEC has proposed tailored fundraising exemptions and safe harbors and, following the failed vote, introduced an Innovation Exemption providing temporary relief for certain tokenized-asset platforms and liquidity providers. These actions could advance portions of the regulatory framework without Congress, although agency rules would likely be less comprehensive and durable than legislation. Bitcoin and crypto-linked equities initially sold off following the vote but reversed sharply by Friday, with Bitcoin climbing back above $80,000.
Overall, the week reinforced the market's current tension between strong underlying growth and AI investment on one side and renewed inflation, energy and interest-rate pressure on the other. With the 10-year Treasury near 5% and the Fed signaling additional tightening remains possible, the hurdle rate for equities has risen. At the same time, continued strength in technology and AI-related earnings expectations has allowed growth stocks to absorb that rate pressure better than the broader market.
Attention next week will shift from the Fed decision itself toward whether incoming growth data and Fed commentary validate the prospect of additional tightening. The most important U.S. releases include the preliminary September manufacturing and services PMIs on Wednesday, followed by weekly jobless claims and new-home sales on Thursday and August durable-goods orders and final University of Michigan consumer sentiment on Friday. Investors will also hear from Fed officials now that the post-meeting blackout period has ended, making any commentary on inflation, energy prices and the threshold for another hike particularly relevant for the rates market. Beyond the data, oil prices and the 10-year Treasury yield should remain the key cross-asset signals: another move higher in crude or a sustained break above 5% on the 10-year could pressure equity multiples, while stabilization in both would provide a more supportive backdrop for risk assets. Markets will also continue watching AI-related spending and technology demand, while the earnings calendar includes names such as Costco, General Mills, Darden Restaurants and KB Home.
Friday's Close (Weekly Performance)
S&P 500 7,650.50 -0.08%
Nasdaq 26,522.54 +0.72%
Dow Jones 51,682.64 -1.69%
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