Weekend Update #294
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Treasury yields dominated the market narrative this week, with the U.S. benchmark yield climbing to its highest level since 2002 as elevated oil prices fueled inflation concerns and a broader global bond selloff. Against that backdrop, markets balanced persistent rate pressure with signs of a cooling U.S. labor market. September nonfarm payrolls increased by just 29,000, missing all estimates, while unemployment rose to 4.2% and wage growth slowed, reducing the likelihood of a Federal Reserve rate hike in October. That followed softer labor data earlier in the week, including August job openings of 7.1 million versus 7.3 million in July and below consensus expectations.
The labor data contrasted with an otherwise resilient economic backdrop. ADP reported private-sector payroll growth of 90,000 in September, above expectations and the strongest pace in three months, while inflation-adjusted consumer spending rose 0.6% in August, the largest monthly increase since March 2025. At the same time, consumer confidence fell to its lowest level since 2014 as concerns around the economy, labor market, and cost of living intensified. Overall, the data continue to suggest resilient consumer activity alongside clearer signs of labor-market softening and weaker sentiment.
Rates remained the primary pressure point throughout the week. Cooler-than-expected PCE inflation initially pushed traders to reduce expectations for an October Fed hike, with interest-rate swaps pricing roughly a 36% probability of an increase versus about 50% beforehand. However, elevated oil prices kept inflation concerns alive and sustained pressure on global bond markets. Housing also continued to reflect tighter financial conditions, with the 30-year fixed mortgage rate rising to 7.30%, its highest since November 2023, while mortgage purchase activity fell to its lowest level since April 2025.
Oil and the Iran conflict remained central to the macro backdrop. Markets received some relief as Middle East oil flows moved closer to pre-war levels, helped by increased Saudi shipments and the restart of a key Saudi pipeline. The U.S. also offered up to 40 million barrels from its emergency reserve. Nevertheless, crude remained around $100 per barrel and geopolitical risk stayed elevated as U.S.-Iran negotiations over reopening the Strait of Hormuz stalled. The Pentagon also deployed additional military assets to the region, while President Trump said an increase in U.S. strikes after the midterm elections was possible. Energy prices therefore remain an important swing factor for inflation expectations and monetary policy.
AI and semiconductor investment remained a source of fundamental strength despite the challenging macro environment. Broadcom reportedly agreed to lend Anthropic as much as $42 billion to lease its chips, while Anthropic has committed to more than $500 billion of cloud, computing, and infrastructure spending over the coming years. TSMC is also considering a new Texas manufacturing campus involving tens of billions of dollars in potential investment, reinforcing the scale of spending being directed toward AI infrastructure. At the same time, AI safety became a more prominent policy issue, with OpenAI delaying an upcoming model to implement stronger safeguards, Nvidia introducing new security tools for autonomous agents, and major AI executives meeting with President Trump to discuss industry risks.
Looking ahead, the key question is whether labor-market weakness continues enough to push the Fed away from further tightening while inflation pressures remain elevated. Weak payroll growth supports a pause, but high oil prices and elevated long-term yields complicate the outlook. Investors will remain focused on incoming inflation and employment data, Fed commentary, and developments in the Middle East. For equities, continued AI infrastructure spending provides fundamental support, while elevated rates and geopolitical uncertainty remain key near-term constraints on risk appetite and valuation multiples.
Friday's Close (Weekly Performance)
S&P 500 7,622.72 -0.27%
Nasdaq 27,190.86 +0.45%
Dow Jones 51,176.96 -1.26%
Thank you Blue Room Senior Analyst NICK PEART.
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