Weekly Recap:

by Michael Reinking, CFA & Eric Criscuolo

There was a cloudless, gorgeous blue sky in New York City on this morning 25 years ago. A striking contrast to the events that unfolded that day when the world changed forever. Many of the people in this building were deeply affected by those events, and those memories will forever be etched in our minds. September 11 was a day of heartbreaking loss for so many. It was also a day of incredible bravery, with love, kindness and unity rising from the tragedy. We remember those we lost and honor the heroism of the first responders and service people who answered the call to duty. 25 years later, about 100 million Americans are too young to remember the events of that day. We will NEVER FORGET.

Last week US markets continued to trade in the choppy range that has been in place since early August, 7,600 - 7,800 for the S&P 500. Equities sold off early in the week as the resumption of kinetic activity in Iran sent oil prices and hence Treasury yields higher. Midweek some mildly dovish Fed commentary helped yields pull back and the S&P 500 bounced after testing the low end of its recent range. Heading into the long weekend the BLS employment report broke a string of weak readings once again sending yields and rate hike expectations modestly higher setting the stage for this week’s inflation data. Most major US indices ended the week on either side of unchanged. However, breadth started to deteriorate. The energy sector continued to lead to the upside. AI tech hardware also outperformed while software moved lower giving back some of the recent gains. Consumer discretionary was the weakest sector with a couple of disappointing earnings updates and weakness in travel-related stocks doing much of the damage.

The main themes remained consistent, revolving around the Middle East, rising yields and AI. Over the weekend the US and Iran continued to exchange fire and the situation in the Red Sea has also deteriorated. The Houthis got more active including taking control of the port city, Mokha, a new chokepoint in the Bab el-Mandeb Strait. Oil prices were up >10% for the second consecutive week before pulling back modestly today after reports that members of the Gulf Cooperation Council will meet with Iranian officials on Monday in Oman for the first time since the start of the war.

With summer unofficially in the rear-view markets started off the week in a foul mood. Most major US indices were down between 1.5% - 3%, heading into today’s session. The week’s main event, the inflation data, was kind of a non-event as the readings were largely inline with estimates but did seemingly cement a rate hike next week. Tech has been a bright spot throughout the week, outside of the outright risk off move yesterday as yields and oil accelerated to the upside along with some risk reduction ahead of this morning’s CPI report. Yesterday, the S&P 500 closed just below the low end of the recent range and its 50dma before bouncing back into the middle of the range today. The tech strength helped the index outperform, ending the week down only 0.8%. However, the weakness was much more pronounced in the equal-weight and small/midcap indices which ended the week lower by ~2%. 

There continues to be quite a bit of news flow around the AI trade, most of which has been positive, outside of the guy claiming that it will end humanity by the end of the decade. Open AI’s Astra model has gotten very positive reviews, but not without some controversy around it solving the Navier-Stokes problem - which everyone knows describes fluid motion mathematically. It took 88 hours and 10,000 AI agents to find a case where the Navier-Stokes equation doesn't work. It may be one of the largest amounts of computing power ever thrown at a singular scientific problem. Also, the model may have borrowed extensively from a competing, flesh-and-blood, actually alive scientists' work. Meta also unveiled Muse AI, a personal AI assistant that has been described as “OpenClaw for normies”, so clearly not designed for the MAC Desk. The commentary at sell side conferences was positive throughout the week. Other headlines included:

Within the S&P 500 9 of 11 sectors ended the week lower. Not surprisingly, energy was the best performing sector.

CPI headlined this week's economic data. Recent comments by Fed officials like governor Waller put particular emphasis on this report. Waller noted the need to see continued improvement in the August inflation data to support a rate hold, otherwise it may be appropriate to hike. Markets had already taken the implied odds of a hike at next week's meeting to 70% as of yesterday.

Headline CPI was inline while core was slightly above expectations month-over-month (0.3% vs 0.2%) but was inline year-over-year (+2.4%). It also eased for the 3rd straight month. Goods disinflation continued- commodities ex-food and energy rose only 0.1% versus last month and 0.7% on a year-over-year basis.

Service ex-Energy rose 0.3% m.m and 3.0% y.y. Shelter rose 0.3% m.m and 3.0% y.y. Education and Comm Services saw a rather large 1.8% m/m increase, led by smartphone services jumping 5.9%. From some commentators, that jump pushed core CPI from 0.2% to 0.3%, likely dialing in a rate hike next week. Yields spiked briefly but quickly came back in on the long-end while the 2y remained higher but off the peak.  

PPI hit the tape a day before the CPI. Headline was inline on a m.m basis (+0.4%) and last month was revised up from 0.0% to 0.1%. Core m.m of 0.2% continued the recent downtrend and was slightly below the 0.3% consensus, while core y.y was inline (+4.6%). Final demand goods rose 1.1% m/m but more than 75% of that was Energy. Ex-Energy and Food it was up 0.4%. Final Demand Services was up 0.1%, driven by transportation and warehouse services. Trade services, a volatile measure (i.e. margins) fell 0.2%.

The Logistics Manager's Index stepped down from last month, driven by a second straight slowdown in growth of inventory levels. Despite the decline, Inventory Costs rose for the second straight month and remain very elevated, dovetailing with the warehouse prices in the PPI. Transportation Capacity continued to contract, which has been a driver for higher pricing. However the contraction slowed markedly from last month. According to the report, "Essentially, this month’s report paints a picture of logistics costs that seem to be rapidly increasing no matter what the underlying situation is."  

The NFIB Small Business survey ticked down from the prior month, which was the highest level since August 2025, but remained slightly above historical averages. A worsening of expected business conditions drove the decline.

Inflation expectations in the NY Fed Survey of Consumer Expectations survey held steady on the 1/5yr time horizons at 3.6% and 3%, respectively while ticking down 0.1% to 3.2% over the 3yr time horizon. This was despite the survey taking place throughout August, when oil prices ripped higher. Labor market readings were mixed. The expectation that the unemployment rate will be higher in a year hit its highest level since 2020 up 1.6% to 44.4%. Spending expectations increased by 0.3% to 5.2% but expectations of missing a debt payment increased as well.

Labor market conditions remain unchanged. Weekly initial jobless claims of 206K were basically inline with consensus (205K) and last week (207K). Continuing claims of 1774K were also roughly in line (1780K). Existing Home Sales were roughly in line and remain lethargic.

The University of Michigan Consumer Sentiment survey was allowed to continue collecting responses despite the collection period having closed as scheduled (shoutout to all you college football fans!). Inflation expectations for next year jumped from 4.0% to 4.6%, while 5-year expectations ticked higher too. Both current and expected sentiment readings fell.  

The rise in yields was a key story this week. They had continued to trend higher earlier in the week before exploding up on Thursday as Brent crude ripped higher. On Friday yields were volatile after the CPI data. Expectations for a hike at next week’s FOMC meeting sit just below 90%, up from 70% on Thursday and 50/50 a month ago.

It wasn't just a US thing. Global yields moved sharply higher as well.   

With global yields moving higher the US Dollar Index was around unchanged on the week. The Dollar continued to weaken against the Yen and is approaching a significant support level at ¥152. Treasury Secretary Bessent stepped up his smack talk game, warning traders not to bet against the currency (yen) saying “I am the house now”, while once again suggesting he has “asymmetric information” as to monetary/fiscal policy.

Sunday Football is back. After that, Central Banks will be the key players next week. The Fed headlines the rate decisions, and the BOJ and BOE will also have policy meetings. Secretary Bessent heads to Congress for his annual Treasury testimony. Retail Sales, some regional Fed surveys and housing data will also be on the US calendar. There will also be a lot of data out of China. Middle East foreign ministers will meet with Iran to discuss an agreement on the Strait of Hormuz. Earnings really cool down while broker conferences pick up the slack. Enjoy your weekend.

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