Weekly Recap:

by Michael Reinking, CFA & Eric Criscuolo

Last week the S&P 500 ended the week around unchanged but that did no justice to the path traveled or what was happening beneath the surface. As for the road, the S&P 500 briefly broke below the low end of the range that has been in place since June to test its 100d moving average just over 7,500 before bouncing back. Beneath the surface it was tech strength helping to offset losses elsewhere, which we’ll discuss more below. The themes were all too familiar: the technology formerly known as AI, the evolving geopolitical backdrop and rising interest rates as the Federal Reserve hiked rates for the first time since 2023. Crypto was the other big story, with the complex coming under pressure early in the week after the Clarity Act failed to pass a procedural vote in the Senate but then rallying sharply on Friday after the SEC and CFTC both made announcements to use their existing statutory authority to establish regulatory guidelines for digital asset markets. Friday ended with a bang as it was Quadruple Witch expiration, and the quarterly index rebalances which led to a record closing auction with ~$245B in notional value trading. Raising the question as to whether the rolling off of hedges would be a release valve, bringing with it some volatility as we are in what has historically been the worst two-week period during the calendar year for equity markets.

With President Xi’s visit to the White House and the UN General Assembly meetings in New York, geopolitics were center stage.  Here at the NYSE we’ve hosted multiple high-profile attendees of the latter including the First Lady, Melania Trump, and Secretary of State Marco Rubio. Outside of geopolitics the themes remained very much the same with investors continuing to focus on rising oil prices, yields and the fast-evolving world of AI. In fact things are evolving so quickly that it’s already been rebranded as Super Intelligence. 

From a market perspective it has been a dynamic headline driven week bookended by rallies that were driven by hopes for a diplomatic resolution in the Middle East and the rise of agentic AI with the adoption of Meta’s Muse platform and the revamp of Microsoft’s Copilot. However, in the middle of the week the focus shifted to rising global yields following better than expected S&P Global flash PMIs and a couple of weak Treasury auctions. Treasury yields were up 15-20bps for the week hitting new YTD highs with the 2yr approaching the pyscological 5% level and the 10yr moving decisively through that level on Wednesday.

It was another week where breadth in the market continued to detoriorate. The tech strength helped the S&P 500 end the week up ~1% while the equal-weight version of the index and small and midcap indices moved slightly lower. This has been the case since yields started accelerating to the upside in late August following Chair Warsh’s Jackson Hole speech. Over that time 2yr yields are up ~65bps while 10yr yields are up ~50bps. The S&P 500 is essentially unchanged while other indices are down ~5% (see chart below).

Starting with the geopolitical highlights coming into the week there were reports that President Trump would meet with Middle East leaders on the sidelines of the UNGA. After his wide-ranging speech at the UN on Tuesday, he confirmed that US officials met with an Iranian delegation suggesting it went well. Over the last two days there have been reports that discussions are happening to re-open the Strait though hardliners continue to refute those claims.

Ahead of President Xi Jinping’s arrival Treasury Secretary Bessent announced that the trade truce between the two countries would be extended for two months until January 10th. There was Much Adoo About the Meeting which seemed to include a lot of pomp but not so much circumstantial, though we can start the clock on Panda Watch. The two leaders were positive about talks and plan on two more rounds of discussions later this year, with both scheduled for a home and away. This morning USTR Greer said the two sides reached an agreement on a number of trade areas with details of negotiations to come on Monday. 

In the Super Intelligence world this week, a surge in downloads and positive reviews of Meta’s Muse personal autonomous AI agent platform sent the stock up >10% this week. This filtered down the tech stack, sending the AI hardware and infrastructure stocks higher as well. However, this also brought in a new twist on the AI disruption trade as investors raised concerned about how agentic AI could impact wealth management, traditional brokerage businesses, payment processors and online travel companies. So you’re saying Agent Smith will simultaneously do your food shopping, make you money trading stocks and book your vacation with the profits, that doesn’t sound like the end of humanity but rather the era of “incredible abundance” Elon’s talked about. Microsoft (+>5% for the week) also announced that it would be revamping its Copilot app to include a coding tool and its own AI agent, Autopilot. 

That being said, the recent news flow around AI has definitely leaned on the negative side of things with rising concerns about security, IPOs being pushed out, political pushback related to data centers and the growing financing and capital needs. Speaking of, this week Oracle reportedly sent the developer of its giant Project Jupiter data center in New Mexico (an OWL affiliate) a force majeure notice to delay payments if the data center is not completed on time (2028), though the company said the project remains on track. This did cause some weakness in the space though markets largely took this in stride as it seemed like a precautionary step, though it adds another layer of complexity to the financing markets. See chart of CDS below from hyperscalers and Coreweave which have been consistently moving higher. 

The sector level activity in the S&P 500 was mixed for the week. It shouldn’t come as a surprise that tech and communication services were the two best performing sectors up >2%. Healthcare was another relative outperformer up ~1.5% with life science and tools after Charles River provided a positive update and there were positive trial results. Within the sector, med devices and managed care stocks underperformed. Energy, yield-oriented sectors and financials were down between 1.5% - 3.5%.  There was broad-based weakness across financials with insurance, alternative investment managers, exchanges and wealth management exposed companies some of the worst performing. Consumer discretionary also ended slightly lower with online travel companies were some of the worst performing. Restaurants were also under pressure after corporate updates from Darden and McDonald’s. Despite the move higher yields and mortgage rates pushing >7% again homebuilders outperformed after Berkshire increased its stake in Lennar. 

Flash PMIs were the major data releases this week and their strength helped trigger a spike in yields. Activity was better than expected and rose from last month in both Services and Manufacturing. 

It wasn’t all growth-related euphoria, however. As noted in the release, “US business continues to boom, with output growing at the fastest rate for over five years in September.”  However, “this growth is being accompanied by some of the most severe supply chain bottlenecks seen in the near-two-decade survey history (ex-COVID).” Prices continued to increase and backlogs are rising sharply, which could develop into new inflationary pressures. 

Unemployment data was uneventful: The ADP weekly employment continued to improve since it troughed in late July, increasing to 20k from 16.25k last week.  Weekly jobless claims were inline with last week.

New Home sales of 684k picked up from last month and beat estimates. The uptick came as the Mortgage Brokers Association said the 30y mortgage rate crossed over 7%, while Mortgage News Daily reported its survey showed the average 30y rate at 7.45%. Durable Goods orders, especially ex-Defense and Aircraft (below) were better than expected, continuing their strong trend.

The Richmond Fed index came in below estimates with Shipments and New orders falling though the employment component improved from last month. The KC Fed Manufacturing survey rose from last month, while the Expectations survey was a tick lower. New Orders improved while backlogs and prices paid/received increased as well. The surveys are volatile but generally continued their upward trend overall. 

There were a lot of Fed officials making the rounds this week and they basically provided hawkish commentary:

Chicago Fed President Austan Goolsbee (2027 voter) said that the Fed may be unable to look through supply shocks like it did historically, as these shocks happen more frequently and prove more durable. As he said, “A cost shock that lasts multiple years forces us to revisit the rationale for looking through… the central bank still has to restore price stability under its legal mandate—and the only way to bring inflation down is to raise rates and narrow the gap between supply and demand.”  On the dovish side, he noted that the magnitude of response to address a persistent supply shock is probably lower than for a demand shock.

Philly Fed President Anna Paulson (voter) spoke at the bank's Fintech Conference. She discussed her support of the latest rate hike, and said modest further tightening may be warranted if conditions evolve as she expects. She noted "it was clear that inflation risks were growing...growth has been solid, perhaps even strengthening somewhat. And the labor market is holding steady. Inflation, meanwhile, remains stubbornly elevated."

Cleveland Fed President Hammack said inflation risk is tilted to the upside while its outlook remains highly uncertain. "The longer that high inflation persists, the more challenging and costly it can be to bring it back down."  

Fed governor Barr did his part, saying inflation is “not clearly trending toward target in a timely way”, “risks to achieving our inflation target have increased” and “further policy adjustments are likely to be needed”. He then discussed the main topic of his speech: the unaffordability of shelter.  

Global yields rose, with the match lit on Wednesday after PMIs came in strong, especially in the US. This week’s 5y Treasury auction was historically weak, tailing by 3bp. It didn’t help it occurred during a bond sell-off. The 7y auction that followed was a relative home run in comparison but still tailed, by 0.7bp. Friday saw a bid return to bonds, mitigating losses for the week and keeping the overall yield move below ~20bp across the curve.

The Treasury repurchased ~$4B of 20-30y bonds in this week’s buyback operation, below the $6B maximum, indicating Treasury saw a lot of prices it was unwilling to transact at (too high). The MOVE index (bond market vol), which has been trending higher since last August, broke away this week and opened up a wide gap between it and the VIX, though it pulled back on Friday as yields fell back. 

The Dollar strengthened this week against most major currencies outside of the yen, which gained on reports of US and Japanese officials again focusing on yen weakness.

As noted in the WSJ by James Mackintosh, Brent futures and the 10y yield are trading at their highest correlations in almost 20 years. While shorter-term yields would be expected to be move closely with oil given the near-term inflation impact, the spillover to longer timeframes is less obvious. In a little bit of corporate news, BP is reportedly looking at buying US shale assets, including assets from Devon Energy.

Regional natural gas prices show sharp divergence. US natural gas rose 10% while European prices fell 10%. Dutch TTF has steadily pulled back from its mid-month highs ~€85. The Gas Coordination Group, advisor to the European Commision, said that Europe’s supply was stable despite lower than normal storage levels. An issue in TC Energy’s Mountain Xpress gas pipeline caused US prices to spike on Thursday but pulled back on Friday as the interruption should be minimal. 

Global Equities -  Lots of holidays in Asia; Europe with modest gains 

The MLB playoffs will arrive, with the Yankees and Red Sox squaring off in another Fall showdown. The puck will also drop on the NHL regular season. Market-wise, Monthly payrolls, PCE, final GDP and ISM Manufacturing PMI will headline. Home Prices, JOLTS, Personal Income / Spending, and Construction Spending will also be on the calendar. We'll get more Fed Speak as well. In corporate events, OpenAI's Dev Day will be closely watched, and there will be several earnings reports, including JEF, CCL, FDS, MU, ACN, MKC and NKE. Enjoy the weekend. Stay Dry. Go Yanks. Go Isles.

by Eric Criscuolo & Michael Reinking, CFA

Last week we discussed the main themes driving markets: the broadening of the Middle East conflict, rising yields and AI. The Iran conflict spread to Yemen as the Houthis took substantial territory and threatened to create another supply chokepoint in the Red Sea. Inflation reports remained elevated. Crude rose another 10%. Global yields jumped, taking the 10-year Treasury to 5.0%. These weren't exactly new catalysts but we did add one new brick to the wall of worry: the possibility that AI destroys the human race. 10% chance- at least- according to some. The S&P ended the week down almost 1% with small caps losing about twice that. Energy was the obvious leader and Tech outperformed due to semiconductor-related strength.

This week started on a strong note as Skynet didn't become self-aware. In another miracle, both the Giants and Jets won their opening day games for the first time since 2009.

Unfortunately, the expected meeting between Gulf states and Iran over the weekend was postponed and the Houthis continued to capture territory. That drove oil higher and kept the pressure on equities. Adding to that strain was the latest plot twist in the AI story. Anthropic’s CEO published an essay calling for the slowdown of AI model development, in order to keep the Skynet scenario from happening, basically. Other AI leaders voiced their support, but many others didn’t, including the President of the United States. Needless to say AI hardware and infrastructure names began the week by selling off (DRAM and ICE Semis down >5% on Monday). However, the countertrade to that was turbo-charged, as software stocks rose sharply (IGV +5%).

Oil continued to climb on news around Libyan production issues and strikes on Russian refineries. The S&P’s 50d moving average around 7615 failed to hold, and then the index fell below 7600, the bottom of the trading range it’s been in since early August. The TL;DR: The Middle East, yields and AI continue to be the major themes driving markets. And they probably will be for the foreseeable future.

This week's big market event would play directly into one of those themes: the Federal Reserve’s rate decision. Before getting into that, however, we'll briefly mention the news that Warren Buffett announced he’s stepping down as Chairman of Berkshire Hathaway, effective immediately. What an incredible run.

Back to the Fed. A 25bp rate hike was the overwhelming expectation and that is exactly what happened. The new Summary of Economic Projections (SEP), which were last updated three months ago, along with Fed chair Warsh’s Q&A session were the the main points of interest. We discuss more below, but the immediate results was yields ripping higher, especially on the front end. The 2y traded up 15bp from the day’s lows. The S&P fell to its 100d moving average ~7515 but support held and it recovered some of the loss into the close. The next day however the index jumped 1%, regaining the 50d and returned back into that 7600-7800 range we've been noting. Equities benefited as yields pulled back, erasing all of the 2y’s post-decision rip, and oil fell on some optimistic geopolitical news (also discussed below).

The Fed decision came right before a huge Quad Witching (welcome back single stock futures) on Friday, as well as index rebalances. It was the third-largest closing auction in NYSE history, at 3.5 billion shares, while notional was a record $244.9 billion. All of this created an enormous amount of market noise, making the overall moves a little harder to disentangle as mechanical flows from options and futures expirations, repositioning and treasury market gyrations flooded the market.

The late-week rally put the S&P 500 only slightly lower for the week. Mega caps limited overall weakness, however. The equal-weight is down over 1% and small caps closer to 2% while the NYSE 100 ended up ~1%. On Friday the S&P once again tested support at its 50d ma just above 7600 but bounced off it. The thematic and high beta baskets we track like quantum and space and rare earths (and quantum space data center mines on asteroids) were mixed but most came under pressure on Friday, coinciding with sharp rally in crypto. If crypto continues to wake up it's possible we see flows durably rotate from those groups into the crypto complex.  

Only 3 sectors were up up for the week:

Healthcare led. Life science tools were among the best performers on some positive updates at investor conferences and there was strength across the rest of the sector, including Med Devices, a YTD underperformer. On the other hand Services and managed care.

Communication Services was also near the top with the mega caps Alphabet and Meta +3%, but the rest was lower, including Netflix (-7%) which caught a downgrade to Underweight on Friday.

Tech was around flat but rallied into Friday's close and the big opex, driven by semis, to finish the week as third sector in the green. It was volatile as a lot of AI news crossed the tape- calls for the AI slowdown mixed with corporate updates highlighting unrelenting demand (Jensen said NVDA chip shipments would double next year).

On the downside, Utilities and Real Estate lagged as yields rose. Financials were lower, continuing the weakness from last week as the yield curve continued to flatten, combined with some negative updates at investor conferences. Bank of America offered soft sales and trading guidance and Goldman Sachs had similar commentary on FICC trading. Huntington cut its outlook on higher funding rates and NII pressure. On the other hand, commentary on overall economic and credit conditions remained positive if not robust. The sector is also digesting the failure of the crypto Clarity Act in Congress and the SEC and CFTC taking matters into their own hands by issuing pieces of a regulatory framework for tokenization and trading.  

Materials lagged with weakness in agriculture names and steel (earnings) / miners. Industrials were also weaker. JB Hunt noted pricing pressures which weighed on trucking and freight peers while talk of slowing down AI development earlier in the week hit other infrastructure names like electrical equipment and construction.              

Consumer Discretionary and Staples continue to diverge, and the most recent move tracks closely with oil's sharp move higher. This despite generally upbeat commentary about economic resiliency and consumer spending. The chart below is a look at the equal-weight Discretionary versus Staples ratio, mitigating the over-influence of the mega caps.

One of the market characteristics we've highlighted was the high dispersion of returns across individual stocks being offset by very low correlations, keeping overall index volatility muted. That dynamic has been changing from its extremes in the summer. Correlations have been rising but individual stock volatility has been falling, keeping index vol relatively stable. This week we saw correlations come back in but remain in an uptrend.

The focus this week was more about the Federal Reserve as opposed to the economic data. The data itself continued to paint a similar picture of a resilient economy, consumer and labor market while the housing data once again highlighted underlying weakness.

Retail Sales beat expectations, both headline and the control group that feeds into GDP.  Headline rose 1.2% in August, more than reversing a decline in July (which was at least partially due to calendar effects from Prime Day) and seeing its highest growth in 5 months. The control advanced 1.4%, the highest in 2 years. 12 of the 13 major retail categories increased. Among the largest gainers, gas stations (no surprise) grew 3.1%, nonstore (online) retailers +2.6% and miscellaneous stores +1.9%.

The labor market looks healthy. Initial claims fell back below 200k and continuing claims fell to 1.73ml from 1.78ml last week, hitting its lowest level since May of 2024. The weekly ADP Employment Change also jumped to 16.25k from 12.25k. 

The housing data continued to highlight weakness. The NAHB Housing Market Index fell to 32 from 35 last month driven by a decline in sales expectations. The percentage of builders cutting price and using incentives both increased. Building permits and housing starts came in a touch below estimates and last month’s readings. August pending homes sales bounced back modestly after big declines in June and July. NAR Chief Economist Dr. Lawrence Yun noted, “Nationally, contract signings today are running roughly 30% below where they were in the years leading up to the pandemic.”

This week we also got our first look at September data with the release of the regional surveys. Both Empire and Philly manufacturing showed some moderation of activity after the big jump in August but remained firmly in growth territory. New orders and employment trends moderated while prices increased.

The data largely supported the first rate hike by the Federal Reserve since July of 2023. The decision to raise rates was unanimous which the Committee said “will support a timelier return” of inflation to their stated 2% target. The Summary of Economic Projection had a dovish tilt. The Committee projected inflation to ease significantly next year, largely in line with the June SEP, but it was notable that the Committee does not see core returning to target until 2029, which stretches the meaning of “timely”.  The DOTS showed broad support for an additional hike this year but for rates to hold steady throughout 2027. Chair Warsh’s press conference was short, ending abruptly at the 30 minute mark, and a bit more hawkish. The Chair suggested that the rate hike comes at a time when the economy seems to be strengthening and reiterated, “I would be hard-pressed to describe broad financial conditions as restrictive. This view was widely shared by the Committee. So, we removed a dose of accommodation.” This seems to suggest that the Committee is looking to unwind some if not all of the late 2024 cuts. 

For the week there was a flattening of the yield curve. The 2yr was up ~10bps to 4.75% which is 75bps above the current Fed Funds Target. The move in the long end was more moderate though markets are closely watching the 10yr which is sitting at the psychological 5% level. 

The USD moved higher throughout the week with much of strength coming against the Yen (more on that below).

Global Equities -  Most major indices ended modestly lower with geopolitics and rising oil/yields weighing on sentiment. 

Asia - a strong rally overnight recouped losses from earlier in the week.

Europe - Major indices tried to rally this week but today’s selloff wiped out those gains. The EuroStoxx index has closed lower in 5 of the last 6 weeks unwinding the August rally. Autos underperformed after Volkswagen cut guidance. Communication and retail stocks were some of the worst performing stocks while tech and pockets of healthcare outperformed. Overnight, ECB inflation expectations moved higher across all time horizons and Germany PPI came above estimates. This added to upward pressure on yields.

UK - The FTSE 100 ended the week around unchanged. In terms of economic data CPI was inline while PPI came in hot. This morning’s retail sales came in ahead of estimates. The Bank of England left rates unchanged in a 6-3 split vote. The central bank tweaked its QT program announcing slowing the pace from £70B to £46B announcing it would permanently hold long dated gilts on its books while bond with maturities ~2035 would be held to maturity and only passively runoff. 

The big event will be the Trump-Xi summit on Thursday. A dinner with AI leaders including Sam Altman and Jensen Huang will also be on the menu. Could turn into an Animal House-like food fight given all the "We need to all slow down!", "You can slow down if you want but I'm not!", "China wins if we slow down!" arguments that erupted this week. Speaking of arguments, the UN General Assembly meetings will also take place next week. The Fed media blackout ends, so we’ll start to hear from Fed officials about their thoughts on this week’s rate hike and overall views of monetary policy. The biggest data releases will be the global flash PMIs. On Tuesday we’ll officially say goodbye to Summer and usher in Fall as the autumnal equinox arrives for everyone in the Northern Hemisphere. Lastly, the NHL preseason begins as the sports calendar gets better and better this time of year. Enjoy your weekend.  

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