Categories:
Key areas of focus
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On the macro front, we get the first of September's regional business sentiment surveys in the Philly Fed and Empire indices, alongside August activity readings in retail sales and industrial production, rounded out by housing data in starts and the NAHB builder sentiment index.
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The FOMC also meets on Tuesday and Wednesday. The futures market is now reflecting an 86.5% probability of a hike this week and a 75% chance of at least two before year-end. Those probabilities rose meaningfully last week, driven by stubborn inflation and climbing oil prices that validated Kevin Warsh's hawkish Jackson Hole message.
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Yields extended their upward momentum last week. The 10-year Treasury rose Friday to close at 4.96%, its highest since October 2023, when it briefly eclipsed 5.00% for the first time since 2007. The 2-year followed to 4.63%, a two-year high, while the 30-year reached 5.35%, a near two-decade peak.
Week in review
Last week was a relatively light week for scheduled macroeconomic releases. With Monday closed for Labor Day and no releases scheduled for Tuesday or Wednesday, equities drifted lower as investors again digested rising oil prices and yields. Front-month Brent pushed back above $100/bbl on intensifying Middle East shipping pressures, and the 10-year treasury climbed toward 5% in sympathy with higher energy prices. Action picked up on Thursday, when the European Central Bank (ECB) raised its policy rate by 25bp to 2.50% as expected, warning that inflation would remain "well above target for an extended period" while upgrading both growth and inflation projections. Economists now forecast a December follow-up toward 3%. A softer Core PPI print, an in-line 2.0% drop in existing home sales, and steady jobless claims rounded out the session. Friday stole the spotlight. A hotter-than-expected 0.29% Core CPI print and rising University of Michigan inflation expectations drove a curve-flattening move, with shorter-term yields increasing while longer-term yields stayed flat.
Spotlight
When the European Central Bank (ECB) lifted rates 25 basis points on Thursday (its second hike of 2026), it did more than respond to a 14.3% surge in eurozone energy inflation. It reinforced a global repricing that the Federal Reserve is now facing. Just weeks ago, markets confidently expected the FOMC to hold, if not cut rates. That consensus has reversed course driven by a confluence of factors including resurgent energy costs, firm inflation prints, and Warsh's hawkish Jackson Hole tone. The CME Group's FedWatch tool now reflects an 86.5% probability of a hike at this week's meeting and a 75% probability of at least two hikes before year-end. Beneath the surface, both central banks are confronting supply-driven inflation that monetary policy cannot easily tame. Treasury yields have responded in kind, with the 10-year pressing toward 5%. Despite a still-resilient labor market, the tone has shifted meaningfully. The real focus will be on whether the Fed frames this week's move as a one-off insurance step or the opening of a broader cycle.
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Sources
1. Producer Price Index (PPI)
U.S. Bureau of Labor Statistics, Producer Price Index News Release Summary, retrieved from U.S. Bureau of Labor Statistics; https://www.bls.gov/news.release/ppi.nr0.htm
2. Existing Home Sales
National Association of REALTORS (NAR), Existing-Home Sales Summary, retrieved from NAR; https://www.nar.realtor/research-and-statistics/housing-statistics/existing-home-sales
3. Jobless Claims
U.S. Department of Labor, Unemployment Insurance Weekly Claims, retrieved from U.S. Department of Labor; https://www.dol.gov/ui/data.pdf
4. Consumer Price Index (CPI)
U.S. Bureau of Labor Statistics, Consumer Price Index Summary, retrieved from U.S. Bureau of Labor Statistics; https://www.bls.gov/news.release/cpi.nr0.htm
5. Consumer Sentiment
Surveys of Consumers, University of Michigan Consumer Sentiment Index Summary, retrieved from University of Michigan, https://www.sca.isr.umich.edu/
6. CME FedWatch Tool
CME Group, FedWatch, retrieved from CME Group; https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
Market Data
Morningstar Direct using Morningstar Indices
Author:
Anthony Silva
CFA®
Senior Director, Strategy Management
World Investment Advisors, LLC