Growth cools, but the long end remains unconvinced

Summary

Last week in markets

U.S. equities advanced modestly last week as softer inflation data outweighed late-week concerns about growth. The S&P 500 Total Return Index gained 0.4% from Monday’s close through Friday.

July CPI rose 0.1%, while the 12-month rate eased to 3.4% from 3.5% and core inflation slowed to 2.5%. Producer prices were unchanged in July, although the 12-month rate remained elevated at 4.7%. Together, the readings reduced the immediate case for a September rate increase and helped sustain elevated equity valuations, which remain sensitive to changes in the rate outlook.

Friday complicated the picture. Retail sales fell 0.6%, while consumer sentiment dropped to 51.0, raising questions about the durability of household demand. The combination of easing inflation and softer consumption leaves markets weighing whether the economy is moving toward a more favorable inflation backdrop or a broader slowdown.

Rates and commodities sent a less reassuring signal. The 10-year Treasury yield ended Friday at 4.68%, 3 basis points above the prior week. The 30-year Treasury auction cleared at 5.216%, reinforcing the market’s sensitivity to duration supply and fiscal concerns.

Brent crude settled at $88.52 a barrel, up 6.0% for the week. After surging nearly 5% on Monday and trading above $90 on Tuesday, crude reversed lower Thursday before recovering into Friday. Stalled talks over the Strait of Hormuz, attacks on tankers, and prospective U.S. sanctions on Iran maintained a substantial geopolitical premium. Energy prices remain the clearest challenge to the improving inflation picture.

The week ahead

The first question for markets this week is whether softer demand signals the beginning of a broader slowdown.

Monday brings China’s July industrial production, retail sales, fixed asset investment, and unemployment data, alongside the Empire State Manufacturing Survey and Canadian CPI. Tuesday adds U.S. housing starts, building permits, import prices, industrial production, capacity utilization, and pending home sales.

Together, these releases should provide a clearer view of whether weakness is spreading into production and construction or activity remains resilient enough to keep the Fed inclined toward restraint.

Wednesday’s FOMC minutes are the week’s central policy event. Investors will look for the breadth of support for renewed tightening at the divided July meeting, the Committee’s assessment of energy-driven inflation, and the threshold for a September move.

UK and euro area inflation data arrive the same day, followed by the Riksbank’s policy decision Thursday. A firmer global policy message could reinforce upward pressure on term premiums and the dollar. A more patient interpretation of the Fed minutes could support the front end of the Treasury curve, but it would not resolve the fiscal concerns weighing on longer maturities.

Friday’s flash PMIs for the United States, euro area, and United Kingdom will provide the first broad assessment of August activity and pricing pressures. China’s loan prime rates Thursday and Japan’s inflation report Friday will add context for Asian policy expectations.

Geopolitics remains the principal wildcard. Markets will continue to monitor negotiations over reopening the Strait of Hormuz, the pace of vessel traffic, and the expected rollout of new U.S. sanctions on Iran. A renewed rise in crude prices could challenge the disinflation narrative, lift inflation expectations, and leave the long end vulnerable even as growth indicators soften.

The tension to watch is increasingly clear: softer growth may give policymakers more room to be patient, but persistent energy and long-term rate pressures could limit how much relief markets ultimately receive.