Growth holds as inflation returns to center stage

Summary

Last week in markets

U.S. equities weathered a volatile start to September and finished modestly higher. The S&P 500 Total Return Index gained 0.39%, rising from 17,219.94 on Monday to 17,287.11 on Friday. Early pressure from higher oil prices and bond yields gave way to a Thursday rebound after Federal Reserve Governor Christopher Waller argued for patience.

Friday’s stronger-than-expected employment report quickly brought the tightening debate back into focus. Payrolls increased by 162,000, well above expectations of 53,000, while unemployment held steady at 4.1%. Markets responded by raising the implied probability of a September 16 rate increase to roughly 60%. That shift limited the equity recovery and underscored how sensitive valuations remain to incoming inflation data.

Rates and commodities sent an even clearer macro signal. The 10-year Treasury yield ended the week at 4.78%, up from about 4.75% on Monday, after briefly reaching 4.80% following the payroll report. Brent crude settled at $96.23 a barrel, up 6.3% from Monday’s $90.49 close, with the largest increase coming Tuesday.

Renewed U.S. and Iranian strikes, combined with continued disruption through the Strait of Hormuz, intensified concerns about energy flows and pushed fuel costs further into the inflation picture. The result is a difficult combination for policymakers: resilient economic growth alongside a fresh supply shock. Together, those forces raise the bar for monetary policy relief.

The week ahead

Inflation takes center stage this week. The U.S. calendar culminates with August PPI on Thursday and CPI on Friday, both at 8:30 a.m. Eastern. PPI will offer an early indication of whether higher crude, freight and refined fuel costs are moving into producer margins. CPI will provide the more consequential test: how much of that pressure is reaching households.

Gasoline, shelter and core services will be especially important. With the Federal Reserve’s September 16 decision approaching and markets now leaning toward a rate increase, a firm core inflation reading could push front-end yields and the dollar higher. Softer data would strengthen the case for patience.

The ECB also takes center stage Thursday with its policy decision and revised projections. Policymakers are widely expected to raise the deposit rate by 25 basis points to 2.50% after euro area inflation accelerated to 3.3%, driven by a 14.3% increase in energy prices.

The decision itself may be less important than what comes next. Investors will be listening for whether ECB President Christine Lagarde characterizes the increase as sufficient insurance against renewed inflation or as the beginning of a longer tightening cycle. That distinction could shape the euro, Bund yields and relative rate expectations, particularly as underlying inflation has softened even while headline pressures have intensified.

Bond supply and geopolitics will add another layer to an already consequential week. Treasury auctions of three-year notes Tuesday, 10-year notes Wednesday and 30-year bonds Thursday will test demand for duration at elevated yields. With U.S. markets closed Monday for Labor Day, investors also have a compressed four-session window to absorb the week’s data and reposition ahead of the Fed.

The Strait of Hormuz remains the key geopolitical variable. Further attacks on shipping or regional infrastructure could drive another increase in oil prices, reinforcing inflation expectations and upward pressure on yields. Credible diplomatic progress could move markets in the opposite direction, easing energy concerns and offering the clearest path to lower yields and broader market relief.

For markets, the question this week is whether inflation pressures ease enough to give central banks room to wait, or resilient growth and higher energy costs force policymakers to act.