Growth holds up as oil and yields stay elevated

Summary

Last week in markets

U.S. equities advanced last week despite significant volatility in interest rates and energy markets. The S&P 500 Total Return Index gained 0.49%, rising 86.04 points from Monday’s close of 17,437.19 to Friday’s close of 17,523.23. The 10-year Treasury yield ended the week at 5.24%, down four basis points from the previous Friday, after moving from 5.31% on Monday to 5.22% on Thursday. Strong demand at Treasury auctions helped limit increases in longer-term yields. However, yields remained elevated as investors assessed persistent inflation, substantial Treasury supply, resilient economic growth and Federal Reserve meeting minutes indicating that most officials still expect another rate increase this year.

Energy prices remained a key link between geopolitical developments and inflation expectations. Brent crude settled at $104.72 per barrel, rising 2.42% for the week and 4.51% over the final two trading sessions, as threats to Middle East shipping routes and production outages in the Gulf constrained supply. On Friday, the United States and Russia announced an agreement for Russia to immediately release more than 300,000 tons of diesel, with larger volumes expected to follow. The U.S. Treasury also temporarily eased related sanctions. Diesel futures declined approximately 4.5% following the announcement. While the agreement could help reduce transportation and agricultural costs, its impact will depend on shipment timing, Russian refinery capacity and the stability of the broader geopolitical arrangement.

The week ahead

Wednesday’s release of September’s Consumer Price Index (CPI) will be the most closely watched economic report of the week. Beyond the expected impact of higher energy prices, investors will assess whether inflationary pressures are extending into shelter, services and core goods. A stronger-than-expected reading would support the case for another Federal Reserve rate increase before year-end and could put renewed upward pressure on the 10-year Treasury yield. Conversely, a softer reading would strengthen expectations that the Fed will hold rates steady at its October meeting. With Treasury yields already above 5% and crude oil above $100 per barrel, even a modest upside inflation surprise could trigger a significant reaction in interest rates and equities.

Thursday’s economic calendar includes producer prices and retail sales, followed by import and export prices and industrial production on Friday.

• Retail sales will offer insight into whether consumer spending maintained its momentum despite higher fuel and financing costs weighing on household purchasing power.

• Producer and import prices will help investors assess whether inflationary pressures are primarily driven by temporary energy costs or are spreading more broadly through the supply chain.

• Industrial production will provide a clearer picture of how manufacturers are managing higher input and capital costs.

• The Federal Reserve’s Beige Book, scheduled for Wednesday, will add regional perspectives on pricing power, wages, hiring and credit conditions ahead of the October 27-28 policy meeting.

Geopolitical developments will also remain central to the inflation outlook. Investors will monitor whether the Russia diesel agreement results in shipments arriving as scheduled, how temporary sanctions relief is implemented and whether damaged Russian refineries can deliver the promised volumes. Renewed tensions involving Iran, the Strait of Hormuz or Gulf energy infrastructure could quickly offset the anticipated benefits of additional diesel supply. Outside the United States, China’s trade and inflation data, final eurozone inflation figures, and Singapore’s monetary policy decision will offer further insight into global demand and price pressures. However, energy market developments remain the most immediate channel through which geopolitical events could influence inflation expectations and Treasury yields.