Higher rates take center stage

Summary

Last week in markets

Higher rates took some momentum out of equities last week as stronger economic activity and rising costs unsettled bond investors. The S&P 500 Total Return Index finished at 17,364.79, down 0.27% from Monday’s close. The 10-year Treasury yield ended the week at 5.17%, 16 basis points higher than the previous Friday.

Wednesday’s flash composite purchasing managers index rose to 58.4 from 56.0, its strongest reading since July 2021. Faster hiring and mounting input costs added to concerns that monetary policy may need to remain restrictive. For investors, the tradeoff was clear: resilient growth supported the earnings outlook but also pushed up the discount rate applied to those earnings.

Energy markets reflected a similar tension between diplomatic progress and persistent supply constraints. Brent crude settled at $104.32 per barrel, up 0.43% from the prior Friday despite falling 2.1% on the final trading day. Hopes for an agreement between Washington and Tehran weighed on prices, while renewed attacks on Saudi Arabia kept supply risks elevated.

Separately, the United States and China extended their trade truce through January 10, 2027, easing near-term tariff uncertainty. Together, these developments offered some relief without resolving the broader inflation challenge. Energy remained expensive, and diplomatic progress had yet to translate into normalized oil flows.

The week ahead

Inflation moves back to the forefront this week. Wednesday’s August personal income and outlays report will include the personal consumption expenditures price indexes, along with updated spending and income figures. Investors will watch for signs that underlying inflation is easing despite pressure from energy prices, as well as whether households can sustain consumption without further drawing down savings.

Also due Wednesday, the third estimate of second-quarter GDP and annual revisions could affect  recent economic momentum. Softer core inflation could provide some support for bonds. Firmer inflation alongside resilient spending could reinforce expectations that monetary policy will remain restrictive.

The labor market will provide another important test. Tuesday’s August job openings report will offer an early look at hiring demand, followed by September’s employment report on Friday, October 2. Payroll growth, unemployment, wage gains, and revisions will all shape the broader picture of the labor market.

Thursday’s ISM manufacturing survey will add another perspective through its readings on orders, employment, and prices paid. Continued labor market strength could support consumption and earnings while giving policymakers less room to tolerate persistent inflation. Broader cooling in hiring could weaken the growth outlook and temper expectations for additional rate increases.

Central bank commentary and geopolitical developments will influence how markets interpret the week’s data. Federal Reserve Governor Michael Barr is scheduled to discuss the economic outlook Tuesday, while Vice Chair Philip Jefferson will address monetary policy Thursday. Investors will listen for indications of what could prompt further tightening.

Energy supply remains another key variable. Markets will look for tangible progress toward restoring traffic through the Strait of Hormuz and securing Saudi export infrastructure. A sustained improvement in supply conditions could ease inflation expectations and borrowing costs. Renewed disruption could do the opposite, putting additional pressure on purchasing power, yields, and equity valuations.