Strong earnings, stubborn inflation

Summary

Last week in markets

U.S. equities advanced last week despite a late pullback driven by shifting rate expectations. Nvidia reported quarterly revenue of $96.2 billion, up 106% from a year earlier, while Data Center revenue rose 117% to $89.0 billion. The results reinforced confidence in artificial intelligence capital spending and supported technology shares through Thursday. The S&P 500 Total Return Index gained approximately 0.78% from Monday’s close through Friday.

That momentum faded after Fed Chair Kevin Warsh used Jackson Hole to emphasize that inflation remains too high and financial conditions are not broadly restrictive. Markets responded by raising the implied probability of a September rate increase to nearly 58%, up from 35% a day earlier.

Treasuries saw an even sharper repricing. The 10-year yield ended the week near 4.73% after falling to 4.64% Tuesday, then reversing as Warsh reinforced the Fed’s focus on bringing inflation back to target. July PCE inflation held at 3.7%, with core inflation at 3.3%. The data showed no renewed acceleration, but offered little reassurance with inflation still well above the Fed’s 2% objective.

Oil provided some relief. October Brent finished at $89.37 per barrel, down 5.3% from the prior Friday and 3.0% from Monday’s $92.17 close. Improving Gulf exports and expectations for wider access through the Strait of Hormuz outweighed the immediate effect of expanded U.S. sanctions on Iran. For markets already focused on persistent inflation, lower oil prices eased one important source of pressure.

The week ahead

The U.S. labor market takes center stage this week. Tuesday brings JOLTS and ISM manufacturing, followed by ADP and factory orders Wednesday. Jobless claims, trade data and ISM services arrive Thursday. The key release comes Friday with the August employment report, following July’s 23,000 payroll decline.

Payroll growth, wages, participation and revisions should provide a clearer view of what is driving the slowdown in hiring. The central question is whether weaker job creation reflects a smaller labor supply or a broader loss of economic momentum. A firm report would support Warsh’s view that current monetary policy is not meaningfully restrictive. Another weak result would make the case for a September rate increase more difficult.

The policy implications extend beyond the employment report. The Fed’s Beige Book arrives Wednesday with district-level evidence on hiring, pricing power and the effects of elevated energy and tariff costs. Governors Michael Barr and Christopher Waller are also scheduled to speak, giving markets another opportunity to assess the Fed’s reaction function following Jackson Hole.

Outside the U.S., the Bank of Canada announces its rate decision Wednesday at 9:45 a.m. Eastern, followed by a press conference. Its guidance will be important for Canadian rates and the currency as policymakers weigh weak growth and easing inflation against continued trade uncertainty.

Geopolitics also remains an immediate market variable. The risk of renewed disruption rose Sunday after U.S. forces struck two Iranian rocket launchers on Larak Island that officials said were being prepared to deploy sea mines into the Strait of Hormuz. A renewed disruption to shipping could quickly restore the oil risk premium and put upward pressure on inflation expectations.

Continued attacks on Russian refining and export infrastructure could similarly tighten global product markets and raise European energy costs. With sovereign yields already highly sensitive to inflation expectations and central bank credibility, the interaction among oil supply, geopolitical escalation and monetary policy may prove more consequential this week than the quieter corporate calendar.