Weekly Market Recap

Overview

For the past two weeks, markets had been preparing for another uncomfortable inflation reading and the possibility of higher US interest rates. This week changed that narrative.

August core inflation came in softer than expected, significantly reducing expectations for another Federal Reserve rate increase in October. Despite that shift, long term US government borrowing costs continued moving higher, with benchmark yields reaching levels not seen in more than two decades.

That divergence became the defining story of the week. Expectations for additional Fed tightening weakened, but pressure in the bond market remained intense as investors focused increasingly on government borrowing requirements and a broader global retreat from sovereign debt.

Oil added another layer of uncertainty as prices reacted to developments involving Iran and global supply conditions. Equity markets also became increasingly divided, with technology shares supported by continued enthusiasm around artificial intelligence while more rate sensitive sectors struggled under higher borrowing costs.

Attention now turns to the September US employment report, which could determine whether long term yields continue rising even if the Federal Reserve remains on hold.

1. Bonds, The Main Market Driver

The biggest movement of the week came from the bond market.

Following the softer inflation data, traders reduced the estimated probability of an October Federal Reserve rate increase from roughly 71% a week earlier to around 32%.

Under normal conditions, that kind of shift would be expected to push government bond yields lower. Instead, the opposite happened.

The yield on the 10 year US Treasury climbed to approximately 5.33%, reaching its highest level since 2002. The 30 year yield moved toward 5.63%.

Over the course of September, the 10 year yield increased by roughly half a percentage point, representing one of its sharpest monthly moves since 2022 and contributing to an extremely difficult quarter for bond investors.

The market is increasingly treating long term borrowing costs as a separate issue from the Federal Reserve's next policy decision. Investors are paying greater attention to the scale of US government debt issuance, fiscal pressure and weakness across global bond markets.

2. Inflation, Softer PCE Changes the Rate Debate

The catalyst for the shift in rate expectations came from the Federal Reserve's preferred inflation measure.

August core PCE increased by 0.2% from the previous month and remained at 3.0% on an annual basis. That was below the approximately 3.3% figure that markets had been preparing for. Headline PCE inflation was reported at 3.4%.

After several weeks of concern that inflation could accelerate again, the numbers provided markets with some relief and significantly reduced expectations for another rate increase in October.

However, the report was not entirely supportive of lower borrowing costs.

Consumer spending increased by 0.9%, while second quarter economic growth was revised higher to 2.2%.

Inflation appears to be cooling, but demand across the economy remains relatively resilient. That combination helps explain why longer term Treasury yields continued to rise even as expectations for immediate Federal Reserve tightening declined.

3. Oil and Iran, The Inflation Wildcard

Oil remained one of the largest sources of uncertainty throughout the week.

Prices rose sharply on Monday as tensions involving Iran increased concerns about potential disruption around the Strait of Hormuz, one of the world's most important transit routes for crude oil.

Brent moved close to $106 per barrel while US crude approached $94.

Conditions eased during the middle of the week. Reports surrounding a possible release from the US Strategic Petroleum Reserve, developments involving sanctions on Russia and recovering Gulf exports helped push US crude back toward $90.

Prices later moved higher again following reports that Chinese refiners had suspended fuel exports for October.

By Friday morning, US crude was trading around $91.50 while Brent remained above $102.

With geopolitical tensions continuing and traders watching developments affecting tanker traffic and regional security, the possibility of an additional risk premium remains part of the oil market.

OPEC+ is also expected to determine November production levels on Saturday, giving traders another important indication of the supply outlook.

4. Equities, A Divided Market

The equity market reflected the same divide seen across bonds.

Rate sensitive areas came under pressure as Treasury yields moved higher. The Dow Jones 30 declined 4.3% during September, while the S&P 500 slipped approximately 0.5%.

Technology stocks moved in the opposite direction.

The Nasdaq gained around 1.9%, supported by continued investor interest in artificial intelligence and semiconductor companies.

Micron became one of the clearest examples of that trend. The company reported a record quarter, with revenue reaching $54.2 billion and rising sharply as demand for AI related memory products accelerated.

Despite the strong numbers and guidance above expectations, Micron shares initially fell by around 3% as investors took profits following the announcement. The stock recovered by more than 2% the following session.

Reports of a $42 billion financing agreement involving Broadcom and AI company Anthropic added further momentum to the technology sector and helped US equities recover later in the week as Treasury yields moved slightly below their recent highs.

5. Jobs, The Next Major Test

The final major event of the week is the September US employment report.

Nonfarm Payrolls are due later on Friday and could provide the clearest indication yet of whether rising long term borrowing costs can continue even as expectations for another Federal Reserve rate increase weaken.

Economists are looking for approximately 90,000 to 100,000 new jobs, with the unemployment rate expected to remain near 4.1%.

That would represent a significant slowdown from August's reported increase of 162,000 jobs.

Earlier in the week, the ADP private employment report came in stronger than expected at approximately 90,000.

A stronger than expected official employment report could reinforce the bond market's recent move and keep long term yields elevated despite reduced expectations for a Fed hike.

A meaningful downside surprise could have the opposite effect, potentially giving bond markets the catalyst needed for yields to move lower.

6. The Bigger Picture

Several different market themes are now beginning to connect.

Softer inflation has reduced expectations for another Federal Reserve rate increase, but long term borrowing costs have continued rising as investors focus more closely on government debt issuance and weakness across global bond markets.

Oil remains an inflation risk, while rising yields are creating a clear divide within equities. Rate sensitive sectors have struggled while technology and AI related companies have continued to attract investor demand.

The September jobs report now becomes the next major test of whether this environment can continue.

Beyond employment data, markets will turn to the OPEC+ production decision on Saturday and then toward the Federal Reserve meeting scheduled for 28 October.

The central question has changed. Investors are no longer focused exclusively on what the Federal Reserve will do next. They are increasingly asking whether the bond market itself is becoming the dominant force determining the cost of money.