What Happened Last Week
- Waller’s Commentary: The Fed Governor pointed to the August inflation reports as being key data for the Fed ahead of its September meeting.
- OpenAI Model Release: OpenAI released its newest, most powerful model yet over the weekend.
- Tensions in Hormuz: Oil prices rallied on reports of renewed U.S. strikes against Iranian oil tankers.
What We’re Watching This Week
- Inflation Reports: This week will bring August inflation data ahead of the Fed’s next policy meeting later this month.
- Treasury Buybacks: Investors will closely monitor Treasury operations and the Secretary’s comments as buybacks begin.
- Japan: Markets are watching for signs of a policy pivot in Japan, one of the largest holders of other countries’ assets, with the global long end in focus.
Investment Management Team’s Views
Equities traded through a relatively wide range but ultimately finished little changed in the final week of the summer holiday season. Still, interest rates and Fed expectations dominated the market conversation. Investors largely looked through an almost 10% rise in front-end crude oil prices, focusing instead on Governor Chris Waller’s Thursday remarks, which appeared to raise the bar for a September rate hike and initially pushed yields lower. Friday’s stronger-than-expected payroll report reversed part of that move, reminding investors that the labor market remains firmer than many had assumed. Yet, this Friday’s inflation report is likely to be more consequential than either development. A cooler reading should give the Fed room to remain on hold next week, while a hotter print would make a hike considerably more likely. Beyond September, the bigger questions are how far rates may rise and where long-term yields go from here.
Several other factors could shape the outlook for long-term yields in the coming weeks, alongside labor market developments and oil prices. The Treasury’s expanded long-term bond buyback program begins this week, with investors watching demand for new auctions and any guidance from Secretary Bessent. Corporate borrowing is also expected to rise after the summer slowdown, driven partly by AI infrastructure spending. Developments in Japan could add further pressure. A stronger yen and a potential shift in the country’s pension allocation could alter global capital flows, making Japanese markets increasingly relevant to Treasury yield direction. None of these forces is likely to determine moves in the long end by itself, but together they reinforce why we expect rate volatility to remain an important feature of the market.
The week is not devoid of corporate news, as Apple and its new CEO will hold its annual product event Wednesday, where investors will get their first look at the next generation of iPhones and other hardware. The event will provide an important read on the consumer technology cycle and AI implementation heading into the holiday season. We are also monitoring price action in semiconductor stocks, and the responses to OpenAI’s latest release. With market participation likely to improve after Labor Day and several major narratives already well understood, the next few weeks should begin to reveal what investors choose to focus on into the fall.