What Happened Last Week
- Inflation Report: Last week’s hot inflation print boosted expectations that the Fed will raise interest rates by 25 bps this week.
- Global Energy Flows: Energy prices rose sharply amid rising tensions in the Middle East.
- Treasury Operations: The Treasury’s buyback operations last week failed to lower long-end interest rates.
What We’re Watching This Week
- Fed Meeting: The Fed is set to hike interest rates at its policy meeting on Wednesday.
- Middle East Escalations: New fighting near the Bab El-Mandeb strait has imperiled Saudi oil flows and pressured global prices higher.
- AI Slowdown Talks: Frontier model developers called for pacing the deployment of new models, citing security concerns.
Investment Management Team’s Views
Last week’s inflation data effectively cemented expectations for a Fed hike, shifting the more important question from whether rates move higher to how far the cycle ultimately goes. Markets have spent much of the past several months asking the Fed to respond more forcefully to inflation, so a limited number of hikes should be manageable for equities and beneficial for long-term yields. Taking back the three insurance cuts delivered last year is one thing; repricing policy materially above those levels would be far more consequential. A hawkish outcome on Wednesday could therefore be poorly received initially. Still, a credible message from Chair Warsh may ultimately provide the bond market with the stability investors have been looking for and help put a floor under recent bearish sentiment.
Long-term yields remain the more important pressure point, particularly as policy volatility in Washington adds to an otherwise strong growth and investment backdrop. The 10-year Treasury yield finished last week just below 5%, a level only briefly reached in October 2023, while the administration’s recent efforts to lower borrowing costs, including the stepped-up Treasury buyback program, have had little visible effect. Strong growth and robust corporate investment are ultimately good problems to have, but heavy supply, elevated oil prices, and policy uncertainty are keeping upward pressure on term premiums. A sustained break above 5% would therefore carry more significance for equity sentiment than another modest move in the policy rate.
With corporate earnings season all but concluded, macro, policy, and the AI pacing debate are likely to dominate the week ahead. The Fed decision and commentary from the Chair arrive Wednesday alongside retail sales. Separately, weekend calls from several major AI executives to slow the pace of frontier-model development have introduced a new source of uncertainty around a theme that has driven much of this year’s equity performance. We would distinguish concerns around the pace and safety of model development from the underlying demand for AI infrastructure, which is likely to remain strong. However, the headlines may still weigh on sentiment in the near term. With September’s weaker seasonal backdrop, elevated long-term yields, and fewer earnings catalysts to absorb attention, investors may be especially sensitive to this new AI theme narrative.