The September 15-16 FOMC meeting will be the week's principal global catalyst, according to Hariselvan Radhakrishnan, Founder & CEO of HST Wealth. The Federal Reserve's monetary policy decision and commentary on future interest rate paths will dominate market movements. The September 11 inflation report showed headline CPI rising 0.4% month-on-month and holding at 3.4% annually, while core inflation increased 0.3% from the previous month but eased to 2.4% year-on-year. The firmer monthly reading keeps inflation risks in focus and could reinforce pressure on global bond yields and the dollar, particularly if the Federal Reserve adopts a more hawkish tone. Wall Street has been betting there will be at least one rate hike by the end of the year, with the Fed holding its benchmark interest rate steady while monitoring inflation well above its 2% target. By late Friday, Fed funds futures were assigning better than an 80% probability to a quarter-point hike on Wednesday, as reported by Investing.com. Following the inflation report, futures markets placed the probability of a 25-basis-point rate hike at nearly 90%, with a hike expected to lift the federal funds target range from 3.50–3.75% to 3.75–4.00%. The US 10-year Treasury yield touched 5% on Monday before retreating slightly, with CME FedWatch indicating a 90% probability of a Fed rate hike this week. The latest rebound in oil prices above $100 a barrel boosted the 10-year US Treasury bond yield to nearly 5.00% and the comparable TIPS yield to 2.60%, as rising oil prices and Middle East tensions fuel inflationary concerns. Treasury futures consolidated while government bonds opened higher in Australia and New Zealand, with traders watching for signs of how long Saudi Arabia's East-West pipeline will remain closed after drone attacks halted operations last week.
Leading artificial-intelligence industry figures have backed calls for a more measured approach to AI development, creating fresh uncertainty in the technology sector. Anthropic CEO Dario Amodei proposed a three-step plan in a blog post titled "We Must Pace the Frontier," beginning with Anthropic granting independent third-party evaluators ongoing access to review safety practices. His position was supported by OpenAI CEO Sam Altman, who said OpenAI would not pursue an initial public offering this year, citing safety concerns and calling an OpenAI IPO this year "ill advised." xAI founder Elon Musk also called for greater oversight and peer review among AI companies. The comments have unsettled investors and cast a fresh spotlight on Wall Street's high-flying AI trade, with futures linked to the tech-heavy Nasdaq 100 falling about 1% on Sunday. The concerns come as the United States and China are expected to address AI safety during bilateral talks planned for later this month, according to sources familiar with the matter. The sell-off was particularly pronounced in technology and AI-linked shares, with Nasdaq futures falling over 1.5% in afternoon trading as investor sentiment towards the AI trade weakened after the leaders called for a slowdown in AI development. US tech stocks fell sharply on Monday as AI industry leaders warned a slowdown is needed for safety, with the Nasdaq dropping 1.2% while the S&P 500 fell 0.8%. Nvidia slid 3.8%, weighing heavily on the market, as the price of Brent crude jumped 3.8% to $108.74 a barrel. Chip and semiconductor stocks came under pressure, with Micron falling 5.25%, AMD 4.4%, Broadcom 4.8%, Marvell 7.3%, Nvidia 3.3% and ARM Holdings 9.7%, while cybersecurity stocks such as CrowdStrike and Palo Alto Networks surged 13-15%. OpenAI weighed a new funding round at a $1.2 trillion valuation, helping sentiment in early trading as contracts for Wall Street gauges nudged up in early trading.
Oil prices jumped more than 3% to above $100 a barrel after Houthi and Iranian attacks heightened concerns over Gulf supply, compounded by the temporary closure of Saudi Arabia's East-West pipeline, which handles exports equivalent to as much as 4% of global oil demand. The surge comes as traders now see an 86% chance of a Fed rate increase this week after August inflation accelerated, with another hike expected later this year. Brent crude touched $109 a barrel after Saudi Arabia shut its East-West pipeline, with reports indicating that the Houthis took control of Perim Island in the Bab el-Mandeb Strait, adding to concerns over global oil supplies and shipping routes. The uncertainty around the key shipping route has heightened concerns that a prolonged disruption could push energy prices higher and fuel inflation globally. Brent crude gained nearly 3% on Monday after fresh strikes targeting Saudi Arabia and ships in the Gulf raised concerns over further disruption to energy supplies, with Brent crude having already gained nearly 9% last week, while US crude rose 2.6% to $102.62 a barrel. US crude oil fell 0.6% to $105.15 a barrel after surging more than 20% this month, helping sentiment as a gauge of chipmakers eked out an increase in early trading. Saudi Aramco is delaying oil supplies to some European customers this month, people familiar with the matter said, as traders watched for signs of how long the pipeline will remain closed. The US 10-year briefly tested 5%, only the second visit to that level since 2007 after the short-lived break in October 2023, while the 2-year yield surged almost 20 basis points toward 4.6%. Gold prices edged lower as oil's sharp rally revived inflation concerns and strengthened expectations for a potential Federal Reserve rate hike.
European shares recovered on Wednesday after two consecutive sessions of losses, as a pause in the recent oil price rally helped ease pressure on risk assets ahead of the Federal Reserve's monetary policy decision. The pan-European STOXX 600 gained 0.4% to 636.81 points by 0705 GMT, while Germany's DAX also advanced 0.4%. Most major European markets traded higher as investors assessed the outlook for interest rates and inflation. Investor focus remained firmly on the Federal Reserve, with markets pricing in a 93% probability of a 25-basis-point interest rate hike. Expectations for tighter monetary policy have strengthened as the conflict involving Iran has pushed energy prices higher and raised concerns about renewed inflationary pressure. The decline in oil prices helped sectors that had been hit by concerns over higher energy costs to recover. Banks were among the biggest gainers, with Barclays rising 1.4% and Standard Chartered advancing 1.7%. The two banking stocks had been among the contributors to the STOXX 600's decline to a three-month low in the previous session. European markets now await the Fed's decision, with movements in oil prices, bond yields and central-bank guidance likely to remain key drivers of investor sentiment in the near term.
Market volatility is expected to rise significantly ahead of the Federal Reserve's decision, with implied volatility likely to reach the 20 region by Wednesday afternoon, up sharply from 13 on Friday afternoon. Bond market volatility should also increase, with the MOVE Index likely to move higher from its current reading of 82 through Tuesday's close. As the Fed meeting approaches, the market will demand a larger volatility premium for the risk of a significant policy repricing, creating headwinds for equities. The inverted MOVE Index continues to serve as a good proxy for where the S&P 500 is likely to head, so if volatility rises as expected, it would point to increasing downside pressure on the index ahead of the Fed decision. September is a month of Treasury paydowns, which should provide some support as cash returns to the market, with $29 billion in net paydowns on Tuesday and another $14 billion on Thursday. However, liquidity conditions are already deteriorating despite those paydowns, with the high-yield advance-decline line falling to a new 52-week low and the NYSE McClellan Summation Index falling below zero after failing to break above 500, indicating declining stocks are increasingly dominating advancing stocks. "The combination of higher interest rates and elevated oil prices is like asking equities to run a marathon with ankle weights strapped on," said Darrell Cronk at Wells Fargo Investment Institute. "Higher rates increase the discount rate investors apply to future earnings, while higher energy costs drain purchasing power from consumers and pressure profit margins."
