Wall Street dipped on Friday as a robust jobs report raised the probability that the U.S. Federal Reserve will increase its key interest rate at this month's monetary policy meeting. All three major U.S. indexes closed lower amid a broad selloff ahead of the three-day holiday weekend, with the indexes essentially unchanged for the week. The Labor Department's August employment report showed the U.S. economy added 162,000 jobs last month, nearly three times the 56,000 consensus forecast, while the department revised June and July payrolls upward by a total of 55,000 jobs. Labor market participation increased while the unemployment rate held firm at 4.1%. As reported by Reuters, while a stronger-than-expected jobs report would generally be good economic news, markets are interpreting it as a sign the data-dependent Fed will implement a rate hike at the conclusion of this month's policy meeting to curb war-related energy price pressures from morphing into broader, more systemic inflation. The Dow lost roughly 0.3%, the Nasdaq gained around 0.2%, and the S&P 500 was effectively unchanged by the closing bell, though the weekly scoreboard might suggest little movement occurred.
Financial markets are pricing in a 67% likelihood of a 25-basis-point rate hike at the conclusion of the Fed's September meeting, up dramatically from less than 30% in mid-August, according to Reuters. Fed funds futures suggest a 57% chance the Federal Reserve will hike interest rates at its September 15-16 meeting, with US money markets boosting odds to around 67% by August 31st. The S&P 500 ended the week with a modest gain, remaining about 1% shy of its mid-August record high after dropping on Friday. The benchmark index has gained nearly 13% in 2026, underpinned by exceptionally strong corporate profits, though investors have braced for potential volatility in September, historically the weakest month for U.S. stocks. Markets have been consumed in recent weeks by the prospects of a rate increase, with such bets ramping up after Fed Chairman Kevin Warsh's speech late last month that signaled the central bank might have to act if inflation remains high. The 2-year Treasury yield pushed to its highest level since January 2025, with the 10-year briefly touching 4.818%, as global sovereign yields moved toward levels not seen since before the financial crisis.
The upcoming inflation reports are expected to provide crucial insights into the Fed's monetary policy direction. Economists polled by Reuters expect a 0.4% monthly rise in August Consumer Price Index and a 0.2% rise in the core measure, excluding volatile food and energy components. The Producer Price Index report is scheduled for Thursday, coming a day ahead of the CPI data due September 11. As reported by Investing.com India, core CPI is expected to rise 0.2%, with the year-over-year rate slipping to 2.4% from 2.5%, while headline CPI is expected to rise 0.4% from 0.1%, for a 3.4% year-over-year increase. The ISM Services Prices Index climbed to around 72 this past week, its highest since September 2022, and has diverged from CPI since 2024. Energy, diesel, and gasoline prices are also up this month, providing a potential positive impulse to CPI. Fed Governor Chris Waller has indicated that the coming CPI report will be super important in determining whether there should be a September rate hike, leaving the Fed in a box if the number comes in hot. Wage growth at around 3.1% year-on-year was hardly an inflation horror show, but the pause camp needed evidence that labor demand was buckling enough to make another hike uncomfortable, and Friday's payrolls removed one of the better arguments for standing still.
Oil prices extended gains significantly, with Brent topping $97/bbl after renewed U.S.-Iran tensions around the Strait of Hormuz pushed crude back above $95/bbl, delivering a weekly gain of more than 6%. WTI rose more than 8%, its strongest week since July, while fresh U.S. strikes, Iranian threats against Gulf exports and Ukrainian attacks on Russian refining infrastructure shoved the geopolitical premium higher again. However, diesel prices are where the macro story gets particularly concerning, with US diesel prices at record levels and the product complex sending a much uglier message than headline crude benchmarks alone suggest. This is where stagflation starts turning up in trading books, as diesel works its way into freight, agriculture, manufacturing, logistics and food, eventually turning up in margins and consumer prices. Global sovereign yields pushed to fresh cycle highs, with Japan's 10-year yield reaching 3% for the first time since 1996, British long-end yields approaching three-decade highs, German and French yields moving into territory associated with earlier crisis periods. The 10-year briefly touched 4.818%, with the 30-year remaining at about 5.25%, well above its October 2023 close. Five percent no longer looks like some distant scare number - it is now standing across the street.
Quarterly results from Oracle on Thursday could have implications for the market's AI trade, as reported by The Economic Times. Oracle is one of the hyperscalers spending heavily to build AI data centers. Some of the highest-flying stocks in the AI trade, including semiconductors, have cooled off in recent weeks, though other groups have helped support the S&P 500. The second-quarter reporting season has ended, with investors now focusing on other factors affecting equity outlook. According to Investing.com India, the Korean won also continued to strengthen, closing at its strongest level since October 2024, which could be a sign of repatriation with capital allocated to the U.S. going back home. The strengthening suggests a lot of that capital has left with no sign of returning, which may weigh on semiconductors, since new buying would have to come from a different part of the market, and software is already beaten down. Broadcom gave the cleanest example of AI earnings challenges, with revenue jumping 86% to $29.6 billion and AI semiconductor revenue surging 221% to $16.7 billion, but shares initially fell as the extraordinary growth is no longer enough when extraordinary is already embedded in the multiple. The market is becoming more selective as the blank-cheque phase of AI investing gives way to harder questions about returns on capital.
Barclays economists noted that the employment report marginally strengthens the case for a quarter-percentage-point hike at the September meeting, with attention now shifting to next week's inflation data. According to The Economic Times, the prospect of tighter monetary policy could undercut stock performance in several ways, including by raising borrowing costs that slow the economy. Rate hikes that translate into higher Treasury yields could create more investment competition from bonds and pressure equity valuations. With inflation having consistently run above the Fed's 2% annual target for several years, the upcoming CPI will be particularly crucial for determining whether the cooling trend seen in June and July is confirmed. As reported by Investing.com India, the most important thing is to determine whether the new reading confirms the slowdown in inflation that was seen in June and July. The 2-year rate, which tends to lead the effective funds rate, has been rising for about six months, putting the Fed in the window where it should be starting to hike, and the longer it runs, the more it will weigh on them. Christopher Waller briefly dimmed the lights on the Fed hike story Thursday, but Friday's payroll report kicked over the drinks and put the September rate hike straight back on the dinner menu, with the deciding vote now belonging to inflation. A benign CPI print would revive Thursday's pause trade almost instantly, while a hot CPI number would be a very different animal because payrolls would stop looking like a one-day rates event and start looking like permission.
