Markets traded lower this week as rising oil prices and long-term interest rates weighed on risk assets.
The S&P 500 fell 2.0%, the Nasdaq declined 1.2%, and the Russell 2000 small-cap index returned -2.6%. Growth (-1.7%) outperformed Value (-2.4%), while the Equal-Weight S&P 500 fell 3.1%, signaling broad weakness beneath the major indexes.
Energy (+0.7%) was the only sector to finish higher, while Technology was nearly flat. Health Care (-4.3%), Consumer Discretionary (-3.9%), and Materials (-3.6%) led to the downside.
Bonds declined as Treasury yields rose, with long-maturity Treasuries falling 1.7% and the 10-year yield approaching 5%. Corporate bonds also declined but outperformed Treasuries. Oil surged 12.5%, volatility increased, the U.S. dollar was little changed, and Bitcoin fell nearly 6% after a 20% rally.
Key Takeaways
Labor Conditions Improved in August After Several Weak Months of Hiring
Employers added 162,000 jobs, while the unemployment rate held at 4.1%. Prior months also looked better after revisions: June payroll growth was raised to +31,000 from +20,000, and July was revised from an initially reported -23,000 jobs to +21,000. Combined, the revisions added 55,000 jobs to the previous two months. The report does not suggest the labor market has returned to the strength of earlier years, but it paints a less concerning picture than investors saw after July’s initial release.
Why it matters: The labor market still appears to be cooling, but August suggests that deterioration is occurring more gradually than previously feared.
Middle East Conflict is Becoming Harder for Markets to Treat as a Temporary Disruption
Oil prices moved sharply higher as fighting intensified and disruptions to energy shipments through the Strait of Hormuz continued. U.S. crude moved back above $100 per barrel after falling substantially earlier in the summer. More importantly, repeated escalations are making it harder to assume that each increase in energy prices will quickly unwind.
Why it matters: The longer the disruption persists, the more relevant energy becomes as an ongoing source of inflation uncertainty rather than a series of isolated weekly price swings.
Long-Term Borrowing Costs Continue to Rise Across Global Bond Markets
The 10-year Treasury yield climbed above 4.90% this week, its highest level since October 2023, while the 30-year moved above 5.3%. Government-bond yields also rose across several major developed markets as investors weighed inflation, higher energy costs, government borrowing needs, and tighter monetary policy. The breadth of the move suggests that higher long-term rates are not simply a reaction to one U.S. economic report or a shift in Fed expectations.
Why it matters: A wider set of global forces is putting upward pressure on long-term borrowing costs, making it harder to attribute elevated yields to any single economic report or shift in central-bank policy.
Expectations for a Rate Hike at Next Week’s Fed Meeting Continue to Build
The Fed held rates at 3.50% to 3.75% in July, although three policymakers preferred a 0.25% hike. At Jackson Hole, Chair Warsh described the labor market as stable and said inflation should remain the Fed’s predominant focus. Since then, stronger August job growth, higher oil prices, and renewed producer-price pressure have strengthened the case for an increase. Futures markets now place roughly a 70% probability on a +0.25% move at the September 15 to 16 meeting.
Why it matters: Next week’s decision will show whether firmer labor data and persistent inflation pressure have been enough to move the Fed from considering a rate hike to delivering one.
AI Infrastructure Spending Remains Resilient Despite Volatile Macro Backdrop
Oil prices and long-term yields have risen, inflation pressure has increased, and the market expects a Fed hike. Those shifts would normally make large capital projects more expensive and could lead companies to reconsider spending plans. So far, however, the largest tech companies have continued committing substantial capital to data centers, computing capacity, and other AI infrastructure.
Why it matters: AI investment has become a significant contributor to both economic growth and corporate earnings, and so far, the largest tech companies appear willing to continue that spending despite volatility in rates, energy prices, and inflation.