WEEKLY MARKET SUMMARY

Global Equities: A three-week winning streak for the S&P 500 was snapped as investors assessed mixed economic data and braced for yet another government shutdown threat. The S&P 500 ended the week with a loss of -0.3%, the Dow Jones Industrial Average slipped -0.2%, and the Nasdaq Composite fell -0.7%. Small Cap stocks were also in the red with a -0.7% weekly pullback. The weekly losses extended across the globe, with developed foreign markets losing -0.4% and emerging markets down -0.6%.

Fixed Income: The pending government shutdown and general concerns over inflation pushed treasury yields higher as the Fed rate cuts have failed to impact the long end of the yield curve. The 10-Year Treasury yield rose to 4.18%, reversing a recent decline in mortgage rates, which ticked higher to a national average of 6.3% for a 30-year fixed rate loan. Short term rates also moved higher as the yield curve flattened, with the 2-Year Treasury yield inching up to 3.64%.

Commodities: US West Texas Intermediate crude oil prices registered their largest weekly jump in over three months, hitting $65.23 per barrel after Ukrainian drone strikes hit critical Russian energy infrastructure targets. Gold rose to $3,763/oz as the precious metal continues to attract strong investor demand as a safe-haven asset. Continued US Dollar weakness has also been a major driving force behind the big rally in gold that shows no sign of stopping.

WEEKLY ECONOMIC SUMMARY

GDP Upgrade: The final estimate for US second-quarter Gross Domestic Product (GDP) was revised upward to 3.8%, reflecting a sharp rebound from the first-quarter contraction of -0.6%. Consumer spending and business investment drove the strong revision. The US economy is expected to stay hot in the third quarter, with the Atlanta Fed’s GDPNow model forecasting a 3.9% GDP growth rate and the New York Fed’s GDP Nowcast model currently at 2.6%.

Inflation Remains Hot: The Core Personal Consumption Expenditures (PCE) Index is the primary inflation measure used by the Federal Reserve, and the August data revealed inflation remains stubbornly above the Fed’s 2% target level. The latest annual Core PCE data, which excludes food and energy, was unchanged from the prior month at 2.9%. The headline PCE inflation reading was slightly hotter in August at 2.7%, which was the highest level in six months. Many Fed members believe that tariff-driven inflation is only beginning to appear in the inflation data, which could push Core PCE above 3% in the coming months and give the Fed reason to pause subsequent rate cuts.

Government Shutdown: The US government is set to shut down at midnight on September 30th unless a continuing resolution is reached to keep government services operational while Congress continues to debate appropriations bills for the next fiscal year. Republicans are seeking a “clean” short-term continuing resolution, while Democrats are seeking to capitalize on a rare opportunity to demand a reversal of Medicaid cuts and extend Affordable Care Act tax credits which are set to expire at the end of the year. To pass a continuing resolution in the Senate, Republicans need a minimum of 60 votes to overcome a filibuster. With their current 53-seat majority, this means they will need the support of at least seven Democrats. However, since at least one Republican senator is expected to vote against the measure, the number of Democratic votes needed may be even higher, likely around eight, to reach the 60-vote threshold.

CHART OF THE WEEK

The Chart of the Week shows how Core PCE inflation has essentially flatlined just under 3% since early 2024, causing headaches for the Federal Reserve, which seeks to maintain inflation around 2%. Fed Funds Futures markets indicate that investors are still expecting the Fed to cut interest rates two more times this year, but revisions to jobs data have caused some Fed members to worry about cutting rates during a stagflationary environment of slowing growth and rising prices. The Q2 GDP revision was a good sign that the US economy remains strong, so two cuts remain likely, but any weakness in jobs data over the next few months could change the narrative.