• US stocks rebound sharply, but major indices still close lower for the week
• Bitcoin sellers regain the short-term advantage ahead of weekend trading
• Why the Saudi Arabian pipeline strike is such a big deal
• JPMorgan now sees the Fed hiking in September and December
• US August Federal budget deficit $167 billion vs $404 billion expected
• ECB’s Lane: If the rise in energy prices persists, maybe it will hit consumption
• Oil falls despite fresh attacks on Saudi energy infrastructure
• Meta stock surges on Muse AI launch—but can it break key resistance?
• UMich September consumer sentiment 47.8 vs 51.0 expected
• Back up the garbage truck: A look at how AI will impact margins in AI
• Forex Kickstart: USD mixed as markets await the US CPI report
• US August CPI 3.4% vs 3.4% expected
• investingLive European news wrap: The calm before the storm?
• Yemen’s Iran-backed Houthis have completed the takeover of Bab el-Mandeb Strait

The North American session featured plenty of crosscurrents on Friday. US inflation remained elevated, consumer sentiment weakened, Treasury yields moved mostly higher and Middle East tensions continued to threaten global energy supplies. Nevertheless, US stocks rebounded following four consecutive days of declines, helped by a sharp reversal lower in crude oil (go figure).

US inflation keeps the Fed on alert

The August Consumer Price Index rose 0.4% month-over-month, accelerating from the 0.1% increase in July. Headline inflation remained at 3.4% year-over-year.

Core CPI, which excludes food and energy, increased 0.3% for the month and 2.4% from a year ago. Gasoline prices rose 3.9% in August and accounted for more than one-third of the monthly headline increase.

The report was not an inflation disaster, but it was not soft enough to remove the possibility of additional tightening. Fed funds futures finished the day pricing close to a 90% probability of a 25-basis-point Fed rate increase next week. With the expectations so high, Fed would simply lose even more credibility if they tried to do nothing.  The Warsh Fed Era will start with a hike.  

Michigan sentiment adds to the inflation concerns

The preliminary University of Michigan Consumer Sentiment Index fell sharply to 47.8 in September, down from 51.7 in August and below expectations near 51.0.

The inflation-expectations component was equally important:

• One-year inflation expectations rose to 4.6% from 4.0%
• Five-year inflation expectations edged up to 3.4% from 3.3%

Consumers are being squeezed by higher fuel prices, trade tensions and concerns about their personal finances. For the Fed, rising inflation expectations matter because expectations can eventually influence wage demands and pricing behavior.  With labor markets tight because of immigration changes and data center build demands, the risk can be real.   It’s not a great time to be in a prolonged war, but that is where the US is at. 

Treasury yields rise, but the curve flattens

Shorter-term Treasury yields reacted most strongly to the increased probability of a Fed hike, while the 30-year yield was little changed:

• 2-year yield: 4.6275%, +7.8 basis points
• 5-year yield: 4.7840%, +5.1 basis points
• 10-year yield: 4.9710%, +2.7 basis points
• 30-year yield: 5.3576%, -0.3 basis points

The larger rise in the 2-year yield reflects the increased probability of tighter Fed policy. The longer end was more contained, leading to a flatter yield curve.

For the week:

• 2-year yield: +25.1 basis points
• 5-year yield: +23.6 basis points
• 10-year yield: + 18.3 basis points
• 30-year yield: +10.9 basis points

US stocks rebound despite higher yields

US stocks moved higher following four consecutive days of declines. The sharp retreat in oil helped ease some inflation concerns, while gains in technology shares provided additional support.

• Dow Jones Industrial Average rose 0.98% to 52,573.29
• S&P 500 rose 0.86% to 7,656.98
• Nasdaq Composite rose 0.96% to 26,333.04
• Russell 2000 rose 0.40% to 2,903.94

For the week:

• Dow Jones Industrial Average: -1.57%
• S&P 500: -0.80%
• Nasdaq Composite: -0.66%
• Russell 2000: -2.41%
• Nasdaq 100: -0.59%

The rebound recovered part of the week’s decline, but all the major indices still finished lower for the week.

Foreign currencies versus the US dollar

The US dollar finished mixed against the major currencies. Expressed as the performance of each foreign currency versus the dollar:

• Japanese yen: +0.48%
• New Zealand dollar: +0.24%
• Australian dollar: +0.20%
• British pound: +0.10%
• Euro: -0.02%
• Canadian dollar: -0.26%
• Swiss franc: -0.50%

The JPY was the strongest currency, while the CHF was the weakest against the US dollar.

For the week:

• Japanese yen: +1.7%
• New Zealand dollar: -1.14%
• Australian dollar: -0.47%
• British pound: +0.09%
• Euro: -0.13%
• Canadian dollar: -0.27%
• Swiss franc: -0.78%

Middle East tensions remain elevated

Middle East risks continued to threaten global energy supplies. Projectiles reportedly struck Saudi Arabia’s East-West oil pipeline system, while Houthi forces continued their advance along Yemen’s Red Sea coast.

The International Energy Agency estimated that Saudi crude supply fell to approximately 6 million barrels per day in August, its lowest level in more than three decades, following attacks on energy infrastructure and shipping routes.

Despite those risks, oil moved sharply lower on Friday. WTI crude fell -$2.43 or -2.37% at $100.05. For the trading week, the price rose $8.54 or 9.35%. 

That price reaction provides an important lesson for traders. Bullish news does not always lead to a higher price. When a market cannot rally on supportive headlines, it may indicate that the news has already been priced in or that buyers are becoming exhausted. Nevertheless, oil remained sharply higher for the week and the geopolitical risks have not gone away.

Other commodity moves included:

• Gold rose 0.66% to $4,349.44. For the week, the price was down -$80 or -1.81%
• Silver rose 1.23% to $64.41. For the week, the price was down -$1.71 or -2.58%
• Copper was virtually unchanged at $6.5465. For the week, the price fell -$0.12 or -1.90%

Looking ahead to next week

With CPI and PPI in the rear view mirror, what key events will dominate next week? 

The event will be highlighted by three major central bank decisions:

First, the Federal Reserve announces its policy decision on Wednesday. Following the stronger CPI report, markets are pricing close to a 90% probability of a 25-basis-point rate increase. The new economic projections, dot plot and Kevin Warsh’s press conference will be just as important as the rate decision itself.  We know Fed Chair Warsh does not like things like the dot-plot, but the market does. Will that be resolved.  

Second, the Bank of England meets on Thursday. The BOE is expected to leave its Bank Rate unchanged at 3.75%, but the vote split and policy guidance will be watched closely—especially after Wednesday’s UK inflation report.

Third, the Bank of Japan decision presents another potential source of volatility. Markets will be watching to see whether the BOJ lifts its policy rate toward 1.25%. Any surprise, or change in guidance, could produce an outsized move in the JPY.

Key events by day:

• Monday, September 14: Canada CPI, including headline CPI, median CPI and trimmed-mean CPI. Headline CPI is expected to fall 0.1% month-over-month, following a 0.5% increase previously.

• Tuesday, September 15: UK employment report, including claimant count change. Claims are expected to rise by 8,300, following an 11,000 decline previously.

• Wednesday, September 16: UK CPI is expected to rise to 3.1% year-over-year from 2.9%. The Federal Reserve announces its rate decision at 2:00 PM ET, followed by its statement, updated economic projections and dot plot. Jerome Powell’s press conference begins at 2:30 PM ET. New Zealand GDP is released later, with growth expected at 0.1% quarter-over-quarter, down from 0.8% previously.

• Thursday, September 17: The Bank of England releases its rate decision, vote split and Monetary Policy Summary. The Bank Rate is expected to remain unchanged at 3.75%. The Bank of Japan also announces its policy decision, with the timing listed as tentative.

• Friday, September 18: The Bank of Japan holds its post-meeting press conference, with the timing also tentative.

With decisions from the Fed, BOE and BOJ, along with inflation reports from Canada and the UK, next week has the potential to be another volatile one across currencies, bonds and equities.

This article was written by Greg Michalowski at investinglive.com.