A Hike, a Spike, and a Market Divide

Last Week

The Federal Reserve raised interest rates, Treasury yields climbed, AI leaders called for slowing advanced model development, and the war raged on. Whereas the headline numbers suggest the market digested those developments well, with the S&P 500 ticking down 0.1% and the Nasdaq Composite gaining 0.7%, beneath the surface, it was rougher waters for stocks. In fact, the number of declining issues more than doubled the number of advancing issues, while the S&P MidCap index and SmallCap index fell 1.7% and 2.0%, respectively. Only the Healthcare and Technology sectors finished in the green, while the Financials, Industrials, and Telecommunications sectors all fell by more than 2%. The Dollar surged over 1%, Gold moved higher, and Crude Oil held over $100 per barrel.

On Wednesday, the Federal Open Market Committee raised the federal funds rate by a quarter percentage point to a target range of 3.75% to 4%. It was the first hike since 2023, and Chairman Warsh’s hawkish tone suggested that additional hikes could be on the horizon. The culprit is stubborn inflation, fueled by higher energy prices. The war in the Middle East has disrupted oil supply, so the tightening cycle seems likely to continue until the conflict ends. An interesting interview with John Cochrane in this week’s Barron’s argues that lower interest rates lead to lower inflation, contrary to the Fed’s position. Additionally, during Chairman Warsh’s press conference, several questions focused on whether higher interest rates would increase the supply of oil, since that shortage was driving the inflation the Fed was addressing.

Leading AI lab executives, including Anthropic’s Dario Amodei and OpenAI’s Sam Altman, called for slowing the rapid pace of frontier AI model development to establish better safety guardrails. Chip stocks stumbled but then rebounded sharply as industry executives reaffirmed the unprecedented demand for their products.

Speaking of stumbling, it was a dreary, rain-soaked afternoon on Sunday at Soldier Field, as the Bears fell to the Vikings 9-3. And Caleb Williams fell to the ground, grimacing in pain. In MLB, with just a week to go, both the Cubs and the White Sox are still in playoff position.

This Week

Geopolitics will be in the spotlight as Wall Street heads into a quiet week for U.S. economic data, with third-quarter earnings season still a few weeks away. Optimism about a possible thaw in U.S./China relations sparked a positive open Monday morning.

On Thursday, President Donald Trump will host Chinese President Xi Jinping at the White House, with trade, tariffs, Taiwan, and AI expected to feature prominently in the talks.

The news over the weekend from the Middle East was discouraging, with the suggestion of a renewed bombing campaign against the Islamic Republic.

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