Weekly Letter (8/31 - 9/4)
Executive Summary:
The markets this week were driven by geopolitics in the Middle East and the Friday jobs report which both had huge effects on September Fed interest rate expectations resulting in strong effects across the markets. In the Middle East this week the US and Iran traded more strikes as tensions continue with still no end to the conflict in sight. The BLS released Non-farm payrolls beating consensus this week indicating the US economy added 162K jobs that was much higher than 52k economists were predicting. Fed rate expectations regarding the September meeting now stand at just over a 50% chance of a hike as oil prices continue to climb and the labor market remains strong. Fed officials have shared both dovish and hawkish rhetoric in the past two weeks but have indicated that the inflation data coming out later this month will likely be the deciding factor in the decision. This rhetoric has also moved the markets as investors search for anything to grab onto as the September decision looms ahead.
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Equities:
WoW Performance: S&P 500 +0.09% | Nasdaq +0.4% | Dow -0.3%
Equities this week were largely driven by Fed rate expectations. The biggest moves this week happened on Thursday after Fed Official Christopher Waller used dovish commentary in his speech regarding his support for a Fed decision to hold rates, causing equities to rally as yields fell over that time period. Friday’s hot jobs report from the BLS that beat expectations caused Thursday's rally to pull back after the strong number changed investor sentiment again regarding this month's rate decision. Broadcom also reported gains Wednesday after the close that helped boost tech stocks into Wallers speech before Thursday’s open.
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Fixed Income:
WoW Yields: 2 Year +1.4bps | 10 Year +5.4bps | 30 Year +3.1bps | 2s10s Spread +4bps
Yields continued to rise this week with the 10 year yield hitting its highest point since 2023 before the Waller speech. The rise in yields came in response to the resumed US and Iranian strikes in the Strait or Hormuz and the continued worries over inflation if the conflict continues to persist. At the long end of the curve, investors continue to worry about an unclear rate path, a politicized Fed, and the growing US deficit that will be harder to finance with higher inflation. The 2 year yield that is most sensitive to Fed expectation shifts experienced its two biggest moves this week on Thursday and Friday. Thursday yields fell in response to dovish commentary from Waller and Friday yields spiked in response to the jobs report. The 2s10s spread widened this week as the strong jobs report was characterized by economic growth with underlying inflation.
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Commodities:
WoW Performance: Oil (Brent) +8.4% | Spot Gold -0.5%
Oil climbed this week as strikes between the US and Iran resumed for the first time in about a month. This reignited investor concerns over the supply distribution in the region as more oil tankers were hit in the Strait of Hormuz. Additionally, commentary from Vice President JD Vance at the White House said that the US would not hold talks with the Iranian regime until strikes in the Strait stop. Gold fell early in the week responding to Fed hike expectations as conflict surged in the Middle East reigniting worries over higher for longer inflation that is bad for the price of gold. The precious metal climbed back up however, in response to dovish comments from Fed officials on Thursday, then fell once again to finish the week in the red due to the strong jobs report.
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Currency:
Wow Performance: DXY -0.5%
The dollar started the week strong on the back of safe haven demand due to the resurgence of strikes in the middle east that ignited worries of inflation and possibilities for a hike that would be favorable for the greenback. It fell back down during the middle of the week in response to dovish comments made by Fed officials regarding the September rate decision coming up but rallied on Friday, responding to the strong jobs report from the BLS, which the market priced in as an increased chance of a potential rate hike. The rally on Friday only partially recovered the losses from early in the week and the dollar finished in the red.
