Rates Rise, Oil Climbs: A Pivotal Week for the Fed

Rates Rise, Oil Climbs: A Pivotal Week for the Fed

Stocks pulled back last week as hotter-than-expected inflation data reset rate expectations heading into this week’s Fed meeting. The S&P 500 fell 0.78% to 7,657, the Dow dropped 1.56%, the Nasdaq slipped 0.64%, and small caps lagged with the Russell 2000 down 2.38%. All remain solidly positive for the year, with the S&P 500 up 12.77% and the Nasdaq up 13.78% year-to-date.

Jobs Hold, Wages Slow

Friday’s inflation report was the catalyst: headline CPI rose 3.4% year-over-year and core CPI 2.4%, both running hotter than expected, while producer prices rose 0.4% month-over-month. Markets responded by pricing in a nearly 90% probability of a Fed rate hike at Wednesday’s meeting, a sharp shift from where expectations stood just a week earlier.

Worker Confidence Is Slipping

Treasury yields moved up sharply across the curve alongside those expectations, with the 2-year yield jumping to 4.63%, the 10-year to 4.96%, and the 30-year to 5.35%, all notably higher than the prior week.

Fed Likely Stays Put

The move wasn’t limited to the U.S. The European Central Bank hiked rates 25 basis points last week, and the Bank of Japan meets alongside the Fed this week as well. Markets are now pricing an additional three rate hikes each from the ECB, BoJ, and Fed by the summer of 2027. If the Fed ultimately proves less hawkish than its counterparts, as easing wage growth and moderating tariff effects could allow, narrowing short-term yield differentials could support foreign currencies against the dollar, a potential tailwind for international equities, which continue to trade at a roughly 32% discount to the S&P 500 on a forward P/E basis despite strong earnings growth this year.

Yields Stay Elevated

Energy was the lone bright spot sector-wise for the week, up 2.1%, while every other sector declined; Consumer Discretionary lagged, down 3.5%. Oil prices remain a key thread in the inflation story: WTI crude has surged to roughly $102 per barrel and Brent to nearly $105, driven largely by renewed Middle East supply concerns after Houthi strikes on Saudi energy infrastructure, rather than by an overheating economy.

Looking Ahead

Looking ahead, this week’s FOMC decision and retail sales data will be the key tests of whether this rate repricing holds or proves to be a one-week overreaction to a single inflation print.

As Always

I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans not for the easy times, but to prepare for the tough ones.