The Top Line
The economy is running hot, so the Federal Reserve raised interest rates for the first time since 2023. The big question now is whether it will need to raise them again this fall.
We are operating in a Late-Cycle regime characterized by an economy running hot enough to pull the Fed back into tightening. August retail sales rose 1.2% (control group +1.4%), and the FOMC hiked 25 bps to 3.75–4.00% with a median dot implying one more 2026 hike and a 4.1% 2027 rate. The 10-year closed at 5.020%, highest since 2007, as the AI narrative shifts from capex expansion toward restraint.
Inflation
The Federal Reserve is the central bank that helps set interest rates on things like mortgages and car loans, and its job includes keeping prices stable. Prices are still rising too fast: overall inflation was 3.4% over the past year, driven largely by gasoline. Yesterday the Fed raised rates to cool things down, much like tapping the brakes on a car going a little too fast. Its chair said plainly that inflation is too high and has been for too long.
Key Takeaway
Borrowing costs for mortgages and car loans are likely to stay high, and could climb a bit more before year-end.
August CPI (released September 11) printed +0.4% MoM and 3.4% YoY on the headline, with core +0.3% MoM, both in line with consensus. Energy remains the dominant driver at +16.3% YoY, with gasoline up 27.4% YoY and accounting for more than a third of the monthly increase. The Fed's new projections confirm the persistence: the 2026 PCE median rose to 3.7% from 3.6% in June, core PCE sits at 3.4%, and core is not projected back to 2.0% until 2029.
The pressure is moving from energy into goods. August import prices rose 0.7% MoM and 7.0% YoY, the largest annual gain since August 2022, while nonfuel import prices climbed 0.8% MoM and 5.5% YoY, the fastest since May 2022, even as fuel import prices slipped 0.1%. Services are firm but not accelerating, with shelter and services ex-energy each at 3.0% YoY. The second-round risk therefore sits in goods pass-through, which September's Empire State survey reinforced: both input and selling prices accelerated.
Wednesday supplied the catalyst. The unanimous 25 bp hike, the first since 2023, came with a statement pointing to a "timelier return" to 2%, and 16 of 18 participants project at least one more hike this year. Chair Warsh said "inflation is too high and has been for too long" and that he would be "hard pressed to describe broad financial conditions as restrictive." Stocks, up roughly 0.3% before the decision, reversed during the press conference, and the 2-year closed 6.5 bps higher at 4.736%.
Key Takeaway
The Fed's bias is explicitly hawkish: 16 of 18 officials see at least one more hike, the 2027 median rose 50 bps to 4.1%, and Warsh does not view financial conditions as restrictive. With the 10-year at 5.02%, the October 28 decision is live and hinges on September CPI and whether goods pass-through keeps broadening.
Risk and Positioning
Think of markets right now as cloudy with a chance of showers, not a storm. Stocks dipped for a third straight day, and the S&P 500 is about 2% below its early-September level. The VIX, the market's fear gauge, rose slightly but remains in calm territory. One thing we're watching: the extra interest companies pay to borrow has started to creep higher, which can be an early sign of strain.
Key Takeaway
Markets are cautious, not panicked, but we're watching borrowing costs for companies closely.
Risk sentiment is defensive but not disorderly. The S&P 500 fell 0.45% to 7,551.82, its third straight decline of about that size, and now sits roughly 2.1% below its September 4 close. The Dow dropped 1.21% while the Nasdaq finished flat (-0.01%) and the Russell 2000 lost 0.40%. Intraday damage was larger: the S&P was down about 1% during Warsh's press conference before defensives rallied into the close, and roughly 61% of issues were declining in afternoon trade.
The VIX rose 3.08% to 17.72, up from 14.52 on September 4 but well short of stress territory. Three consecutive declines of about 0.45% imply close-to-close realized volatility near 7% annualized, so implied volatility carries a wide premium: buyers are paying for a gap move that has not arrived. That fits a market hedging a policy tail rather than liquidating.
Credit is starting to move. The ICE BofA high-yield OAS widened to 276 bps on September 15, from 271 bps on September 14 and 265 bps on September 11. That is the first meaningful widening of this drawdown and leaves spreads 24 bps below our 300 bps Bear trigger. The contradiction we flagged in recent editions, stressed rates alongside calm credit, is resolving: credit is catching down to rates rather than rates easing.
Key Takeaway
The VIX at 17.72 sits roughly 10 points above ~7% close-to-close realized vol, a rich premium for a gap move that has not arrived. HY OAS widened 11 bps in two sessions to 276 bps. Tail risks: spreads through 300 bps, a sustained 10-year above 5%, and further Red Sea supply shocks.
Sector and Cross-Asset Analysis
Tech companies (XLK) held steady yesterday, helped by Intel's jump on news of a possible chip partnership. Oil and gas companies (XLE) fell nearly 3% as oil prices dropped. Banks and financial companies (XLF) slipped 1.5%, since the gap between short- and long-term interest rates, a key driver of lending profits, keeps narrowing. Home builders are struggling too: with mortgage rates above 7%, many are cutting prices to attract buyers.
Key Takeaway
Big tech held up; banks, energy and housing stocks felt the pressure of higher rates.
Leadership flipped from Monday's pattern. Energy (XLE) fell 2.8% as WTI spot dropped 3.33% to $102.28, with Diamondback (FANG) down about 8%. Financials (XLF) lost 1.5% as the 2s10s curve bear-flattened to 28.4 bps, from 33.5 bps Tuesday and 41.0 bps on September 4, compressing the lending-margin outlook. Technology held, with the Nasdaq flat and Intel (INTC) up 4.3% on reported talks with SK Hynix over US memory production. Defensives finished positive, while transports took a hit as J.B. Hunt (JBHT) fell 12.6%.
Housing-linked equities remain the clearest casualty of 5% rates. The NAHB index fell 3 points to 32 in September; 38% of builders cut prices, and 66% offered incentives, the highest share since December. Mortgage rates above 7% also prompted a Truist downgrade of Meritage Homes (MTH). Across assets, the dollar index rose 0.73% to 100.34, its highest since July 31. Gold fell 0.70% to $4,263.86, extending its decline since September 4 to about 3.8% and still trading as a real-rate instrument. Bitcoin slipped below $76,000 after the Senate Clarity Act failed 49–50.
Oil fell even though the Saudi East-West pipeline is shut and the Hormuz disruption reaches day 201. We found no verified single catalyst; a stronger dollar and expectations of weaker demand under tighter policy are the most consistent explanation. The front-month contract (CL1!) settled at $102.43, $0.15 above spot, so last week's spot premium has not reappeared as the October contract nears expiry.
Key Takeaway
Performance is concentrated in large-cap tech and late-day defensives; energy, financials, transports and homebuilders are out of favor. A bear-flattening curve, a dollar at its highest since July 31 and falling gold describe positioning for tighter-for-longer policy, not recession.
Economic Data & Events
- 6:30 AM MT — Initial Jobless Claims (how many people filed for unemployment last week) — High Impact
- 6:30 AM MT — Philadelphia Fed Manufacturing Index (a survey of how factories in the mid-Atlantic region are doing) — High Impact
- 6:30 AM MT — Housing Starts (how many new homes began construction) — Moderate Impact
- 6:30 AM MT — Building Permits (how many new homes were approved to be built) — Moderate Impact
- 8:00 AM MT — Pending Home Sales (homes under contract but not yet sold) — Low Impact
After yesterday's rate hike, every new report matters more. The factory survey is expected to cool from last month's very strong reading. A cooler number would ease pressure on the Fed to raise rates again. A hot number would do the opposite.
Key Takeaway
This morning's factory report is the week's key test of whether the economy is still running hot.
Today's Calendar
- 6:30 AM MT — Initial Jobless Claims — High Impact
Consensus: 207K | Previous: 206K
- 6:30 AM MT — Philadelphia Fed Manufacturing Index (Sep) — High Impact
Consensus: 31.3 | Previous: 47.4
- 6:30 AM MT — Housing Starts (Aug) — Moderate Impact
Consensus: 1.320M | Previous: 1.239M
- 6:30 AM MT — Building Permits (Aug) — Moderate Impact
Consensus: 1.400M | Previous: 1.433M
- 8:00 AM MT — Pending Home Sales (Aug) — Low Impact
Consensus: +2.0% | Previous: -2.3%
Week Ahead
Friday brings August industrial production and capacity utilization, the Leading Economic Index, remarks from Governor Bowman, and quarterly options expiration. The Trump–Xi summit follows September 24, August PCE lands later this month, and the next FOMC decision is October 28.
The Bottom Line
Expect a bumpy, rate-driven market this week as investors adjust to a Fed that isn't done raising rates. Staying diversified and patient matters more than reacting to daily swings.
The 10-year's 5.00% handle is the pivot: holding above it keeps rate-sensitive sectors under pressure, and a hot 6:30 a.m. MT claims or Philly Fed print pushes the 2-year past 4.75% and extends the bear flattening. The S&P 500 at 7,551.82 faces resistance at 7,585–7,620 and support at 7,500, our Bear-flip level just 0.7% below. Favor large-cap tech and defensives over energy, financials and housing.
Disclosure — AI-Assisted Content & Regulatory Notice
This briefing was drafted with the assistance of artificial intelligence tools. All content has been reviewed and approved by Thomas MacPherson, Investment Adviser Representative (Series 65) and Chief Compliance Officer, River Rose Financial, LLC, prior to publication. AI systems may produce errors, omissions, or outdated information; readers should independently verify data.
Market Currents does not constitute an investment advisory relationship, does not create a fiduciary duty, and does not include personalized investment advice. Subscribers should not rely on Market Currents as a substitute for individualized financial advice. This briefing is for informational purposes only. Market conditions change rapidly; all data and projections are subject to revision without notice.
River Rose Financial, LLC is a registered investment adviser with the State of Colorado. Registration does not imply a certain level of skill or training. Past performance is not indicative of future results. All investment strategies involve risk, including possible loss of principal.
