The Top Line
The economy grew faster this spring than first reported, and long-term interest rates hit their highest levels in nearly two decades. The open question is whether the Federal Reserve raises rates again this month.
We are operating in a Late-Cycle regime characterized by re-accelerating growth colliding with a long-end rates repricing. Q2 GDP was revised to 2.2% from 1.5% and the Chicago PMI jumped to 58.8, while the 10Y closed at a cycle-high 5.289% and the 30Y near 5.64%, highest since 2002. Core PCE eased to 3.0% YoY, though BEA methodology revisions did much of the work. AI capex keeps escalating—Micron raised FY27 spending—even as the equity risk premium approaches zero.
Inflation
Prices are still rising faster than normal, about 3% a year by the government's preferred measure. That reading came in lower than expected, but partly because the government changed how it counts some service costs. The Federal Reserve (the central bank that helps set interest rates on things like mortgages and car loans) noticed that change. People also kept spending strongly, and gas prices are climbing again with oil near $93 a barrel. So the Fed may still raise rates once more, though the odds of a move this month dropped from about 70% to under half.
Key Takeaway
Inflation looks cooler on paper, but borrowing costs for mortgages and car loans are still rising.
August PCE came in cooler than expected on paper. Headline rose 0.3% MoM and 3.4% YoY against a 0.4% / 3.7% consensus, while core rose 0.2% MoM and 3.0% YoY against 0.3% / 3.3%, down from 3.3% in July. A 30 bp one-month drop in core YoY would be the sharpest disinflation of the cycle, but much of it is definitional: BEA retroactively revised three fast-rising services components back to January 2021—portfolio management and investment advice (now fee-based rather than employment-based), legal services, and software—and cut July headline to 0.1% MoM. Consensus was built on the old methodology, so the miss overstates genuine deceleration. The 0.2% core monthly print, annualizing near 2.4%, is the more honest constructive signal.
Pressure points are shifting toward demand and energy. Nominal spending jumped 0.9% ($190.8B) in August, led by goods ($114.1B) over services ($76.7B), and real spending rose 0.6% against 0.2% income growth—demand strength that does not square with a durable cooling narrative. Energy is the live risk: WTI spot rose 1.47% to $93.13 on Iran-related supply-restoration uncertainty despite a 0.9M-barrel EIA crude build, and ISM manufacturing prices paid is expected at 72.9 today (prior 71.1). Labor is mixed rather than slack: August JOLTS openings fell to 7.08M, but September ADP printed 90K against a ~70K consensus and a 36K prior.
The market reaction split along the curve. October hike odds collapsed from ~71% to roughly 35–47% (Babypips 34.9%, BNN 37%, CME midday 47%), yet the 2Y rose 1.4 bps to 4.893% and the 10Y rose 5.5 bps to 5.289% as the GDP revision, Chicago PMI and ADP overwhelmed the inflation relief. Kashkari explicitly discounted the print, citing the methodology change and robust spending; he now projects one more hike in 2026 and a second in 2027 and questions whether 3.75–4.00% is restrictive at all.
Key Takeaway
The Fed holds a tightening bias at 3.75–4.00%, but an October hike is now priced near 35–47%, down from ~71%. Financial conditions are tightening through the long end, not the policy rate: 10Y 5.289%, 30Y ~5.64%. Today's ISM prices paid and Friday's payrolls decide whether October reprices back toward a hike.
Risk and Positioning
On the surface, the stock market looks calm, like a clear morning. The market's fear gauge (the VIX) sits at a quiet 16. But the bond market is stormier: the extra interest riskier companies pay to borrow jumped sharply this past week. That's often an early sign investors are moving money toward safety. Stocks haven't followed yet, so we're watching to see whether those clouds roll in.
Key Takeaway
Stocks look calm, but borrowing stress for riskier companies is rising, so we're watching closely.
Risk sentiment is mixed, with a widening divergence between equity calm and stress in rates and credit. The VIX rose 1.87% to 16.33, still below a front-month future near 17.5 with contango intact. Meanwhile the MOVE index jumped 4.7% to 106.6 on September 29, the top of Saxo's tracked sample, and S&P skew sits at 144.6 against a typical 115–120. Option buyers are paying for duration protection and equity tail protection, not for near-term equity volatility.
Credit has crossed a line that equities have not. The ICE BofA HY OAS widened to 308 bps on September 29 (FRED) from 273 bps on September 23—a 35 bp move in four sessions and the first print above the 300 bp threshold in our bear trigger. Valuation offers no cushion: at a 19.1x forward P/E (FactSet, stale as of September 11), the ~5.24% earnings yield now sits below the 5.289% 10Y, leaving the equity risk premium modestly negative.
The anomaly to respect: the Dow fell 0.86% and the Russell 2000 0.39% while the Nasdaq rose 0.24%, so the S&P's 0.25% decline understates how narrow participation has become. September closed with tech (XLK) the only positive sector at +5.0%, while financials, materials and REITs each lost about 7%; Q3 ended with the S&P up 2.0% but the Dow down 2.7%. Indexes are being held up by AI-linked mega-caps—a concentration of positioning, not a broad risk-on signal.
Key Takeaway
Implied equity vol (VIX 16.33) sits well below the stress signaled by rates vol (MOVE ~107) and credit (HY OAS 308 bps, +35 bps in four sessions). That gap is the risk: persistent credit widening would reprice equity vol from a low base. Tails: 30Y above 5.75%, WTI above $100, or a hot payroll print.
Sector and Cross-Asset Analysis
Tech companies (XLK) were the only part of the market that gained in September, up about 5%. Banks and financial companies, real estate, and utility companies like electric and water providers each fell 6% to 7%, hurt by higher interest rates. Oil and gas prices rose, while gold slipped after a brief jump. Memory-chip maker Micron reported record sales, though investors worried about how much it plans to spend on new factories.
Key Takeaway
A handful of tech giants are carrying the market while most other areas are struggling.
Leadership remains concentrated in AI hardware and software. The Nasdaq rose 0.24% to 26,861 while the Dow fell 0.86% to 50,906, with Hewlett Packard Enterprise up 3.9% on a raised AI networking forecast and Synopsys and MongoDB each up 3.4%, offsetting defense weakness: Northrop Grumman fell 4.3% after Boeing won a ~$20B Navy stealth fighter contract. After the close, Micron reported record FQ4 revenue of $54.23B, EPS of $33.42 versus $31.83 expected and an 87.0% gross margin, and guided FQ1 to $61.5B versus $56.8B. Shares traded flat-to-lower after hours as a higher FY27 capex plan (~$25B in the first half) tempered the beat—an early sign the market is starting to price AI capex intensity as a cost, not just a demand signal.
Across assets, the bear steepener resumed: 2s10s widened 4.1 bps to 39.6 bps with the long end doing the work, a term-premium move rather than a policy move given that October hike odds fell. The DXY rose 0.08% to 101.461 (EUR/USD 1.1332, USD/JPY 157.34), capping its best month since June. WTI spot gained 1.47% to $93.13 and November CL1! 1.16% to $90.42; the spot–futures spread widened back to $2.71 from $2.41, consistent with renewed prompt tightness. Gold reversed 0.59% to $4,157 after a post-PCE spike to ~$4,215—Tuesday's restored hedge bid did not survive rising yields and a firmer dollar.
September's rotation was negative for both defensives and cyclicals: utilities (-6%) and staples (-5%) failed as havens alongside REITs and financials (-7% each). When the rate-sensitive bucket is sold harder than the growth-sensitive bucket, the pattern points to a discount-rate shock rather than a growth scare. That argues against reading the Russell 2000's 0.39% decline as a recession signal—small caps are trading the 10Y, not the cycle.
Key Takeaway
Performance is concentrated in AI-linked tech (XLK +5.0% in September, the only positive sector) while rate-sensitive groups—REITs, utilities, financials—are in outright retreat. Positioning is a crowded AI-long, duration-hostile book; Micron's capex-driven after-hours fade is the first test of its tolerance.
Economic Data & Events
- 6:30 AM MT — Initial Jobless Claims (how many people filed for unemployment last week) — Moderate Impact
- 7:45 AM MT — S&P Global Manufacturing PMI (a survey of factory managers on business conditions) — Low Impact
- 8:00 AM MT — ISM Manufacturing PMI (the most-watched monthly check on whether factories are growing or shrinking) — High Impact
- 8:00 AM MT — Construction Spending (how much is being spent building homes, offices and roads) — Low Impact
- Throughout Session — Fed Speakers (nine Federal Reserve officials share their views on interest rates) — Moderate Impact
Today's key report is the manufacturing survey at 8:00 AM. Last month it showed factories growing, and prices paid by manufacturers rising fast. A strong reading would push the Fed toward another rate increase. Friday's jobs report matters even more, because it may decide what the Fed does this month.
Key Takeaway
Friday's jobs report is this week's big event: it could decide whether the Fed raises rates in October.
Today's Calendar
- 6:30 AM MT — Initial Jobless Claims — Moderate Impact
Consensus: 201K | Previous: 197K (Continuing: 1,730K vs. 1,719K)
- 7:45 AM MT — S&P Global Manufacturing PMI (Sep, Final) — Low Impact
Consensus: 57.0 | Previous: 53.9
- 8:00 AM MT — ISM Manufacturing PMI (Sep) — High Impact
Consensus: 54.8 | Previous: 54.6 (Prices Paid: 72.9 vs. 71.1)
- 8:00 AM MT — Construction Spending (Aug) — Low Impact
Consensus: 0.0% | Previous: -0.5%
- Throughout Session — Fedspeak: Waller, Williams, Cook, Bowman, Jefferson, Barkin, Collins, Schmid, Logan — Moderate Impact
Consensus: N/A | Previous: N/A
Week Ahead
Friday's September payrolls (6:30 AM MT; consensus ~50K, prior 162K) now swing an October hike priced near 35–47%, with ADP's 90K beat raising upside risk. Nike reports after today's close. Nine Fed speakers today, led by Waller and Williams, test whether "no urgency" is the committee view ahead of the Oct 27–28 FOMC.
The Bottom Line
Expect interest rates, not company news, to steer the market today. If long-term rates keep rising, most stocks outside of tech will likely stay under pressure.
The 10Y at 5.289% is pressing 5.30%; a close above opens 5.40%, while a close below Wednesday's 5.20% intraday low would signal the long-end selloff is exhausting. The S&P 500 at 7,651.54 has closed below 7,686.14 three straight sessions, with resistance at 7,686–7,743 and support at 7,600, then 7,500. Breadth is too narrow to reclaim resistance without tech; expect semis to trade Micron's capex debate and rate-sensitives to stay heavy while the 30Y holds above 5.60%.
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.
