Author: Davis Finke, CFA
With earnings season largely complete, investors’ focus has shifted back to geopolitics and economic data. This week came with the release of multiple inflation measures as well as data on the health of the consumer. Headline inflation rose 0.1% in July and 3.4% from a year earlier, both in line with expectations. Core inflation, which excludes food and energy, increased 0.2% for the month and 2.5% year-over-year, also in line with expectations. As a result, the three-month annualized rate of core inflation is now 1.6%, which is the first reading below the Fed’s 2% target since December 2025. On the consumer side, spending softened in July, with headline retail sales posting their first monthly decline since January, falling by 0.6% and coming in below expectations of a 0.1% gain. Taken together with last week’s weaker jobs data, investors have reassessed the likelihood of a Fed rate increase at September’s meeting. Prior to last week’s payroll report, markets had priced in roughly a 60% probability of a rate increase. However, following this week’s inflation data, markets are now tilted toward a pause, with the probability falling to around 30%.
With steady rates generally viewed as a tailwind for equities, markets set new record highs on Thursday. However, following headlines from U.S. Treasury Secretary Scott Bessent and U.S. Defense Secretary Pete Hegseth regarding developments with Iran, equity markets dropped on Friday to end the week. As efforts to secure a deal to reopen the Strait of Hormuz have stalled, Bessent announced that the U.S. would apply unprecedented economic pressure on Iran. Meanwhile, Hegseth indicated that the U.S. was fully capable and prepared to maintain the naval blockade indefinitely. While the news weighed on markets on Friday, equities still finished the week higher, with the Nasdaq up 0.91% and the S&P 500 up 0.34%, while the Dow was down 0.55%. At the sector level, energy was the best performer, up nearly 8% for the week as oil prices have again started to climb. Other strong performers included utilities, communications, and consumer staples, while consumer discretionary and materials were the worst performers.
Looking ahead to next week, the economic calendar is relatively light, with housing data and jobless claims being the primary releases. The minutes from the July Fed meeting are also scheduled to be released on Wednesday, which could provide additional clarity on the committee’s views regarding inflation and employment. In addition, Walmart, which typically provides valuable insights into consumer health, is scheduled to report earnings next week. With relatively few major economic releases on the calendar, geopolitical developments and the movement of oil prices could play an outsized role in driving markets next week.
