Resilient Growth Meets Renewed Rate and Oil Pressure

US equities finished the holiday-shortened week little changed, but the relatively calm headline performance concealed another meaningful shift in interest-rate expectations.

Markets initially struggled as rising global bond yields and higher oil prices renewed concerns over inflation and monetary policy. Sentiment improved sharply on Thursday after Federal Reserve Governor Christopher Waller indicated that he could support keeping rates unchanged if inflation continued moving towards the Fed’s 2% objective. Friday’s substantially stronger-than-expected employment report, however, shifted the debate back towards the possibility of a September rate increase.

The Labour Market Rebounds Sharply

The most important development of the week came on Friday. The US economy added 162,000 jobs in August, almost three times the consensus forecast of approximately 56,000. The unemployment rate remained unchanged at 4.1%. July’s previously reported loss of 23,000 jobs was also revised to a gain of 21,000.

Private payrolls increased by 127,000, while manufacturing added 16,000 jobs. Average hourly earnings increased 3.1% year-on-year, slightly above expectations.

The report materially changes the interpretation of July’s weak employment numbers. Rather than indicating an abrupt deterioration in the labour market, the latest data suggest that employment growth remains resilient.

That is fundamentally positive for the economic outlook, but less straightforward for financial markets.

Following the report, the probability of a 25-basis-point September rate increase rose to approximately 60%, from below 50% a day earlier. The two-year Treasury yield climbed to around 4.37% as investors reassessed the likelihood that the Federal Reserve can afford to remain patient on inflation.

The S&P 500 consequently declined 0.4% on Friday, while the Dow lost 0.5% and the Nasdaq fell 0.3%.

The Fed’s Decision Is Increasingly About Inflation

This week’s developments reinforce an important distinction. A strong labour market does not necessarily require the Federal Reserve to raise rates. But it removes one of the principal constraints preventing it from doing so.

Governor Waller said on Thursday that he would support keeping rates unchanged if there is continued progress towards the Fed’s inflation objective, while also leaving open the possibility of tightening should inflation remain elevated. His comments initially reduced rate-hike expectations and helped drive a broad equity rally.

Friday’s employment data subsequently strengthened the argument that the economy may be sufficiently resilient to absorb another increase.

The Fed’s September decision therefore increasingly depends upon one variable: inflation. That makes next week’s CPI report particularly significant.

Oil Complicates the Inflation Outlook

Unfortunately for the Fed, energy markets moved decisively in the wrong direction this week. Brent crude rose 7.6% for the week to US$92.68 per barrel, while WTI gained almost 10% to US$91.48 as renewed US-Iran military strikes increased concerns over Middle Eastern supply disruptions.

Traffic through the Strait of Hormuz also remained constrained. Only four vessels reportedly passed through the Strait on Thursday, compared with a recent 10-day average of approximately fifteen.

The consequences are increasingly visible beyond crude prices. US diesel prices have risen sharply, adding another potential source of cost pressure across transportation, agriculture and industrial supply chains.

This is important because the Federal Reserve is confronting two simultaneous signals. The labour market is stronger than expected, reducing concerns over economic weakness. Oil prices are rising, increasing the risk that inflation remains persistent.

Taken together, those developments strengthen the argument for keeping monetary policy restrictive.

AI Remains Strong But Expectations Remain Even Stronger

Technology continued to provide an important counterweight to macroeconomic concerns. Broadcom reported quarterly revenue of US$29.6 billion, up 86% year-on-year, while adjusted earnings exceeded expectations. More importantly, AI semiconductor revenue surged 221% to US$16.7 billion.

The company projected AI revenue of approximately US$115 billion in fiscal 2027 and US$230 billion in fiscal 2028, highlighting the extraordinary scale of investment continuing across custom AI processors and networking infrastructure.

Yet Broadcom’s shares declined following the results because its near-term fourth-quarter revenue guidance fell short of market expectations.

This mirrors the pattern seen across several AI-related companies during recent earnings seasons.

The fundamental demand environment remains exceptionally strong. The difficulty is that valuations already incorporate very high expectations.

The market is therefore increasingly distinguishing between strong AI growth and AI growth sufficiently strong to exceed what is already priced in.

Elsewhere, memory and semiconductor stocks performed strongly on Friday despite the broader market decline. Sandisk rose approximately 12%, while Seagate, Western Digital and Micron gained around 6%. The Philadelphia Semiconductor Index advanced more than 3%.

Bond Yields Remain a Critical Market Variable

The week began with another global bond-market sell-off, reinforcing concerns that long-term borrowing costs may remain elevated even if the Federal Reserve eventually pauses.

Treasury yields rose alongside yields in several other developed markets as investors continued to focus on inflation, fiscal deficits and government borrowing requirements.

This remains particularly relevant for equity valuations.

A resilient economy supports corporate earnings. But if that resilience also keeps inflation and bond yields elevated, the valuation multiple investors are willing to pay for those earnings may remain constrained.

That tension explains why stronger economic data are currently producing a more complicated market reaction than they ordinarily would.

What to Watch Next (Beginning 7 September 2026)

The August Consumer Price Index on Friday, 11 September is now the most important near-term catalyst. It will be the final CPI release before the Federal Reserve’s September meeting.

Following the strong employment report, a hotter-than-expected inflation reading would materially strengthen the case for another rate increase. Conversely, clear evidence of moderating inflation could allow the Fed to remain on hold despite the resilience of the labour market.

Investors should therefore pay particular attention not only to headline CPI but also to core inflation and underlying services inflation.

Oil will remain equally important. Brent crude above US$90 increases the risk that energy costs begin feeding more visibly into headline inflation and inflation expectations.

The equity backdrop remains fundamentally supported by resilient economic activity and strong corporate earnings, particularly across AI infrastructure.

However, the market now faces a considerably narrower path.

Strong growth is positive for earnings, but only if it does not keep inflation sufficiently elevated to force the Federal Reserve into further tightening.

For the coming week, inflation rather than earnings, is likely to determine which side of that equation dominates.