Midweek Market Note - August 12, 2026

TL;DR: Markets have spent the first half of the week balancing two opposing forces. Renewed tension around the Strait of Hormuz pushed Brent crude back towards $90 per barrel and revived the inflation risk that had eased last week, while Wednesday's U.S. CPI report showed underlying price pressure continuing to moderate.

The result is a more conflicted cross-asset setup. Equities remain close to record highs and AI-related earnings continue to support technology shares, but Treasury yields remain elevated and oil has recovered much of last week's decline. July inflation reduced the immediate case for a September Federal Reserve hike, but the next question is whether producer prices and consumer demand confirm that message.

U.S. equities have largely consolidated last week's rally rather than extending it. The S&P 500 fell 0.06 percent on Monday and 0.32 percent on Tuesday as rising oil prices and fading optimism around U.S.-Iran negotiations weighed on risk appetite. The Nasdaq came under somewhat greater pressure as investors reduced exposure to several large technology names ahead of Wednesday's inflation report.

Wednesday produced a modest recovery. The S&P 500 gained 0.26 percent to 7,748.58 and the Nasdaq Composite rose 0.55 percent to 26,588.49, while the Dow was essentially unchanged. The move followed an in-line U.S. CPI report and another positive set of results from companies exposed to AI infrastructure spending.

CoreWeave was among the strongest performers after exceeding quarterly expectations and increasing its capital spending outlook. Super Micro Computer also rallied on stronger revenue guidance, while other data-centre and semiconductor-related companies moved higher. The reaction reinforces the distinction that has developed within the AI trade: investors are still willing to reward companies showing tangible demand, revenue growth and expanding order books, even as concerns around funding requirements and valuations remain.

Cisco added to that message after Wednesday's close. The company forecast fiscal 2027 revenue above expectations and reported $4 billion of AI infrastructure orders from hyperscale customers during the latest quarter. Shares rose in extended trading.

European equities have been steadier. The STOXX 600 remained near record levels through Monday and Tuesday before declining 0.16 percent on Wednesday to 659.48. Strong corporate earnings have continued to provide support, although energy sensitivity is becoming increasingly important as crude prices recover. Second-quarter earnings for STOXX 600 companies are currently estimated to have grown around 22 percent, with the energy sector contributing heavily to that increase.

Asian markets were mixed but generally calmer than during July's semiconductor volatility. MSCI's broad Asia-Pacific index outside Japan gained 0.92 percent on Wednesday. Japan's Nikkei rose 0.83 percent, while Hong Kong's Hang Seng declined 0.83 percent.

Treasuries have been caught between renewed energy inflation and softer U.S. macro data.

The U.S. 10-year Treasury yield rose to approximately 4.70 percent on Monday as Brent crude jumped almost 5 percent and markets prepared for substantial Treasury issuance. It remained close to that level on Tuesday, leaving long-term yields near their highest levels in roughly 18 months.

Wednesday's CPI report provided some relief. The 10-year yield moved back towards 4.67 percent as investors reduced expectations for a September Federal Reserve rate increase. Markets now assign a greater probability to the Federal Reserve remaining on hold next month than they did before the inflation release.

The important point is that yields have declined only modestly despite weaker employment data last Friday and softer inflation on Wednesday.

That suggests the bond market is still attaching a meaningful premium to future inflation, oil prices, Treasury supply and the possibility that the Federal Reserve will eventually need to tighten again. The immediate September policy risk has declined, but the longer-term rates problem has not disappeared.

The dollar has remained surprisingly resilient given the reduction in near-term Federal Reserve tightening expectations.

The dollar index traded around 99.98 on Wednesday, while the euro weakened to approximately $1.152. Fed funds futures reduced the probability of a September hike to around 40 percent, from 55 percent a week earlier, but higher oil prices and continued geopolitical uncertainty helped support the U.S. currency.

The yen remains the more structurally important currency story. Dollar-yen traded around 159.45 on Wednesday, reversing much of the appreciation generated by the coordinated U.S.-Japanese intervention in late July. Markets are simultaneously pricing an increasing probability of a Bank of Japan rate increase in September, but the underlying interest-rate differential continues to favour the dollar.

The failure of intervention to produce a lasting yen appreciation reinforces the point that currency intervention can alter positioning and momentum, but is less effective when monetary-policy fundamentals remain unchanged.

Oil has reversed sharply from last week's decline.

Brent crude gained almost 5 percent on Monday to $87.72 per barrel and another 1.4 percent on Tuesday to $88.91 as expectations for a rapid reopening of the Strait of Hormuz deteriorated. Iran has continued to attach conditions to reopening the waterway, while the United States and Iran have exchanged competing demands around sanctions, compensation and the terms of any broader agreement.

Brent eased slightly on Wednesday to $88.58 as OPEC reduced its forecast for 2026 global oil-demand growth, but the geopolitical premium remained firmly in place. Shipping attacks have continued and Iranian officials have said there has been no meaningful progress towards reviving the interim agreement reached earlier this year.

This matters because the rebound in crude has already reversed part of the cross-asset improvement seen last week. Lower oil had allowed markets to price weaker inflation, lower Treasury yields and a less aggressive Federal Reserve. Brent approaching $90 again makes that combination less secure.

Gold has simultaneously strengthened. Spot gold rose to approximately $4,407 per ounce on Wednesday, its highest level in more than two months, supported by lower expectations for a September Fed hike and continuing geopolitical uncertainty.

Wednesday's U.S. CPI report was the main macro event of the first half of the week.

Headline CPI increased 0.1 percent in July after declining 0.4 percent in June, leaving annual inflation at 3.4 percent compared with 3.5 percent previously. Core CPI increased 0.2 percent month-on-month and 2.5 percent from a year earlier, down from 2.6 percent in June.

The composition was also relatively constructive. Energy prices declined 1.5 percent during July and gasoline fell 2.9 percent, while shelter increased only 0.1 percent. The complication is that the report largely predates the latest rebound in crude prices. Energy prices were still 14.7 percent above year-ago levels even before the latest geopolitical deterioration.

Markets therefore received confirmation that underlying inflation is moderating, but not confirmation that the energy shock is finished.

The Federal Reserve debate shifted accordingly. Following last week's weak employment report and Wednesday's inflation data, markets now price approximately a 40 percent probability of a September rate increase. The probability of an increase by October remains higher, reflecting the view that the Fed may delay rather than completely abandon further tightening.

Elsewhere, the Reserve Bank of Australia left its cash rate unchanged at 4.35 percent on Tuesday after raising rates by 75 basis points earlier this year. The decision was unanimous, but policymakers retained the possibility of further tightening if inflation fails to moderate sufficiently.

The central market tension has shifted again.

Last week, falling oil and weaker employment created an unusually supportive combination for equities: inflation pressure declined, Treasury yields moved lower and the Federal Reserve appeared less likely to tighten. The first half of this week has partially reversed that move.

Oil has rebounded by more than 6 percent from last Friday's close, Treasury yields remain around 4.7 percent and the dollar has held firm. At the same time, equities have remained remarkably resilient and the S&P 500 is still close to record territory.

Wednesday's CPI report prevented that tension from becoming more disruptive. The data gave the bond market evidence that underlying inflation continues to moderate and reduced the probability of an immediate Federal Reserve hike. The market is effectively separating July disinflation from August energy risk.

That distinction is important.

If oil stabilises or declines, Wednesday's CPI report strengthens the case that the Federal Reserve can remain patient while monitoring the weaker labour market. In that environment, yields could move lower without requiring a significant deterioration in growth, which would remain supportive for equity valuations.

If Brent moves back towards $100, the interpretation changes. The Fed would face renewed headline inflation pressure at the same time that employment momentum has weakened. That would recreate the growth-inflation conflict that produced much of July's bond-market volatility.

Equities are currently treating this as a manageable risk rather than a new regime. Strong earnings are the main reason. AI infrastructure companies continue to demonstrate sufficient revenue and order growth to support the investment narrative, while broader corporate earnings have remained stronger than expected. But the bond and commodity markets are signalling that the macro constraint has not disappeared.

July PPI is the next test for the inflation narrative.

Producer prices fell 0.3 percent in June, largely because final-demand goods and energy prices declined sharply, but the index was still 5.5 percent higher than a year earlier. July's report is due Thursday at 8:30 a.m. Eastern Time.

The details matter because recent business surveys have shown elevated input costs even as consumer inflation moderates.

A soft PPI report would reinforce Wednesday's CPI signal and reduce pressure for a September Federal Reserve hike.

A stronger report would reopen the question of whether higher upstream costs are still moving through supply chains and could eventually interrupt the improvement in consumer inflation.

The first estimate of UK second-quarter GDP is due Thursday morning.

The UK economy expanded 0.6 percent quarter-on-quarter in the first quarter. The second-quarter release will provide an important test of how activity developed before the latest energy-price rebound and will be closely watched after the Bank of England recently left rates unchanged.

For sterling and gilts, the important combination will be whether growth remains resilient enough to coexist with the Bank's continuing concern around inflation.

July retail sales are due Friday at 8:30 a.m. Eastern Time.

The report has become more important after last Friday's employment surprise.

If household spending remains strong despite weaker hiring, markets can continue to interpret the labour data as a moderation rather than the beginning of a broader slowdown.

Weak retail sales would be more difficult. It would suggest that labour-market weakness is beginning to affect consumption, moving the macro discussion away from inflation alone and towards a more significant growth risk.

Applied Materials remains one of the key earnings releases in the second half of the week.

The company's outlook will matter for semiconductor capital expenditure, memory investment and the broader AI infrastructure cycle. Recent results from CoreWeave, Super Micro and Cisco have reinforced strong underlying demand, but investors continue to scrutinise the amount of capital required to sustain that growth.

The question is increasingly not whether AI infrastructure spending is growing. It is whether returns on that spending can continue to justify the valuations attached to the companies supplying it.

Geopolitics remains the largest unscheduled risk.

Iran has said the Strait of Hormuz will remain closed unless the United States accepts its conditions, while shipping attacks in the wider region have continued. At the same time, weaker oil-demand forecasts have limited the upside in crude.

The market remains caught between those forces.

A credible agreement that restores physical shipping flows would reduce the inflation premium embedded in oil and Treasury yields.

Further attacks or a formal breakdown in negotiations would increase the probability that crude returns towards the levels seen during July.

Markets remain close to record levels, but the cross-asset backdrop has become less straightforward than it appeared at the end of last week.

Wednesday's CPI report was constructive. Underlying inflation moderated, Treasury yields eased and the probability of a September Federal Reserve hike declined. Strong AI-related earnings provided an additional source of support for equities.

Oil is the complication.

The rebound towards $90 means the energy shock has not disappeared, and the July CPI report does not capture the latest move. The remainder of the week will therefore test whether softer inflation and resilient corporate earnings are strong enough to keep rates contained despite renewed geopolitical pressure.

PPI and retail sales will provide the scheduled macro tests. The Strait of Hormuz remains the unscheduled one.

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