Weekly Market Note - Week Ending August 14, 2026

TL;DR: U.S. equities reached fresh records during the week as softer inflation and strong corporate earnings reduced the immediate threat of another Federal Reserve rate increase. The S&P 500 nevertheless finished only modestly higher as weaker retail spending and another rise in oil complicated the increasingly benign rates narrative.

The cross-asset message remains conflicted. Markets are pricing a lower probability of a September Fed hike, but the U.S. 10-year Treasury yield remains close to 4.7 percent and Brent rose around 6 percent over the week as U.S.-Iran negotiations deteriorated. Next week shifts the focus from inflation data towards Federal Reserve communication, the health of the consumer and whether economic activity can remain resilient as energy costs stay elevated.

U.S. equities spent much of the week close to record levels, supported by softer inflation data and continued strength in corporate earnings.

The S&P 500 gained 0.4 percent over the week and the Nasdaq Composite added 0.1 percent, marking a third consecutive weekly advance for both indices. The Dow Jones Industrial Average fell around 0.6 percent, while the Russell 2000 gained approximately 1.1 percent. The S&P 500 reached another record closing high on Thursday before slipping 0.17 percent on Friday to 7,785.76.

The muted headline weekly gains concealed another important development. Equity performance broadened somewhat beyond the largest technology companies, even as AI infrastructure remained one of the strongest earnings themes. Around 85 percent of S&P 500 companies reporting this season have beaten earnings expectations, and profit growth excluding large mark-to-market effects at Alphabet and Amazon remained above 30 percent.

At the same time, the market continued to demonstrate very little tolerance for results that failed to exceed already elevated expectations. Applied Materials fell more than 5 percent on Friday despite delivering an upbeat forecast, while Broadcom and Intel also declined. The reaction reinforced a pattern visible throughout earnings season: AI-related demand remains strong, but high valuations require increasingly convincing evidence on revenue, margins and returns on capital.

European equities were comparatively weaker. The STOXX 600 fell 0.3 percent over the week, ending a four-week winning streak, although the benchmark remained within 1 percent of its record high. Higher oil prices and renewed Middle East concerns offset another strong earnings week. Aggregate second-quarter earnings for STOXX 600 companies are now expected to rise 23.4 percent, the strongest increase in almost four years.

Asian markets remained dominated by technology and semiconductor volatility. South Korea's KOSPI rebounded sharply, gaining around 11.5 percent over the week as investors returned to AI-related shares after the recent correction. Japan's Nikkei also strengthened into the end of the week, while broader Asia-Pacific equities finished Friday modestly higher.

The Treasury market sent a less comfortable message than the equity market.

Softer CPI and PPI data pushed yields lower during the middle of the week as investors reduced expectations for a September Federal Reserve hike. The move helped support technology shares and allowed the S&P 500 to reach another record on Thursday.

The relief did not last.

The U.S. 10-year Treasury yield ended Friday close to 4.69 percent after rising as oil prices recovered. That left the benchmark yield slightly higher over the week despite softer inflation, weak employment data from the previous Friday and disappointing retail sales.

That resilience in long-term yields is important. Markets have become more confident that the Federal Reserve will remain on hold in September, but the long end of the Treasury curve continues to reflect concerns around energy inflation, fiscal supply and the possibility that inflation settles above the Fed's target.

The market is therefore distinguishing between the next policy decision and the longer-term inflation problem.

The dollar weakened as the probability of a September Federal Reserve increase declined.

The dollar index ended Friday around 99.7, while the euro strengthened to approximately $1.156 and sterling moved above $1.35. Friday's unexpectedly weak retail-sales report accelerated the move as markets reduced the probability of a September rate increase to around 31 percent.

Sterling gained around 0.25 percent over the week against both the dollar and the euro after UK data showed stronger-than-expected economic growth. The pound also continued to benefit from relatively high short-term UK interest rates compared with several other developed markets.

The yen remained the more significant structural story. It weakened by around 1 percent over the week and finished near 159.4 per dollar, giving back much of the appreciation generated by recent coordinated intervention. Markets increasingly expect the Bank of Japan to raise rates again, potentially as soon as September, but the interest-rate differential continues to work against the currency.

The inability of intervention to produce a lasting appreciation continues to suggest that a durable yen recovery will require a change in monetary-policy fundamentals rather than intervention alone.

Oil reversed much of the previous week's decline.

Brent crude finished Friday at $88.52 per barrel, gaining approximately 6 percent over the week. WTI ended at $82.40 and rose around 5.4 percent.

The move reflected another deterioration in the U.S.-Iran negotiations. Shipping traffic through the Strait of Hormuz slowed, two ADNOC-linked vessels were attacked and the United States said it could maintain its naval blockade of Iran indefinitely. Iran continued to insist on greater control over shipping through the strait as part of any agreement.

The rebound matters beyond the energy market.

Lower crude had been one of the key reasons Treasury yields fell and Federal Reserve expectations softened during the previous week. Brent moving back towards $90 means the energy-driven inflation risk has returned before it ever fully disappeared.

There are nevertheless counterweights. OPEC and other forecasters have pointed towards softer demand growth, while U.S. crude inventories recently recorded their largest weekly increase in more than three years. The oil market is therefore balancing significant supply disruption against signs that demand and inventories are less tight than initially feared.

Gold gained around 0.9 percent over the week and traded near $4,380 per ounce on Friday. Lower expectations for a September Fed hike and a weaker dollar provided support, while renewed tension around Hormuz maintained demand for geopolitical protection.

The U.S. inflation data were broadly constructive.

Headline CPI increased 0.1 percent in July and 3.4 percent from a year earlier, down from 3.5 percent in June. Core CPI increased 0.2 percent on the month and 2.5 percent year-on-year. Gasoline prices fell for a second consecutive month, helping limit headline inflation.

Producer prices provided another relatively benign signal. July PPI was unchanged month-on-month, compared with expectations for a 0.2 percent increase, while the annual rate slowed to 4.7 percent from 5.5 percent. Goods prices fell 0.7 percent, partly offset by a 0.2 percent rise in services.

The complication is timing. Much of the July inflation data was collected before the latest increase in oil prices, meaning the reports provide only limited information about the inflation consequences of the renewed disruption in August.

Friday's consumption data then shifted the focus from inflation towards growth.

U.S. retail sales fell 0.6 percent in July, the first decline in nine months and considerably weaker than the 0.1 percent increase expected by economists. The control-group measure used in GDP calculations fell 0.4 percent, while the University of Michigan consumer-sentiment index declined to 51.0 in August from 55.2 in July.

Combined with July's unexpected decline in payrolls, the data strengthened the case for the Federal Reserve to remain on hold in September.

Outside the United States, euro-area GDP expanded 0.4 percent quarter-on-quarter in the second quarter, while the UK economy also delivered a more resilient growth picture than expected. The contrast leaves Europe dealing with a familiar problem: activity has improved, but renewed energy inflation limits how confidently central banks can respond.

The central market message from the week is that Fed expectations became more dovish without producing a clean decline in long-term yields.

That distinction matters.

CPI, PPI, payrolls and retail sales all moved the market towards the view that the Federal Reserve can remain on hold in September. By Friday, markets assigned only around a one-third probability to another rate increase next month. Ordinarily, that combination would be expected to produce a clearer decline in Treasury yields.

Instead, the U.S. 10-year remained close to 4.7 percent.

Oil explains part of the disconnect. Brent's 6 percent weekly increase revived the risk that the recent improvement in inflation proves temporary. Treasury supply and the term premium remain additional constraints.

Equities have so far been willing to tolerate that setup because earnings remain strong. The S&P 500 reached another record despite higher oil and elevated yields because corporate profits, particularly around AI infrastructure, continue to validate a significant part of the market's growth assumptions.

That creates a relatively clear hierarchy of risks.

If oil stabilises and incoming activity data remain soft but not recessionary, the current combination can persist: the Fed stays on hold, earnings support equities and long-term yields gradually move lower.

If consumer weakness develops into a broader growth slowdown, lower rates become less helpful because the earnings outlook starts to deteriorate.

If oil moves substantially higher while activity remains resilient, the inflation problem returns and the market again has to confront the possibility of tighter monetary policy.

The dollar and gold are consistent with that uncertainty. The dollar weakened as near-term Fed expectations fell, while gold remained supported by both the softer rates outlook and geopolitical risk.

Minutes from the Federal Reserve's July 28-29 meeting are due Wednesday.

The meeting produced an unusually divided decision. The Federal Reserve left rates at 3.50 to 3.75 percent, but three voting members supported an immediate rate increase. The minutes should provide more detail on how broadly inflation concerns were shared across the committee and what conditions policymakers believe would justify further tightening.

The limitation is that the minutes predate the latest payroll, CPI, PPI and retail-sales reports.

They therefore matter less as a direct September signal and more as a guide to the Fed's reaction function. Markets will want to understand how much evidence policymakers need before becoming comfortable with inflation and how willing they are to tolerate weaker growth while oil remains elevated.

Jackson Hole on August 27-29 is likely to provide the next major opportunity for current policy guidance.

Retail earnings become one of the most useful real-time tests of the economy next week.

Home Depot reports Tuesday, Target and Lowe's on Wednesday, and Walmart on Thursday. Deere and other companies exposed to household, construction and agricultural spending will also report.

The timing is important following Friday's 0.6 percent decline in retail sales.

The market will be focused less on whether individual companies beat quarterly estimates and more on what management teams say about consumer behaviour.

Key questions include whether households are shifting towards essentials, whether higher gasoline prices are affecting discretionary spending, and whether retailers are absorbing higher costs through margins or passing them through to customers.

July housing starts and building permits are due Tuesday. The housing sector remains sensitive to long-term financing costs, with Treasury yields and mortgage rates still elevated.

Industrial production and regional manufacturing surveys will provide additional information on whether the stronger manufacturing momentum seen earlier in the summer is continuing.

Flash PMI data later in the week will then provide the first broad reading on August activity.

After weak payrolls and retail sales, the distinction between a controlled slowdown and a broader loss of momentum is becoming more important for markets.

Japan's second-quarter GDP report is expected to show that the economy expanded for a third consecutive quarter, with economists forecasting approximately 2 percent annualised growth.

The data matter because expectations for another Bank of Japan rate increase have risen significantly.

Japan's producer prices increased 7.2 percent year-on-year in July, while the yen remains near 160 per dollar despite recent intervention. Stronger growth would make it easier for the Bank of Japan to justify another hike, potentially as soon as September.

Japanese inflation and trade data later in the week will provide further evidence on how higher energy import costs and yen weakness are feeding into the economy.

UK inflation and labour-market releases will be closely watched after stronger-than-expected growth data supported sterling last week.

The UK has remained comparatively resilient despite the energy shock, but the Bank of England still faces a difficult balance between persistent inflation pressure and slower underlying activity.

A renewed acceleration in inflation would strengthen the case for maintaining restrictive policy and could reinforce sterling's yield advantage.

Geopolitics remains the largest unscheduled market risk.

There was little evidence of progress over the weekend. Iran reiterated that control over the Strait of Hormuz would remain central to any agreement, while tanker attacks and restricted traffic continued to complicate attempts to restore normal energy flows.

The relevant market indicator remains physical shipping activity rather than diplomatic rhetoric.

A verifiable increase in tanker traffic would reduce the geopolitical premium in crude and provide relief to Treasury yields.

Further attacks or a deeper disruption to traffic would move the market back towards the July regime of higher oil, higher inflation expectations and greater pressure on central banks.

Markets ended the week with a more dovish view of Federal Reserve policy but without a fully supportive cross-asset backdrop.

Inflation data improved, retail spending weakened and expectations for a September Fed hike fell substantially. Corporate earnings remained strong enough to push the S&P 500 to another record during the week.

But Treasury yields remain elevated and oil rose around 6 percent as the U.S.-Iran dispute deteriorated.

That leaves markets balancing three narratives: moderating underlying inflation, softer consumer demand and renewed energy pressure.

Next week's Federal Reserve minutes will help clarify the policy debate, while retail earnings will provide a more immediate test of whether weaker macro data are beginning to show up in corporate demand.

Oil remains the variable capable of changing the setup fastest.

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