Yields Surge On Busy Week of Geopolitics And AI Updates

It was a mixed week for stocks, and although the major indexes were higher, the average stock did not fare as well. The S&P 500 rose 1.21%, led by big cap tech, including a 12.9% increase in Meta, but the equal weighted S&P 500 index fell 0.56%. Technology was the best performing sector, boosted by a rally in AI names, while utilities and energy were the worst performing sectors, impacted by rising bond yields and lower oil prices.

Weakening breadth in the market has been a key theme taking place beneath the surface. The cap-weighted versus equal weighted S&P 500 is one example. Since the mid-August highs, the S&P 500 is down less than 1% while the equal weight index is down nearly 6%. In addition, only about 25% of S&P 500 companies are trading above their 50 day moving average, indicating weaker momentum.

Meanwhile, perhaps generating more buzz and another market theme lately, the Treasury selloff intensified last week – the 10-year Treasury yield rose another 17 basis points (one basis point is equal to one hundredth of one percent, 0.01%) to end the week at 5.17%, reaching its highest level since 2007. The 30-year yield saw the same increase, finishing at 5.50% on the week.

This has also impacted borrowing rates, with mortgage rates providing a clear example. According to Freddie Mac’s weekly mortgage survey, the average 30-year mortgage rate for a prime borrower was 7.03% last week. The low for the year was 5.98% in February, just before the war in Iran broke out. However, mortgage rates remain below the cycle high of 7.79% reached in October 2023.

Higher mortgage rates have had a significant impact on the housing market, making home financing more expensive and weighing on affordability at a time when home prices are up 58.5% from January 2020, just before the pandemic. Existing home sales are running at an annualized pace of 4.00 million, down from 5.50 million before the pandemic, while new home sales are running at an annualized pace of 684,000. While new home sales are not near their cycle lows, both measures remain below their pre-pandemic pace.

Existing home sales have struggled much more than new home sales, largely because many homeowners are reluctant to give up the ultra-low fixed mortgage rates they locked in during the pandemic—a phenomenon known as the “mortgage lock-in effect.”

One of the big drivers of the bond selloff (and higher yields, as bond prices and interest rates have an inverse relationship) was the release of the S&P US PMI, which is a survey of services and manufacturing firms. The survey easily beat expectations, suggesting strong business activity in the US, as the index increased at the fastest pace in over five years.

But the bigger news on the week came from geopolitics – the UN held its General Assembly in New York, Trump hosted China’s President Xi in Washington, and there were key developments with the Iran situation.

The war between the U.S., Israel and Iran was the dominant issue, with President Trump warning of further escalation in the war if Iran did not reach a deal, while U.S. and Iranian officials held their first indirect talks in months. The two sides remain far apart on how to end the conflict, but the renewed diplomacy provided some hope of a path toward de-escalation.

By Friday, a report said Iran and US negotiations had entered a “technical phase,” with the latest plan focused on accelerating the reopening of the Strait of Hormuz quicker than the prior 60-day process. Any progress would be particularly important for financial markets given the conflict's impact on the Strait and global oil supplies, which could have broader implications for inflation and interest rates.

In Chinese President Xi’s three-day state visit to the White House, trade and the broader U.S.-China economic relationship took center stage. The two sides agreed to extend their existing trade truce by two months, while also reaching agreements to pursue lower tariffs on roughly $30 billion of goods, increase Chinese purchases of U.S. agricultural products and continue discussions over rare earths and other critical minerals. However, significant differences remain over trade, AI, Taiwan and China’s relationship with Iran.

One of the bigger stories on the corporate side revolved around artificial intelligence (of course) with additional updates on Meta’s new AI agent Muse. The company unveiled the agent three weeks ago and it quickly became the most downloaded app. Muse moves AI from a chatbot that answers questions, to an agent that can actually take actions for you.

Rather than simply responding to a prompt, Muse can use its own browser and connected apps to perform multi-step tasks—such as sending emails, booking travel, filling out forms, researching products, handling customer-service interactions and making purchases. It can also continue working in the background after the user closes the app, returning when it needs approval or has completed a task.

The latest development announced last week is Muse’s ability to search across the web, compare products and ultimately complete a purchase on a user's behalf. Shopify, a commerce platform that allows businesses to build, run, and scale online stores, is the newest partner to Meta, allowing the agent to purchase from eligible Shopify merchants. Notably, Amazon has blocked Muse from making purchases on its platform.

The AI trade saw another boost after Akami, whose content delivery networks allow websites to load faster and protects businesses from cyber attacks, secured a $11.6 billion infrastructure deal with Anthropic, a leader in AI development, to support AI agents on CPU-based systems.



The focus this week moves back to economic data with several labor market reports on deck, including the monthly employment report on Friday where consensus sees 90,000 jobs added for September. Outside of a key report from memory chip maker Micron, earnings remain quiet, while the conference schedule remains busy. 

Recent Economic Data



• New Home Sales: The number of sales of newly built homes was at a seasonally adjusted annual rate of 684,000 in August, which is an increase of 6.4% from July but down 2.0% from a year ago, and the fastest sales pace so far this year. The drop in new home sales was driven by sales of completed homes, which was offset by an increase in sales of homes currently under construction. The number of new homes for sale was 483,000, unchanged in the month and down 2.0% from last year. This represents a supply of 8.5 months at the current rate, consistent over the past year. The median sales price has steadily moved lower over the past year, down 5.8% from last year to $393,700.

• Mortgage Rates: The average 30-year mortgage rate for a prime borrower moved over 7% for the first time since May 2024, according to the weekly Freddie Mac mortgage survey. Rates are up from a recent low of 5.98% just 7 months ago. For reference, the highest of the cycle was 7.79% in October 2023.

• Durable Goods Orders: Orders for durable goods were unchanged in August but are up a strong 7.7% from a year ago. Core capital goods orders excluding aircraft, a better “core” reading, increased 1.6% in the month. On the other hand, shipments of durable goods fell 0.2% after seeing eight consecutive monthly increases. The decline was driven by a 1.8% drop in shipment of transportation equipment (like vehicles and aircraft) while core shipments rose 0.6%.

• Money Supply: The amount of money in circulation, called the money supply, increased to $23.342 trillion in August, a 0.5% increase in the month and a 5.7% increase from a year ago. The 5.7% annual increase has accelerated 7 of the past 9 months and is now the fastest pace since the inflation issue after the pandemic in 2022. This is another factor the Fed will be watching, as monetarist theory says that rapid growth in the money supply can contribute to higher inflation.

• Jobless Claims: The number of jobless claims the week ended September 19 was 197,000, relatively unchanged from the prior week, with the four-week average down slightly to 202,250. The number of continuing claims was relatively unchanged at 1.719 million with the four-week average down 13,000 to 1.744 million. Initial unemployment claims remain at very low levels.

Company News



• AMD: Last week, chipmaker AMD’s market cap surpassed $1 trillion, becoming the 12^th US company, and 16^th in the world, to hit the milestone. The next largest US company by market capitalization is JPMorgan, whose current market cap is around $905 billion.

• McDonald’s: Bloomberg reported McDonald’s is testing a new advertising business by placing third party ads on digital menu boards and touchscreen kiosks at select company-owned restaurants. The pilot is designed to monetize the company’s large customer base and generate high margin advertising revenue, with ads appearing during customers’ wait time while keeping the McDonald’s ordering experience central.

• Meta: Meta and Shopify are partnering to let Meta’s Muse AI agent shop across Shopify stores and complete purchases through Shop Pay. The deal expands Muse from simply finding or recommending products to actually handling the transaction on a user’s behalf, while giving Shopify merchants access to purchases generated by AI agents. Related, Amazon has blocked Muse from shopping on its website.

• Meta: Reuters reported that Meta is testing the use of a “human concierge” for its Muse app that was released two weeks ago and quickly became the most downloaded app. Muse would use human contractors to handle some phone calls that Muse is unable to complete successfully. The feature was being tested by about half of Meta employees last week, but some workers raised privacy concerns about sensitive information being exposed, with Meta later pausing the feature because of this. It also reported that human handling can significantly improve call success rates, with internal tests reaching 95%–98%, compared with lower success rates for AI-only calls. It also unveiled a small handheld device called Meta Charm that brings its personal AI agent Muse to a portable device. It is roughly the size of an Apple Airpods case.

• Akami: Shares of Akamai moved higher after announcing a $11.6 billion, seven-year deal with Anthropic to provide cloud infrastructure for its growing AI workloads. The agreement could expand to nearly $20 billion, offering Akamai significant long-term revenue potential while accelerating its push into AI cloud infrastructure.

• Oracle: Oracle invoked a force majeure notice over potential delays at its massive Project Jupiter AI data center in New Mexico, reportedly due to difficulties securing power. The project could be delayed by about a year, raising fresh questions about the financing and risk involved in the rapidly expanding AI data-center buildout, although Blue Owl said the project's financial commitments remain unchanged. The news drove costs to insure bonds for hyperscalers (those building and running massive data centers) higher with credit default swaps rising to new highs.

• IonQ: Shares of IonQ jumped after the company announced a breakthrough in quantum error correction, saying it successfully demonstrated a real-time decoder running on a standard CPU. The technology is designed to identify and correct errors without slowing quantum-computing operations, addressing a key hurdle to building practical, fault-tolerant quantum computers.

Other News



• Stress Testing AI Models: The Information reported OpenAI and Anthropic came close to a legally binding agreement that would have allowed each company to stress-test the other’s commercially available AI models for vulnerabilities, unexpected behavior and potential safety risks. Under the proposal, each would receive API access to the other’s models but agree not to retain the testing data, while unreleased models would be excluded. It was unclear whether the agreement was ultimately finalized.

• Ratepayer Protection Act: It was reported the Senate could vote this week on the Ratepayer Protection Act, after the House passed it 417-3 earlier this month. The bill would require states to consider making large data centers—generally those using 100 megawatts or more—pay the full incremental cost of new power generation and grid infrastructure needed to serve them, rather than shifting those costs to other electricity customers.

• Fed Talk:
• Chicago’s Fed President Goolsbee said the Fed should not look through supply shocks, like it has in the past, when assessing the inflation situation this time around, suggesting the more frequent supply shocks (tariffs, war, weather, supply chain, oil, etc) we are currently seeing may require a different approach.
• St Louis Fed President Musalem said that the Fed will need to tighten policy further (raise rates) as strong demand persists and sees the current commodity price shock (higher oil/gas prices) moving beyond oil. He argued it would be better to tighten sooner than later because earlier tightening is better than later which could require more abrupt policy action.
• Fed Governor Michael Barr said further adjustments to monetary policy will likely be needed to bring inflation down to the Fed's 2% target in a timely manner, according to his base-case outlook.
• Philadelphia Fed President Anna Paulson said additional rate hikes may be needed because underlying inflation remains stubbornly high at roughly 2.5%–3%. She supported last week’s quarter-point hike and said the resilient economy and limited progress on inflation could warrant further tightening if conditions continue as expected.

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