AI Leaders Sound the Alarm on Their Own Race

Last week saw another move higher in oil prices as tensions remain high in the Middle East. This led to a down week for stocks in the holiday shortened week. The S&P 500 fell just 0.80%, but the average stock fared worse – the equally weighted S&P 500 fell by 1.89%. The momentum trade was mixed as semiconductors rose slightly, memory stocks fell slightly, and mega cap (Mag 7) was mostly higher. The only two sectors higher were energy and communication services, up 2.03% and 1.06% respectively. On the other hand, small caps were the biggest underperformers, falling 2.41% on the week.

Military activity ramped up in the Middle East last week with additional concerns about a disruption in the flow of oil. Early in the week saw airstrikes on Iran’s Kharg Island, its main oil-export terminal, which drove the first rise in oil prices. Later, the Iran-backed Houthis struck energy facilities in Saudi Arabia and the Saudis said its oil output fell to the lowest level since 1990, causing another move higher in oil.

The risks expanded further after reports of the Houthi advances toward the Bab el-Mandeb Straight, another key shipping route between Yemen and Africa that leads to the Red Sea. This has the potential to threaten another critical shipping chokepoint, in addition to the Strait of Hormuz. WTI crude oil rose 9.4% over the course of the week to $100 per barrel, the highest since mid-May.

This will certainly have an impact on the economy. The average price for a gallon of diesel rose to over $6 for the first time ever. According to AAA, the national average for a gallon of gasoline was $4.31, rising about 15 cents over the week.

Higher energy prices led to a larger increase in inflation for August as well. Consumer and wholesale prices both accelerated in the month. The consumer price index increased 0.4% in the month for its fastest pace in several months, driven by a 2.1% increase in energy prices (fuel up 10.1%). Excluding energy prices (and food, since both are volatile and less “sticky”), core prices rose 0.3%. That was more than expected.

Wholesale inflation, the price increases that producers see, have generally risen at a much faster pace than consumer inflation. The producer price index was up a faster than expected 0.4% in August and is up 5.4% over the past year, an acceleration from 4.8% the prior month.

The concern over a prolonged war and higher energy prices is leading to worries about higher inflation for longer. This is continuing to fuel the expectations for interest rate increases in the near future. As of Friday, the implied Fed funds futures (the likelihood the Fed will raise interest rates according to market participants trading interest rate futures) shows a 89% probability the Fed will raise interest rates at its meeting this Wednesday. It was only a week prior those odds were at 60% and a month ago at 33%.

The Fed has avoided any sort of guidance on what it will do next, a key change for the new Fed chairman Kevin Warsh. While the markets are itching for any sort of indication on what comes next, we do not think this will be the case, which we believe will lead to a volatile trading day Wednesday.

Artificial intelligence is still one of a handful of bright spots with sentiment remaining strong. Last week saw strong earnings results from Oracle, who is benefiting from building out data centers with Nvidia’s AI chips and selling its computing capacity to customers.

Last week also saw a new model release, this time by OpenAI. Its Astra release saw positive takeaways from its improved capabilities and efficiencies with it seeing so much demand that it paused its Pro subscriptions.  Meta also had a release, announcing its personal AI Agent, Muse. The agent will be able to carry out tasks across multiple connected apps.

Microsoft added to the sentiment after announcing it is planning to more than triple its global data center capacity by 2032. It plans to increase capacity from 12 gigawatts today, to at least 38 gigawatts in 6 years. As Bloomberg reported, that amount of capacity would eclipse the amount of electricity the state of New York uses during peak periods.

However, sentiment took a sharp turn over the weekend after an Anthropic employee left the company and posted on X about the risks of AI and the impact it could have on humanity. Not long after, Anthropic’s CEO wrote a detailed blog post titled “We Must Pace the Frontier” calling for a global and coordinated slowdown in AI development, saying the world “must slow the pace at which we improve the capabilities of AI models.”

The concerns about AI advancing too quickly really took off following the hack of Hugging Face by a rogue swarm of AI agents that were being tested by OpenAI several weeks ago. He said with the way the development has accelerated recently, he worries “in 6-12 months such a swarm could be capable of taking over the entire internet.” He argues AI development should not stop, rather the industry should stop assuming its always safe or desirable to move as fast as possible.

Rivals to Anthropic, like Elon Musk with SpaceX, Demis Hassabis with Google’s DeepMind, and Sam Altman with OpenAI, joined the call for a slowdown in the development of AI.

Anthropic and OpenAI are on pace to go public later this year, but the safety risk is becoming too much for Open AI - over the weekend OpenAI CEO Altman said the unacceptable safety risks rules out an IPO for this year. 

This does not mean the massive investment in AI infrastructure is over, but we may see a shift in spending to inference, deployment, networking, power, and security.

Moving to the week ahead, the Federal Reserve meeting will be the main event with the policy announcement coming Wednesday afternoon. Markets expect a rate increase, as do we, but there is still support inside the Fed for no changes so anything could happen. Iran/Middle East will be top of mind, along with oil, particularly after news over the weekend said Saudis shut down a key oil pipeline as the situation escalates. Economic data and earnings are on the lighter side, but there are a handful of investor events where we could see guidance updates. 

Recent Economic Data



• Consumer Price Index: Consumer inflation picked up to its fastest pace in three months as the consumer price index increased 0.4% in August, meeting expectations. Energy prices, which increased 2.1%, including a 10.1% in fuel, drove much of the increase, while food prices were up 0.1%. The index excluding these two volatile categories (food and energy) increased 0.3%, slightly more than expected. Housing was up 0.3%, vehicle prices were up 0.4%, vehicle maintenance was up 1.1%, while airline fares were up 2.7%. The headline index increased 3.4% over the past 12 months, matching July’s increase with core prices up 2.4%, a tick lower than July and the lowest annual increase for core prices since 2021. Finally, services prices excluding shelter (housing) rose 0.3% in the month and up 3.1% over the past year.

• Producer Price Index: The producer price index, which measures wholesale inflation, increased 0.4% in August, as was expected, and compared to the 0.1% increase in July. Prices are up 5.4% over the past year, accelerating from 4.8% in July. Much of the increase came from energy, which rose 4.2% in the month, but core prices (which exclude food and energy categories) were still up 0.4%. Prices for final demand services, which tend to be stickier, rose 0.1%. Core prices are up 4.7% from a year ago, matching July’s rate.

• Existing Home Sales: The number of existing home sales in August fell 2.0% in the month to a seasonally adjusted annual rate of 3.980 million. This is 1.2% below the pace from August 2025. The sales pace has only fallen below 4 million several times over the past 10 years and compares to the roughly 5.500 million sales pace prior to the pandemic. Sales are based on closings, so the number reflect contracts that were signed in June/July when mortgage rates were 25 basis points lower. There are currently 1.620 million unsold units on the market, up 5.9% from the level last year. The number of months it would take to exhaust current inventory of existing homes at the current sales pace stands at 4.9 months, the highest level in 10 years reflecting the lower sales pace and steadily increasing supply. The median sales price was $429,100, a 1.6% increase from a year ago.

• Mortgage Rates: According to the Freddie Mac weekly mortgage survey, the average 30-year mortgage rate for a prime borrower was 6.76% last week, rising 5 basis points from the week prior, and up from the low of the year of 5.98% in February prior to the Iran war. This is the highest mortgage rates have been since July 2025.

• Jobless Claims: The number of unemployment claims filed the week ended September 5 was 206,000, slightly lower than the prior week, with the four-week average up slightly to 206,000. The number of continuing claims was relatively unchanged at 1.774 million with the four-week average down slightly to 1.779 million. Jobless claims have remained very steady. 

Company News



• Meta: Shares of Meta moved higher after it announced the launch of Muse, a personal AI agent, designed to do more than just answer questions. The AI agent will be able to carry out tasks across connected apps, such as planning travel, managing emails, shopping, and organizing schedules. The agent is initially available in the U.S. through its app and WhatsApp, with free and paid tiers. Meta says users control which services it can access and that security systems monitor its actions, but the rollout follows reported testing issues involving reliability and privacy.

• Qualcomm: Shares of Qualcomm moved higher it announced a multiyear partnership with Amazon to develop custom AI chips and advanced optical networking for Amazon’s AWS data centers, with Amazon potentially purchasing up to $60 billion of related products. The deal pushes Qualcomm further into AI infrastructure and beyond smartphones. Qualcomm is targeting $15 billion in data-center revenue by fiscal 2029.

• Starbucks: Starbucks is reportedly planning to invest $1 billion to renovate its North American locations in a bet to bring more customers back by remodeling the stores as “community lounges” with additional seating, rugs, bookshelves, plants and artwork, according to the Financial Times.

• Apple: Apple unveiled its biggest iPhone shakeup in years, introducing the $1,999 iPhone Duo, its first foldable smartphone, alongside the new iPhone 18 Pro and Pro Max. The company also announced an upgrade to its Apple Watch and AirPods lineup while putting greater emphasis on AI-powered Siri, health tracking and on-device intelligence, signaling Apple's push to integrate AI more deeply across its hardware ecosystem.

• Microsoft: Bloomberg News reported Microsoft is planning to more than triple its global data-center capacity to over 38 gigawatts by 2032, up from roughly 12 gigawatts today, as surging demand for AI and cloud computing has reportedly left the company without enough capacity to serve some customers. The capacity would eclipse the amount of electricity the state of New York uses during peak periods. The report added Microsoft has faced capacity constraints that have limited its ability to take on some AI and cloud business. 

Other News



• Trade: The White House announced new import restriction on Canadian imports of alcohol, dairy products, and motorcycles, along with limiting government procurement access to Canadian businesses, with the moves going into effect September 29. This comes after a Canada retaliation of tariffs on $20 billion of US imports went into effect.

• Credit Score Reporting Changes: FHFA Director Bill Pulte is pushing for more competition in the mortgage credit-scoring market by allowing lenders working with Fannie Mae and Freddie Mac to use VantageScore (a score created via a joint venture from the three credit reporting agencies). This challenges Fair Isaac’s (maker of the FICO score) longstanding dominance/monopoly. Pulte is also pushing for more competitive pricing from Fair Isaac. Pulte is also considering changes to credit-reporting requirements that could further reduce costs for borrowers, creating additional pressure on FICO and the major credit bureaus.

• ECB Raises Rates: The European Central Bank raised its benchmark interest rate by 25 basis points (0.25%) this morning, as was expected, as it believes inflationary pressures remain too high. The ECB said “the conflict in the Middle East continues to generate inflation pressures and  the outlook remains highly uncertain, with risks to the upside for inflation and to the downside for economic growth.”

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