This week, Nick Amat, Senior Portfolio Designer, shares his investment insights for the week ahead.
The economy continues to operate as a tale of two tapes. On one side, geopolitical turmoil keeps aggravating an already sticky inflation picture and limits how much the Fed can afford to look through. On the other, the underlying economy keeps grinding forward, with manufacturing now in its eighth consecutive month of expansion.
This week we look at the cause and the consequence. Renewed conflict between the U.S. and Iran pushed energy prices to a six-week high. That, combined with inflation that has stopped moving toward target, has sharply increased the odds of a rate hike when the Fed meets later this month, even as hiring has clearly cooled, which is precisely what makes the decision a difficult one.
Beneath both stories, the real economy has held up better than the headlines suggest. Both forces are real, and this week’s data does not resolve the tension between them.
1. Oil Prices Whipsaw as Conflicts with Iran Reignite
Oil shot to a 6-week high this week, with Brent Crude sitting at nearly $96 per barrel at the time of this writing, representing a nearly 42% increase over the past year.
Earlier this week, the U.S. carried out further strikes on Iran and threatened further devastating attacks. Iran retaliated, targeting U.S. assets in neighboring countries. These are the first attacks in nearly a month and have further complicated an already fragile effort to end the conflict in the Middle East. As a result, the Strait of Hormuz, the primary shipping lane for a fifth of the world’s oil supply, has once again seen a significant drop-off in traffic, adding stress to an already stressed global oil supply.
The traffic data captures the instability better than the price does. Energy Secretary Chris Wright noted that 17 million barrels moved through the Strait on Monday, the highest daily volume since the war began. By Tuesday, vessel transits had fallen to four, down from ten the day prior. The result was record throughput one day, and a bear standstill the next. This highlights the volatility that market participants are attempting to price.
The chart below shows the price of Brent over the past year. Prices have moved in tandem with attacks in the area. Each round of negotiations has been fragile and short-lived, and the resulting volatility has been substantial. This is reflected in inflation data as well. Energy prices have been a catalyst for the recent inflation resurgence this year.
Where this becomes tangible for households is in the home and at the pump. Gasoline prices are up nearly 56% over the past year, and heating oil has roughly doubled. This is a meaningful consideration heading into the winter months. Notably, natural gas is down slightly over the same period, which tells us this is a geopolitically driven oil shock rather than broad-based energy inflation.
This presents a very unique problem for the Federal Reserve. Higher interest rates can cool demand, but they cannot reopen a shipping lane or produce additional barrels of oil.
Bottom Line: Sticky inflation has been a headwind for markets for several years now. Coming into the year, it looked like a story of when inflation returns to 2%, not if. A resilient consumer and strong corporate earnings have allowed the market to weather that storm. The conflict with Iran has introduced a new problem, and it operates on a different timeline and responds to different levers.
Energy costs are now the most immediate constraint on households, and the winter months will make that more apparent if this persists. The important thing to remember is that the volatility we’ve seen in the last six months cuts both directions. Prices fell nearly 20% in a single month when a ceasefire looked plausible and shot back up to over $100 a barrel when it didn’t. Six months in, the only consistent feature of the conflict is how quickly the picture changes. Until a durable resolution is in place, energy prices and the inflation data that follows will keep moving the headlines.
2. The Fed Draws a Hard Line on Inflation
Newly appointed Federal Reserve Chairman Kevin Warsh made waves last week with his comments in Jackson Hole. He made it clear that the Fed views inflation returning to 2% as a target, not a goal. The comments made one thing clear: the Fed has one mandate in this economic environment, and it’s inflation. Coming on the heels of an inflation print that showed persistent inflation, the odds of a rate hike at the September FOMC meeting have dramatically shifted. The recent hawkish rhetoric from Warsh increased the probability of a rate hike at the September meeting to almost 65% from around 35% the week before.
Warsh’s remarks did not come from a Committee that needed much convincing. The July decision to hold rates was a 9-3 vote, with three members dissenting in favor of a rate increase. Additionally, in the June predictions, 9 of 19 participants expected at least one rate hike by year-end. The Chairman’s comments clarified a direction that a meaningful share of the Committee has already signaled.
The market’s skepticism had a visible cost. When the Fed held rates in July, long-term yields rose rather than fell. The opposite of the usual response, and a sign investors read the hold as a Committee unwilling to defend its own target. Warsh’s July press conference did little to help, repeatedly pointing to bond yields when asked how the Fed would address inflation. Jackson Hole was the correction, and the 10-year at 4.80% and 30-year near 5.29% reflect a market still demanding compensation for that uncertainty.
The target rate currently sits at 3.50%-3.75%, and PCE, the Fed’s preferred measure of inflation, sits at 3.7%. That creates a real policy rate of around 0%. This would indicate that the current policy rate isn’t restrictive, which leaves room for a rate hike to help subdue inflation.
Bottom Line: The probability of a rate hike moved from roughly 35% to nearly 65% in a matter of days, but almost nothing changed about the inflation data itself. PCE was already sitting at 3.7%, and the labor market was already cooling. What changed was the market’s understanding of how the Fed intends to respond to the information it already had. With inflation and the target rate running at nearly the same level, the real rate is virtually 0%. Warsh’s message was that this is no longer an acceptable place to be. Inflation isn’t moving, so it naturally points back to rates.
3. Manufacturing Continues to Expand
While the headlines have focused on oil and the Fed, the factory data has quietly held up. The ISM Manufacturing PMI came in at 54.6 in August, down a point from July and modestly below consensus, but still the second-best reading since May 2022, and above 50 every month so far this year. Readings above 50 indicate expansion, and ISM estimates that a 54.6 print corresponds with roughly 2.4% annualized real GDP growth.
All five subindexes remained in expansion territory. Production was the standout at 58.3, essentially unchanged from July, meaning factories kept output up even as order growth cooled. New orders eased to 53.7 and employment to 51.2. This was a softer reading, but both were still growing. The separate S&P Global U.S. Manufacturing PMI was unchanged at 53.9, slightly above consensus, with firms in that survey reporting that hiring picked up, input cost inflation eased to a five-month low, and business optimism climbed to a three-month high on expectations of sustained demand and a reduced impact from the Iran war.
The labor data released this week fits the same picture. Job openings edged up to 7.3 million in July, and the ratio of openings to unemployed workers rose to 1.05 from 1.01. This is the highest reading since January 2025. Hires and separations both fell, continuing a low-hire, low-fire pattern. That is a labor market near balance rather than one under strain, and importantly, it is not currently a source of additional upward pressure on inflation.
One component runs counter to the theme. The ISM Prices Index held at 71.1, off the peak levels seen earlier this year but still elevated relative to a year ago. This is consistent with the sticky inflation discussed earlier. Manufacturers are producing and hiring, but they are still paying up for inputs.
Bottom Line: Eight straight months of manufacturing expansion is a meaningful signal in an economy absorbing an energy shock, a new tariff regime, and the prospect of tighter monetary policy. Growth has moderated, but moderation from a strong level is a different thing than deterioration. The more encouraging detail may be the improvement in business optimism, which reflects expectations of steadier demand and a diminishing drag from the Iran conflict. Businesses closest to the real economy are still investing and still hiring, and that is the foundation everything else in this brief is built on.
Closing Thoughts
Three stories, one question. Can an economy this resilient absorb an energy shock without letting it settle into prices? Manufacturing suggests the underlying economy can take the hit. The Fed appears unwilling to wait and find out.
We believe the thing to watch after this month’s FOMC meeting is the long end of the curve. Short rates are the Fed’s decision. Long rates are the market’s verdict on whether that decision is credible. When the Fed held in July, the long end moved against it. If a hike restores confidence, short rates go up while long rates settle down. That would tell you it’s working.
This has been a year of war, tariffs, and an inflation scare, and the economy has kept growing through all of it. That’s worth keeping in mind the next time a headline suggests otherwise.
