Markets Retreat from Highs Amid Inflation Concerns and Budget Tensions

Equity markets began the week with strength, setting fresh record highs on Monday. However, momentum faded sharply, and by Friday all three major U.S. stock indexes—S&P 500, NASDAQ, and Dow—closed slightly lower for the week, breaking a seven-week stretch where gains outpaced losses. The S&P 500 slipped 0.3%, the NASDAQ dropped 0.6%, and the Dow edged down 0.1%.

Market participants began repositioning after three consecutive days of selling, prompted by concerns over a steady uptick in inflation and renewed budget brinksmanship in Washington. The U.S. economy, meanwhile, showed signs of resilience, with an upgraded GDP print for Q2 adding some cushion to risk sentiment.

Fed’s Preferred Inflation Metric Heats Up

August’s PCE Index, the Federal Reserve’s inflation gauge of choice, rose 2.7% year-over-year, ticking up from 2.6% in July and marking the highest level in six months. Core PCE, which strips out volatile food and energy prices, held steady at 2.9%. Although in line with expectations, the data suggests inflation is proving sticky just as policymakers are preparing their final decisions on rates for the year.

This development complicates the macroeconomic picture. Yields across the curve fell slightly—most notably the 2-year, down 59 basis points year-to-date—hinting that markets still expect the Fed to remain on pause. However, fixed income total returns posted mild losses for the week as rate uncertainty persisted.