Markets Scream Caution With Rate Hike All But Guaranteed
Last week was an eventful one. Hostilities escalated significantly in the Middle East. The Saudis shut down their critical east-west pipeline “temporarily,” following drone and missile attacks from the Houthis in Yemen, who also seized a key port on the Red Sea.
This puts another key global transit point at risk. Not surprisingly, oil prices surged last week. Diesel fuel moved to over $6 per gallon on average in the United States for the first time in history. In states like California, it has become even more expensive. Refineries are running at full capacity as Russia is no longer exporting diesel fuel and the refineries in the Gulf region has been impacted by recent events.
Both the August CPI and PPI rose .4% on a month-over-month basis last week. This all but cemented a 25 BPS rate hike at the FOMC meeting this week. Average 30-year mortgage rates shot above the 7% threshold, another shot across the bow to the moribund housing sector.
Home foreclosures rose 21% in the first six months of this year after hitting a seven year high late in 2025. I expect this critical economic engine to continue to deteriorate in the months ahead. The yield on the 10-year treasury looks destined to move past the 5% mark as the fiscal deficit is poised to surpass $2 trillion in FY2026.
This litany of bad news all but locks in a change of leadership in the House of Representatives after the upcoming midterm elections. It is close to a coin flip that the Senate also changes hands as well — more change investors will have to navigate in early 2027.
In the odd story of the week, a safety researcher that had worked for a few years at OpenAI before taking a similar position at OpenAI, quit in a high-profile departure. He publicly warned that there was a good chance that AI could morph into a potential Skynet situation. Somehow, this low-level, 20-something employee and his warning found themselves splashed across the pages of The Wall Street Journal and New York Post and airing on CNN and Joe Rogan’s show, despite no one knowing of this person prior to a week ago.
Then the CEO of Anthropic publicly called for development of frontier AI models to “slow down” and for coordination with China on this front. This motion was quickly seconded by Sam Altman and Elon Musk. Maybe I have become increasingly skeptical as I turned 60 this weekend, but I hardly think that these tech oligarchs have suddenly developed a deep caring for the hoi polloi of society.
I believe this coordinated messaging is signaling one of two things. These firms have realized there was little to no moat to developing AI models and want to set up a regulatory regime where only a few big firms (theirs) can afford the compliance costs. The second scenario is the acknowledgement that much cheaper Chinese AI models have been taking substantial market share in token utilization since these firms moved from a subscription based to usage-based model this spring. They have now become an existential threat. This effort would be the start of a push to set up some type of federal backstop. All in the name of “national security,” of course.
Obviously, neither scenario playing out would be a vote of confidence that the massive amount of investment in AI infrastructure will generate a significant return on that investment.
In summary, the markets are screaming caution right now, especially given the current valuations and extreme concentration of equites. Prudent investors should position their portfolios accordingly.
At the time of publication, Jensen had no positions in any securities mentioned.
