U.S. equities were mixed as investors digested the Federal Reserve's first rate hike since 2023, another move above 5% in the 10-year Treasury yield, and continued volatility in oil prices. The SPX slipped 0.1%, the Dow fell 1.7%, and the R2K declined 1.5%, while strength in semiconductors and other technology shares helped the Nasdaq gain 0.7%. Market leadership remained narrow with healthcare (XLV) and technology (XLK) the strongest areas of the market, gaining roughly 1.6% and 1.0%, respectively, while utilities (XLU) fell nearly 3% and financials (XLF) declined more than 2%. Growth outperformed value, while mid- and small-cap stocks lagged their large-cap counterparts. The underlying breadth was considerably weaker than the headline S&P 500 return suggested, with roughly three-quarters of U.S. stocks tracked by Morningstar declining for the week.

Technology stocks successfully absorbed a call for a slower pace of AI development owing to safety concerns from a number of industry leaders. Monday's reaction was sharp as the Philadelphia Semiconductor Index fell nearly 6% as investors questioned whether additional safeguards would temper the enormous capital-spending cycle. However, the selloff was not uniform across technology as Alphabet and Meta actually rose as investors considered whether slower AI development could reduce the extraordinary capital requirements facing hyperscalers. Likewise, software and cybersecurity stocks also benefited from the prospect of greater emphasis on AI safety. Investors returned aggressively to AI infrastructure names helping the Nasdaq gain 1.7% on Thursday, with AMD, Micron and other semiconductor stocks participating as investors concluded that safeguards could be implemented without a significant spending slowdown and President Trump refused to accept losing ground to China.

The dominant macro development was the FOMC's unanimous 25 bps rate hike, which raised the federal funds target range to 3.75%–4.00%. Updated Fed projections indicated policymakers expect another 25 bps increase before year-end, reinforcing the message that persistent inflation remains the central bank's primary concern. The 10-year Treasury yield briefly reached 5.04%, its highest level since 2007, and finished the week near 5.01%, up from 4.96%. The 2-year yield rose more sharply, to roughly 4.76% from 4.63%, implying a flatter yield curve. Equities historically have often struggled in the first several months following an initial Fed hike before subsequently recovering, although the pace of tightening has historically mattered as much as the hikes themselves.

Energy remained a major source of cross-asset volatility. WTI crude traded above $106 at one point as attacks on Saudi energy infrastructure raised concerns about supply through the region, before easing later in the week. WTI ultimately settled Friday near $100.30/barrel, up about 0.2% for the week, while Brent slipped roughly 0.7%. Elevated energy and diesel prices are feeding directly into inflation expectations and the outlook for monetary policy.

Gold proved resilient despite the Fed hike and rising Treasury yields. Spot gold rose roughly 1% for the week to about $4,390/oz, snapping a three-week losing streak as the late-week pullback in crude reduced some inflation and rate concerns. Silver also strengthened, rising more than 3%.

European equities weakened as investors confronted the combination of higher oil prices, rising government bond yields and tighter global monetary policy. The STOXX Europe 600 declined 0.57%, Germany's DAX fell 1.03%, France's CAC 40 declined 1.40%, while the UK's FTSE 100 edged higher. Eurozone inflation accelerated to 3.2% y/y in August from 2.9%, with energy accounting for much of the increase, while core inflation was 2.4%. The Bank of England left rates unchanged at 3.75%, although three members favored an immediate hike.

Japanese equities were a notable outperformer. The Nikkei 225 rose 1.57% and the TOPIX gained 1.56%. The Bank of Japan raised its policy rate 25 bps to 1.25%, its highest level since 1995. The move was expected, but the 7–2 vote and relatively cautious forward guidance helped push the yen weaker rather than stronger; USD/JPY moved above 157 by the end of the week. Japan's core CPI eased to 1.7% y/y in August, while exports rose 19.3% y/y and imports jumped 28.0% as energy costs increased.

Chinese equities were mixed as the CSI 300 was marginally lower while the Shanghai Composite rose 0.61%. Technology shares recovered sharply late in the week, but economic data continued to highlight the divergence between resilient industrial production and weak domestic demand. August industrial production rose 5.2% y/y, while retail sales increased only 0.4% y/y and fixed-asset investment fell 7.2% through the first eight months of the year. New bank lending also came in well below expectations. Hong Kong underperformed, with the Hang Seng falling 0.22%.