U.S. equities finished the week higher despite a continued rise in Treasury yields amid ongoing concerns over elevated inflation and strong economic data. President Trump and President Xi met and agreed to extend the existing trade truce by two months, to early January 2027, allowing for further negotiations over tariffs, agricultural purchases and rare earths thereby reducing the near term risk of further trade tensions. For the week, the S&P 500 gained 1.2%, the Nasdaq Composite advanced 2.1%, and the Dow added 0.3%. Small caps did not participate in the rally, with the Russell 2K declining 0.8%, while the S&P MidCap 400 was essentially unchanged. Market leadership continued to be narrow with large-cap growth, up 2.4% on the week, returning to the leadership position as investors sought out “durable” growth stories in the secular AI buildout trade.

Technology (XLK) and communication services (XLC) led the advance, up 3.6% and 2.3% respectively, as excitement over Meta's rollout of its Muse AI agent provided investors with a tangible example of potential AI monetization. Semiconductor and infrastructure-related companies also benefited as investors focused on the computing capacity likely to be required by increasingly sophisticated and numerous AI agents. AI-related stocks have repeatedly absorbed negative headlines, concerns over spending, regulation and valuations, only to attract buyers again when evidence of adoption or monetization emerges. That strength has helped keep the capitalization-weighted S&P 500 near record levels, even as broader participation has weakened. Utilities (XLU) and Energy (XLE) were the big sector losers, both down ~3%, as higher fixed income yields and a potential thawing of tensions in the Iran war weighed on investor enthusiasm.

Economic data continued to show a resilient US economy. S&P Global's flash U.S. composite PMI increased to 58.4 in September from 58.0 in August, its highest level in more than five years. Services activity accelerated to 58.7, while manufacturing PMI rose sharply to 57.0 from 53.9. New orders and production were particularly strong. However, input costs also accelerated to their highest rate since October 2022, increasing concerns that stronger demand, and higher oil prices, could prolong inflation pressures. Initial jobless claims of 197K likewise remained consistent with a relatively firm labor market.

The bond market continued to demand higher yields as several Fed officials emphasized that inflation remains too high and that additional tightening may be necessary. The 10-year Treasury yield climbed above 5.2% during the week, while the 30-year yield moved above 5.5%, its highest level since 2004. Demand at both the five-year and seven-year Treasury auctions was weak, particularly from foreign buyers, reinforcing concerns about the amount of yield investors may require to absorb increased government issuance. Rising yields are partly a function of economic growth, a good outcome for equities, but also sticky inflation, expectations for additional Fed tightening and a lack of forward guidance from Fed Chair Warsh.

WTI crude fell below $93/barrel Friday morning after trading above $100 earlier in the month, as hopes for progress in the U.S.-Iran conflict and improving Middle East supply flows reduced fears of prolonged shortages. Lower oil prices helped Treasury yields retreat from their weekly highs on Friday, although any talks should be treated as tentative, at best. Gold declined ~3% amid rising Treasury yields, a stronger dollar and expectations for additional Fed tightening which reduces demand for the non-yielding metal.

European equities advanced modestly despite many of the same bond-market pressures affecting U.S. investors. The STOXX Europe 600 rose 0.5%, Germany's DAX gained 0.4%, France's CAC 40 advanced 0.2%, and the UK's FTSE 100 gained 0.3%. Improving economic data helped offset concerns over energy prices and the possibility of tighter monetary policy. Eurozone business activity strengthened more than expected, with the September composite PMI rising to 53.1 from 52.0. German activity improved and French business activity returned to expansion for the first time in 10 months. However, input costs and selling prices increased at their fastest pace in four months, creating the same growth-versus-inflation tension confronting policymakers in the U.S. German business confidence also improved for a fifth consecutive month, although consumer sentiment remained weak.

Japanese equities were higher as the Nikkei 225 gained 2.1% and the TOPIX rose 0.9% despite trading for only two sessions because of national holidays. AI and semiconductor-related shares led the advance as Japanese markets caught up with strength in U.S. technology stocks, while banks benefited from higher domestic bond yields. Japanese government bond yields continued to rise, with the 10-year JGB yield reaching approximately 3.09% from 2.99% the prior week. The yen weakened beyond 158 per USD before rebounding Friday as investors remained alert to possible government intervention. The Bank of Japan's recent rate increase has not prevented yen weakness, and officials continue to signal concern about excessive currency depreciation.

Chinese equities were lower as the CSI 300 fell 1.5% and the Shanghai Composite declined 0.6% through Thursday before mainland markets closed Friday for the Mid-Autumn Festival. Growth and technology shares weakened as higher global yields, elevated oil prices and only limited progress from the U.S.-China summit weighed on sentiment. The extension of the U.S.-China trade truce through January offered some near-term stability, but significant disagreements remain over agricultural purchases, rare earths, technology restrictions and other trade commitments. The summit reduced immediate tail risk without materially changing the longer-term competitive relationship between the two countries. Hong Kong's Hang Seng fell 1%.