Good morning Traders and Quants! U.S. equities closed Friday on a firmer footing, shaking off midweek jitters after August’s PCE inflation report landed exactly in line with expectations. The S&P 500 and Nasdaq snapped a three-day losing streak, while the Dow also advanced, helped by a rebound in utilities, consumer discretionary, and healthcare. Staples lagged, but breadth was broad enough that all eleven S&P sectors managed gains. That strength provided a reset into quarter-end, though the rally came on light volumes, signaling relief more than conviction.

Bond markets told a more nuanced story. The 10-year yield climbed to 4.18%, up from its early-month low of 4.0% and marking seven gains in the last eight sessions. The move reflected firmer consumer spending data alongside the steady inflation print. 

Traders continue to weigh the Fed’s easing bias against sticky shelter and services costs, and with supply-heavy issuance calendars ahead, duration risk remains elevated. Meanwhile, the dollar lost ground, particularly against the yen and euro, unwinding part of its Thursday surge. 

Commodities were active: oil prices pushed higher after reports of Russian fuel-export cuts tied to Ukrainian strikes, with WTI logging its best weekly gain in three months. Gold rose for a sixth consecutive week, buoyed by geopolitical hedging and lingering inflation anxieties, with futures settling above $3,800.

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As traders open the books on Monday, attention turns to whether Friday’s rebound can carry into the quarter-end. Futures are pointing to a higher open this morning, but positioning remains cautious ahead of looming macro and policy catalysts. The government shutdown deadline sits just hours away, with agencies preparing contingency plans if Congress and the White House fail to strike a deal by tomorrow. Traders worry about the impact on data releases and sentiment, though shutdowns have historically had muted direct effects on equities.

Tariffs are the other story to watch. Trump’s sweeping levies, 25% on heavy trucks, 50% on cabinets and vanities, 30% on upholstered furniture, and a surprising 100% tariff on branded drugs unless companies build U.S. plants, are rattling corporates and forcing supply chain recalculations. Reports suggest semiconductors could be next, with the administration weighing rules to match domestic production with imports. Asia already showed stress, with pharma stocks dragging regional indices lower overnight.

Credit markets are also in focus. High-yield issuance remains robust, but that strength has traders uneasy about complacency creeping back into risk pricing. Goldman’s strategists upgraded their equities view, citing low recession risk and resilient consumption, but hedge funds logged their biggest EM selloff in five months, signaling global caution beneath the surface. For today, expect rotation themes to dominate, energy is benefitting from geopolitical tailwinds, while defensives could see support if yields push higher. Traders will also parse Fed speakers for clues on how tariffs and sticky services inflation shape the rate path into October.

The Fed’s internal debate remains front and center, with Friday’s PCE keeping the door open for another cut this year but far from settling the outlook. Core inflation stuck at 2.9% is well above target, yet policymakers remain focused on a labor market that is cooling without collapsing. Cleveland Fed President Beth Hammack highlighted that tariffs could add fresh complexity to the disinflation process, warning against complacency. By contrast, more dovish voices argue that unemployment at 4.3% and softening job creation argue for faster easing. This split leaves markets glued to incremental data, particularly labor reports and services inflation prints, before the October meeting.

Beyond the U.S., central banks are navigating similarly tricky waters. The ECB faces the dual challenge of slowing growth and elevated energy costs, while the BOJ’s policy ambiguity keeps the yen volatile and intervention risk alive. The Swiss National Bank paused after a series of cuts, pointing to tariff-driven risks as justification. Investors continue to debate whether this is a synchronized global easing cycle or a staggered patchwork of responses. 

For fixed income markets, the implication is straightforward: being a “buyer” of Treasuries means betting on weaker growth and lower yields, driving bond prices up. Being a “seller” signals expectation of stickier inflation or heavier issuance, pushing yields higher. With the 10-year yield grinding up nearly 13bps in the last two weeks, the market is currently leaning toward caution on inflation risks, even as equities find room to rally.

Geopolitics remains a swing factor. In Washington, the Pentagon is seeking to double missile production, citing potential conflict with China and rising strain on munitions stockpiles. This signals not just a shift in defense budgeting but also a structural tailwind for defense contractors, though the budget debate in Congress complicates the outlook. 

NATO, meanwhile, faces new tests as Russian drones crossed into Polish and Danish skies, exposing gaps in air defenses. The alliance is scrambling to accelerate counter-drone technology, but officials acknowledge the asymmetry: cheap UAVs are forcing expensive defensive responses. Analysts warn Moscow is deliberately exploiting this mismatch to drain Western resources.

Elsewhere, Russia’s efforts to extend influence in Africa appear to be unraveling. Once hailed as a cornerstone of Moscow’s global strategy, its ventures are running into financing shortfalls, operational challenges, and shifting alliances. For markets, the takeaway is twofold: Europe remains in the crosshairs of hybrid warfare, while Russia’s broader global reach may be less durable than headlines suggest. 

In commodities, these dynamics matter directly. Ukraine’s attacks on Russian energy infrastructure have already forced Moscow to curtail exports, contributing to oil’s climb last week. Gold’s rally reflects the same dynamic—investors hedging against a widening set of geopolitical stress points. Together, these developments reinforce the reality that markets cannot disentangle inflation, growth, and geopolitics, rather they are increasingly intertwined.

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Shutdown brinkmanship is back, with the September 30 deadline just a day away. Trump is pressing Democrats for immigration concessions and tighter spending caps, while Democrats warn of delayed FEMA response and healthcare disruption. Agencies are preparing for furloughs and data delays, which markets will need to factor in if funding lapses. 

The tariff announcements add another layer of complexity, with corporates scrambling to adapt to shifting cost structures. Pharma and semis in particular are bracing for long-term supply chain rewiring, while furniture and truck makers eye short-term pricing power. Policy risk is becoming a constant driver of market volatility, leaving investors wary of overconfidence.

Markets enter the final stretch of September on firmer footing after Friday’s relief rally, but the setup is far from straightforward. Inflation is holding steady, consumption is still humming, and corporate earnings expectations remain solid, all of which underpin Goldman’s fresh call that recession risk looks low. In contrast to those bullish forces, credit spreads are flashing signs of unease, hedge funds are unwinding EM risk, and positioning is stretched with cash allocations at multi-year lows. That leaves little margin for error heading into the quarter-end.

Policy uncertainty is another weight. A government shutdown at midnight tomorrow would freeze parts of the federal apparatus, inject noise into economic data flow, and add to the sense that fiscal policy is drifting toward brinkmanship. Tariffs are compounding the complexity, testing already-fragile supply chains. For the Fed, that means a delicate balancing act, supporting a cooling labor market without reigniting inflation that has yet to return to target.

The takeaway: momentum remains on the bulls’ side, but it is powered by narrow breadth and fragile assumptions about growth, policy, and stability. Traders will be watching whether quarter-end flows extend Friday’s rebound or whether the convergence of shutdown drama, tariff fallout, and data releases resets the tone as October begins.