Fed Rate Hike Odds Hit 89% as AI Stocks Slide, Oil Supply Risks Rise, Anthropic Eyes IPO

Market Overview

Global markets entered Monday focused on three major themes.

First, U.S. equities staged a broad rebound on Friday, with the S&P 500 closing at 7,656.98, up 0.86%, while the Dow Jones Industrial Average gained 0.98% and the Nasdaq Composite rose 0.96%. However, sentiment toward the AI trade weakened in early Monday trading after both OpenAI and Anthropic signaled plans to slow the pace of AI development. S&P 500 futures fell 0.6%, while Nasdaq-100 futures dropped 1%, putting renewed pressure on expectations surrounding AI-related stocks.

Second, U.S. core CPI inflation slowed to 2.4% year over year in August, its lowest level in five and a half years, although the 0.3% monthly increase came in relatively hot. Traders raised the implied probability of a 25-basis-point Federal Reserve rate hike this week from 69% to 89%, bringing expectations close to 90%. Meanwhile, the Bank of Japan is expected to raise its policy rate to 1.25%, which would mark a 30-year high. With several G7 central banks set to announce policy decisions, markets are heading into a pivotal week for global monetary policy.

Third, Saudi Arabia's East-West crude oil pipeline was shut down following a drone attack. With inventories at export terminals reportedly sufficient to cover only five to seven days of shipments, the disruption could potentially create a supply shortfall equivalent to roughly 4% of global supply. WTI crude fell 2.00% on Friday to settle at $100.44 per barrel, but still posted a weekly gain of approximately 9%.

In corporate news, Anthropic has selected Nasdaq as the venue for a potentially massive IPO that could move forward as early as this fall. Nvidia CEO Jensen Huang is also reportedly in talks over an investment of up to $10 billion in the AI company. Meanwhile, Chinese AI firm Zhipu has completed a financing round worth approximately $5 billion.

Key Themes to WatchG7 Central Bank Week and the Rate-Hike Outlook

U.S. core CPI inflation fell to a five-and-a-half-year low in August, but stronger-than-expected month-over-month inflation has pushed market expectations for a Federal Reserve rate hike this week to nearly 90%.

The Fed will not be the only major central bank in focus. The Bank of Japan, Bank of England, and European Central Bank are also scheduled to announce policy decisions this week. If the world's major economies collectively reinforce a more hawkish policy stance, volatility in global bond yields and foreign exchange markets could intensify.

The key focus will therefore be less on the individual rate hikes themselves and more on the Fed's updated dot plot and the language policymakers use to describe the persistence of inflation.

Middle East Chokepoints and Oil Supply Risks

The shutdown of Saudi Arabia's East-West oil pipeline following a drone attack, combined with export-terminal inventories sufficient for only five to seven days of shipments, has sharply increased tail risks on the supply side of the crude oil market.

At the same time, escalating concerns surrounding both the Bab el-Mandeb and Strait of Hormuz are adding another layer of risk to global energy flows. If the Saudi pipeline cannot be restored quickly, a potential supply shortfall equivalent to roughly 4% of global supply could be enough to drive oil prices sharply higher again after their roughly 9% gain over the past week.

Investors should closely monitor progress on pipeline repairs, negotiations in Oman between Iran and Gulf states over safe passage through the Strait of Hormuz, as well as potential knock-on effects on tanker freight rates and maritime insurance costs.

Key Events and Developments

• Federal Reserve Rate Decision: The Fed is set to announce its policy decision this week, with markets pricing in nearly a 90% probability of a 25-basis-point rate hike.

• Critical Week for G7 Central Banks: The Bank of Japan is expected to raise its policy rate to 1.25%, which would mark its highest level in 30 years.

• Saudi Oil Pipeline Disruption: Saudi Arabia's East-West oil pipeline has been shut down following a drone attack, while Iran and Gulf states are heading to Oman for talks on a Strait of Hormuz transit agreement.

• Anthropic Eyes Major Nasdaq IPO: Anthropic has selected Nasdaq for a potentially massive IPO targeted for this fall, while Nvidia is reportedly discussing an investment of up to $10 billion.