Weekly Newsletter September 1st to September 5th
RECAPPING LAST WEEK
U.S. equity indices recovered from a sharp drop to start the holiday-shortened week, racing to record highs before easing slightly after the latest employment data reinforced the likelihood of upcoming interest rate cuts. The Nasdaq Composite and Russell 2000 indices each rose around 1% while the S&P500 posted a marginal gain for the week. Treasury yields and the U.S. dollar tumbled on Friday after August’s non-farm payrolls increased by just 22,000 and the unemployment rate ticked up to 4.3%. The 10-year yield settled near 4.08%, breaking below a key technical support level near 4.20%. Gold futures soared nearly 4% to new all-time highs as fed funds futures moved closer to pricing in three rate cuts this year. Additional data suggested that the U.S. labor market has been weakening more than previously thought. Last month, job openings fell below the level of those seeking employment for the first time in more than four years, while private payrolls increased less than expected and layoffs were on the rise. While the weaker jobs data increased the probability for rate cuts beyond this month’s FOMC meeting, it also heightened concerns of a broader economic slowdown developing. Earlier last week, equities sold off after a federal appeals court ruled that most of the tariffs imposed by the current U.S. administration were illegal, calling into question the hundreds of billions of dollars in revenue already generated. Rising long-term government bond yields around the globe also rattled investors as budget deficits came into focus. In other economic news, ISM manufacturing PMI remained below the 50-level expansion threshold, although last month’s new orders rose to 51.4 from 48.7. Tariffs remained a headwind with the prices paid index coming in at a still-elevated 63.7. ISM services PMI climbed to 52.0 but also revealed cost pressures. Finally, reports indicated that OPEC+ was likely to consider another production increase at their upcoming meeting over the weekend. The potential for higher supply, along with prospects of a slowing U.S. economy, sent crude oil lower by 3% to $62 per barrel. Overseas, Eurozone inflation rose slightly last month to 2.1% YoY, likely keeping the ECB in a holding pattern on rates in the near term. Core CPI was flat at 2.3% YoY while services inflation ticked down to 3.1%. In the UK, Prime Minister Starmer’s Labour party took another hit with the resignation of Deputy PM Rayner over a tax issue. Yields on the country’s 30-year gilts reached 5.68%–the highest level since 1998—as the government struggles to plug a large fiscal hole in its upcoming budget. Questions about the reliability of official economic data also surfaced after retail sales growth in the first half of 2025 was revised down to 1.1% from 1.7%, with statisticians discovering mistakes in seasonal adjustments.
THE WEEK AHEAD
With a rate cut at the next FOMC meeting being essentially priced in, the CPI and PPI releases this week will likely do little to alter that assumption, unless the readings are glaringly above expectations. For now, labor market concerns trump any modestly above-target inflation readings. However, the inflation reports will still be important for setting the tone in the Fed’s upcoming statement, especially if officials feel that tariffs may have a more lasting effect on consumer prices. Friday preliminary consumer sentiment reading for September will also be closely monitored for evolving inflation expectations. Auctions of 10- and 30-year Treasuries will arrive on the heels of last week’s jitters surrounding long-term government debt. Consumer credit figures and small business sentiment round out the domestic calendar. The Fed’s blackout period begins this weekend so there won’t be any commentary from FOMC members until the September 17 meeting. Overseas, the European Central Bank is expected to hold rates steady at Thursday’s meeting, with the next cut not being priced in until March 2026 at the earliest. This could continue to support the euro as the U.S. dollar slides from anticipated falling rates. Elsewhere, the UK releases monthly GDP numbers while China has trade balance and inflation figures on the docket.
CHART OF THE WEEK
The rule of 16
The Cboe volatility index (VIX) is a weighted measure of the implied volatility of S&P 500 index (SPX) options. One perspective is that VIX reflects the expectation of movement in SPX. With VIX at 15.6 last week, how would that be interpreted for anticipated daily SPX moves? A formula known as the “Rule of 16” alongside plotting the average true range (ATR) on SPX can help facilitate this conversion and confirmation. Accounting for daily moves involves taking the square root of 252—the typical number of trading days in a year. While the actual square root equals 15.87, conventional rounding allows for a simple formula: VIX level, divided by 16, to provide the daily expected move for SPX. A VIX at 16, as was the case multiple days last week, would imply around a 1% expected daily movement. By contrast, VIX at 48 in April implied a 3% daily SPX movement. The ATR indicator measures the average range of price moves over a specific time frame, with a default setting of 14 periods. The SPX daily ATR achieved a high of 198 in April, with the index at $5,268. This validates that the actual average daily move of SPX was consistent with what VIX implied (198/5268 = 3.7%). As of last week, an ATR of 52 with SPX at $6,475 shows statistical SPX movement at 0.8% daily over the most recent 14-day duration. While neither the VIX “Rule of 16” nor the ATR indicator provides a directional bias, each metric can potentially help when assessing both expected and realized volatility.
Source: Charles Schwab Corporation
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