Market snapshot: all eyes on Fed as US inflation rises, AI leaders call for slowdown

US markets rallied on Friday but remained down for the week, and the immediate prospects are no brighter following some concerning developments over the weekend.

The Consumer Price Index (CPI) showed that inflation had risen by 0.4% in August, annualised to 3.4% and, while the reading was in line with estimates, it was warm enough to all but ensure an interest rate hike from the Federal Reserve later this week. Traders are pricing in a near 90% probability of a rate rise, which then leads to the question of whether it will mark the beginning of a tightening cycle, since historically the Fed rarely makes interest rate adjustments in isolation.

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However, the market optimism could prove to be short-lived. Two separate interviews on Saturday from the CEOs of rivals OpenAI and Anthropic threw some cold water on the current state of play. OpenAI revealed that it would not be proceeding with its IPO this year, on the basis that it would be “ill-advised”, and Anthropic advised that the pace of AI innovation needs to slow because of safety concerns. Of course, even if Anthropic and others in the US went down that route, the “toughest dilemma” would then remain as to whether China and others would follow suit. It also brings into question whether the tsunami of investment may be starting to peak in that space.

The weekend was also punctuated by a further 2% oil price spike overnight on Sunday to leave the price hovering around $107 per barrel. This followed reports that Saudi Arabia had temporarily closed a key pipeline which had been used to bypass the Strait of Hormuz following drone attacks launched from Iraq. This East-West pipeline, which links the Gulf to the Red Sea, had been moving several million barrels each day and inevitably causes additional supply constraints.

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The development also suggests that the conflict is as far away from resolution as ever, and the inflationary impacts of elevated oil (and derivative) products are starting to become keenly felt. The CPI report in the US, for example, showed that the major driver of the August inflation increase was gasoline, which increased by 3.9% over the month.

The cumulative impact has left Dow futures pointing lower, with the Nasdaq currently looking likely to open around 1.3% in the red, more than reversing Friday’s gains. Nonetheless, in the year to date the main indices remain strongly higher, with the Nasdaq’s 13.3% gain complemented by rises of 9.4% and 11.9% for the Dow Jones and S&P 500 respectively.

The FTSE 100 opened defiantly higher, despite the headwinds of weaker copper and gold prices which weighed on the likes of Antofagasta (LSE:ANTO) and Fresnillo (LSE:FRES) respectively. International Consolidated Airlines Group SA (LSE:IAG) was an inevitable loser from the higher oil price, although conversely BP (LSE:BP.) and Shell (LSE:SHEL) firmed as a result. Other opposing forces came through on the limited index exposure to the tech trade, as Polar Capital Holdings (LSE:POLR) fell on the renewed AI concerns although Sage Group (The) (LSE:SGE) rose, potentially in response to its cybersecurity expertise which could become more of a focus if the hyperscalers retrench.

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GSK (LSE:GSK) rose on the back of some promising news on its lung cancer trials in China, with a small read across to the rest of the sector. The overall gain for the primary index consolidated its punchy returns, and the FTSE 100 is now ahead by 7.8% in the year to date, with an average dividend yield of 3.1% across the index providing additional underlying insurance.