Global markets ended the week on a cautious note after Federal Reserve Chair Kevin Warsh signaled that another interest rate increase could be needed if U.S. inflation remains above the central bank’s 2% target.
His comments at the Federal Reserve’s annual Jackson Hole symposium quickly changed market expectations. The probability of a rate hike at the Fed’s September meeting rose to 55.7% on Friday from 35.4% a day earlier, according to CME Group’s FedWatch tool.
The shift was visible in the bond market as well. The yield on the two-year U.S. Treasury note ended Friday at around 4.34%, while the 30-year yield was about 5.17%. The longer-term yield had traded above 5.3% earlier in August.
U.S. stocks also moved lower. The Dow Jones Industrial Average fell 0.02% to 53,559.99, while the S&P 500 lost 0.25% to 7,711.76. The Nasdaq Composite declined 0.52% to 26,402.42. Small-cap stocks came under heavier pressure, with the Russell 2000 falling 1.4%.
The broader MSCI global equity index slipped 0.13%. Technology and small-cap stocks were particularly sensitive to the shift in rate expectations as investors reassessed the outlook for borrowing costs and economic growth.
The dollar, meanwhile, posted its strongest one-day gain in roughly two and a half months as traders adjusted their expectations for U.S. monetary policy. Bitcoin fell 3.34%, while gold dropped 3.19% and silver declined 4.3%.
Investor flows had already shown a more cautious tone in the days leading up to Warsh’s speech. Global equity funds recorded $5.87 billion in net outflows in the week through August 26, ending a 13-week streak of inflows. U.S. equity funds accounted for $22.33 billion in net withdrawals, while European equity funds attracted $7.92 billion and Asian equity funds received $4.8 billion.
Bond funds continued to attract capital, recording $10.25 billion in inflows during the week. Short-term bond funds drew $6.29 billion, their strongest weekly inflow in seven weeks.
Emerging-market funds remained relatively resilient. Equity funds focused on emerging markets attracted $709 million, while emerging-market bond funds received $956 million during the same week.
Commodity funds also saw strong demand, attracting $4.21 billion, their largest weekly inflow in six months. Much of the demand was concentrated in precious metals, despite the sharp decline in gold and silver prices on Friday.
Oil prices moved lower as markets weighed monetary policy expectations alongside developments around the Strait of Hormuz. Brent crude fell 0.43% on Friday and WTI declined 0.16%, leaving them down more than 5% and 4%, respectively, for the week.
The latest moves leave markets balancing a stronger dollar, higher Treasury yields and weaker equities against continued flows into bonds, commodities and emerging-market assets. Investors are now reassessing how far U.S. interest rates may need to rise as inflation remains a key concern.
