Rate Hikes, Tariffs and a Momentum Hangover

David Halseth
Aug 30
2 min read

For the week ended 8/29/26.

Welcome to September, when cooler weather and football return - and, apparently, so does talk of higher interest rates.

Federal Reserve Chairman Kevin Warsh surprised investors Friday by sounding considerably more concerned about inflation than many expected. His suggestion that the Fed may have more “work to do” suddenly put a September rate hike firmly on the table. Interest-rate futures now imply roughly a 58% probability of an increase at the Fed’s next meeting, up from 35% just one day earlier. Subtle, it was not.

Short-term Treasury yields jumped sharply following the remarks, while longer-term yields rose more modestly. Interestingly, Warsh’s hawkish tone also eased concerns that the Fed might hesitate to raise rates because of pressure from President Trump. In other words, the message reinforced the Fed’s independence – but may have created a new problem. Warsh has now set expectations so firmly that the Fed could face pressure to raise rates next month even if incoming data begins to weaken. The tightrope remains; only the person walking it has changed.

Meanwhile, the tariff roller coaster continues north of the border. President Trump’s new 50% tariffs on roughly $20 billion of Canadian goods are threatening smaller Canadian exporters already struggling with five consecutive quarters of declining business investment. Canada plans retaliatory tariffs on U.S. goods beginning September 8. Trade wars are easy to start, difficult to control and generally paid for by businesses and consumers on both sides. Quite the bargain.

Momentum stocks are also experiencing a spectacular hangover. After surging a record 44% in the second quarter, the S&P 500 Momentum Index has fallen more than 9% since July 1, even as the broader S&P 500 gained 2.8%. Speculators have also built some of the largest net short positions against Nasdaq-100 futures in two decades. Apparently, “buy whatever is going up” works wonderfully – right up until it doesn’t.

For the week, domestic stocks led with a 0.5% gain, followed by liquid alternatives at 0.2% and bonds at 0.1%. Commodities slipped 0.1%, while publicly traded real estate fell 1.2%. Year-to-date, commodities remain far ahead at 30.9%, followed by foreign stocks at 17.4% and real estate at 14.7%. Bonds are the lone asset class in negative territory, down 0.2%.

This week brings August manufacturing and services PMIs, followed by Friday’s unemployment rate and nonfarm payroll report. Those numbers may determine whether September delivers a rate hike – or merely another market head fake.

Enjoy the cooler weather, football and, hopefully, a quieter news cycle. One can dream.