Dow holds weekly gain as Warsh inflation warning lifts rate hike bets

The US stock market ended lower on Friday as investors assessed Federal Reserve Chair Kevin Warsh’s warning that recent inflation data had not shown enough improvement to alter the underlying trend.

The remarks increased expectations for a potential interest rate hike in September.

The S&P 500 fell 0.26% to 7,711.05, while the Nasdaq Composite dropped 0.53% to 26,400.56. The Dow Jones Industrial Average slipped 0.02% to 53,558.38.

Despite Friday’s declines, the Dow gained 0.5% for the week. The S&P 500 and Nasdaq fell 0.5% and 0.9%, respectively, over the same period.

Warsh comments lift rate hike expectations

Speaking at the Federal Reserve’s annual symposium in Jackson Hole, Wyoming, Warsh said recent PCE and CPI readings, while better than expected, did not indicate that underlying inflation trends had “meaningfully improved.”

He said the Federal Reserve needed to be confident that underlying inflation was moving toward its 2% target “clearly and at sufficient speed.” Otherwise, he said, the central bank still had work to do.

The comments prompted traders to increase their bets on a September rate hike.

According to CME Group’s FedWatch tool, the probability of a rate increase rose to around 57% on Friday from 35.4% a day earlier.

Treasury yields at the short end of the curve moved higher following the speech, while longer-term yields were roughly flat.

Mark Hackett, chief market strategist at Nationwide, said Warsh was reiterating the Fed’s hawkish stance rather than signaling an incremental change.

Bill Birmingham, managing director at REX Financial, similarly described the speech as a strong message about the Fed’s approach to inflation and monetary policy.

Chip stocks pull back

Technology stocks came under pressure, with semiconductor shares weighing on the Nasdaq. Nvidia declined, while Marvell Technology tumbled about 10% after its current-quarter non-GAAP gross margin guidance disappointed investors.

Marvell’s shares fell despite the company raising its 2027 revenue forecast. Investors remained concerned about the timing of revenue from its AI chip agreement with Alphabet.

The move followed a strong previous session for chip stocks, which had rallied after Nvidia issued a forecast signaling continued strength in AI-related demand.

Most megacap technology stocks were higher, however.

Alphabet gained, providing the biggest boost to the S&P 500’s communication services sector, while Apple also advanced. Salesforce extended its previous-session gains, supporting the Dow.

Gap jumps while Ulta and PayPal fall

Outside technology, Gap shares climbed after the retailer named industry veteran Michael Francis as the new chief executive of Old Navy and raised its annual profit forecast. The company’s shares gained despite a mixed quarterly report.

PayPal declined after Bloomberg News reported that a consortium involving Advent and Stripe had abandoned its pursuit of the payments company.

Ulta Beauty also fell after comparable sales growth slowed in the second quarter.

Investors additionally assessed consumer sentiment data. The final reading of the University of Michigan’s consumer sentiment survey came in at 51.7, slightly above economists’ estimate of 51.

With markets now closely split between a September rate hike and a hold, investors are likely to focus on upcoming inflation and employment data for further clues on the Federal Reserve’s next move.