U.S. stocks rallied on Friday as falling oil prices helped improve market sentiment, even as Treasury yields moved higher following the latest inflation data.
The August CPI report came in broadly in line with expectations but showed slightly stronger core inflation, increasing the likelihood of another Federal Reserve rate hike.
U.S. Stocks Rally Despite Higher Rate Expectations
At 14:24 ET, the S&P 500 gained around 1% to 7,666.34, while the Nasdaq Composite rose 1.1% to 26,369.16.
The Dow Jones Industrial Average also advanced 1.1% to 52,630.81.
Despite Friday’s gains, the major U.S. stock indexes remained on track for weekly losses.
Rising Treasury yields, stronger expectations for tighter Federal Reserve policy and elevated oil prices had weighed on markets throughout the week.
August CPI Boosts Fed Rate Hike Odds
Investors focused heavily on the latest U.S. Consumer Price Index report.
Headline CPI increased 0.4% month over month in August, matching expectations but accelerating from July’s 0.1% increase.
Core CPI rose 0.3%, slightly above the 0.2% forecast and also stronger than July’s reading.
On an annual basis, headline inflation remained at 3.4%, while core CPI eased to 2.4% from 2.5%.
The data strengthened expectations that the Federal Open Market Committee could raise interest rates by 25 basis points at its next meeting.
According to CME FedWatch, the probability of a quarter-point increase rose to nearly 87%, compared with around 69% before the CPI release.
Hawkish Fed Expectations Build
Expectations for tighter monetary policy have been strengthening for several weeks.
Three regional Federal Reserve presidents dissented from the central bank’s decision to leave rates unchanged in July.
Fed Chair Kevin Warsh later reinforced the hawkish tone during his Jackson Hole speech, warning that underlying inflation pressures had not improved enough.
Strong U.S. employment data and a hotter-than-expected Producer Price Index report also added to the case for another rate increase.
Treasury Yields Move Higher
The U.S. bond market has reflected the growing expectations for tighter monetary policy.
Treasury prices fell again on Friday following the CPI release.
The benchmark 10-year Treasury yield rose around 2.4 basis points to 4.968%, while the more rate-sensitive 2-year yield climbed 8 basis points to 4.630%.
Long-term Treasury yields have also risen sharply in recent weeks, with the 30-year yield reaching levels not seen in nearly two decades.
The Treasury Department has responded by increasing buybacks of longer-dated securities, although the move has so far done little to reverse the sell-off.
Fed Credibility Comes Into Focus
The latest inflation figures have pushed market expectations firmly toward another Fed hike.
However, uncertainty remains over whether policymakers will actually tighten monetary policy.
The political environment adds another layer of complexity, with President Donald Trump publicly calling for lower interest rates.
King Lip of BakerAvenue Wealth Management argued that the Fed’s credibility may now be more important than the size of the next policy move.
He suggested that markets are heavily positioned for a hike, meaning a surprise pause would require a strong explanation from policymakers.
Oil Prices Fall on Diplomatic Hopes
Oil prices dropped more than 2% on Friday following reports of renewed diplomatic efforts involving Iran and Gulf states.
The Financial Times reported that Oman is organizing a meeting in Salalah with Gulf officials and Iran aimed at restoring commercial shipping through the Strait of Hormuz.
The prospect of improved shipping conditions helped ease some concerns over energy supply disruptions.
Lower oil prices also reduced some of the inflation pressure weighing on financial markets.
Crude Still Posts Strong Two-Week Gain
Despite Friday’s decline, oil remained on course for a powerful two-week advance.
Brent crude and West Texas Intermediate both moved above $100 per barrel during the week for the first time since late May.
Crude prices have climbed more than 18% over two weeks, driven by renewed military tensions between the United States and Iran.
Recent fighting around the Strait of Hormuz has raised concerns about prolonged disruptions to global energy flows.
Oracle Gives Back Post-Earnings Gains
Oracle shares lost momentum on Friday after initially rallying following stronger quarterly results.
The software and cloud company reported better-than-expected earnings and raised its annual profit guidance.
Oracle also booked more than $30 billion in additional AI cloud contracts, pushing its revenue backlog to approximately $664 billion.
The company raised its fiscal 2027 adjusted earnings forecast to $8.10 per share while maintaining its spending target of between $90 billion and $95 billion.
The strong results helped ease some concerns over the company’s heavy spending on artificial intelligence infrastructure.
Adobe Moves Higher After Earnings
Adobe shares also advanced after the company reported solid quarterly results.
The design software group beat expectations on earnings, although its forward guidance came in slightly below analyst forecasts.
The move highlighted continued investor sensitivity to earnings outlooks as markets balance corporate growth against higher borrowing costs and tighter monetary policy.
Overall, Friday’s rally showed that U.S. stocks remain highly sensitive to oil prices, inflation data and Federal Reserve expectations, with investors closely watching whether lower energy prices can offset the pressure from higher interest rates.
