Stocks Post Their Best Day In Six Weeks As Yields Ease

Wall Street took back most of its reaction to the Federal Reserve's first rate increase since 2023, with the S&P 500 and the Nasdaq Composite posting their biggest one-day gains in six weeks on Thursday while government borrowing costs fell across the board. Overnight the Bank of Japan raised the rate it sets to the highest level since 1995, and the yen weakened rather than strengthened. At home, August's housing figures showed the part of the economy that feels higher rates first already slowing.

Fast Facts

• Oil prices fell for a third straight day on Friday, with U.S. crude slipping below $100 a barrel as traders bet Saudi pipeline flows would be restored (Read More)
• New claims for unemployment benefits dropped to 196,000 in the week through September 12, down 10,000 from the week before (Read More)
• The Securities and Exchange Commission cleared the way for trading venues to offer tokenized stocks in the U.S., while letting companies block the offerings (Read More)
• Micron, Intel and other chip stocks extended their comeback as worries about an AI spending slowdown eased (Read More)
• Data-center builder Crusoe raised $3.9 billion at a $30.9 billion valuation to build large sites and modular "AI factories" (Read More)
• A rough year for the cryptocurrency industry got rougher after the market-structure bill it had pushed for lost a key Senate vote (Read More)

Global News

• The Bank of England left its key interest rate unchanged, holding steady in a week when the Federal Reserve and the Bank of Japan both raised (Read More)
• HSBC and other major Hong Kong banks left their prime lending rates alone after the territory's monetary authority followed the Fed higher (Read More)
• Euro-zone consumers nudged up their inflation expectations in the European Central Bank's monthly survey (Read More)
• Italy said it will send warships to protect shipping through the Bab al-Mandeb strait, with its defence minister warning of severe economic damage if the route closes (Read More)

Stocks Took Back Most Of Wednesday's Drop, And Treasury Yields Fell With Them

U.S. stocks spent Thursday, September 17 taking back most of what they gave up the day before. The S&P 500 closed at 7,637.76, up 85.95 points from Wednesday's 7,551.81, the Nasdaq Composite rose 439.87 to 26,418.30, and the Dow Jones Industrial Average added 316.14 to 51,778.04. For the first two it was the biggest one-day gain in six weeks. Government borrowing costs eased at the same time: the two-year Treasury yield closed Thursday at 4.67% and the ten-year at 4.94%, each down seven basis points, a basis point being one hundredth of a percentage point. A day earlier, after the Federal Reserve raised the rate it controls by a quarter point to a range of 3.75% to 4.00%, stocks fell and the ten-year finished just above 5 percent.

Two other prices moved with it. Brent crude, the global oil benchmark, settled down 1% at $104.82 a barrel, a second straight down day after trading near $110 earlier in the week. Investors also moved back into the AI and chip stocks that had led the selling for most of three weeks, Micron and Intel among them. Reporting attributed the rally to those cheaper barrels and to one reading of Wednesday's decision: traders acted as though a higher rate made it more likely, not less, that the Fed brings inflation down.

Why can a rate rise be followed by cheaper long-term borrowing? Because the two ends of the bond market answer different questions. Short-term yields mostly track what traders expect the Fed to do over the next year or two; long-term yields track expected growth and inflation over a decade. An increase now raises the cost of short-term money and, if traders think it will work, lowers the inflation investors expect to be paid for over the next ten years, which is the number the ten-year follows. Households feel the two ends differently: a higher Fed rate reaches a credit-card balance within a billing cycle or two, while a mortgage rate follows the longer-term yields instead.

What Thursday reversed was a reaction, not a policy. Wednesday's vote was unanimous at 12-0, and 16 of the 18 officials who submitted forecasts see at least one more increase this year. None of that changed because stocks had a good session. Oil is the piece most likely to move next, and much of the inflation problem that brought the Fed here runs through energy prices.

Sources: AP via The Blade on Thursday's rally · WSJ on the six-week gains · WSJ on investors returning to AI stocks · WSJ on falling Treasury yields · U.S. Treasury · Federal Reserve · Rapunzl on yesterday's briefing

Japan's Central Bank Raised Rates To A 31-Year High, And The Yen Fell Anyway

The Bank of Japan raised the interest rate it sets for the Japanese economy by a quarter of a percentage point on Friday, September 18, taking it to 1.25%. That is the highest Japanese rates have been since 1995, a 31-year high, and it arrived three months after the bank's last increase rather than the six that separated the earlier ones. The vote was 7-2, with board members Toichiro Asada and Ayano Sato preferring no change. Then the part that runs against intuition: the yen weakened rather than strengthened, trading past 157 to the dollar in Friday's Tokyo session, having been above 160 earlier this year. The Nikkei 225 rose more than 1% alongside it. Japan's core consumer price index, which strips out volatile fresh food, rose 1.8% in August 2026 from a year earlier, up from 1.7% in July.

Here is why a currency can fall on the day its central bank makes money more expensive. Traders are not really pricing the increase that just happened, because it had been expected for weeks and was already in the exchange rate. What they price is the path: where they think rates will be a year or two from now, since that determines how much interest a yen deposit earns against a dollar one. Two dissenting votes are new information about that path, and reporting on Friday attributed the yen's decline to them, read as a signal that the next increase may come more slowly than markets had assumed. A rate decision has two parts, the move and the message, and on Friday the message pointed the other way.

For an American reader, the connection runs through the bond market. Japanese investors are among the largest foreign holders of U.S. Treasury securities, the IOUs the U.S. government issues to fund itself, and their choice between lending to Washington and lending at home turns on which pays better. Japan's own 10-year government bond yield reached 3.03% this week, a level not seen there in three decades. The more Japanese savers can earn without leaving home, the less compelling the trip abroad. All of it sat inside a week when the big central banks moved in different directions: the Fed raised on Wednesday, the Bank of England held on Thursday, and the Bank of Japan raised on Friday.

Sources: WSJ on the Bank of Japan's increase · Al Jazeera on the 31-year high · CNBC on the yen and Japanese stocks · Investing.com on Japan's August inflation · SCMP

Builders Broke Ground On Fewer Homes For A Second Straight Month

Homebuilders started work on fewer houses in August, the second monthly decline in a row. The government's monthly report on new residential construction, published Thursday, put housing starts down 2.6% from July at a seasonally adjusted annual rate of 1.275 million, the pace builders would hit over a full year if August held and the usual seasonal swings are stripped out. That is the lowest reading since October of last year, against expectations of roughly 1.3 million. The headline hides a split, though. Single-family starts, the bulk of homebuilding, rose 7.6% to 918,000; the drop came from apartments, where starts on buildings with five or more units fell 22.5% to 344,000. The more forward-looking number is building permits, since a builder pulls one before breaking ground, and permits fell 2.7% to 1.394 million.

Housing is where interest rates land first, because almost nobody buys a house with cash and builders borrow to finance construction too. The average 30-year mortgage rate is about 7.24%, up from 5.99% in February, and that gap shows up as a larger monthly payment on the exact same house. Here is the part that trips people up: mortgage rates do not follow the Fed's own rate. They track long-term Treasury yields, which move on what investors expect inflation to do over many years, and the 10-year Treasury yield closed Thursday at 4.94%. Builders notice first: a National Association of Home Builders survey out Wednesday put single-family builder sentiment at a one-year low for September, with builders citing mortgage rates, labor shortages and materials prices. Set that beside the August retail sales report we covered yesterday, where spending at U.S. retailers and restaurants rose 1.2% from July. Households are still spending. The corner of the economy that runs on borrowed money is where a rate increase lands first.

Sources: WSJ on August housing starts · Reuters via Yahoo Finance on starts and permits · WSJ on mortgage rates near 7% · U.S. Treasury · Rapunzl on yesterday's briefing

What To Watch

Also today:

• The Federal Reserve is scheduled to publish its monthly industrial production figures at 9:15 a.m. Eastern.
• Michelle Bowman, the Fed's Vice Chair for Supervision, is scheduled to speak about bank stress testing at 9:30 a.m. Eastern, the first scheduled remarks by a Fed official since Wednesday's decision.

Early next week:

• Grifols (GRFS), the Spanish plasma company, is expected to report Monday, September 21, with analysts' average estimate at $0.27 in earnings per share against $0.19 a year ago.
• AutoZone (AZO) is expected to report Tuesday, September 22, before the open, with an average estimate of $54.97 against $48.71 a year ago.
• KB Home (KBH), the homebuilder, is expected to report Tuesday after the close, with an average estimate of $0.88 per share.

Further out:

• Philip Jefferson, the Fed's Vice Chair, is scheduled to speak at the Treasury Market Conference on September 22, and Governor Michael Barr on housing affordability on September 23.
• The Bureau of Economic Analysis is scheduled to publish estimates of economic growth and personal income on September 30.
• The Fed's next meeting is scheduled for October 27-28.

The Classroom Takeaway

Thursday showed that a market's verdict on a decision can arrive a day late and point the other way. Following a handful of companies through a full week in a stock market simulator turns that into something a student can size for themselves.