Equity markets advanced in the week ended 9/1, but additional upside may be limited. The move was driven by softening labor market data that led the market to reprice its expectation for interest rates. Softer labor market data is good news, but the takeaway is that labor markets are normalizing at levels once considered strong. In this light, the data gives the FOMC little room to maneuver and may lead them to hike rates given the state of wage inflation. Wage inflation continues to run hot above 4.0%.

A new risk has emerged for the market and the Fed. The oil price rose to a new 1-year high this week, and looks like it will move significantly higher. Oil prices underpin inflation and cause it to remain hot if not accelerate. In this scenario, the FOMC should be expected to hike rates again this year, and they may do it more than once. Regarding the S&P 500, it is trading against critical resistance now. If the market can not move higher over the next few weeks, a 5% to 10% correction is likely.