What Happened Last Week
- Israel Strikes Iran: Israel struck Iran’s nuclear infrastructure and senior military leadership, leading to open conflict between the two nations.
- Cooling Inflation: The May inflation report came in lighter than expected, setting the stage for the Fed to weigh interest rate cuts at this week’s meeting.
- Trade Progress: The U.S. and China made progress on trade talks in London, although tensions remain high and tariff rates are considerably above pre-Liberation Day levels.
What We’re Watching This Week
- War in the Middle East: The Israel-Iran conflict has entered its fourth day. Markets expect no lasting impact on energy supply or risk sentiment from these actions.
- Fed Meeting: The Fed will meet on Wednesday and is expected to leave interest rates unchanged, but may signal a cut in September.
- Trade Talks and the G-7 Meeting: G-7 leaders continue meetings in Alberta as the U.S. closes in on trade deals with several countries.
Investment Management Team’s Views
Israel’s attacks against Iran’s nuclear infrastructure and high-level officials overshadowed last week’s constructive news on U.S.-China relations, solid economic data, and a positive earnings outlook from Oracle (ORCL). However, the market’s reaction to the violence has been relatively muted. Crude oil prices have risen, but Israel has thus far shown restraint in striking Iranian energy infrastructure, instead primarily focusing on nuclear and military sites. U.S. equities initially sold off after the attacks began on Friday, but returned to nearly unchanged at one point in the day. Investors seem to be taking solace in the fact that Israel is not targeting critical energy infrastructure and that Iran’s ability to respond militarily has been greatly degraded. While the situation remains incredibly fluid, investors are keen to act on the standard playbook, which indicates that geopolitical risk should subside after the initial shock.
Beyond the headlines from the Middle East, the macroeconomic backdrop improved marginally last week. At talks in London, the U.S. and China struck an agreement that restores the consensus achieved in Geneva last month. May’s CPI report came in lower than economists’ expectations, extending the streak to four straight downside misses versus estimates. Auctions of long-dated U.S. Treasuries were well received by investors, and yields fell on the week. In addition, readouts from consumer and business sentiment surveys were unexpectedly better last week as the government’s easing stance on trade filters back into the soft data. With the G-7 meetings underway and reports emerging that several countries are close to striking trade deals with the U.S., investors will be looking for something concrete on trade to emerge from one of those channels.
Thirteen central banks, including the Federal Reserve, are scheduled to meet this week, making it a busy one for global monetary policy. Chairman Powell is expected to maintain a low profile as the improving but still considerable uncertainty works its way through the economy. The Fed is on hold for now, but investors will be watching for a potential tone shift that could pave the way for cuts as soon as September. The Bank of Japan (BOJ) and the Swiss National Bank (SNB) could also provide dovish surprises, with the BOJ set to taper its quantitative tightening program and the SNB considering negative interest rates for the first time since 2022.
