What Happened Last Week
- The Warsh Era Begins: Fed Chair Warsh led his first meeting at the helm and delivered a brief, hawkish message.
- Memo Signed: The U.S. and Iran signed a memorandum of understanding and committed to further talks to end the Mideast crisis.
- Recovery in Semis: Progress in the Middle East helped risk assets, led by semiconductors, recover last week.
What We’re Watching This Week
- Micron Earnings: The chipmaker’s results will be a critical test for the historic rally in semiconductor stocks.
- Economic Data: June business surveys and consumer confidence readings will give the first indication of how lower oil prices are flowing into the economy.
- Peace Talks: Technical talks continue between the U.S. and Iran to deliver a lasting peace.
Investment Management Team’s Views
The prospect of lower energy prices and easing geopolitical tensions helped drive another week of gains for risk assets. Equities moved higher while crude oil fell sharply after the U.S. and Iran signed an interim peace agreement, leading investors to price in a lower probability of prolonged disruptions to global energy markets. The change was immediately reflected in sector leadership. Energy was the worst-performing sector in the S&P 500 Index, while other traditional defensives also lagged. Investors instead gravitated back toward growth-oriented areas of the market, with technology, industrials, and emerging markets leading the advance. Lower energy prices remain one of the most powerful potential tailwinds for both growth and risk appetite.
Kevin Warsh’s first meeting as Fed Chair was more hawkish than expected, but markets largely took it in stride. Warsh’s abbreviated communication style and emphasis on inflation marked a departure from 25 years of Fed leadership, while updated projections pointed to a greater willingness among policymakers to keep rates elevated. The initial read was clearly hawkish, with short-term yields moving higher and the dollar strengthening. More notable was the behavior of longer-term rates, which declined despite the hawkish overtones. To us, that suggests investors increasingly believe in Fed independence, a very important issue that had been a question mark in the market’s mind. While breadth weakened somewhat during the week, the broader market continues to signal confidence in the growth outlook so long as inflation remains contained.
The week ahead will bring another important test for the growth narrative. Markets will focus on Micron’s earnings report, which arrives at a critical moment for the AI infrastructure trade after a powerful rebound in technology shares. Investors will also be watching updated purchasing manager’s index (PMI) data and consumer confidence readings for evidence that economic activity remains resilient as the effects of lower energy prices begin to work through the economy. Beyond the data, attention will remain fixed on the implementation of the Iran agreement and the pace of energy market normalization. If oil continues to move lower and growth data remain firm, the backdrop for equities could become increasingly supportive despite the Fed’s nascent hawkish posture.