What Happened Last Week
- Middle East Escalation: Investors largely shrugged off rising tensions last week, assuming a weakened Iran will quickly back down.
- Weekend Bombing: Markets initially reacted to Saturday’s U.S. bombing with a similar lack of medium-term concern.
- Fed on Hold: The Fed held interest rates and revised its economic projections in a stagflationary direction.
What We’re Watching This Week
- War in the Middle East: Investors anticipate that today’s response from Iran will not lead to further escalation or a sustained rise in oil prices.
- Fed Speakers: Powell is unlikely to make headlines before Congress this week, but other Fed speakers and the central bank’s preferred inflation gauge will help shape the policy outlook.
- Bank Regulations: Investors are watching U.S. bank stress test results, potential easing of leverage rules, and progress on stablecoin legislation in Congress.
Investment Management Team’s Views
Investors shrugged off the escalating conflict in the Middle East in last week’s holiday-shortened trading. The early reaction to the U.S. bombing of key Iranian nuclear sites over the weekend renders a similar conclusion: markets are expecting a swift and orderly conclusion to the war in the Middle East. While oil prices and energy stocks rose last week, market-wide barometers of risk, such as the VIX and high-yield credit spreads, showed very little nervousness. The situation remains incredibly fluid as we await the Iranian response, but our assessment of the situation places investors in read-and-react mode with a bias that the worst of the conflict is behind us.
Monetary policy was also in the news last week as the Fed and twelve other central banks held rate-setting meetings. Economic projections from the Fed were not market-friendly. Inflation was revised higher and growth lower, causing the rate path to indicate fewer rate cuts over the next few years. The dollar rallied last week as some European central banks delivered rate cuts, which weighed on international stocks relative to the S&P 500. Now that the Fed meeting is out of the way, committee members will present their cases in public to try to influence policy. We are watching to see if the dovish viewpoint, espoused most forcefully by Governor Waller, gains any traction in market pricing.
Events in the Middle East and a NATO summit in the Hague are likely to overshadow the economic calendar this week. Chair Powell will appear before Congress to deliver his semiannual testimony on Tuesday and Wednesday. The banking sector will be a key focus for the markets as the Fed issues guidance on several key regulatory considerations, including leverage and capital ratios. In the background, two informal deadlines loom for markets in early July: July 4th for the reconciliation bill and the 9th for reciprocal tariffs.
