Updates

With rising tensions comes increased oil prices and Treasury yields…

 

• Three major developments are shaping capital markets this week: renewed escalation in the Middle East, another sharp rise in Treasury yields, and important inflation data ahead of next week’s Federal Reserve meeting. Over the weekend, Iran launched ballistic missiles at U.S. naval forces, including an aircraft carrier and destroyer. American forces responded by striking and sinking several Iranian oil tankers with additional tanker strikes reportedly occurring Tuesday. The escalation comes as Iran remains under increasing pressure from U.S. sanctions and restrictions on its ports, adding further strain to its already weakened economy.

 

• Energy markets have responded accordingly with Brent crude moving back above $100 per barrel, reaching this level for the first time since late July. A conflict initially expected to last days or weeks has now extended into its seventh month with few signs of a near-term resolution. With U.S. midterm elections approaching, investors are increasingly considering the possibility that geopolitical uncertainty, higher energy prices, and related inflationary pressures could persist well into the Fall.

 

• Bond markets too remain under pressure. The Treasury Department announced plans to purchase up to $6 billion of Treasury securities maturing in 10 to 20 years, primarily to improve market liquidity amid the recent selloff but also in an attempt to drive longer yields lower. Investors were underwhelmed by this move. The benchmark 10-year Treasury yield subsequently climbed to 4.85%, its highest level since November 2023. The market’s reaction reinforced an important point: government purchases can influence market conditions at the margin, but investors ultimately determine where long-term interest rates settle.

 

• Attention now turns to inflation with the August PPI data being released Thursday, followed by the CPI release on Friday. Economists expect headline CPI to remain at 3.4% year over year, while core CPI is expected to ease from 2.5% to 2.4%. With oil above $100, long-term yields rising, and employment remaining firm, the Federal Reserve enters next week’s meeting with increasingly limited room for error.

Markets this Week Face a Major Test from Inflation, AI, and the Fed…

 

• This week is providing investors with unusually important insights into inflation, artificial intelligence, monetary policy, and geopolitical risk.

 

• Wednesday began with the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) Index as core PCE came in as expected at 3.3%. Although the core reading was not a surprise, inflation remains stubbornly high relative to the Fed’s 2.0% target. The report reinforces the likelihood that interest rates remain elevated and has modestly increased market expectations for another Fed rate increase.

 

• After markets close Wednesday, Nvidia will report with one of the quarter’s most closely watched earnings releases. Given the enormous scale of the ongoing AI infrastructure buildout, Nvidia remains at the center of the investment cycle. Its results and, more importantly, forward guidance should provide an important indication of whether AI-related demand and capital spending remain on track. With Nvidia now serving as a barometer for the broader AI trade, its outlook could influence technology stocks and the overall market.

 

• On Friday, investors will turn to Fed Chair Kevin Warsh at the annual Jackson Hole Economic Policy Symposium. Warsh has expressed skepticism toward traditional forward guidance, preferring that markets respond more directly to incoming economic data. With inflation still running materially above target and bond yields elevated, investors will listen closely for his assessment of inflation, interest rates, and the Fed’s policy direction.

 

• Finally, Middle East tensions remain an important market risk. The Administration continues efforts to economically isolate Iran, but Iran’s ability to maintain significant trade relationships—particularly with China—limits the effectiveness of financial pressure alone. For markets, the principal concern remains the potential impact on global energy supplies, oil prices, inflation, and ultimately interest rates.

 

 

 

The All Clear that Isn’t….

 

• The Trump Administration’s insistence that the Iran conflict is effectively resolved is not yet reflected by conditions on the ground. Negotiations between Washington and Tehran continue to advance, but intermittent strikes on commercial vessels transiting the Strait of Hormuz keep resetting the confidence those talks are meant to build. Each new incident reminds markets that a ceasefire framework on paper is different from a secured shipping lane in practice. Until a formal agreement is signed and the Strait is fully reopened to commercial traffic, every geopolitical headline is a potential volatility event — energy and risk assets remain hostage to a chokepoint that has not yet been secured.

 

• New Fed Chair Kevin Warsh can now breathe easier though. Yesterday’s narrow 5–4 Supreme Court ruling rejected President Trump’s attempt to remove Lisa Cook from the Fed Board. This is a structural win for the new chair just as his tenure begins, removing a cloud of uncertainty that had hung over the central bank for months. Chief Justice Roberts’ language was explicit: both the independence and the appearance of independence of the central bank are non-negotiable if policymakers are to set rates without fear of political reprisal. For investors, this is a precedent that matters — monetary policy is made based on the economic data, not the President’s whim.

 

• The Fed’s credibility is about to be tested by the current economic data. May’s PCE report showed headline inflation accelerating to 4.1% year-over-year – the hottest print since April 2023 and more than double the Fed’s target. Core PCE climbed to 3.4%, confirming that price pressures remain persistent rather than transitory. Coupled with a resilient labor market that continues to defy slowdown expectations, the Fed’s rhetoric has pivoted back squarely to inflation-fighting. Markets are now pricing one, or possibly two, rate hikes before year-end – a meaningful repricing investors should treat carefully.

 

Conflict in the Middle East from is far from over….

• Optimism surrounding the Middle East ceasefire was tested this week as reports emerged that a U.S. helicopter was struck by Iranian forces. The United States subsequently launched retaliatory strikes against Iranian targets, describing the operation as a lawful act of self-defense. Markets responded predictably with volatility rising sharply in the immediate aftermath. The episode serves as a pointed reminder that, despite incremental diplomatic progress, active U.S. military engagement in the region remains an ongoing risk and that the prospects for a permanent resolution are far from assured. 

• Last week’s May employment report exceeded expectations, marking the third consecutive month of stronger than anticipated payroll gains. The unemployment rate remained steady at 4.3%, a reading many economists attribute to an expanding labor supply — particularly among immigrant workers re-entering the workforce — keeping pace with demand rather than signaling a broader deterioration in the jobs market. 

• This morning’s May Consumer Price Index (CPI) release showed inflation rising 4.2% year-over-year, marking the highest reading since April 2023. Much of the increase was driven by elevated energy prices stemming from the ongoing Middle East conflict. Excluding the more volatile food and energy prices, core CPI still rose 2.9%, sharply higher than the Fed’s 2.0% target. Many economists believe this reading may represent a near-term high-water mark for inflation. However, this assumes that geopolitical tensions do not escalate further, and that energy prices begin to stabilize. 

• Meanwhile, Wall Street is eagerly awaiting the initial public offering of Elon Musk’s SpaceX later this week. The aerospace/social media/AI company is expected to debut at a valuation in excess of $1.7 trillion, implying a price-to-sales multiple exceeding 90 times 2025 revenues. Skeptics point to comparisons with the late1990s dotcom era when growth expectations frequently outpaced underlying fundamentals.  

Ceasefire, Yields, and a Fed Chair on Trial…

 

• Markets continue to swing sharply on developments surrounding a potential U.S.- Iran agreement. Despite intermittent military skirmishes earlier this week, negotiations have advanced with proposals to extend the current ceasefire and reopen the Strait of Hormuz for at least two months being considered. Several vital issues remain unresolved though, namely control over maritime traffic, the disposition of Iran’s uranium stockpiles, the release of frozen Iranian assets, and the terms of a broader ceasefire involving Lebanon. Until these issues are settled, the risk of a breakdown in negotiations remains substantial. As a result, investors should expect continued volatility in both energy prices and risk assets.

 

• Despite elevated geopolitical risks, Wall Street has continued to advance, propelled largely by the artificial intelligence trade. Equities, however, are not the only asset class registering significant moves. The 10-year Treasury yield surged sharply through early May before easing, yet they remain meaningfully elevated relative to early March levels — a reflection of shifting risk appetite and renewed inflation concerns tied directly to the energy markets’ disruption. If a formal agreement with Iran materializes, both oil prices and Treasury yields could retreat as geopolitical risk premiums unwind. Until then, the bond market is pricing in a more persistent inflation environment than are reflected in equity values.

 

• Reinforcing that concern, the Federal Reserve’s preferred inflation gauge — the Personal Consumption Expenditures Index — is due for release tomorrow. Consensus expectations call for headline PCE to rise 3.8% year-over-year with Core PCE projected at 3.3%. Both measures are also anticipated to accelerate on a month-over-month basis, suggesting inflationary pressures are broadening rather than fading. For a Fed already under intense political scrutiny, rising inflation reading would narrow policy options considerably.

 

• The new Federal Reserve Chair, Kevin Warsh, steps into this environment carrying significant uncertainty — not merely about the economic path ahead, but about his own independence. With the Trump Administration powerfully pressing for lower rates, and the labor market showing repeated continued signs of softening, how Warsh navigates the Fed’s dual mandate may prove among the most consequential monetary policy actions of the next several years.

 

Ever rising Federal debt amidst resilient growth and rising inflation pressures…

 

• Federal finances continue to deteriorate at a historically notable pace. Net U.S. federal debt now exceeds annual GDP for the first time since World War II with little indication of near-term improvement. The government currently spends roughly $1.33 for every dollar of revenue collected, while interest expense consumes approximately one out of every seven federal dollars. If left unaddressed, the trajectory places the U.S. on a path more commonly associated with highly leveraged developed economies such as France, Italy, Greece, and Japan. Over time, sustained fiscal imbalance risks extending beyond government accounts, placing upward pressure on borrowing costs across the entire American economy, including mortgages, auto loans, and consumer credit.

 

• Geopolitical tensions remain elevated despite the continuation of the U.S.–Iran ceasefire. Iran has tested the boundaries of the agreement through limited missile activity targeting U.S. naval assets, while the U.S. blockade continues to constrain Iran’s oil export capacity and broader economic activity. Reports suggest growing frustration within the Administration as Iran has yet to fully comply with negotiated terms, underscoring the fragile nature of the current détente and the ongoing risk of renewed escalation.

 

• Against this backdrop, economic data continues to reflect underlying resilience. U.S. GDP expanded at a 2.0% annualized rate last quarter – modestly below the 2.2% consensus estimate but a meaningful acceleration from the prior quarter’s 0.5% pace. However, inflation readings remain elevated with the most recent report being above expectations, driven in part by higher energy and transportation costs linked to the Middle East’s energy disruption. Increasingly, economists are questioning whether these pressures will prove more persistent, raising the risk of a renewed inflation cycle. Attention now shifts to upcoming labor market data, which will be critical in assessing whether employment conditions remain strong enough to overcome these headwinds.

Markets Shrug Off Geopolitical and Policy Uncertainty..

 

• The U.S.–Iran ceasefire was extended yesterday, though signals from Iranian leadership remain mixed. Iran’s ambassador to the United Nations indicated a willingness to pursue a more durable agreement, suggesting continued openness to diplomacy. In contrast, the Islamic Revolutionary Guard Corps struck a more confrontational tone stating that the U.S. naval blockade “is no different than bombing” and must be met with a military response. The U.S. administration has maintained its position, indicating the blockade will remain in place for now. The divergence in rhetoric underscores the fragility of the arrangement and the risk that tensions could re-escalate with limited warning.

• Meanwhile, Federal Reserve Chair nominee Kevin Warsh appeared before the Senate Banking Committee for his confirmation hearing. Lawmakers questioned him on his policy framework, financial background, and, most notably, his ability to maintain independence from the Executive Branch. The nomination process remains stalled as members of the Committee continue to withhold advancement pending the resolution of ongoing investigations involving current Chair Jerome Powell. The delay extends uncertainty around the future direction of monetary policy leadership at a time when inflation remains above target.

• Markets may receive additional clarity next week with the release of the March Personal Consumption Expenditures (PCE) Index. Expectations call for inflation in the upper-2% to 3% range – meaningfully above the Federal Reserve’s 2% objective and indicative of persistent price pressures. This backdrop complicates the interest rate policy outlook, particularly given the potential for continued energy-related volatility tied to Middle East developments.

• Despite disruptions in the Strait of Hormuz and the risk of broader instability in global energy markets, U.S. equities have continued to advance with major indices reaching new all-time highs. The divergence suggests investors remain focused on forward-looking expectations and the prospect of eventual stabilization, even as near-term geopolitical risks remain elevated.

 

 

 

Fragile Ceasefire, Firm Economy – so far…

 

• After a day marked by escalating rhetoric—most notably threats via social media that the United States would “end civilization” in Iran absent an agreement—President Trump announced late Tuesday that a two-week ceasefire had been reached. As part of the arrangement, Iran agreed to reopen the Strait of Hormuz, albeit with control over vessel traffic. Markets responded with equities strongly rallying, oil prices declining sharply, and U.S. Treasury yields moving lower. Even so, the durability of the agreement remains highly uncertain, with meaningful questions around both compliance and longevity.

 

• That uncertainty surfaced almost immediately. Within a day of the announcement, reports indicate renewed Iranian attacks on regional partners including infrastructure targets in Kuwait and additional strikes in the U.A.E. Complicating matters further, Israel—America’s primary regional ally—was not involved in the negotiations and has expressed strong dissatisfaction with the terms. While vessel traffic through the Strait appears to be gradually increasing, the broader backdrop reflects a fragile equilibrium where intermittent conflict coexists with efforts to preserve the flow of critical global trade.

 

• Against this geopolitical backdrop, the U.S. economy continues to exhibit resilience. The March employment report materially exceeded expectations with 178,000 jobs added versus consensus estimates of 59,000. Meanwhile, the unemployment rate declined to 4.3% from 4.4% in February. Attention now turns to the Federal Reserve’s preferred inflation gauge, the PCE Index, due to be released later this week. Current expectations call for a 2.8% year-over-year increase, implying little to no month-over-month acceleration. Together, labor and inflation data will remain central to the Fed’s policy path as it navigates an increasingly uncertain global environment.

 

Both financial markets and the global economy confront a narrowing path due to Iranian war energy disruption…

 

• Fighting in the Middle East continues to escalate with Iranian forces launching attacks on Kuwait, Bahrain, and Saudi Arabia. The U.S. administration has increased efforts aimed to de-escalate the war with officials suggesting that recent discussions with Iran have been constructive. The President has directed the Pentagon to delay any major military response to allow for potential progress. Iranian leadership, however, has disputed American claims, maintaining that no direct negotiations with the United States have occurred. The divergence in messaging underscores the uncertainty surrounding any near-term conflict resolution.

 

• A meaningful portion of global oil supply, estimated at ~15 million barrels/day, remains stranded in the Persian Gulf due Iran’s control of the Strait of Hormuz, a critical chokepoint for energy flows. Recent reports indicate an almost complete stop in non-Iranian tanker traffic through the Strait as risks—including sea mines, drone strikes, and small-boat attacks—have sharply risen. The result is a sharp tightening in global energy supplies driving oil prices higher and prompting some nations to draw on strategic reserves or take emergency measures. Iran is willing to utilize its control of the Strait in an attempt to outlast the American and Israeli offensive.

 

• Against this backdrop, the Federal Reserve held its policy rate steady at last week’s meeting. However, rising energy prices are beginning to filter through to broader inflation measures, complicating an already incomplete disinflation process. With inflation still meaningfully above the Fed’s 2% target, a sustained increase in oil prices could further constrain policy flexibility and delay any interest rate easing cycle. The risk of a stagflationary environment—characterized by stagnant growth and persistent inflation—is increasing, presenting a challenging backdrop for both policymakers and markets.

 

 

 

Energy Tensions and Conflicting Economic Signals Cloud the Near-Term Outlook…

 

• Rising geopolitical tensions in the Middle East have introduced a new source of volatility across global financial markets. The primary concern centers on the Strait of Hormuz, one of the world’s most critical energy transit corridors. Iran’s threats to target commercial vessels moving through the passage has created a temporary choke point in global oil and commodity flows. Given the region’s central role in global energy distribution, this development has been enough to push energy markets sharply higher in the last 10 days and inject additional uncertainty into equities, currencies, and other asset classes.

 

• While such developments naturally evoke comparisons to the oil shocks of the 1970s, the U.S. economy today is structurally far less vulnerable to energy supply disruptions. Energy production now represents a smaller share of domestic economic activity, and the United States has transitioned from being a net oil importer to a net oil exporter. These structural changes provide a meaningful degree of economic insulation relative to prior decades. Even so, sustained increases in energy and commodity prices could still work their way through the economy via higher input costs and renewed pressure on consumer prices—an outcome that would complicate the current inflation trajectory.

 

• Against this backdrop, the Federal Reserve faces a policy environment that is becoming increasingly difficult to interpret. The two variables most central to the Fed’s decision-making—employment and inflation—are currently moving in opposite directions. February’s labor report showed an unexpected decline of roughly 92,000 jobs, contrasting with expectations for modest job growth. At the same time, inflation data released today showed headline CPI rising 2.4% year-over-year and core CPI at 2.5%, broadly in line with expectations. Markets will receive another key data point later this week with the release of the Personal Consumption Expenditures (PCE) index, which will likely play an important role in shaping the Federal Reserve’s tone when policymakers meet next week.