Except for large caps, which benefitted from a partial rebound in AI-related stocks following the prior week’s selloff, markets generally ended the week lower as renewed fighting between the US and Iran left the already strained cease fire on life support. The resumption of fighting put modest upward pressure on oil prices, adding to ongoing concerns about higher inflation, and pushing interest rates higher. For the week, the 10-Year Treasury gained 0.07%, closing at 4.56%, after briefly reaching 4.60%, its highest level since mid-May. Higher interest rates put downward pressure on small cap stocks, which tend to be more interest rate sensitive than large cap stocks. International markets sold off on the prospect of diminished energy exports out of the Persian Gulf, upon which many Asian and European countries rely.
Minutes from the Fed’s May meeting, showed officials remain concerned about inflation. “Participants anticipated that inflation would remain elevated in the near term and then begin to decline as the effects of tariffs and energy price increases wane and other supply disruptions related to the closure of the Strait of Hormuz diminish. Participants judged that the risks to the inflation outlook were still tilted to the upside. Many participants noted that elevated commodity prices and supply disruptions could persist longer than currently anticipated.” The meeting was held days after the US and Iran agreed to work on a longer-term peace deal. The most recent outbreak of fighting threatens to exacerbate those concerns and delay the timing of when inflation ultimately returns to the Fed’s longer-term 2% target.
New Fed Chair Kevin Warsh announced the chairs of his five task forces focusing on Communications, Balance Sheet Policy, Data, Productivity and Jobs, and Inflation Frameworks. All five will be led by external leaders, which the Fed described as “accomplished economists, business, leaders, and former central bank practitioners.”
