by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment will focus primarily on the Federal Reserve meeting and the outlook for monetary policy under new leadership. We begin by examining potential shifts in the Fed’s operating framework, including a possible pullback in forward guidance. We then turn to the policy decision itself and its implications for rates. Finally, we briefly assess the agreement between the United States and Iran to reopen the strait. As usual, we include a review of recent domestic and global economic data.

First Meeting: Fed Chair Kevin Warsh held the first FOMC meeting of his term and signaled a potential shift in the Federal Reserve’s relationship with financial markets. During his press conference, Warsh indicated that he plans to establish a task force to review several aspects of the Fed’s operations. He also suggested a move away from forward guidance, marking a significant departure from recent communication strategy. If implemented, these changes could materially alter how markets interpret and respond to Fed policy decisions.

• While Warsh has announced his intention to implement changes, they are not expected to occur overnight. The new Fed chair has stated that he will establish a task force to examine the central bank’s communications, balance sheet management, inflation framework, data sources and uses, as well as productivity and its impact on the economy. Although he has not yet named the individuals who will lead these efforts, he expects the work to be completed by the end of the year.
• Chair Warsh has made it clear that he wants to reduce forward guidance to limit the central bank’s market footprint. While he didn’t outline specific changes, he consistently refused to comment on the Fed’s future policy path during the press conference. Furthermore, the official statement was drastically shortened, removing individual voters’ names. He was also non-committal about the future of the Summary of Economic Projections (SEP) as well as whether he would maintain a press conference after every meeting.
• Given his past statements, Warsh appears to be aiming to return the Federal Reserve to its pre-financial crisis roots. This would likely entail less communication about policy decisions, a reduced influence over the bond market, and greater flexibility in interpreting economic data; specifically, becoming less reactive to any single report. During the press conference, Warsh mentioned that he envisions the bank focusing more on underlying trends.

• While the push for change is notable, its durability is uncertain — particularly in a rising inflation environment. In 2022, both the ECB and the Federal Reserve attempted to step back from forward guidance after upside inflation surprises allowed for larger-than-expected rate hikes. However, both central banks ultimately retained the tool to manage market volatility and mitigate recession fears.
• As he settles into leading the Fed, the more important test will be how Warsh responds to market reactions, particularly if investors perceive a decline in transparency. The 10-year Treasury yield has been especially sensitive to shifts in expectations around Fed policy, underscoring the importance of clear communication. As a result, while we expect some adjustments to operations and forward guidance, these changes are unlikely to be as aggressive as Warsh may prefer at this stage.

Rate Decision: The latest two-day FOMC meeting concluded with a notable hawkish shift. Although the Federal Reserve voted to hold rates steady at 3.5%–3.75%, the accompanying statement and forward guidance revealed growing policymaker unease. Officials are increasingly concerned that recent inflationary upticks may necessitate an additional rate hike later this year. Yet, the Fed resisted locking in that outcome, choosing to keep its options open while it works through pending changes to its policy-setting approach.

• The SEP reveals that much of the hawkish shift stems from rising inflation anxiety and diminishing growth concerns among Fed officials. The latest forecasts show upward revisions to inflation across all three projection horizons, with the most striking adjustment coming this year. Core PCE is now expected to reach 3.3%, up from the previous 2.7% estimate. By contrast, GDP and employment projections remained largely unchanged, underscoring that inflation, not growth, is driving the current policy debate.
• The latest projections underscore how sharply Fed sentiment has shifted since March. Back then, when the Iran conflict was still in its early stages, the median SEP path still pointed to one rate cut in 2026, with no support for hikes. By contrast, the latest projection now shows a clear hawkish tilt, with roughly half of participants anticipating at least one rate increase, and most of those expecting more than one, while only a single member still projects a cut this year.

• That said, Chair Warsh reiterated that the Fed’s overriding goal is to return inflation to target, while cautioning that markets should not prejudge policy on the basis of the projections alone, since the dots do not represent a preset path for rates. He noted that views on 2026 remain divided and stressed that much could change before the Committee meets again, underscoring that policymakers’ preferences are conditional and likely to evolve with the data and the outlook.
• Although the Federal Reserve has clearly turned more hawkish since its last meeting, it does not appear to be in a rush to raise rates. The outcome of the next FOMC meeting will likely hinge on how the recent Iran-US ceasefire agreement feeds through to inflation in the coming weeks. If the data suggests that the worst of the inflationary pressure has passed, the Fed may step back from further hikes and keep rates on hold. However, if inflation remains stubborn, then policymakers could opt to raise rates before year’s end.

Deal Signed: The US and Iran have signed a memorandum of understanding regarding the conflict in the Strait of Hormuz. The decision to sign came ahead of schedule and will take effect immediately. The agreement follows the release of a 14-point plan and will likely be followed by discussions over Iran’s nuclear program. While the waterway is set to reopen immediately, ships may not move until it is safe, as there are signs that mines still remain in the strait and need to be removed before shipping can commence.

Note: Due to the holiday, there will be no Comment published tomorrow.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with a discussion of how the United States is leveraging AI capabilities to keep key allies within its strategic orbit. We then turn to the Federal Reserve, outlining our views on its next policy direction. Next, we provide briefings on SpaceX’s rising valuation, newly released details of the US-Iran ceasefire agreement, and risks of a potential oil glut next year. As always, we include a review of recent domestic and international economic data.

AI Foreign Policy: The United States is increasingly turning to artificial intelligence as a tool to reshape its foreign policy. Just one week after the White House prohibited foreign nationals, including those working within the US, from using the Anthropic tools Mythos and Fable 5, Washington has initiated talks with European partners regarding access to American-made AI tools. These discussions reflect the US’s growing willingness to leverage its technological edge as an instrument of geopolitical influence.

• During the G7 Summit, the United States discussed a “trusted partner” scheme that would grant close allies privileged access to the latest AI models. The scheme could mean that AI providers would be restricted from selling their products to certain countries — or, in some cases, specific companies. A broad agreement may allow participating nations to leverage these advanced technologies in order to assist in the ramping up of their defenses against rivals such as China.
• The decision reflects growing US concern over the capabilities of Anthropic’s latest models. Last week, Commerce Secretary Howard Lutnick warned that the company may require special export licenses to provide certain tools to foreign nationals, citing national security risks. While the White House has not formally explained the directive, it is widely believed to be linked to the discovery of a jailbreak in Fable 5 that could circumvent Anthropic’s safety guardrails.
• The move to restrict AI exports mirrors the semiconductor controls that expanded from 2022 to 2024, which sharply limited advanced chip sales to China and other “countries of concern.” In both domains, Washington aims to guarantee allies’ access to US technology while constraining rivals, underscoring how protective it has become of its technological edge and how it is using that edge to keep key states within its strategic orbit.
• The government push to limit advanced AI-model use by foreign nationals is likely to weigh on the earnings of major technology firms, which are more dependent than most sectors on international revenue. These restrictions also highlight the risk that tech valuations may be elevated relative to rising policy and regulatory headwinds. We continue to advocate sector diversification as a way to hedge against over‑concentration, given the growing dominance of large technology companies within equity indexes.

Warsh Takes the Lead: All eyes will be on Fed Chair Kevin Warsh this afternoon as he presides over his first meeting since taking office. Markets will be focused on how the central bank assesses the inflation outlook, particularly in light of recent progress toward de-escalation in Iran. While easing geopolitical tensions should help improve the near-term inflation outlook, uncertainty around the policy path remains elevated amid persistent signs of underlying price pressures.

• Warsh inherits a more hawkish Federal Reserve than his predecessor. Ahead of today’s meeting, several Fed officials have signaled that further rate hikes may be warranted if inflation remains above the 2% target, citing not only pressures from the Iran conflict but also demand strength from the AI boom and a firming labor market. The departure of a noted dove, Governor Stephen Miran, further removes a key counterweight to tightening.
• Further reinforcing the hawkish bias are recent moves by peer central banks. Despite the agreement between Iran and the US to reopen the strait, policymakers elsewhere remain cautious about declaring victory on inflation. The Bank of Japan raised rates on Tuesday, citing ongoing inflation concerns, while ECB Chief Economist Philip Lane signaled that additional tightening remains possible following this month’s hike.

• Markets will be paying very close attention to Warsh as he offers his views on the direction of Fed policy. Over the past several years, the dollar has grown increasingly sensitive to shifts in interest rate differentials, as investors have come to view central banks with relatively dovish stances less favorably against a backdrop of persistently elevated inflation. Against that environment, any hawkish tilt from the Fed could lay the groundwork for another sustained dollar bull market.
• Heading into his first meeting, we expect Warsh to signal that the Fed will stay the course while keeping its options open. Such a stance would leave room for potential rate cuts later this year, which could act as a headwind for the dollar. That said, any shift toward a more hawkish tone could prompt a reassessment of current equity valuations while simultaneously supporting the dollar.

SpaceX’s Rise: The Musk-owned company’s stock is off to a strong start, having just surpassed Amazon’s valuation to become the fifth-largest firm by market capitalization. The sharp move reflects robust post-IPO demand, but much of the recent upside also appears tied to a broader relief rally following progress in Iran-US talks. The rise of SpaceX reflects the growing dominance of tech companies in the S&P 500.

Iran Deal: There remains significant debate surrounding the reported agreement between Iran and the United States to reopen the Strait of Hormuz later this week. While the official framework has been released, subsequent leaks suggested the possibility of a $300 billion investment fund tied to Iran’s compliance with the terms of the deal. The White House has denied any direct US involvement in such a mechanism, but the emergence of these reports underscores the intensifying political pressure and scrutiny surrounding the agreement.

Oil Glut? The International Energy Agency warns that the Middle East agreement could set the stage for oil overproduction during the next few years. Although it does not expect exports to rebound immediately once the conflict ends, it anticipates that as shut‑in capacity and war‑affected facilities gradually return to operation, global output could rise sharply, creating a substantial supply overhang by next year. This prospective increase in production is likely to exert downward pressure on oil prices and related inflation measures in the coming months.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the latest on the US-Israeli war against Iran, including news that the US will support a rebuilding fund for Iran. We next review several other international and US developments that could affect the financial markets today, including the European Parliament’s formal approval of last year’s trade deal between the US and the EU and a few words about the Federal Reserve today as it starts its first policy meeting helmed by new Chair Kevin Warsh.

United States-Israel-Iran: Citing an unidentified senior US official, the Financial Times late yesterday said the Trump administration is prepared to allow the private sector to establish a $300-billion investment fund for Iran if Tehran agrees to a final settlement to end the war that includes a nuclear deal. According to the official, sanctions relief and the fund “to rebuild their country” would be connected to Iran’s “performance” in adhering to the framework of the US-Iran ceasefire extension that is to be formally signed on Friday.

• If the reporting is accurate, it could draw criticism as payment of reparations to Iran or bribing the country to get a nuclear deal. Even though the proposed fund would apparently be financed by private companies, Washington could offer tax or regulatory incentives for companies to participate, essentially transforming the fund into a US institution.
• Separately, the chief executive of Mitsui OSK Lines, the world’s biggest operator of oil tankers, has warned that shippers will not resume transit through the Strait of Hormuz for weeks until they are confident that the US-Iran deal is “material.” That being the case, he estimated that shipping through the strait probably won’t start in earnest until at least two weeks after the new US-Iran ceasefire extension is formally signed on Friday. Such a delay would further raise the risk of new surges in energy prices.

United States-European Union: The European Parliament today finally approved the trade deal reached last year between President Trump and European Commission President von der Leyen. Under the deal as it now stands, the US is relying on temporary emergency legislation to impose a 10% levy on top of existing duties, putting the total US duty north of 15% for some products. Meanwhile, the EU will cut its duties on US industrial goods and some farm products to 0%. The formal parliamentary approval will now provide more certainty in US-EU trade.

US Monetary Policy: The Fed starts its latest two-day policy meeting today, with its decision due tomorrow at 2:00 PM ET. This will be the first policy meeting led by new Fed Chair Warsh, with former Chair Powell also at the table. Based on the latest futures trading, investors are nearly unanimous in expecting the policymakers to hold their benchmark fed funds rate steady at a range of 3.50% to 3.75%. In fact, investors appear to be assuming rates will be held steady through the end of the year.

US Defense Industry: In a scoop last night, the Wall Street Journal said auto giant General Motors is in talks with Lockheed Martin about making parts for the defense contractor’s weapons. Under the arrangement, GM would manufacture commonly used parts that could help Lockheed bolster munitions output. The companies are currently discussing which components GM could potentially make.

• The potential deal harkens back to the World War II era, when many civilian firms shifted rapidly to military production to leverage their manufacturing expertise and excess capacity.
• The potential Lockheed-GM deal echoes developments that we’ve also seen in Europe, where firms with idle civilian production lines have made their workers and facilities available to support the Continent’s rearmament.
• In sum, the phenomenon illustrates how increasing defense budgets around the world are creating financial opportunities for firms far beyond the defense sector.

Japan: As widely expected, the Bank of Japan today raised its benchmark short-term interest rate to a 31-year high of 1.00%, compared with 0.75% previously. The hike reflects Japan’s new experience of continued high price inflation, as well as concerns about the weakness of the yen. The move follows the European Central Bank’s rate increase last week, which was also driven in large part by inflation concerns as global energy and commodity prices have jumped in response to the war in Iran.

China: May retail sales were down 0.6% from the same month one year earlier, marking their first annual decline since 2022 and illustrating the country’s persistently weak domestic demand. Meanwhile, fixed-asset investment in January through May was down 4.1% on the year, largely because of an ongoing slump in property investment. The weakness in Chinese domestic demand will likely encourage the government to keep emphasizing exports for growth, which in turn will keep pressuring foreign firms and raising international trade tensions.

Global Gold Market: A survey by the World Gold Council shows many major central banks, including those of France and India, have been pulling their gold reserves out of New York and London as they worry more about the security of their holdings. The finding illustrates just how concerned central bank reserve managers have become about geopolitical risk. Although central banks and some other major market participants have sold gold in recent months to raise liquidity, that concern suggests they will resume buying once the US-Iran conflict eases.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with some observations about the reported US-Iran deal to extend their current ceasefire. Importantly, we think investors should consider the deal highly fragile and not necessarily enough to prevent a further spike in energy prices. On a news day that is otherwise very slow, we next review several other international and US developments that could affect the financial markets today, including an effort by the UK to stop young teens from using social media and a sudden US export ban on Anthropic’s most powerful AI model.

United States-Israel-Iran: The US and Iran yesterday said they have agreed on a deal to extend the current ceasefire for 60 days, with the signing of the agreement to come this Friday. Once the deal is signed, Iran will stop attacking ships trying to transit the Strait of Hormuz and the US would lift its naval blockade of Iranian ports. Within the 60-day ceasefire extension, the US and Iran would also enter negotiations over the future of Iran’s nuclear program. In response, stock futures prices are surging today, while crude oil prices are down about 5%.

• Throughout the US-Israeli war against Iran, financial market participants have been taking an overly optimistic view of when and how the conflict will end. Time after time, they have been disappointed. We, in contrast, have been much more cautious, assessing that the advantage lies much more with Iran than people realize. The Iranians have therefore been dragging the conflict out. We would caution that the slightest provocation, such as renewed Israeli strikes on Lebanon, could well prompt Iran to scuttle the deal.
• Even if the deal is signed and implemented, we would also caution that it will likely take months to normalize the shipments of oil, natural gas, and other commodities through the Strait of Hormuz. Until then, the world’s commodity inventories are likely to be drawn down further, keeping prices high.
• Indeed, top oil company executives have been warning that the stockpile drawdown to date already threatens to cause a new spike in energy prices in the coming weeks. The drawdown has affected not just the US’s Strategic Petroleum Reserve, but also commercial inventories.
• In sum, the announced deal is positive on its face, but investors should consider it highly fragile. Renewed attacks by the US, Israel, or Iran could lead to the ceasefire breaking down. Failure of the upcoming talks on Iran’s nuclear program could probably also lead to the deal being abandoned. In any case, we think the war will permanently raise investor perceptions of risk in the region and the need to stockpile more energy and other commodities, which will likely keep prices higher than before the war.

US Artificial Intelligence Industry: Late Friday, Commerce Secretary Lutnick sent a letter to Anthropic CEO Dario Amodei informing him that the firm’s Mythos 5 and Fable 5 models would be subject to export controls to any location outside of the US and to all foreign persons within the country, based on national security concerns.

• The move forced Anthropic to make the models unavailable to all users while it and the government hammer out measures to implement the controls.
• The incident illustrates how security concerns will likely lead to significant restrictions on the most advanced models and affect major US companies in the AI space. In turn, that could affect the firms’ ability to commercialize their products broadly and limit potential profits.

US Defense Industry: In an interview with the Financial Times, Anduril Chief Executive Officer Brian Schimpf called for a “reset” of the US’s strict arms-export rules to make it easier for defense contractors to produce inexpensive weaponry at scale. According to Schimpf, making it easier to export or co-produce weapons with allies is essential to helping the US deter foreign adversaries. We also remain optimistic about US and foreign defense stocks going forward, and deregulation of arms exports would likely bolster the case for those equities.

US Stock Market: SpaceX shares started trading on Friday and closed at $160.95, up 19.2% from their offering price. That gives the company a market capitalization of $2.2 trillion. If it were included in the S&P 500 today, the company would be the fifth largest in the index, with a weight of about 5%. It would also have one of the most extreme valuations in the US stock market, given that the closing price on Friday is equivalent to about 107x SpaceX’s sales.

United Kingdom: Following Australia’s lead, the British government today will announce new rules to force leading social media companies to restrict access to their sites for teens under 16 years of age. The new rules will come into effect early next year. Similar restrictions are now being considered in about a dozen other countries, potentially creating marketing and operational challenges for companies such as Snapchat, TikTok, YouTube, Instagram, Facebook, and X.

China-Taiwan: In a little noticed development over recent weeks, the Chinese military has stepped up its provocative territorial moves in the South China Sea, including by sending coast guard and law enforcement ships into the area around Taiping Island and around the Donsha Islands, which are midway between the Chinese mainland, Taiwan, and the Philippines. The renewed territorial intrusions are likely designed to assert Chinese sovereignty over the disputed waters. The risk is that they could also spark outright military conflict that could draw in the US.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with a discussion of the ECB’s decision to raise rates and its potential implications for other central banks. We then turn to the ongoing talks of renewing the USMCA before covering SpaceX’s anticipated IPO, and the latest developments in US-Iran peace negotiations. As always, we conclude with a review of recent domestic and international economic data.

Global Pivot: The sudden surge in inflation has paved the way for central banks to consider raising interest rates in a bid to restore price stability. On Thursday, the European Central Bank made history as the first monetary authority within the G-7 to announce a rate hike of 25 bps, raising its deposit rate to 2.25%. The decision comes in direct response to soaring energy prices, which have driven inflation across the bloc to three-year highs. By raising rates, the ECB may be paving the way for a shift in global monetary policy from a dovish lean to a more hawkish stance.

• The ECB’s decision reflects a broader trend among central banks navigating the aftermath of the Iran war amid heightened concerns over potential pass-through effects from rising energy prices. The Bank of Japan is projected to follow suit at its next meeting, while the Bank of England is anticipated to implement a rate hike in September. Meanwhile, an increasing number of Federal Reserve officials have openly signaled their readiness to support tighter monetary policy should inflation continue to accelerate.
• The Bank of Japan and the ECB have shown the greatest willingness to raise rates due to their heightened vulnerability to an energy shock stemming from the continued closure of the Strait of Hormuz. Both regions source a disproportionate share of their oil from the Middle East, leaving them very exposed to the risks of a prolonged conflict. The US and Canada, by contrast, enjoy greater energy independence, explaining why both central banks are expected to exercise more patience before committing to a rate hike.
• The potential policy pivot is likely to reverberate across bond markets and exchange rates. Rising short-term rates have historically acted as a floor for long-term yields during expansions, and a similar dynamic is expected to play out here. Exchange rates have proven particularly sensitive to shifts in Fed policy expectations with fears that the conflict could force a rate hike providing a tailwind for the dollar.
• The ECB’s decision signals how central banks intend to respond to inflationary pressures from the conflict in Iran. Countries most exposed to oil price shocks are expected to tighten first, while those with greater energy independence are likely to be more patient. A resolution could take hikes off the table, though the bar for cuts remains considerably higher than before the conflict, likely requiring clear evidence that the inflation spike is transitory rather than structural.

USMCA Trade Talks: The US has entered trade talks with Mexico and Canada as the three nations assess the future of their free trade agreement ahead of the July 1 renewal deadline. Earlier this week, President Trump signaled a potential unwillingness to renew the deal, a stance that could trigger a formal, decade-long withdrawal process and spark a lengthy renegotiation. These comments have introduced significant uncertainty into America’s relationships with its two largest trading partners, elevating the risk of renewed trade tensions.

• While the president has stopped short of saying he wants to leave the agreement, his comments have triggered a push for changes to the deal. On Thursday, the US ambassador to Canada expressed optimism that a deal could be reached, provided that there is no escalation. His optimism appears to be driven by Canadian Prime Minister Mark Carney’s push to establish a North American economic bloc, a vision of a unified trade front among the three countries under the existing agreement.
• Despite the optimism, talks to renew the trade agreement are expected to yield a more tailored arrangement as a way to keep the US on board. According to a Canadian trade official, any renewal of the USMCA will likely be accompanied by additional bilateral agreements between Canada and the US. The official also expects Mexico to pursue a similar arrangement. Although it is unclear as to what concessions these countries will make, it does appear that they are more open to appeasing the US than challenging it.
• A central theme emerging from these talks is the push for a unified trade policy. The White House has long sought to align Canada and Mexico with its stance on trade with China, and the current negotiations are expected to address the gaps between the three nations on this front. This alignment may take the form of coordinated restrictions on Chinese investment and trade in strategic industries, as well as tighter controls on sourcing requirements.
• Although the president has raised the prospect of not renewing the USMCA, there is currently little evidence of a planned US withdrawal. While negotiations will likely introduce temporary uncertainty as all sides work toward a new deal, this friction is unlikely to have a lasting impact on markets, provided investors remain confident the agreement will stay in place. Any credible signs of a US withdrawal, however, could weigh on market sentiment.

Hottest IPO: SpaceX has seen record demand for its shares leading up to its debut on NASDAQ. On Thursday, the company raised over $75 billion for its IPO, marking the largest stock opening on record. Demand was four times greater than the available supply, demonstrating robust investor interest. This surge partially reflects the inclusion of retail investors, who were allocated over 20% of the shares. The stellar performance suggests that other highly anticipated IPOs, such as Anthropic and OpenAI, may also see strong market demand.

Deal Imminent? The president has decided to call off a planned strike on Iran amid progress in ongoing peace talks. The decision comes as the president indicated that an agreement could be signed as soon as this weekend in Europe. While the details have yet to be released, the president announced that Iran’s Supreme Leader has agreed to a deal. The current arrangement would extend the ceasefire by 60 days, reopen the Strait of Hormuz without tolls, and provide Iran with sanctions relief contingent on compliance.

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by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment opens with takeaways from the latest CPI report and its implications for monetary policy. We then provide an update on the US-Iran conflict, followed by an analysis of the oil markets. Next, we briefly cover PIMCO’s growing concerns regarding financial weakness, Anthropic’s latest funding round for its AI buildout, and the ECB’s decision to hike interest rates. As always, we conclude with a review of recent domestic and international economic data.

Inflation Problems: Less than a week before Kevin Warsh will chair his first Federal Reserve meeting, policymakers appear to be confronting a renewed inflation problem. The latest CPI report showed headline inflation accelerated to 4.2%, its third consecutive monthly increase and its fastest pace in more than three years. This pickup in inflation is likely to complicate plans for a Fed chair who had previously signaled openness to rate cuts and could instead strengthen the hand of a Federal Reserve Board that has grown more inclined toward further tightening.

• In May, energy prices were the main driver of the latest CPI upturn, reflecting both the Iran-related supply shock and surging power demand from the AI buildout. Gasoline prices jumped 40.5% year over year, while fuel oil and other household energy costs climbed an even steeper 58.9%. Although such extreme moves are likely to normalize over time, a more troubling development is the nearly 6% increase in electricity prices, which appears increasingly tied to the growing power needs of data centers.
• The pickup in inflation is likely to complicate Kevin Warsh’s efforts to set a monetary stance that accommodates the AI buildout. He has argued that the Fed should be willing to hold rates steady and allow a prospective AI‑driven productivity boom to show up in the data. Yet, the recent energy‑price surge associated with that same buildout risks having the opposite effect, forcing Warsh to persuade more hawkish officials to tolerate above‑target inflation in the meantime.

• May’s inflation data is likely to harden the stance of many Fed officials, several of whom only a month ago had pressed the central bank to drop its easing bias and openly entertain the prospect of a rate hike. Market pricing has moved in tandem — overnight rates have swung from implying a 25-50 basis point cut at the start of 2026 to instead assigning a roughly 70% probability to at least one hike by year end at the time of writing.
• While the latest CPI report likely gives the Fed cover to delay any rate cuts, we remain less convinced than fed funds futures that policymakers will deliver a hike this year. The 2023 episode showed the Fed’s willingness to treat a rise in 10‑year yields as a substitute for additional tightening at the front end, plus, given today’s split among officials and the current chair’s leanings, an extended pause looks more likely than an outright hike as the conflict plays out.

Ceasefire in Jeopardy? The US has escalated its military operations in Iran, reflecting growing impatience over stalled negotiations to reopen the Strait of Hormuz. Iran has retaliated by targeting other Gulf states and signaling its intent to further restrict access to the waterway. The renewed hostilities follow a breakdown in talks that had appeared close to a resolution just weeks earlier. As anticipated, the escalation is likely a strategic effort by both sides to strengthen their bargaining positions and extract additional concessions in forthcoming negotiations.

• Following the latest round of strikes, which lasted roughly four hours before pausing, the president stated that military operations will continue until Iran agrees to peace terms. While several issues remain unresolved, the primary sticking point appears to be US demands that Iran dismantle or relinquish its uranium stockpiles. Iran, in turn, has held firm on securing the unfreezing of approximately $10 billion in assets, along with a ceasefire in Lebanon, as preconditions for any agreement.
• Investors had taken comfort from Washington’s reluctance to abandon the ceasefire, reflecting concerns that a broader escalation could prove difficult to control given Iran’s ability to sustain strikes even after significant damage to its military capabilities. At the same time, although there has been speculation that US forces could reopen the strait with a more substantial ground presence, the White House appears wary of the domestic political backlash that a visible troop deployment could trigger.

• The stop‑start pattern of strikes between the two sides has added to the volatility in crude, but it has also helped prevent prices from revisiting the peaks seen at the onset of the conflict. One area we have been watching closely is the spread between futures and physical barrels. While that spread has narrowed, the move appears driven less by easing tensions and more by buyers pulling forward deliveries amid concerns about future disruptions, even as some suppliers continue to face resistance in selling into Asian markets.
• While the worst may be behind us, we are reluctant to say that oil prices will normalize anytime soon. For one, it still appears that the US and Iran will continue to trade strikes even as they hold talks. Second, the spread between crude futures and the physical market suggests that near‑term demand and delivery concerns are outweighing any longer‑term optimism about a lasting deal, leaving room for another step higher in prices if negotiations fail in the coming weeks.

PIMCO Fears: PIMCO has reiterated its warning that a credit loss cycle may be approaching. In its latest outlook, the firm cautions that the AI buildout could leave lower‑quality borrowers particularly exposed to defaults. While credit spreads remain near historical lows, PIMCO flags the growing use of maturity extensions and payment‑in‑kind structures — where interest is paid with additional debt — as key red flags. Even so, there are still no clear, broad‑based signs of credit deterioration at this stage.

AI Debt: Apollo and Blackstone have partnered with Broadcom to help Anthropic finance additional chips for its AI buildout. The deal involves roughly $35 billion to fund purchases of Google‑designed chips that Broadcom helped develop. The arrangement highlights both the growing reliance on credit and the increasingly circular financing needed to support the AI infrastructure boom. While this may bolster near‑term growth, it also reinforces concerns about the longer‑term sustainability of the current investment cycle.

ECB Hawk: The European Central Bank raised interest rates by 25 bps for the first time in three years, marking a significant shift toward tighter policy. The move comes as the euro area contends with an energy shock that threatens its ability to maintain price stability. Although the hike was largely priced in and initially met with a muted market reaction, it could offer additional support to the euro if the Federal Reserve signals a pause at its meeting next week.

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