by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the latest developments in the Israel-Iran conflict. We next review several other international and US developments with the potential to affect the financial markets today, including new forecasts of excess supply in the world oil market despite the conflict in the Middle East and new details on US fiscal policy as envisioned by Republicans in the Senate in their proposed version of President Trump’s “big, beautiful” tax-and-spending bill.

Israel-Iran Conflict: After reports surfaced that President Trump vetoed an Israeli plan to kill Iranian Supreme Leader Ayatollah Ali Khamenei in recent days, Prime Minister Netanyahu yesterday insisted that killing Khamenei would end the current conflict. Other Israeli officials have echoed Netanyahu’s stance. That raises the possibility that Israel will ultimately decide to ignore Trump, kill Khamenei, and pursue regime change in Iran, leaving the country and region even more politically unstable and potentially upending global financial markets.

• Many Iran critics who support regime change reportedly believe that Khamenei and his top officials could be replaced by former Crown Prince Reza Pahlavi, the eldest son of the former shah. Pahlavi reportedly has high name recognition among Iranians and has called for the country to transition to a secular democracy. However, it isn’t clear whether Iranians would rally around him if Khamenei were to be assassinated.
• In any case, President Trump spooked the markets late yesterday when he said he would leave early from the Group of 7 summit in Alberta, Canada, first warning that Tehran should be evacuated but then hinting that he should be back in Washington for talks about a ceasefire.
• Separately, as Israel and Iran continued to strike each other overnight, global investors worry that Israel could attack Iran’s oil export hubs or Iran could make a full-throated effort to close the Strait of Hormuz, through which much of the world’s oil exports pass. In either scenario, a key victim could be China, which currently takes more than 90% of all Iranian crude oil exports.

Global Oil Market: In its annual report, the International Energy Agency today forecast that global oil supplies will substantially outstrip demand in 2025, despite escalating conflict in the Middle East. The agency predicts that world oil production this year will rise by 1.8 million barrels per day to 104.9 million bpd, while demand rises by just 720,000 bpd to 103.8 million bpd, largely reflecting weakness in the US and China. As a result, the agency expects rising inventories and weaker pricing.

Global Gold Market: In a new survey of world central bankers, the World Gold Council found that a record 95% of respondents expect their institution’s gold holdings to rise over the next 12 months. As we have argued before, central banks are likely to continue being avid gold buyers amid today’s geopolitical tensions, sanction risks, and growing concern about the value of the US dollar. We therefore believe that gold prices will continue to march upward in at least the near term.

Japan: The Bank of Japan today held its benchmark short-term interest rate unchanged at 0.50%, as widely expected. Perhaps more important, BOJ Governor Ueda announced that the central bank will move more slowly on cutting back its purchases of Japanese government bonds starting next April. The move follows recent volatility in the market for JGBs, which has pushed longer-term bond yields higher, boosted the value of the yen, and created economic headwinds.

• The BOJ is currently buying 4.1 trillion JPY ($28.3 billion) of Japanese government bonds each month, with the purchases being reduced by 400 billion JPY ($2.7 billion) every three months.
• Under Ueda’s plan, the BOJ will start tapering its purchases by just 200 billion JPY ($1.3 billion) every three months starting next April, with the aim of reaching a monthly purchase level of 2.1 trillion JPY ($14.5 billion) by March 2027.

US Monetary Policy: The Fed starts its latest policy meeting today, with its decision due on Wednesday at 2:00 PM ET. Based on futures trading, investors widely expect the policymakers to hold their benchmark fed funds interest rate at its current range of 4.25% to 4.50%. Investors expect the next rate cut to come only in September, with perhaps one more cut by the end of the year. We agree with that assessment, but we’ll also be looking for more clues on the direction of rate cuts at Chair Powell’s Wednesday press conference.

US Fiscal Policy: Republicans in the Senate yesterday released details on their version of President Trump’s “big, beautiful” tax-and-spending bill. The basic contours of the bill duplicate what the House passed in May, but the proposal also includes significant differences that will be tough to reconcile with the delicate compromises agreed by Republicans in the lower chamber. That suggests that US fiscal policy will probably remain up in the air for at least a few more weeks, and passage of the final bill may not meet Trump’s preferred July 4 deadline.

• For example, the Senate bill includes more permanent business tax breaks, deeper cuts to Medicaid, slower phaseouts for clean-energy tax credits, and a much lower cap on the state and local tax deduction.
• The Wall Street Journal provides a handy summary of the main policy differences between the Senate and House bills here.

US Tariff Policy: President Trump’s decision to make an early departure from the G7 summit in Canada, mentioned above, has precluded most of his bilateral meetings with other leaders that many investors thought would lead to trade deals and reduced trade tensions. He did meet with Canadian Prime Minister Carney, but that meeting ended only with an agreement to work toward a deal in the next 30 days. The lack of any meetings or deals with other leaders is likely one reason for the weakness in US stock prices so far this morning.

US Immigration Policy: Following reports that US Immigration and Customs Enforcement leaders had directed agents to ease up on immigration raids at farms, meatpacking plants, restaurants, and hotels, as we noted in our Comment yesterday, reports yesterday revealed that Department of Homeland Security Secretary Kristi Noem has overridden the decision and ordered that “[W]e must dramatically intensify arrest and removal operations nationwide.”

• The reversal highlights growing disagreement within the Trump administration on whether to go full-bore on the president’s immigration raids even if they disrupt economic activity.
• Some top Trump officials are reportedly more sensitive to business concerns and argue for taking a softer, slower approach to removing illegal migrants.

US Commercial Real Estate Industry: New data from CBRE shows that the supply of office space is now on track to fall for the first time in 25 years, as developers hold off on building new work space and office-to-residential conversions accelerate. Conversions have been especially encouraged by rapid price declines for obsolete office buildings, changes to zoning rules that allow for more residential construction, and government incentives that help bring down costs.

• According to CBRE, conversions and other losses will reduce available US office space by about 23.2 million square feet in 2025, while developers are only expected to build about 12.7 million square feet of new offices.
• At the same time, corporate return-to-work policies are boosting the demand for office space.
• The result will likely help support office rents and the value of office buildings going forward.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with the latest developments in the Israel-Iran conflict. We next review several other international and US developments with the potential to affect the financial markets today, including signs that the US and China remain susceptible to new military and economic tensions and President Trump’s partial reversal on some of his immigration crackdowns.

Israel-Iran: Both Israel and Iran continued to strike each other with air and missile attacks throughout the weekend, following Tel Aviv’s initial attacks on Friday. Israel’s attacks, mostly using aircraft, have broadened beyond the initial focus on nuclear sites, military leadership, and air defenses and now include strikes on Iran’s energy infrastructure. Israel has also conducted at least one attack on the Iran-supported Houthi rebels in Yemen. All told, dozens of Israelis and Iranians have now been killed in the conflict.

• By expanding its attacks on Iran’s oil industry, Israel could potentially spark further investor concern about the world’s energy supplies, especially if Iran takes the cue to launch retaliatory attacks on energy facilities throughout the region. Nevertheless, as of this writing, oil prices have fallen about 1% so far today, with Brent trading at $73.64 per barrel and WTI at $72.27.
• Importantly, reports over the weekend said the Israeli government has pressured the US to participate in the attacks. Since the US has powerful “bunker buster” munitions that Israel doesn’t possess, Tel Aviv apparently wants the US to help take out the Iranian nuclear facilities that are buried in deep underground bunkers. So far, President Trump has refused the request. However, if he changes his mind, fear of Iranian retaliation against the US could well lead to even greater concern among investors.

China-United States: According to two officials involved in the latest US-China trade truce last week in London, the Chinese side would not commit to re-starting exports of some specialized rare-earth magnets that US military suppliers need for fighter jets and missile systems. According to the officials, the Chinese negotiators hinted they wouldn’t take that step unless the US eases up on its limits on sending advanced artificial-intelligence chips to China.

• The US officials also suggested they are looking to extend the US’s existing 30% reciprocal tariffs on China for a further 90 days beyond the August 10 deadline agreed in Geneva last month. That indicates that a more permanent trade deal between the US and China is unlikely to happen before late 2025.
• Earlier reporting suggested the London deal merely re-established the interim cooling-off deal reached in Geneva in May. However, after China reneged on its Geneva promise to ease up on rare-earth exports, the end result of the London meeting appears to be that China has only eased up on its civilian rare-earth exports. That suggests US-China trade tensions could easily flare up again and further delay any deal. Investors will therefore have to deal with heightened trade uncertainty for some time to come.

Chinese Military: In its latest yearbook, the Stockholm International Peace Research Institute (SIPRI) said China’s nuclear arsenal has now risen to 600 warheads, up from 500 last year. Beijing’s nuclear arsenal remains far below those of the US and Russia, which each have more than 5,000 warheads, but it remains on track to match the 1,700 or so the US has deployed by 2035.

• While the Trump administration’s tariff policies can make it seem that today’s US-China tensions are all about economics, the new SIPRI data on Beijing’s rapid nuclear build-up is a reminder that geopolitical and military tensions remain a key part of the relationship.
• As we noted in our Bi-Weekly Asset Allocation Report from April 15, 2024, China’s nuclear build-up is likely also boosting the price of uranium. SIPRI’s estimate that China built 100 new warheads over the last year isn’t far off from the 115 warheads we projected in our report. We estimated that such a level would require more than 10% of the world’s 2023 uranium production, which almost certainly would put upward pressure on prices.

Chinese Economy: Total industrial production in January through May was up 5.8% from the same period one year earlier, slowing from its gain of 6.1% in January through April. Fixed investment in the first five months of the year was up 3.7% on the year, after a gain of 4.0% in the first four months. This weak data was partially offset by a stronger-than-expected rise in May retail sales, but that gain likely only reflected the government’s temporary buying incentives. In sum, the figures suggest Chinese economic growth remains weak.

Australia: The Securities and Investments Commission today said it will open a probe into the country’s stock exchange operator, the Australian Securities Exchange, over its governance and risk management practices. The investigation stems from recent mishaps, including a botched upgrade to the exchange’s clearing and settlements systems and a prolonged outage late last year. The exchange is also suffering from a long drought in initial public offerings. The probe could potentially help boost Australian stock prices and new offerings going forward.

Eurozone: In a speech today, Bundesbank leader Joachim Nagel said the European Central Bank shouldn’t rush in cutting interest rates further, given that consumer price inflation in the region has already fallen to the targeted level. The statement comes after the ECB cut its benchmark short-term interest rates for the eighth straight time earlier this month, leaving it at 2.00%. The hawkish statement has given a boost to the euro so far today, with the currency now up about 0.2% to $1.1579,

G7 Summit: Leaders from the US, Japan, Germany, France, Italy, the UK, and Canada today begin their annual “Group of 7” summit in Alberta, Canada, along with invited leaders from a range of other countries, such as Mexico. While the forum will allow the leaders to discuss many key topics, such as the Israel-Iran and Russia-Ukraine conflicts, key trading partners are also reportedly eager to finalize commercial deals with the US at the meeting. Any announcements could potentially affect the global financial markets this week.

US Monetary Policy: The Fed will hold its latest policy meeting starting tomorrow, with its decision due on Wednesday at 2:00 PM ET. Based on interest-rate futures trading, investors widely expect the policymakers to hold their benchmark fed funds rate at a range of 4.25% to 4.50%. Investors currently expect the next rate cut to come only in September, with perhaps one more cut by the end of the year. We agree with that assessment, but we’ll also be looking for more clues on the direction of rate cuts at Chair Powell’s Wednesday press conference.

US Labor Market: Reports say President Trump late last week ordered US Immigration and Customs Enforcement to mostly pause its immigration raids on farms, meatpacking plants, hotels, and restaurants. According to one source, Trump was not aware of the extent of the enforcement push he had unleashed, and “once it hit him, he pulled it back.” Under his new directive, enforcement raids on the designated business types would focus only on arresting immigrants accused of serious crimes.

• As we have long surmised, any large-scale immigration crackdown would run the risk of creating labor shortages and driving up wage rates, especially in industries heavily dependent on immigrant labor.
• Trump’s quick pullback on the raids helps confirm that our concerns were valid. We suspect Trump was hearing an earful of complaints from backers in the business community.
• In any case, the president’s climbdown on the raids is a reminder that the actual policies he leaves in place on trade, immigration, fiscal policy, or regulation might be much less dramatic, and less disruptive for the economy or the financial markets, than his rhetoric or initial steps.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! Markets are focused squarely on Middle East tensions. Today’s Comment analyzes the market impact of the Israel-Iran conflict, explores why recent inflation trends have bolstered calls from the president for rate cuts, and highlights other key developments moving global markets. We’ll wrap up with our regular overview of today’s most important international and domestic economic data releases.

Israel Strikes Iran: As expected, Israel has launched a military attack on sites in Iran as it looks to prevent the country from producing a nuclear weapon.

• The strikes targeted Tehran, with Israel destroying key military installations and killing two of Iran’s senior commanders. The operation aimed to cripple the heart of Iran’s nuclear program, with the campaign expected to continue for two weeks. Meanwhile, the US denied any involvement in the attacks. Still, it urged Iranian officials to proceed with scheduled nuclear talks on Sunday, seeking to prevent an all-out war from spreading into other parts of the Middle East.
• Iran appears to be in disarray as it scrambles to formulate an effective response. The regime launched over 100 drones in retaliation, many of which were intercepted by Israeli defenses. Meanwhile, reports suggested that the replacement of top military leaders were later retracted, highlighting Tehran’s leadership crisis following the attacks. Despite this turmoil, Iran and its proxy forces are planning retaliatory strikes, along with potential blockades of critical shipping lanes in the Red Sea and Strait of Hormuz.

• The escalating conflict in the Middle East threatens to disrupt global trade, with Brent crude prices surging 10% in just five days amid mounting supply concerns. Shipping routes are being redrawn as vessels divert from contested waters, driving freight costs higher. This comes on top of existing supply chain pressures, as global shipping rates had already jumped 52% last week, and companies are racing to stockpile goods before the expiration of the 90-day tariff pause.
• The potential for this conflict to trigger significant global spillover effects hinges primarily on Israel’s strategic objectives. If its sole aim is to dismantle Iran’s nuclear program, market disruptions may prove temporary. However, should Israel expand its goals to include regime change, the resulting escalation could unleash sustained market volatility as a wider regional conflict would become increasingly likely.
• Current evidence suggests Israel is pursuing the more limited objective, having carefully targeted only key nuclear facilities. However, this restrained approach could shift if Iran refuses to back down despite the attacks. Should tensions escalate further, commodities would likely emerge as safe haven assets, poised to rally amid heightened geopolitical uncertainty.

 Trump Fed Pressure: Softer inflation data has led the president to add further pressure on the Federal Reserve to implement rate cuts at its next meeting.

• Supply-side inflation remained subdued in May. The overall Producer Price Index (PPI) rose 2.6% year-over-year, narrowly exceeding estimates of 2.5%, while core inflation edged down from 3.2% to 3.0%. Moreover, key components feeding into the Federal Reserve’s preferred inflation gauge — the PCE price index — showed muted growth, indicating that the May reading will likely reflect further progress toward the central bank’s 2% target.
• The subdued inflation figures marked the second consecutive report this month showing progress toward the Fed’s inflation target, even as new tariffs took effect. The president has seized on these numbers to demand an aggressive 100 basis point rate cut at the Fed’s upcoming meeting. While he has stopped short of threatening to dismiss Chair Powell, he has hinted that the administration may have to “force something” if the central bank doesn’t act.
• The Federal Reserve has pointed to persistent uncertainty around inflation’s path as the primary reason for holding rates steady. Policymakers are split on whether businesses will fully pass through tariff-driven cost increases to consumers or partially absorb them, prompting the central bank to adopt a wait-and-see approach. Fed officials have emphasized the need for more time to assess the tariffs’ broader economic effects before considering any policy adjustments.

• Recent PPI inflation data suggests businesses have so far resisted passing on higher costs to consumers, instead absorbing the impact of tariffs. Trade services margins, which track wholesaler-to-retailer pricing, indicate firms are currently bearing these additional costs. However, this absorption capacity may stem from inventory stockpiles accumulated before the new tariffs took effect. Consequently, it remains uncertain whether companies can sustain this pricing restraint in coming months as inventories dwindle.

The Golden Share: The proposed acquisition of US Steel by Nippon Steel remains under review as the White House and the Japanese steelmaker continue negotiations.

• On Thursday, the president announced that the proposed Nippon Steel acquisition of US Steel would give the US government veto power over key corporate decisions, though he provided no further details. Nippon Steel swiftly pushed back, insisting it would not accept any deal that compromises its management control. With just days remaining before the June 18 deadline, the standoff underscores the significant gap between the two sides.
• Despite the disagreements, the two sides appear to have reached consensus on key provisions that would grant the US government certain oversight powers. As part of the deal, Nippon Steel is expected to sign a binding national security agreement requiring it to maintain US Steel’s headquarters domestically, with severe penalties for non-compliance. The Japanese firm has also committed to providing employee bonuses upon deal completion and investing billions to modernize American steel production.
• Despite ongoing negotiations, optimism remains high that a deal will be reached. The Trump administration has argued that the acquisition could help revitalize America’s steel industry, which has struggled against foreign competition in recent years. Meanwhile, Japan views US Steel as a strategic opportunity to diversify its holdings and gain stronger access to North American markets.
• The potential Nippon Steel-US Steel deal may establish important precedents for how the US handles foreign mergers amid rising trade protections. This acquisition could demonstrate whether partnerships and mergers will become viable strategies for foreign firms to navigate America’s tariff regime. The terms of this deal may ultimately shape how Washington regulates foreign investment in other strategic domestic industries.

New Tariffs: The president announced new tariffs as he looks to drive more manufacturing back to the US.

• The Trump administration announced that it would expand tariffs to include not only steel products but also steel derivative products, effective June 23. The new tariffs — set at 50% — will apply to goods such as home appliances. This move comes just a week after Trump declared he would increase steel tariffs, aiming to shield American manufacturers from foreign competition by discouraging imports of cheaper steel-based goods.
• The new tariffs are likely to raise concerns, as trade restrictions could force firms to either accept lower profit margins or pass costs on to consumers through higher prices. Additionally, the move suggests that the president may consider additional tariffs in the future. So far, these measures have not disrupted supply chains, and if this stability continues, it should help maintain economic resilience.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning! The market’s attention is firmly on the latest Producer Price Index data. In today’s Comment, we’ll analyze the implications of the recent inflation figures, discuss new developments in Trump-era trade policies, and cover other key market-moving stories. As always, we’ll also provide a concise summary of today’s domestic and international economic data releases.

CPI Cool Streak: Inflation continues to trend lower, as many tariffs have yet to fully impact consumer prices.

• According to the BLS, consumer price growth in May fell short of expectations, signaling ongoing caution among businesses in raising prices. While many had forecast an uptick in inflation, both headline and core inflation slowed month-over-month, declining from 0.2% to 0.1%. The modest increase pushed the annual inflation rate up slightly, from 2.3% to 2.4%. Meanwhile, core inflation held steady at 2.8% year-over-year, unchanged from the previous month.
• The subdued price pressures were primarily driven by ongoing moderation in services inflation. Shelter prices, which account for over a third of the index, continued to normalize, having fallen to fresh post-pandemic lows. Meanwhile, energy prices remained a downward force on overall inflation as consumers benefited from lower gasoline prices.

• While most of the inflation report was positive, there were some signs of emerging price pressures. The month-over-month percentage changes compared to the previous year suggest inflation momentum may be building. Although January saw an acceleration driven by rising insurance costs, inflation had largely stabilized at pre-pandemic levels before the tariff announcement. Since then, however, inflation appears to have accelerated to match last year’s pace.
• The continued moderation of the rise in inflation remains a welcome surprise, though it may be too early to tell whether this trend will persist. As noted in previous reports, much of the recent moderation appears attributable to inventory accumulation ahead of tariff implementations. While we expect this effect may soon fade, we believe a structural downward trend in services inflation should help prevent a return to the peak seen following the pandemic.

Trump’s Trade Tactics: The president’s trade truce with China eased fears of resource shortages but sparked speculation about potential new tariffs.

• During yesterday’s briefing, the president has confirmed a trade truce that will enable China to resume shipping critical rare earths and magnets for another six months. This agreement, however, requires the final go-ahead from Chinese President Xi Jinping. Although the precise concessions made by the US haven’t been fully disclosed, the president indicated that reinstating student visas for Chinese nationals attending American universities might have been a component of the deal.
• While markets welcomed signs of easing tensions between the US and its largest trading partner, the president reaffirmed his commitment to maintaining tariffs regardless of any new arrangements. After announcing what he called a “done deal” with China, he suggested that Chinese imports could still face total tariffs of 55% — a combination of the 30% imposed under the new agreement and the existing 25% from before his term.

• The president’s economic strategy of consistently leveraging tariffs as a dual-purpose tool to influence trade policy and generate revenue for deficit reduction may be paying off. A record $23 billion in tariff revenue last month played a significant role in narrowing the budget deficit from $341 billion to $316 billion, representing a 17% year-over-year decrease. This substantial increase in government receipts was primarily the result of tariffs enacted in April, showing that tariffs are a legitimate revenue tool.
• That said, the president is preparing to issue unilateral tariff notices to multiple trading partners within the next one to two weeks, reinforcing his stance against complacency in trade negotiations. This move echoes his mid-May ultimatum that yielded only partial progress, and critical disagreements are still blocking deals with Japan and the EU.
• With the trade deadline approaching, we anticipate the president will escalate his rhetoric to strengthen his negotiating position. Thus far, markets appear confident that the worst of the trade war has passed, with investors pricing in expectations that tariffs will remain at current levels or decrease. However, should this sentiment shift, we could see a rapid reduction in risk exposure from market participants.

Iran Defies Calls: The Islamic republic appears poised to advance its nuclear expansion plans, disregarding renewed diplomatic pressure and raising the prospect of war with Israel.

• Tehran has announced plans to establish a new uranium enrichment facility following its censure by the International Atomic Energy Agency (IAEA) for noncompliance with nuclear safeguards. The covert site will operate alongside the ongoing modernization of centrifuges at the Fordow nuclear plant. This development, particularly the refusal to disclose the facility’s location, constitutes a further violation of Iran’s nonproliferation obligations.
• Iran’s move to accelerate its nuclear program comes amid a collapse in diplomatic efforts to address its nuclear activities. Although Washington and Tehran maintain open channels for dialogue, negotiations have stalled without meaningful breakthroughs. The prospects for Sunday’s planned talks now appear uncertain after President Trump denounced Iran’s negotiating stance as “unacceptable,” casting doubt on whether discussions can proceed productively.
• The lack of diplomatic progress has led to concerns that Israel may launch an attack on Iran in the near future. In response, Iran has warned it could retaliate by targeting US military assets across the Middle East. These escalating tensions prompted Washington to order partial evacuations at its Baghdad embassy amid security concerns. Israel’s resolve was further demonstrated by parliamentary proceedings following the controversial elimination of military conscription exemptions, a move that nearly triggered the government’s collapse.
• The risk of conflict over Iran’s nuclear program has risen significantly, and will more so if Israel launches a full-scale attack. A major regional war would likely spill over into global markets, driving up commodity prices. A key factor will be Iran’s response. If Tehran adopts a “now or never” approach, the conflict could escalate dramatically, potentially drawing in neighboring countries.

Boeing Problems: The aircraft manufacturer is likely to face renewed scrutiny after one of its planes crashed in India.

• An Air India Boeing Dreamliner crashed shortly after takeoff, killing an unknown number of people. The aircraft was carrying 242 passengers and plunged into a residential area, raising fears of a high death toll. The incident is likely to fuel further skepticism about aviation safety, particularly Boeing’s aircraft quality, following a series of mishaps over the past six years — most notably the 737 Max crisis in 2019.
• Boeing aircraft are among the most valuable US exports, and orders for these planes have often been leveraged in trade negotiations to secure favorable terms. However, the public relations fallout from this incident could have far-reaching consequences if countries grow hesitant to purchase Boeing jets due to mounting safety concerns.

View PDF

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Good morning. The market’s primary focus today is the latest Consumer Price Index release. Today’s Comment will delve into a new contender that President Trump might consider to succeed Federal Reserve Chair Jerome Powell, discuss signs of progress in US trade negotiations, and review other key market-related news. As always, we will conclude with a summary of today’s domestic and international economic data releases.

Bessent Fed Chair? While the Trump administration has abandoned the idea of ousting the Fed chair, it has not stopped its attempt at influencing monetary policy decisions.

• Treasury Secretary Scott Bessent has emerged as a potential nominee to succeed Fed Chair Powell when his term expires in 2026. The administration has reportedly begun considering candidates well in advance, aiming to shape market expectations for future policy rates. This move comes amid the Fed’s reluctance to cut rates in 2025, following a 100-basis-point reduction the previous year.
• Bessent has long been one of the most trusted and loyal figures in the Trump administration. While investors have viewed him as a steady hand, his potential nomination as Fed chair could face skepticism given his proximity to the president. Although Bessent has publicly downplayed interest in the role, he was reportedly the architect of the so-called “shadow Fed” strategy.

• Since the start of the year, the 10-year Treasury yield has been highly sensitive to shifting expectations around Fed rate cuts. The yield has largely fluctuated within a range of 4.20% to 4.50% as investors attempt to gauge the Fed’s next moves. When economic data signals weakness, markets price in more aggressive rate cuts, pushing the yield lower. Conversely, signs of resilience have led traders to scale back rate-cut bets, driving the yield higher.
• That said, it would be disingenuous to claim that the Fed is the only factor influencing the 10-year yield. Concerns over the national debt and shifting expectations around US Treasury demand have also played a role. For instance, even after the Fed cut rates by 100 bps last year, the 10-year yield reached peaks higher than any level seen in 2024, and unlike last September, it has yet to dip comfortably below 4%.
• The potential nomination of Bessent — or, as we’ve previously noted, former Fed Governor Kevin Warsh — to Fed chair could raise concerns about the central bank’s independence. While this might clear the path for lower short-term rates, we believe it could also increase volatility in long-term rates. Ultimately, the push to appoint a new Fed chair may lead to more accommodative monetary policy but at the cost of heightened bond market instability.

Trade Progress: The Trump administration has advanced trade framework negotiations to de-escalate tensions before the critical July 9 deadline.

• China and the US have reached a tentative agreement aimed at easing bilateral trade tensions amid a row over compliance with the “Geneva Deal.” While details have not been released, trade talks seem to focus on export restrictions as opposed to import tariffs. Particularly, the Trump administration has agreed to relax some technology export controls in return for accelerated shipments of critical rare earth minerals from China.
• Building on its China negotiations, the administration has achieved parallel breakthroughs in other trade talks. Most notably, US-Mexico negotiations have yielded a proposed steel agreement establishing duty-free access within defined limits on imports. Additionally, the US and India are close to a “phased trade deal,” which will include market access in India and reduced non-trade barriers such as quality control.
• However, mounting evidence suggests several key trading partners may fail to meet the administration’s July deadline. European negotiators are currently advocating for an interim agreement to maintain negotiations beyond the cutoff date, while preserving ongoing dialogue. This follows South Korea’s formal request earlier this month for an extension to its bilateral trade terms.

• While the president is focused on long-term trade deals, he is also securing short-term economic boosts. For instance, recent Boeing sales solidified during his trip to the Middle East are expected to further stimulate growth. In May, Boeing secured 303 new bookings and delivered 38 new 737 MAX jets, marking its sixth-highest monthly order tally in company history. As one of the nation’s largest exporters, Boeing’s performance can have a significant impact on overall economic growth.

Gold Climbing: Central banks are accumulating gold at a pace not witnessed since the post-war Bretton Woods era.

• A significant shift in global reserve holdings has occurred, with gold now officially ranking as the second most important reserve asset for central banks, surpassing the euro. This increased accumulation of gold is a strategic move by central banks to diversify their portfolios, given the perceived heightened risk of dollar-denominated assets due to recent US trade and political measures.
• According to the report, gold currently comprises 20% of global official reserves, significantly exceeding the euro’s 16% share but still well below the US dollar’s dominant 46%. In 2024, central banks collectively acquired over 1,000 tons of gold for the third consecutive year, representing approximately one-fifth of total global production. This accumulation has increased global gold reserves to 36,000 tons, nearing the record 38,000-ton peak last seen in the mid-1960s.
• Notably, the largest gold buyers included India, Poland, Turkey, and China — countries that have often faced US and EU sanctions or penalties, particularly in response to alleged human rights abuses. We suspect this surge in gold acquisition is largely driven by the dollar’s weaponization against Russia post-Ukraine invasion, alongside a broader ambition to diminish trade dependence.
• The accumulation of gold by central banks likely signals potential weakening for the dollar. While strong indicators suggest the US will maintain its role as the dominant reserve currency, supported by its robust, diverse economy and deep, liquid markets, it is evident that markets may begin exploring alternative options. Although it is premature to predict a dollar bear market, this trend clearly suggests a potential softening of demand.

Netanyahu in Trouble? The Israeli parliament may dissolve over disagreements about military exemptions.

• A vote is scheduled for Wednesday regarding the exemption for religious students from military service. An ultra-Orthodox party, allied with Prime Minister Netanyahu’s Likud Party, has threatened to dissolve parliament if the measure fails. This development risks exacerbating political uncertainty as the nation simultaneously navigates tensions with its territorial rivals.
• It appears that lawmakers are seeking to postpone any final vote until after the parliamentary session concludes in July. However, it is widely believed that a new vote could significantly complicate PM Netanyahu’s efforts to establish a governing coalition. This political uncertainty could, in turn, hinder efforts to reach a resolution in the two ongoing conflicts in which the country is involved.

View PDF