Markets finished the holiday-shortened week modestly higher after navigating a peace deal between the U.S. and Iran that was announced over the weekend and Kevin Warsh's first FOMC meeting as the new Fed chair. Monday opened sharply higher on news that Washington and Tehran had agreed to end the war, lift the US blockade, and reopen the Strait of Hormuz, sending Brent down 5% to ~$83/bbl. On the macro data front, the Empire State manufacturing survey declined to 5.7, well below the 13.2 consensus, while May industrial production rose just 0.1%, a meaningful step down from April's revised 0.9%. Tuesday saw stocks pull back modestly with core import prices surprising to the upside at 0.8% and housing starts sliding 15.4% on multi-family weakness. Wednesday's focus shifted to the FOMC, which held rates unchanged (as expected) but revealed a higher path forward, signaling a bias toward delayed cuts. Thursday extended gains on a strong Philly Fed Survey beat before markets closed Friday in observance of Juneteenth.
Beyond the rate decision of last week's FOMC meeting was a meaningful shift in tone. A surprisingly strong rebound in the labor market has refocused attention on whether inflation is becoming problematic enough to justify tighter policy. Historically, the Fed has not hiked in response to oil price shocks. However, last week's meeting struck a hawkish tone, with nine members projecting a Fed funds hike in 2026 and the median 2027 Q4/Q4 core PCE projection rising to 2.5%. Markets seemed to quickly reprice this view. As of Friday, CME FedWatch futures were assigning an 89.6% probability of at least one hike by year-end, up sharply from 59.4% a week prior, while the odds of two or more hikes jumped to 55.6% from 17.1%. What could actually prompt a hike? A meaningful pickup in inflation expectations or a broadening of high inflation across categories, and ultimately, whether the inflation impulse looks more like a standard oil-shock passthrough than a pandemic-style, broad-based surge.
1. Empire State Manufacturing Survey
The Federal Reserve Bank of New York, Empire State Manufacturing Survey, retrieved from New York Fed, https://www.newyorkfed.org/survey/empire/empiresurvey_overview
2. Industrial Production
Board of Governors of the Federal Reserve System, Industrial Production and Capacity Utilization – G.17, retrieved from The Federal Reserve, https://www.federalreserve.gov/releases/g17/current/
3. Import Prices
Bureau of Economic Analysis, International Trade in Goods and Services, retrieved from BEA, https://www.bea.gov/data/intl-trade-investment/international-trade-goods-and-services
4. Housing Starts
United States Census Bureau, Monthly New Residential Construction, retrieved from U.S. Census, https://www.census.gov/construction/nrc/current/index.html
5. Philly Manufacturing Survey
The Federal Reserve Bank of Philadelphia, Manufacturing Business Outlook Survey, retrieved from Philadelphia Fed, https://www.philadelphiafed.org/surveys-and-data/regional-economic-analysis/manufacturing-business-outlook-survey
6. CME FedWatch Tool
CME Group, FedWatch, retrieved from CME Group; https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
7. The Fed’s June Projections
The Federal Reserve Board, Federal Reserve Board and Federal Open Market Committee release economic projections from the June 16-17 FOMC meeting, retrieved from Board of Governors of the Federal Reserve System; https://www.federalreserve.gov/newsevents/pressreleases/monetary20260617b.htm
Market Data
Morningstar Direct using Morningstar Indices