Markets continued to process the strength of last week’s nonfarm payrolls report, which reignited fears of a Fed tightening cycle. Interest rate futures have fully priced in a 25 bp hike by year-end, and BNP Paribas updated its call for the Fed to reverse last year’s “insurance” cuts. President Trump told NBC News there’s “no reason” to raise rates after the report, arguing that “success can kill inflation just like higher interest rates.” Despite the comments, Trump said “Kevin (Warsh) is fantastic, and I’ll let him do whatever he wants.”
Markets may also be signaling to the new Fed chair that rates aren’t high enough. Yields on policy-sensitive two-year notes are at their highest level in more than a year as traders price in a full 25 bp hike as soon as October. Last week’s jobs report and this week’s inflation data indicate that rates aren’t necessarily in restrictive territory at this time.
The week’s most consequential data was on the inflation front. May CPI rose 0.5% MoM and 4.2% YoY – the fastest annual pace since early 2023 – driven primarily by energy prices tied to the Iran war. Core CPI (excluding food and energy) rose a softer-than-expected 0.2% MoM, suggesting the energy shock has not yet fully passed through to border prices. The relief from that print was short-lived with PPI rising 1.1% MoM and 6.5% YoY, the hottest reading since November 2022, with CORE CPI also remaining elevated at 4.9% YoY.
The Iran war escalated sharply midweek, with U.S. forces launching strikes on multiple Iranian targets on June 10. The move effectively collapsed the April cease fire and sent equities to a one-month low overnight. On June 11, President Trump vowed further strikes and threatened to seize Kharg Island, Iran’s primary oil export hub, keeping crude prices over $90 per barrel. The World Bank warned that the conflict represents the worst hit to the global economy since Covid, projecting world GDP growth of just 2.5% in 2026.
The European Central Bank (ECB) raised its benchmark rate from 2% to 2.25% on Thursday, its first hike in nearly three years. President Christine Lagarde warned that Iran war-driven inflation is spreading beyond energy into broader price categories, adding that “inflation risks are to the upside.” The ECB revised its eurozone inflation forecast from 2.6% to 3% and trimmed projected GDP growth from 0.9% to 0.8%. Markets have priced in another ECB rate hike for September.
KEY INDICATORS THIS WEEK
Jobless claims – Rose 4,000 to 229,000, their highest level since February.
Next week – Kevin Warsh’s first meeting as Fed Chair.