Markets already jittery from the Israel-Iran exchange of strikes were further spooked by the US entering the narrative. US President Donald Trump publicly demanded Iran’s unconditional surrender, warning of potential military action, sending the CBOE Oil ETF VIX index up by 26.4% to 71.6, its highest level since March 2022. As Brent crude oil prices surged by 5.2% to USD77/barrel, the S&P 500 Index fell by 0.8% to 5983. Investors sought safety in the USD and bonds. The DXY Index rebounded by 0.8% to 98.8 while the US Treasury 10Y bond yield fell 5.7 bps to 4.39%.
Weaker-than-expected US data also weighed on risk appetite. Advance retail sales contracted by 0.9% MoM in May, worse than the -0.6% consensus, while April was revised from +0.1% to -0.1%. Capacity utilisation fell to 77.4% in May instead of staying unchanged at April’s 77.7%. The NAHB Housing Market Index declined to 32 in June, its lowest since December 2022, bucking expectations for an improvement to 36 from 34 in May. Homebuilders cited Trump’s tariffs as adding to construction costs amid rising inventory from prospective home buyers holding off purchases.
Markets will be cautious about extending USD purchases into today’s FOMC meeting. The Fed’s widely expected decision to leave the Fed Funds Rate unchanged at 4.25-4.50% today will likely see Trump beating war drums against Fed Chair Jerome Powell. Trump explicitly demanded a 100 bps cut following the lower-than-expected CPI inflation readings, warning that he “may have to force something” to push for rate cuts. Markets are alert to Trump’s threat to nominate Powell’s successor ahead of the end of his term in May 2026, raising fears of a “shadow chair” scenario that could challenge Powell’s authority and undermine the Fed’s independence.
Markets will parse the accompanying Summary of Economic Projections for the Fed’s assessment of Trump’s tariffs on its dual mandate of price stability and full employment. We will be keen to see if the retreat in the New York Fed’s inflation gauges across the 1Y, 3Y, and 5Y horizons tempers the Fed’s worries about tariff-led inflation. The futures market is still looking for a September rate cut, though odds have decreased to 56% from 69% after Israel and Iran escalated their conflict on Friday 13th. Given fragile consumer and business sentiment, the Fed will likely consider any oil price shock as much a threat to growth as to inflation.
Quote of the Day
“A leader is a dealer in hope.”
Napoleon Bonaparte
June 18 in history
Napoleon Bonaparte was defeated in Waterloo in 1815.
Topic
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