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Good Morning!
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Now let’s break down what actually moved markets this past week and what to watch next.
Market Recap
This was a choppy, headline-driven week that swung on every twist in the Iran story and a closely watched inflation report. After the prior week's brutal tech selloff, markets clawed back ground, sold off again midweek, then rallied into Friday on growing hopes that a peace deal is finally within reach. The net result was a volatile but modestly positive week, though the major indexes remain down for the month.
The most important economic event was Wednesday's inflation report, and it confirmed that the energy shock is now fully showing up in the data. Consumer prices rose 0.5% in May, pushing the annual inflation rate to 4.2%, both in line with expectations, with much of the surge coming from a jump in energy prices that are now up more than 23% over the past year. That headline number is the highest in years and reflects the pain Americans are feeling at the pump. But underneath it, there was a genuine silver lining. Core inflation, which strips out food and energy, rose just 0.2% for the month, below estimates, with core goods prices actually declining and shelter costs rising at half of April's pace. In other words, the inflation problem is still almost entirely an energy story. Strip out oil, and underlying pressures are actually easing.
That distinction matters enormously for the Fed, and it is exactly why markets did not panic on a 4.2% print. Stock futures held in negative territory but came off their lows after the release, while Treasury yields were little changed. Still, the broader inflation picture has clearly shifted the rate outlook. A hotter-than-expected wholesale prices report this week added to the concern, with one strategist noting that all the main measures of inflation are now flashing red, though many believe the spike is temporary and will subside once the Iran war ends.
The Iran situation drove the day-to-day swings all week. Early on, markets sold off hard as the U.S. signaled fresh military action. The Dow dropped 900 points midweek as the U.S. signaled more strikes in Iran, and oil and gas stocks climbed after Trump said the U.S. would assume control of key Iranian energy infrastructure. Then the mood flipped sharply. By Friday, reports emerged that the U.S. and Iran could sign a peace deal as soon as this weekend, with a draft agreement including a U.S. commitment to lift oil sanctions and an Iranian pledge to reopen the Strait of Hormuz within 30 days. Crude oil fell roughly 2% to near $85 per barrel, holding just above its two-month lows, as peace hopes built. A durable deal that reopens the strait is the single most important thing that could bring energy prices, and therefore inflation, back down.
Overseas, the inflation problem is global. The European Central Bank raised its key interest rate to 2.25% on Thursday, becoming one of the first major central banks to respond directly to the inflation fallout from the Iran conflict. The takeaway is that the energy shock is forcing central banks worldwide to lean more hawkish, not less.
The bottom line on the week: inflation is high but concentrated in energy, the Fed is on hold and leaning hawkish, and the entire market is now hanging on whether a peace deal actually gets signed. Oil falling toward $85 is the most encouraging development, but it all hinges on the strait reopening.
What's Coming Next Week
The Federal Reserve meeting is the marquee event. The Fed meets June 16 and 17, the first meeting under new Chair Kevin Warsh, alongside policy meetings from the Bank of Japan and Bank of England. The Fed is widely expected to hold rates steady, with investors now pricing in at least one rate hike by the end of the year. The decision itself is not the story. What matters is the tone Warsh sets in his first meeting as chair and whether he treats the energy-driven inflation spike as temporary or signals a genuine willingness to hike. Every word of his press conference will move markets.
The potential Iran peace deal is the other dominant variable, and it could land at any moment. A final agreement could reportedly be signed as soon as this weekend. If it happens and the Strait of Hormuz genuinely reopens, expect oil to fall further, inflation fears to cool, and a likely relief rally. If talks break down again, as they have before, oil and volatility would spike right back up.
Also on the calendar is retail sales data, which will give an important read on whether the consumer is holding up under the weight of the highest inflation in years. After this week's record-low sentiment backdrop, any sign of the consumer pulling back would be a warning worth watching.
The bottom line heading into next week: a pivotal Fed meeting, a possible peace deal, and fresh data on the consumer all land at once. The energy picture is improving and core inflation is tame, but the Fed is leaning hawkish and the market is volatile. Watch the weekend headlines on Iran closely.
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