by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment begins with key takeaways from the latest escalation between the US and Iran. We then turn to the Federal Reserve, providing a breakdown of the most recent meeting minutes. Next, we briefly cover the US decision to expand support for Ukraine, China’s move to permit limited purchases of US chips, and forthcoming changes to key inflation measures. As always, we conclude with a review of recent domestic and international economic data.

Iran Escalation: Concerns of a possible breakdown in ceasefire negotiations continue to weigh on markets. On Wednesday, the US carried out a second consecutive day of strikes on Iran, aiming to degrade the country’s ability to control transit through the Strait of Hormuz. The escalation has provoked a response from Iran, which has signaled it has no clear red lines when it comes to defending its interests. These developments are reinforcing doubts about the durability of the ceasefire, adding to broader market uncertainty.

• The escalating back-and-forth increasingly points toward a renewed slide into open conflict. As of Thursday morning, the US reported that its latest round of strikes targeted 90 sites, up from 80 the previous day. In response, Iran launched strikes on military installations in Kuwait, Bahrain, and Qatar.
• The latest escalation in tensions follows President Trump’s declaration that he believed the ceasefire was over, though he later clarified that he would allow negotiations to continue, stating he did not want a resumption of war. In the wake of the attacks, maritime traffic through the strait appears limited. Ships authorized by Iran have been able to transit the waterway, while the US-supported shipping corridor along Oman has remained quiet.
• Despite rising friction in the Strait of Hormuz, the markets have remained relatively stable compared to the onset of the conflict. Oil prices continue to fluctuate between $70 and $80 per barrel, well below the $100 peak seen earlier. Equities closed only slightly lower on Wednesday, with the Nasdaq even managing to finish higher. Meanwhile, the bond market showed the greatest anxiety, driven by lingering concerns over elevated inflation.
• At this stage, we believe the market is interpreting the recent skirmish as a sign that both sides will remain engaged in dialogue. However, any escalation in hostilities could trigger a significantly stronger negative reaction. In light of this uncertainty, we continue to advocate for a well-balanced portfolio. Specifically, we recommend limiting duration risk to help mitigate volatility, while favoring dividend-paying equities, which can provide a stable income stream during turbulent periods.

Fed Speak: The Federal Reserve released the first set of minutes following Kevin Warsh’s assumption of leadership, offering additional insight into the June 16-17 policy meeting. The minutes highlighted a notable divergence of views among policymakers regarding the outlook for the economy, inflation, and the labor market, though the overall tone carried a hawkish tilt. While the decision to hold rates steady was unanimous, several members signaled openness to a rate increase at that meeting.

• The minutes indicated that Fed officials remain confident that inflation will return to the 2% target over the intermediate to longer term. Policymakers attributed the recent uptick in inflation to factors including the AI investment cycle, Middle East tensions, and tariff pass-through effects. While there was broad agreement that the worst of the geopolitical disruption may be behind them, concerns persist that inflationary pressures could reemerge over time due to the other lingering factors.
• AI-related demand has emerged as a growing area of concern. While some policymakers expressed confidence that productivity gains from AI could ultimately help ease inflationary pressures, there was recognition that, in the near term, the buildout is contributing to price pressures, particularly through increased demand for technology goods and rising electricity costs. Additionally, some officials noted that elevated AI-related capital spending could risk contributing to broader economic overheating.
• With respect to the labor market, the tone within the Fed appeared more constructive. Overall, the committee expressed confidence that labor market conditions remain solid, citing firmer hiring trends, an unemployment rate broadly in line with its long-run average, and relatively low jobless claims. However, some policymakers noted lingering concerns about a lack of dynamism in the job market, as well as the risk that geopolitical developments could trigger layoffs.
• While concerns about persistent inflation alongside a stable labor market point to a hawkish bias, the committee does not appear firmly committed to that stance. The minutes suggest policymakers are still seeking additional data before altering the policy path, with most indicating that holding rates steady, or potentially cutting, remains feasible moving forward. However, if the labor market continues to show resilience and inflation proves more persistent, many expressed openness to future policy tightening.

Ukraine Boost: The US has provided Ukraine with a fresh boost in its fight against Russia. On Wednesday, President Trump authorized Ukraine to coproduce Patriot missile systems, a move aimed at strengthening its air defense capabilities. The decision comes amid growing confidence in Ukraine’s recent battlefield momentum. While the US still appears to favor a negotiated end to the conflict, the move suggests diminishing faith in Russia’s willingness to return to meaningful talks.

China Loosens Restrictions: Beijing is expected to ease restrictions on firms seeking to purchase US-made chips. On Wednesday, Chinese officials informed leading AI companies that they may acquire a limited number of Nvidia’s H200 chips, subject to prior approval. The decision to relax these controls suggests a modest de-escalation in tensions between China and the United States, even as both sides continue to compete for leadership in AI.

Inflation Makeover: The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, is set to undergo methodological updates that could result in more favorable inflation readings. While the changes are not expected to take effect until September, the BEA has announced revisions to components including legal services, software, and investment advice — categories that have drawn criticism for exerting an outsized influence on measured inflation. The change could reduce the urgency for rate hikes.

View PDF