Equities Advance on Peace Agreement: On Wednesday, President Trump signed an interim memorandum of understanding with Iran. It is intended to immediately end military hostilities, reopen the Strait of Hormuz, and launch a 60-day period to negotiate a comprehensive final agreement. The price of oil, as measured by West Texas Intermediate (WTI) closed on Thursday at $76.60 per barrel, down $8.28 for the holiday shortened week. Global equities rallied as oil prices eased. The S&P 500 gained 0.9%, for the four day trading period, bringing its year-to-date return to 10.2%. Internationally, the MSCI EAFE (developed markets) and the MSCI Emerging Markets indexes gained 1.1% and 4.4%, respectively, bringing their year-to-date returns to 10.2% and 28.6%.

Fed Holds Rates Steady but Leans Towards Future Hikes: Also on Wednesday, the Federal Open Market Committee (FOMC) voted unanimously to hold the federal funds target range steady at 3.50%–3.75%. However, in its accompanying quarterly Summary of Economic Projections (SEP), the FOMC raised its estimate for the year-end 2026 fed funds rate to 3.8% from its previous forecast of 3.4%. This was largely in response to a worsening outlook for inflation. The FOMC’s median year-end estimate for its preferred inflation measure, the Core Personal Consumption Expenditures Price Index (PCE), was lifted to 3.3% from 2.7%. Meanwhile, the median estimate for the unemployment rate was lowered to 4.3% from 4.4%.

The Federal Reserve operates with a dual mandate to maintain full employment and price stability. With the unemployment rate hovering towards the lower end of its 25-year average range, and recent payrolls growth surprisingly strong, the FOMC’s employment mandate has been satisfied. However, its price stability mandate has not been. The PCE has averaged close to 3% in 2026, well above the FOMC’s target of 2% and its 25-year average of 2.1%. Surging oil prices stemming from the closure of the Strait of Hormuz explain a portion of the increase, but the overall strength of the economy has been a factor as well. In his first post-meeting press conference, newly appointed Federal Reserve Chairman Kevin Warsh made it clear that the FOMC will deliver price stability. This could entail raising interest rates or possibly reducing the size of the Fed’s balance sheet. As of Thursday, fed funds futures implied a more than 50% probability of a 0.25% fed funds rate hike by September.

Yield Curve Flattens, Bond Indexes Advance: The Fed’s clear message on inflation came as a surprise to the fixed income markets last week. With short-term rates potentially staying higher for longer than previously anticipated, U.S. Treasury note yields out to seven years maturity edged higher. However longer dated notes and bonds edged lower, presumably on the Fed’s inflation resolve. Two-year Treasury notes closed on Thursday at 4.18%, up 0.10% for the week while 10-year notes closed at 4.45%, down 0.03%. The Bloomberg U.S. Aggregate Bond Index and the Bloomberg Municipal Bond Index gained 0.1% and 0.4%, respectively, which brought their year-to-date returns to 0.5% and 2.0%.

Retail Sales Accelerate in May: Consumer spending gained momentum in May, with retail sales climbing 0.9% above April’s. Gains were broad-based with 11 of 13 spending sectors advancing led by automobiles. Control group sales, which exclude volatile categories such as gasoline and auto dealers, advanced 0.7%, up from 0.5% in April.

On Saturday June 20th, Iran stated it closed the Strait of Hormuz due to Israeli attacks on Hezbollah in Southern Lebanon. This was in violation of a ceasefire agreed to on Friday following pressure on Israel from the U.S. Whether the Strait is truly closed or this latest development is part of a negotiating strategy is not clear. However, it does suggest that the 60-day negotiating period between the U.S. and Iran as they attempt to hammer out a permanent agreement could be a bumpy road for the financial markets.

Aside from the ongoing geopolitical drama, the investment backdrop remains positive, supported by the AI spending boom, resilient economic activity, firm consumer spending, and a corporate earnings environment much healthier than analysts anticipated. The Federal Reserve’s toughened stance on inflation could present a headwind for the markets but the economy’s momentum may be strong enough to offset a modest uptick in interest rates.

Temperature Check on June’s Economy: On Tuesday, S&P Global will release its June Flash (preliminary) Composite Purchasing Managers’ Index (PMI). The Bloomberg median forecast is 51.7, slightly above May’s final reading of 51.5. PMI readings above 50 indicate expansionary economic conditions.

Inflation Update: On Thursday, the Bureau of Economic Analysis will release the Federal Reserve’s preferred inflation measure, Core PCE, for May. Measured year-over-year, the Bloomberg median estimate is 3.4%, up from 3.3% in April.

Roger Khlopin, CFA
Chief Investment Officer

Aaron Nghiem, CFA, CIMA
Senior Portfolio Manager