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The Economic Calendar:
MONDAY: Empire State Manufacturing Index (7:30a CT), NOPA Crush Report (11:00a CT), 20-Year Bond Auction (12:00p CT)
TUESDAY: Import/Export Prices (7:30a CT), Retail Sales (7:30a CT), Redbook (7:55a CT), Industrial Production (8:15a CT), Capacity Utilization (8:15a CT), Manufacturing Production (8:15a CT), Business Inventories (9:00a CT), NAHB Housing Market Index (9:00a CT), Retail Inventories (9:00a CT), 2-Day FOMC Meeting Begins
WEDNESDAY: MBA Mortgage Applications (6:00a CT), Building Permits (7:30a CT), Jobless Claims (7:30a CT), Housing Starts (7:30a CT), EIA Petroleum Status Report (9:30a CT), EIA Natural Gas Report (11:00a CT), Fed Interest Rate Decision (1:00p CT), Fed Press Conference (1:30p CT), Overall Net Capital Flows (3:00p CT)
THURSDAY: Juneteenth Holiday – U.S. MARKETS CLOSED
FRIDAY: Philly Fed Manufacturing Index (7:30a CT), Leading Economic Indicators (9:00a CT), Baker Hughes Rig Count (12:00p CT), Fed Balance Sheet (3:30p CT)
Key Events:
The Israel-Iran conflict escalation (strikes on nuclear sites, 138 deaths from Iran’s retaliation) spiked oil (CL) and gold (GC) futures, pressuring the ES with risk-off sentiment. VIX futures (VX) also hit a multi-week high.
Tensions in the Middle East have dramatically escalated following Israel’s “pre-emptive” strikes on Iranian nuclear and military facilities. Israeli Prime Minister Benjamin Netanyahu announced “Operation Rising Lion,” framing the attacks as essential to counter “the Iranian threat to Israel’s very survival.” The International Atomic Energy Agency confirmed a strike on Iran’s Natanz nuclear facility, though no increased radiation levels were reported.
In swift retaliation, Iran launched over 100 drones towards Israel, with Supreme Leader Ayatollah Khamenei warning of a “bitter, painful fate” for Israel. An Israeli military spokesman expressed confidence that defense systems would intercept the threats.
The United States has distanced itself from Israel’s initial attack, with Secretary of State Marco Rubio stating the U.S. was not involved and that Israel informed Washington the strikes were for self-defense.
The Federal Reserve is expected to keep interest rates unchanged at this week’s meeting. Futures markets are pricing in a near-certain 99.9% chance of no policy shift, reflecting broad consensus among economists.
We don’t anticipate strong forward guidance from Chair Powell; we see the risks skewed toward a modestly dovish market reaction to the meeting’s outcome.
This cautious stance comes as the central bank monitors the evolving impact of tariffs and inflationary pressures.
Despite President Trump’s calls for an immediate rate cut, Fed officials remain circumspect. While acknowledging that tariffs have dampened economic sentiment, they point to the overall resilience of the U.S. economy.
Markets are still pricing the Fed to implement two rate cuts in 2025, consistent with its March “dot plot” projections.
Source: CME Group Market Data
Reports of Israeli strikes on Iranian nuclear and ballistic missile infrastructure, coupled with the targeting of key personnel, have sent jitters through global oil markets. Despite a roughly $10 per barrel price surge over the past three days, analysts warn that the potential for a far more severe market disruption remains largely unreflected in current valuations.
The White House has swiftly denied any U.S. involvement in the attacks, though questions linger regarding potential support from Saudi Arabia or other regional players.
Iran, meanwhile, has vowed a “harsh response,” fueling concerns of a significant escalation. Prompt West Texas Intermediate (WTI) futures reacted sharply to the news, climbing approximately 10% at the reporting time.
Traders, however, also recall similar situations since October 2023, where cooler heads prevailed, with diplomatic efforts leading to measured responses from both sides and preventing the situation from reaching a tipping point. This history provides some reason to believe that a full-blown crisis, while a significant risk, is not inevitable.
Source: TradingView
Buy protection when you can, not when you must.
The music stopped on Friday, and the VIX formed a bottom and traded 15% higher. The slow-motion melt-up in major indexes has resulted in volatility imploding in the past weeks. The VIX (inverted) has moved in close tandem with the SPX, but it will be hard for the VIX to move much lower from here. Volatility is mean-reverting, and we are close to some sort of “natural floor” level in VIX.
And here we go again.
Source: TradingView
Source: Grok
While President Donald Trump has expressed satisfaction with a new tariff agreement, Chinese leaders have not publicly responded to the proposed deal. The agreement narrowly avoids the 145% import tax Trump had threatened earlier this year but will subject Chinese goods to a substantial 55% tariff.
In a CNBC interview, Commerce Secretary Howard Lutnick clarified that this 55% rate comprises the latest 30% tariff on top of an existing 25% in levies. Lutnick emphasized that this 55% tariff is a “hard floor” and will remain in place even if a comprehensive trade deal is ultimately reached.
The agreement’s finalization hinges on approval from both the U.S. and Chinese leadership. Beijing’s lack of response, coupled with the non-negotiable 55% tariff on Chinese goods, introduces potential last-minute complications for the deal’s future.
The S&P 500 dipped on Friday but maintained only a slight loss of 0.36% for the week. The Nasdaq 100 fell by 0.56%.
Despite ongoing uncertainties stemming from tariffs, trade disputes, and geopolitical tensions, the U.S. economy has shown resilience in the first half of the year, with robust GDP growth, a strong labor market, and manageable inflation.
Markets appear to have largely discounted the immediate threat of trade wars, reducing perceived “left tail” risks like recession. However, counter-arguments highlight growing concerns over the national deficit, continued dollar weakness, the precarious state of the 30-year bond yield, and persistent headline risk from President Donald Trump.
Goldman Sachs trader Louis Miller points to an “ongoing market meltup,” characterized by unusual strength in “low quality, short momentum, and high short interest areas.” While acknowledging this “junk rally” could continue in the near term due to “resilient growth, freer trade, and low inflation” narratives, Miller ultimately advises investors to “fade this junk rally,” expecting complex economic data to worsen and the tariff narrative to re-emerge soon.
With some of the immediate uncertainty surrounding trade tariffs seemingly abating, traders’ attention has firmly shifted to the Federal Reserve’s policy announcement this week. Financial markets are now primarily in agreement that the central bank will opt for a “wait and see” approach, holding interest rates steady.
According to the CME FedWatch tool, traders are pricing in a 99.9% probability that the Fed will keep its benchmark interest rate unchanged following its June 18 meeting. This reflects a significant shift in expectations from just yesterday, when markets had assigned a slim 3% chance to a rate cut. Today, that possibility has evaporated entirely, with some even eyeing a remote 0.1% chance of a rate hike this week.
Looking further into 2025, the CME FedWatch data indicates that market participants still anticipate two or three rate cuts over the remainder of the year, with the first easing of monetary policy broadly expected to occur in September. The Fed’s commentary following next week’s meeting will be closely scrutinized for any clues regarding the timing and pace of future adjustments.
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