Author: Igor Kuchma

The minutes from the Fed’s last meeting are due on Wednesday, and on paper, there’s not much reason to expect any major dovish surprises. The statement, the dot plot, and policymakers’ comments all pointed to inflation still being a concern, and another rate hike remained very much on the table. On top of that, Kevin Warsh mentioned that the Fed shouldn’t let its guard down too soon.

The good news is that a lot has changed since that meeting: geopolitical tensions have eased, oil prices have pulled back, gasoline prices are falling, and inflation expectations have started moving in the right direction, with consumers seeing inflation averaging 4.6% over the next year, down from 4.8% in May, while five-year expectations have fallen from 3.9% to 3.3%. Last but not least, the June jobs report came in weak, with just 57,000 jobs added, far below expectations. 

Yet money markets are still pricing in a 25-basis-point hike by December, and the 10-year Treasury yield rose last Thursday from 4.37% to 4.49%, suggesting the market isn’t expecting a quick shift in Fed rhetoric.

But let’s imagine the next few weeks play out in the Fed’s favor: the situation in the Middle East remains relatively calm, with the Strait of Hormuz half-open but still operating, oil continues to drift lower, and inflation comes in softer than expected, increasing the chances of a shift toward a more dovish stance. Who stands to benefit the most?

Bonds would likely be first in line. If markets become convinced the hiking cycle is over, Treasury yields should fall, pushing bond prices higher. Gold (XAUUSD) and other precious metals, including silver (XAGUSD),  would likely follow. Then there’s Big Tech, as lower discount rates tend to boost the value of future earnings.

But of course, for that to happen the data shouldn’t disappoint, but even with gasoline prices coming down, the impact won’t be immediate. 

While policymakers kept rates unchanged at 3.5% -3.75%, nine of the 18 officials now expect a rate hike, as inflation projections were revised higher from 2.7% in March to 3.6% by the end of 2026, and to 2.3% for 2027 from 2.2%. 

Much of that deterioration came from events in the Middle East, especially disruptions in the Strait of Hormuz, which hit global energy supplies and pushed oil prices higher. Now that things seem to be easing, with shipping resuming and crude back below $75 a barrel, does that mean inflation could cool fast enough for the Fed to cut rates before year-end?

Not according to the CME FedWatch Tool, where the odds of rates being at 3.25%–3.50% by January 1st, 2027 are… 0%. 

And for good reason.

Although headline PCE inflation accelerated to 4.1% year-over-year in May, while core PCE remained elevated at 3.4% and broadly in line with expectations, both are still well above the Fed’s 2% target. Lower energy prices should eventually help, but policymakers know disinflation doesn’t happen overnight.

On top of that, the U.S. economy continues to hold up well. First-quarter GDP was revised higher to 2.1%, and the University of Michigan Consumer Sentiment Index rose to 49.5 in June from 44.8 in May. While confidence remains weak by historical standards, the direction of travel is positive.

Hence, the dollar (DXY) strengthened, while gold extended its decline.

Now all eyes are on this week’s labor market data. Payroll growth is expected to come in at around 115,000 jobs, down from 172,000 previously. If the numbers disappoint, markets could start pricing in a more dovish Fed. If, in turn, employment stays strong, rate-cut expectations will likely fade further. 

Four months into the conflict between the US and Iran, there finally seems to be a light at the end of the tunnel, although it looks more like a flickering flashlight. One day, sides are signing a memorandum of understanding, the next, the Iranian delegation walks out of talks with the US after new threats from Trump.

Still, looking at oil prices, the S&P 500, and the Dow Jones indices, markets seem to be leaning toward a more positive outcome. And indeed, reports of a partial easing of the naval blockade on Iranian ports and the reopening of parts of the Strait of Hormuz, along with claims that three fully loaded oil tankers linked to India passed through, seem to back that up.

But what about the delayed demand effect? Shouldn’t that be supporting prices?

In theory, yes. According to Kpler, around 1.15 billion barrels of supply were disrupted during the war. At the same time, countries drew heavily on strategic reserves to avoid buying at peak prices. US crude inventories, for example, fell to 340.3 million barrels, the lowest since 1983.

On the other hand, oil bears argue that some flows may still have been moving covertly along the Omani coast even during the blockade. On top of that, the UAE’s exit from OPEC+ adds long-term supply-side upside pressure, and if sanctions on Iran are lifted, production could ramp up quickly.

And most importantly, even the IEA expects that by 2027 supply will rise by about 8 million barrels per day while demand grows by only around 2 million, implying a potential surplus of more than 5 million barrels per day.

The thing is that OPEC Secretary General Haitham Al Ghais said the IEA’s numbers are not grounded in reality. It is also worth noting that any US-Iran deal could still fall apart.

In the end, time will tell who is right. For now, one should keep in mind that the surge in energy prices from the Hormuz disruption has already fed through the system, forcing central banks to tighten policy, potentially including the Fed. 

SpaceX shares closed 19% above their IPO price of $135 on the first day of trading, and the momentum continued into Monday’s pre-market session, with the stock gaining a further 5%. 

So, the skeptics who predicted the IPO would fail were wrong? 

Time will tell, but for now, the rally seems to be driven less by fundamentals and more by hype around the company and investors hoping to capitalize on the idea that SpaceX stock will soon be added to major indices. For instance, although the S&P 500 has stuck to its standard criteria, the Nasdaq has revised its index inclusion rules to speed up the process, which could end up forcing large passive funds to buy the stock.

At the same time, news that the United States and Iran may be close to reaching an agreement could have contributed to the momentum.

The problem with the latter is that reopening the Strait of Hormuz would not immediately lower global inflation. Moreover, parts of the proposed agreement may be difficult to implement, and even if a memorandum is signed, the U.S. and Iran would still need to agree on the nuclear program and other unresolved issues. Thus, a deal reached this week would not necessarily end the conflict.

As for SpaceX itself, even before the IPO, Morningstar assigned a fair value estimate of just $63 per share.

Today, SpaceX’s market capitalization exceeds that of Taiwan Semiconductor Manufacturing Company, despite the fact that, as of Q1 2026, TSMC reported earnings per share of $3.49 on revenue of $35.9 billion, surpassing analyst expectations, whereas SpaceX had $4.7 billion in revenue in the first quarter of 2026 but a net loss of $4.3 billion.

This does not necessarily mean the stock cannot continue rising in the short term; however, if the hype fades and investor sentiment shifts, the correction could be sharp, and if that occurs after the stock has been included in major indices, the consequences may extend beyond SpaceX itself.

By the end of last week, the Nasdaq plunged more than 4%, the S&P 500 lost 2.6%, and the Dow Jones fell 1.4%. Ironically, it was good news or, more precisely, the fact that the U.S. economy added 172,000 jobs, while payroll figures from previous months were revised upward, that triggered the sell-off, as it gives the Fed more room, if not to tighten monetary policy, at least to keep it unchanged for a longer period.

For instance, according to the CME FedWatch Tool, markets are now pricing in more than a 70% chance of another rate hike. No wonder gold is once again below $4,400.

Yet investors seem to have short memories. U.S. futures opened the new week higher despite rising tensions in the Middle East. Why?

On the geopolitical front, Trump’s Truth Social posts about progress in talks with Tehran appear to have reassured markets once again.

As for monetary policy concerns, attention seems to be shifting toward the upcoming SpaceX (SPCX) IPO, reportedly targeting up to $75 billion, making it one of the largest public offerings in history. The concern is that, despite generating more than $18.5 billion in revenue in 2025, SpaceX lost nearly $5 billion and is still targeting a valuation of roughly $1.77 trillion. The bet appears to be that SpaceX could become another meme stock like Tesla, growing regardless of fundamentals.

Now, if negotiations with Iran stall, if inflation remains stubbornly high, or if economic data continues to undermine hopes for Fed rate cuts, optimism around the SpaceX IPO could eventually turn into an “entire market trap,” as AI-linked companies already account for an outsized share of gains, leaving downside risks elevated. That risk could only increase further once OpenAI and Anthropic go public.

Legalities didn’t stop the U.S. campaign against Iran. Trump simply declared that a ceasefire between the two countries had been in place since April 7, 2026, effectively arguing that no Congressional authorization is needed to continue military operations.

Following the same logic, recent strikes on Iranian radar installations and drone command centers in Goruk and on Qeshm Island shouldn’t reset the clock simply by being justified as retaliation for Iran’s “aggressive actions,” including the downing of a U.S. MQ-1 drone over international waters.

What matters is that the Strait of Hormuz remains closed, and while investors celebrate record highs in the S&P 500 and Nasdaq, the economic costs of the conflict continue to accumulate.

Starting with inflation, headline PCE inflation accelerated to 3.8% year-over-year in April from 3.5% previously, while core PCE remained stuck at 3.3% — still far above the Federal Reserve’s 2% target. Thus, even with Kevin Warsh leading the Fed, hopes for meaningful rate cuts look increasingly misplaced.

Could the good news, then, be that the growth picture is also weakening, as the weaker the employment figures are this week, the stronger the case for eventual monetary easing in the name of preserving full employment becomes?

Under normal circumstances, yes. The problem now is that if the conflict drags on and the Strait of Hormuz remains blocked, oil prices could move dramatically higher. Strategic petroleum reserves are finite, spare production capacity is limited, and there is still no realistic substitute for oil at the scale required by the global economy.

Should that happen, inflationary pressures could intensify further, forcing regulators to raise interest rates — something financial markets would find much harder to ignore. And with reports that Iran has suspended talks with the U.S. amid the escalation of hostilities in Lebanon, this no longer appears to be an unlikely scenario.

Futures on the Dow Jones, Nasdaq, and S&P 500 opened the week in the green, while oil prices slipped on hopes that Washington and Tehran may finally reach an agreement after Trump said, “the final aspects of the deal are being discussed and will be announced shortly.”

Although Iran’s Foreign Ministry spokesperson, echoing some of the U.S. president’s rhetoric, noted a “trend toward rapprochement,” he stressed that this does not necessarily mean both sides will reach an agreement on the key issues.

In particular, the draft reportedly requires Tehran to permanently abandon its nuclear weapons program and dismantle all enriched uranium stockpiles, conditions Iran has previously rejected. There is also still little clarity on how control and security in the Strait of Hormuz would be managed.

If talks fail again, bond yields could rise, and stocks may turn more nervous as prolonged uncertainty around the Strait of Hormuz adds pressure to the economy through higher oil prices.

Meanwhile, inflation expectations continue to drift higher, with the one-year measure rising from 4.7% to 4.8% and the long-term gauge climbing from 3.5% to 3.9%, largely driven by independent and Republican voters. 

At the same time, consumer confidence in the U.S. continues to deteriorate. According to the University of Michigan, the consumer sentiment index fell to 44.8 in May, another record low. Assessments of current conditions dropped from 52.5 to 45.8, while the expectations index declined from 48.1 to 44.1, reaching historically depressed levels for the first time since 1973.

Markets are not yet pricing in that risk, but weaker consumer demand could eventually weigh on corporate profits. At the same time, the minutes from the latest Federal Reserve meeting showed that a rate hike may be necessary if inflation remains above the 2% target.

Now, even if an agreement is signed, it would likely be temporary rather than a full resolution to the broader conflict, so any rally could also be short-lived. 

Last week’s U.S. macroeconomic data was, to say the least, disappointing for the markets, though not yet for the S&P 500 or Nasdaq. As now-former Federal Reserve Chair Jerome Powell warned, the conflict in the Middle East, or more precisely the resulting rise in oil prices, is driving inflation.

CPI rose 0.6% from the previous month, in line with expectations, while core inflation increased 0.4%, above the projected 0.3%. On an annual basis, the CPI stood at 3.8% versus the expected 3.7%, while core inflation reached 2.8%, slightly above the forecast of 2.7%.

Producer inflation was even worse. The PPI surged 6% year-over-year versus expectations of 4.8%, while monthly growth stood at 1.4%, well above the forecast of 0.5%. Core PPI also surprised on the upside, rising 5.2% year-over-year versus the expected 4.3%, and 1% month-over-month versus forecasts of 0.3%.

At this point, hopes that the Fed will cut rates this year basically vanished. More than that, CME FedWatch now shows around a 40% chance of another rate hike. 

Against this backdrop, the bond market came under pressure toward the end of the week. Yields on U.S. Treasuries rose to their highest level in a year, while German Bund yields reached levels not seen since 2011. In the UK, political developments may also have contributed to the pressure.

Still, calling this a full-blown debt crisis might be premature, as tensions in the Middle East ease, inflationary pressures could ease, and markets could stabilize quickly. 

The problem is that, despite optimistic posts on Truth Social, the situation around the Strait of Hormuz has hardly improved; if anything, it has worsened, with Trump threatening to “annihilate” the country, while Israel openly states that the operation is far from over.

Both the S&P 500 and the Nasdaq closed at new all-time highs last week, driven by three main factors, none of which, however, is as clearly bullish as the headlines suggest.

Starting with the labor market surprising on the upside, unemployment indeed remained at 4.3%, and the economy added 115,000 jobs, well above forecasts of 65,000, though these numbers could still be revised later. Even if they are not, with inflation still a concern, this gives the Fed another reason to hold off on cutting rates. Swapping Jerome Powell for Kevin Warsh would probably not change much.

As for a federal court ruling overturning Trump’s 10% tariffs, which had been introduced to replace earlier measures deemed illegal, this does not eliminate the trade war. Even if it becomes harder for Trump to impose tariffs unilaterally, his team will likely continue seeking alternative ways to do so. Thus, it is too early to claim that one of the key inflationary risks is going away anytime soon.

Finally, the main driver of sentiment this week was hope for a breakthrough in peace talks between the U.S. and Iran. Oil prices fell sharply after reports that both sides were discussing a one-page memorandum that could include a ceasefire, the gradual reopening of the Strait of Hormuz, and further negotiations over Iran’s nuclear program.

In practice, however, Trump rejected Iran’s proposal, calling it “unacceptable,” while the Iranian Foreign Ministry accused the U.S. of continuing to make “unfounded demands.” Meanwhile, Israeli Prime Minister Benjamin Netanyahu stated on Sunday that the war with Iran “is not over,” as both the U.S. and Israel continue to try to curb Tehran’s nuclear ambitions. 

So, does this mean a market crash is inevitable?

The conditions are certainly there, but investors are staying optimistic over the longer term. They believe that sooner or later these geopolitical risks will fade, fueling dip-buying.

Now, the longer these risks persist, the greater the potential damage to the U.S. economy, and eventually markets will no longer be able to ignore that reality.

Continuing the saying, “Fool me once, shame on you; fool me twice, shame on me,” fool me three times and I should be an investor.

As expected, the two-month deadline limiting the U.S. president’s ability to take military action without congressional approval has expired without the conflict coming any closer to an end. In a letter to congressional leaders, Trump argued that he is not subject to the War Powers Act, claiming that last month’s ceasefire with Iran “stopped the clock” on any such obligation. To be fair, historically, other presidents have also found ways to extend military interventions beyond that limit.

Either way, the markets, judging by the rise in the S&P 500 and the Nasdaq, do not seem particularly concerned, betting on another “TACO” or a verbal intervention from the U.S. president.

And they didn’t have to wait long. On Sunday, Trump said that a U.S. operation to ensure the safe passage of ships through the Strait of Hormuz would begin on Monday, adding that negotiations with Iran were progressing positively.

The only issue is that, at the same time, Washington rejected Iran’s proposal to end the conflict in three phases, and, on top of that, reports emerged on Monday that Iran had attacked a U.S. vessel attempting to pass through the Strait of Hormuz after ignoring warnings.

Although the U.S. has denied those claims, the two sides are still a long way from any real agreement, despite the optimistic rhetoric on Truth Social.

For the global economy, this kind of uncertainty is far from benign. While central banks are not rushing to raise interest rates in response to inflation risks, they are preparing for that possibility. Even within the Federal Reserve, as Powell noted, a growing number of members are uncomfortable with maintaining a “more accommodative” stance.