Author: Igor Kuchma

Weak July labor data, with 23,000 jobs lost and major downward revisions to previous months, boosted U.S. stocks, including the Dow Jones index, on hopes the Fed won’t raise rates.

That confidence grew as CPI fell to 3.4% year over year in July from 3.5% in June, Core CPI fell to 2.5% from 2.6%, and PPI came in below expectations, flat monthly versus +0.2% expected and down to 4.7% year over year from 5.5% in June. 

And yet, the U.S. 30-year Treasury yield hit 5.216% at auction, its highest since 2001. Why?

Investors are still worried inflation could stay sticky as the situation in the Middle East remains unresolved, while the U.S. faces a huge deficit and rising debt. Meanwhile, USDJPY has climbed back above 159 despite joint U.S.-Japanese intervention, fueling fears that Japan could sell Treasuries to support the yen.

The problem is that higher Treasury yields can quickly push up mortgage rates, car loans, etc., putting more pressure on the economy and ultimately financial markets.

Adding to the pressure, an El Niño that could be one of the strongest on record may cause major losses, alongside the growing U.S.-China AI competition. If Z.ai’s GLM-5.3 outperforms GPT, Claude, and Gemini, it could put further pressure on chip stocks. 

As for what could move markets this week, Wednesday is the deadline for a temporary CUSMA/USMCA deal. Without an agreement, the U.S. could impose 50% tariffs on around $20 billion of Canadian exports.

Washington could also push Iran into unprecedented economic isolation, with China and India potentially caught in the crossfire for buying and transporting Iranian oil, adding more pressure to an already tense geopolitical situation. 

Last Friday’s US jobs report was hardly encouraging: the economy lost 23,000 jobs in July, with 53,000 fewer in the public sector and 30,000 more in the private sector, while previous months were revised down by 103,000.

The unemployment rate fell from 4.2% to 4.1%, but not because more people found jobs: the labor force participation rate fell to 61.4%, while the employment rate dropped to 58.9%.

So the economy is deteriorating, yet stocks are hitting new highs. Why?

Because the Fed has a dual mandate: 2% inflation and maximum employment. Its main tool is interest rates. When the economy weakens and people lose jobs, the Fed cuts rates to support growth, and vice versa.

So, after the weak jobs data, markets sharply cut the odds of a September hike, from nearly 60% to 46%.

Add strong earnings momentum, with 88% of the S&P 500 now reported, 86% beating earnings estimates and 76% beating revenue estimates, plus the US intervention to stabilize the yen, which temporarily eased Treasury liquidity concerns, and it is hardly surprising that the S&P 500 and Dow hit new highs. 

Falling oil prices, on hopes of easing tensions in the Middle East, and increased traffic through the Strait of Hormuz might have helped too. The only problem is that, beyond the positive rhetoric, there is still no real progress toward ending the conflict. 

The last piece of the puzzle is this week’s July inflation report. With headline CPI expected at 3.4% and core CPI at 2.5%, a core reading of 2.3% or lower would strengthen the case for a more dovish Fed, potentially pushing indices and gold higher.

It’s also worth watching Thursday’s producer prices and Friday’s retail sales, as well as preliminary University of Michigan consumer sentiment data. Remember, worse economic data would actually be better for markets right now. 

The Fed, the Bank of England, and the Bank of Japan all left interest rates unchanged, but that does not mean the meetings had nothing to offer.

Starting with the Fed, the key takeaway wasn’t that it kept rates at 3.5-3.75% as inflation eased in June, with headline inflation falling 0.1% month-on-month and the annual rate to 3.7% from 4.1%, but that three members voted for a rate hike, showing pressure inside the central bank is building. And this is not the best news for the S&P 500, Nasdaq, or Dow Jones.

Looking ahead to September, markets are pricing in more than a 60% chance of a rate hike as inflation risks persist, driven by high energy prices, the unresolved Middle East conflict, and tariff wars back on the table. As for the Fed’s outlook, Kevin Warsh has not provided forecasts, although he said the central bank does not have a magic ability to bring inflation down quickly.

Similar story with the Bank of England: three of nine members voted for a 25-basis-point hike, up from two at the previous meeting, suggesting uncertainty remains. Now, taking into account that its more moderate inflation outlook compared with April relies on lower oil and gas prices, which has yet to happen, the possibility of another rate hike remains alive.

Finally, the Bank of Japan also kept rates at 1%, but warned that core inflation could exceed its target, leaving the door open to future hikes. The problem is that its room to raise rates is limited and unlikely to fully offset inflation risks or support the USD/JPY pair.

That’s why the regulator sold $58.97 billion in its latest attempt to support the yen. Together with the U.S. Treasury, which had the Federal Reserve Bank of New York sell euros to buy yen on its behalf, the currency moved back toward 157 per dollar. But once again, this could provide only temporary relief, as the fundamentals, including higher Fed rates, have not changed.

Last week, SpaceX launched Starship’s 13th test flight, the spacecraft designed for future Moon and Mars missions. While the mission was successful, a partial engine failure during the Super Heavy booster landing burn may have damaged the launch pad and did little to help SpaceX shares, which fell to $113.50 on Monday, almost 20% below their $135 IPO price. 

And the stock may not have bottomed yet.

According to Aswath Damodaran, aka the “Dean of Valuation”, SpaceX is worth about $1.3 trillion, or almost $100 per share, assuming the AI market is worth tens of trillions, xAI faces lower margins due to competition and high costs, and SpaceX will need to spend heavily on infrastructure. Now, if the company overestimates the AI market and keeps pouring money into xAI despite weaker economics, the investment case could deteriorate even further.

Another headwind could come from upcoming lockup expirations. About 20% of insider-held shares will become available for sale two days after SpaceX reports its first earnings as a public company, potentially flooding the market with nearly 1 billion shares. For comparison, only 629 million shares were sold in the June 12 IPO. Another wave hits around August 20, when 455.8 million more shares could enter the market.

On top of that, tech sentiment has turned increasingly volatile in recent weeks.

Yet bulls aren’t backing down. Morgan Stanley, for example, said Flight 13 boosted confidence in Starship’s progress, with a successful Flight 14 tower catch seen as the next major catalyst, and kept its Overweight rating with a $300 price target versus Wall Street’s $237 average. 

As for what could drive the stock higher, positive SpaceX catalysts could trigger a short squeeze, forcing bears to cover and pushing shares higher. 

There was a theory that any major escalation between the U.S. and Iran would stay on hold until the FIFA Club World Cup was out of the way. Reality, however, had other plans — already on July 10, Trump declared the ceasefire with Iran effectively dead, and the U.S. has now been striking targets inside Iran for nine straight nights.

Hence, oil prices are back above $85 per barrel, while gold (XAUUSD) is once again trying to hold the $4,000-per-ounce level.

But could it be that things from here will only get worse now that the cup has ended?

Could be the case as over the past week alone, at least three American service members have been killed, while the Pentagon is reportedly preparing to expand its military operations across the region.

But if we look at the oil market, investors still don’t seem convinced that a major escalation is imminent — even amid reports that Yemen’s Houthi rebels have begun imposing a maritime blockade on Saudi Arabia.

Now, if the situation does deteriorate, the world could face another wave of inflation, although temporary, but significant enough to force central banks to keep monetary policy tighter for longer.

Thus, the fact that U.S. CPI fell 0.4% month-over-month in June, versus expectations of -0.1%, doesn’t necessarily mean inflation is getting back under control. July’s data could easily disappoint again. Meanwhile, Kevin Warsh has made it clear that bringing inflation back to 2% remains the Fed’s top priority and that policymakers won’t tolerate persistently elevated inflation.

As for Europe, the ECB is widely expected to leave interest rates unchanged this week. Still, it could hint at a more hawkish stance should tensions continue to rise around one of the world’s key oil shipping routes.

On the bright side, if markets do start getting nervous, we could always see another round of TACO from the U.S. president.

The ceasefire between the US and Iran is showing cracks after the two sides exchanged strikes at least three times over the past week, prompting Iran’s Islamic Revolutionary Guard Corps (IRGC) to declare that the Strait of Hormuz will remain closed until further notice — or, more specifically, until the U.S. retreats from its positions.

Naturally, oil jumped more than 8% over the week.

That renewed pressure on US Treasuries as markets priced in the possibility that the Fed may have to keep rates higher for longer — or even hike again — sending the 10-year Treasury yield up to 4.56% from 4.37% and the 30-year yield to 5.06% from 4.87% over the past two weeks. Gold, meanwhile, slipped around 2.5%.

And yet, the S&P 500 index still ended the week up more than 0.7%, while the Nasdaq added another 0.8%. How?

On the one hand, investors don’t seem convinced that this will lead to a conflict on the scale of what we saw a couple of months ago. On the other hand, there is hope for another “TACO” call from the president, pulling back whenever markets start to wobble.

Are markets underestimating the risks?

Given that Republicans’ control of the U.S. Senate has weakened following Graham’s death, the White House has every incentive to prevent this conflict from dragging on. A prolonged period of uncertainty in the region would mean higher oil prices, higher gasoline prices, and ultimately angry voters.

But of course, rationality doesn’t always prevail in geopolitics…

All eyes will now be on Kevin Warsh’s appearance before the U.S. Senate on July 15. If he doubles down on his post-Fed meeting comments, that the central bank remains committed to bringing inflation back to 2% and that the inflation outlook has become more challenging, equity indices could also turn red.

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.