MIDDLE EAST
Israel launched airstrikes targeting Iran’s nuclear facilities and killing several key commanders. Israel Prime Minister Benjamin Netanyahu stated that Israel is planning follow-on attacks to hinder Iran’s nuclear program while President Trump encouraged Iran to accept a negotiated end to its nuclear program to avoid further Israeli strikes. Iran launched a largely ineffective drone strike against Israel and vowed further retaliation. The U.S. stated that it did not participate in the attack and warned against retaliation against U.S. personnel or assets. Oil prices and gold were up as investors moved to havens, although Treasuries did not rally significantly.
Our Take: The Israeli strikes greatly increase the likelihood of a broader regional conflict. While Iran’s proxies in the region have been weakened, the Iranians could still significantly disrupt global oil supplies by closing the Strait of Hormuz or attacking production facilities in the Gulf.
INFLATION
Both consumer and producer inflation for May were less than expected, and the year-to-date trends for year-over-year inflation are close to the Fed’s 2% target. Headline Consumer Price Index (CPI) was +0.1% vs +0.2% expectations, while core was +0.1% vs +0.3% expectations. Producer Price Index (PPI) figures were +0.1% headline and core, which were below expectations. Both CPI and PPI showed some price increases in tariff-sensitive areas that were offset by decreases in other areas. Treasuries rallied on these reports.
Our Take: The inflation data are so far showing a contained impact on prices from tariffs. Markets are interpreting this to mean that more Fed easing is likely to happen. The weakness in prices in areas less sensitive to tariffs indicates that trade policy changes are so far more of a headwind to growth than a driver of inflation.
TRADE
Following a call between President Trump and Chinese President Xi Jinping and high-level negotiations in London, the U.S. and China announced an agreement on how to implement the previously reached consensus around trade between the two nations. The agreement addressed shipments of rare earth magnets to the U.S. and export controls on chips from the U.S. to China. President Trump also indicated that the pause in retaliatory tariffs against other countries will end in two weeks and that the U.S. will impose tariffs at that time on nations that have not reached a trade agreement with the U.S.
Our Take: Avoidance of an escalation of trade tensions with China is a positive development. Even if the ultimate level of tariffs on imports to the U.S. is much lower than those announced on April 2, the volatility in U.S. trade policy may have increased uncertainty enough to cause a pullback in consumer spending and business investment and hiring.
MUNICIPALS
The first week of June had the most municipal issuance in a single week since 2017 according to Bloomberg. Municipalities issued $20 billion of debt last week. Year-over-year issuance is up 12.7% according to the Securities Industry and Financial Markets Association (SIFMA).
Our Take: State and local governments are tapping the municipal bond market at a strong pace this year. The end of stimulus funds, along with the rising costs of many projects have led to the increase in borrowing. Municipalities are also using the municipal bond market as a source of financing this year due to uncertainty about federal funding.