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Geopolitical Release Valve Taking Pressure Off Resilient Economy
The US-Iran interim peace deal is shaky; but if it holds, it will end the US blockade of Iranian ports and reopen the Strait of Hormuz to commercial shipping. Now comes a 60-day negotiating period to hammer out a permanent agreement, centered on restricting Iran's nuclear program. The price of Brent crude oil extended its sharp decline following the peace deal announcement, with markets pricing in the return of Iranian barrels and the normalization of Persian Gulf shipping lanes (chart). Meanwhile, the 10-year US Treasury yield fell from 4.67% on May 19 to 4.46% on Thursday, a sign that the market believes inflation will be contained over the longer term (chart). The 2-year Treasury yield steadied at around 4.19% on Thursday after climbing to this highest level in more than a year on Wednesday following Fed Chair Kevin Warsh's surprisingly hawkish comments at the June FOMC meeting. With the geopolitical pressure valve beginning to release, the latest economic data tell an encouraging story about how well the US economy has held up under the strain of higher energy prices and elevated geopolitical uncertainty. Consider the following: (1) Retail sales. May retail sales rose 0.9% m/m, marking the fourth straight month of expansion (chart). Much of the headline increase was driven by a 3.4% m/m surge in sales at gasoline stations, as prices at the pump averaged $4.50 per gallon in May. However, even after excluding autos and gasoline, retail sales still rose at a solid 0.5% m/m pace. Eleven of the 13 major categories posted gains, suggesting broad-based resilience in consumer spending. Control-group retail sales, used in calculating GDP, rose a solid 0.7% m/m following a healthy gain of 0.5% in March (chart). We were not surprised by the blockbuster increase in retail sales, given that we have been closely following and reporting on the Redbook same-store retail sales index, which continued to accelerate in May (chart). (2) GDP. Following the strong increase in control-group retail sales, the Atlanta Fed's GDPNow model estimate for Q2-2026 real GDP growth was revised higher, from 2.8% to 3.0% (chart). The “nowcast” for real consumption growth was raised from 2.4% to 2.7%, and real gross private domestic investment was lowered from 8.6% to 8.5%. These numbers imply that consumer spending growth accelerated in the second quarter and that capital investment remains strong due to the AI infrastructure buildout. (3) Labor market. Initial unemployment insurance claims dropped slightly to 226,000 last week, a low level that is consistent with very subdued layoff activity (chart). Continuing claims ticked up to 1,810,000. The readings suggest that the labor market remains in good shape and continues to support consumer spending. (4) Regional Fed surveys. The average of the business conditions indexes across two Fed regional business surveys ticked down to 8.0 in June but still suggests that manufacturing activity in the US economy remains in expansionary territory (chart). At the same time, the averages of prices-paid and prices-received indexes across the two Fed regional business surveys indicate that inflation pressures have remained elevated in June (chart). These surveys confirm that the balance of risks remains skewed toward the inflation side of the Fed's dual mandate.
Musk’s Lunar Economy, Data Centers & Industrials
Today, Jackie explores SpaceX’s extraterrestrial plans to build AI data centers in space, establish a lunar economy, and develop new trillion-dollar markets on the Moon, Mars, and beyond. Revolutionizing earthly travel with super-sonic aircraft is on the company’s to-do list as well. … Plus: Entrepreneurial upstarts and established companies alike also envision next-gen data centers operating in outer space, as well as the oceans. … And: The furious pace of AI data center construction has benefited the S&P Industrials sector this year; that and company restructurings have helped the index outperform ytd.
A Hawk In Dove's Clothing ... June Swoon Is Back ... 'We Have A Task Force On That'
We weren't surprised by most of the news following today's FOMC meeting. We expected the committee to pivot from April's easing bias to a tightening bias, and they did. We expected the committee to acknowledge that, in their dual mandate, the risk of higher inflation had risen, while the risk of higher unemployment had fallen, and they did. The FOMC's Summary of Economic Projections (SEP), including the Dot Plot, unambiguously confirmed the committee's hawkish pivot. We expected a June Swoon in the stock and bond markets because investors hadn't fully discounted our hawkish Fed scenario. The stock market swooned today as yields rose. The 2-year US Treasury note jumped to 4.20% today in response to the FOMC news (chart). On the other hand, we were blown away by Fed Chair Kevin Warsh's press conference. We thought he was a dove who favored lowering the federal funds rate (FFR) because he believes that AI is boosting productivity and economic growth while keeping a lid on inflation. Instead, he hammered home a strict, orthodox message on inflation with a strong commitment to price stability. Here are six key takeaways from June's FOMC meeting and Warsh's first press conference as Fed chair: (1) A more hawkish interest-rate outlook. In the June SEP, the median FFR projection for the end of 2026 increased from 3.4% in March to 3.8% (chart). The 2027 projection increased from 3.1% to 3.6%. The June Dot Plot pulled off a massive hawkish pivot compared to March. Over the rest of this year, nine meeting participants expect hikes: three expect one more, five expect two, and one expects three more (chart). Eight participants see rates remaining unchanged this year, while one still expects a cut. Warsh abstained, so there are 18 rather than 19 dots. (2) No more easing bias in the policy statement. In the FOMC's policy statement, the April language hinting at future rate cuts was replaced by a much shorter, blunter sentence committing to inflation control: "This Committee will deliver price stability." Warsh stripped the document down from over 300 words to a very brief 130 words. The text now narrowly outlines present economic facts (e.g., solid growth, energy-driven inflation) without any forward guidance. Nevertheless, the Dot Plot clearly reflects the hawkish shift we expected. (3) Acknowledgment of the economy's resilience. Warsh characterized economic growth as solid, broad-based, and supported by strong fundamentals, stating that “economic activity is expanding at a solid pace despite elevated uncertainty.” He said that “productivity growth and capital investment both [are] strong” and that “job gains have kept pace with the workforce.” He also emphasized that the labor market is “stable” and that “the jobs data has been moving in a good direction.” The SEP's projection for the unemployment rate at year-end was lowered from 4.4% in March to 4.3% (chart). It is projected to remain there in 2027. (4) Acknowledgment of persistent above-target inflation. Again, we were blown away by how often Warsh stressed that the FOMC's number-one goal was to bring inflation down to 2.0% y/y. He described inflation as persistently elevated, noting that it has been “running well ahead of the Fed’s … 2% [goal] … for more than five years” and said it “remains elevated … in part reflecting supply shocks.” While acknowledging uncertainty around inflation’s “first- and second‑round effects,” he stressed that the key risk is the prospect of inflation broadening. At the same time, he emphasized that inflation is controllable, arguing that it is “primarily determined by monetary policy” and that “inflation is a choice,” underscoring his view that any potential build‑up in inflation pressures reflects policy decisions rather than an embedded acceleration dynamic. The SEP projections for the core PCED inflation rate were raised from 2.7% to 3.3% this year and from 2.2% to 2.5% next year (chart). (5) The restrictiveness of the policy rate. Warsh suggested that the current policy stance is unevenly restrictive rather than uniformly tight. Overall, his remarks imply that the FFR is partially restrictive but not broadly so, with tightening effects concentrated in certain areas rather than the economy as a whole. The SEP shows that the "longer-run" (a.k.a. the neutral) FFR projection remained at 3.1%, in a 100bps range from 2.9% to 3.9% (chart). Warsh did not reveal whether he gives any credence to the concept of a neutral FFR. (6) Warsh aims to reform the Fed. Warsh announced that he is launching five task forces to overhaul key operational areas of the Fed: monetary policy frameworks, communications, regulatory scope, balance-sheet operations, and data and modernization. Warsh used the exact phrase "we have a task force on that" to deflect questions four times during his Q&A session. Whenever a reporter tried to pin him down on a specific market pain point, economic distortion, or policy prediction, he systematically dodged by pointing to his new five-panel security blanket.
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ORACLE: FORWARD PROFIT MARGIN
S&P 500 INDUSTRIALS SECTOR & INDUSTRIES: ANNUAL EARNING GROWTH FORECAST*
S&P 500 INFORMATION TECHNOLOGY SECTOR & INDUSTRIES: ANNUAL EARNING GROWTH FORECAST
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