Key developments last week included progress in US-Iran negotiations and renewed US inflation data, setting the stage for the upcoming Federal Reserve meeting.
Key Economic Events
Progress was made in US-Iran talks, though a final agreement has not been reached. Iranian media disclosed a draft 14-point memorandum of understanding covering sanctions relief, the opening of the Strait of Hormuz, and the unfreezing of assets. However, former US President Donald Trump later denied the text's alignment with any formal bilateral agreement. In the short term, the prospect of a deal has moderated expectations of extreme supply disruptions. In the medium term, core issues like the nuclear program, security guarantees, and sanctions relief remain unresolved, meaning Middle East risks will continue to influence oil prices, shipping costs, and inflation expectations.
US inflation re-accelerated in May, with the Consumer Price Index rising 4.2% year-over-year and the Producer Price Index climbing 6.5%. Against a backdrop of strong employment, this data leaves the Federal Reserve with little basis for a rapid shift towards monetary easing in the near term.
New Federal Reserve Chair Christopher Waller has emphasized reform and policy discipline. The upcoming June FOMC meeting will be his first under this new framework. Market focus will be on the statement's wording, the Summary of Economic Projections, the dot plot, and his responses to questions on inflation, energy shocks, and Fed independence.
The European Central Bank raised interest rates by 25 basis points, primarily in response to energy-driven inflation. The eurozone now faces the policy dilemma of balancing inflation control with growth stabilization.
Performance of Major Assets
For the week of June 8 to June 12, gold prices trended lower. COMEX gold futures settled at $4,207.90 per ounce, down 2.57% for the week. The renewed uptick in US CPI and PPI reinforced expectations that the Fed would not ease policy soon. Simultaneously, news of progress in US-Iran talks temporarily cooled fears of extreme supply disruptions and full-scale conflict, leading to a pullback in safe-haven buying. Over the medium to long term, gold retains strategic allocation value, supported by central bank purchases and geopolitical risks. However, with US inflation still elevated, Chair Waller emphasizing policy discipline, and a narrative of US dollar credibility repair, a sustained gold rally likely requires a decline in real interest rates.
Oil prices also moved lower. WTI crude futures settled at $90.54 per barrel, down 6.25% for the week. The potential for a US-Iran deal, despite being unconfirmed, eased market fears of severe supply disruptions, leading to a retracement of previously priced geopolitical risk premiums. Additionally, the World Bank's downgrade of global growth forecasts heightened demand-side concerns. Looking ahead, oil prices are expected to remain highly volatile, caught between potential declines from easing geopolitical tensions and possible spikes if negotiations stall again on core issues.
US Treasury yields declined. The 10-year yield settled at 4.48%, down 7 basis points for the week. This drop did not signal expectations of imminent Fed easing but rather a technical correction following the prior rise driven by strong jobs data and inflation. The fall in oil prices eased reflationary pressures, and the World Bank's growth forecast downgrade boosted demand for duration assets. Medium-term, US yields are likely to remain elevated and range-bound, as high inflation, fiscal supply pressures, and the Fed's policy discipline limit the potential for a sharp downward trend.
The US Dollar Index weakened slightly, settling at 99.80, down 0.27%. The decline was influenced by the pullback in Treasury yields and lower oil prices, which marginally reduced support from US interest rate differentials. The euro gained 0.39% against the dollar, supported by the ECB's rate hike. The dollar's foundation for a sustained decline appears shaky, given persistent US inflation and the Fed's constrained ability to pivot to easing.
Global equity markets mostly recovered. The Nasdaq Composite rose 0.70% and the S&P 500 gained 0.65%. The temporary retreat in Treasury yields, a weaker dollar, and positive capital market events like the SpaceX IPO and Nvidia's expanded AI partnerships supported risk sentiment. In the medium term, the focus for US equities may shift from simply trading AI momentum to a more selective approach based on earnings delivery capability, with AI remaining a key long-term theme.
For the prior week of June 1 to June 5, asset performance was driven by different factors. Gold fell sharply (COMEX down 4.92%) as a strong US jobs report fully priced in Fed rate hikes for the year, boosting the dollar and real yields. Oil prices rose 3.64% as military tensions in the Middle East around the Strait of Hormuz escalated supply security concerns, though a stronger dollar capped gains. US Treasury yields surged on the strong jobs data and hawkish Fed signals. The US Dollar Index rose 1.17%. Global equities broadly declined, with the Nasdaq dropping 4.68%, as higher yields pressured valuations and markets reassessed AI-related risks and capital expenditure returns.
Detailed Asset Analysis
Gold faced pressure from reinforced expectations of prolonged Fed policy tightness following the hot US inflation prints. While Middle East risks and central bank buying provide medium-term support, the path for a sustained gold rally is constrained by high US real rates and a strong dollar narrative.
The oil market's decline was primarily driven by the easing of extreme supply disruption fears due to the US-Iran negotiation window. Demand concerns, amplified by the World Bank's growth forecast cut, also played a role. The outlook remains one of high volatility, balancing potential geopolitical premium erosion against persistent supply risks.
The pullback in US Treasury yields reflected a technical adjustment and a response to lower oil prices and softer global growth expectations, rather than a shift in Fed policy expectations. Yields are expected to stay elevated. Chinese government bond yields edged higher, mainly due to marginal liquidity tightening and profit-taking after reaching low levels, though underlying weak credit demand continues to limit upside.
The US dollar's weakness was tied to the drop in Treasury yields and oil prices. The euro found support from the ECB's rate hike. The medium-term path for the dollar remains tied to US inflation dynamics and Fed policy, while the euro faces a growth-inflation trade-off.
Global equity markets showed a mixed recovery. US stocks were supported by lower long-term yields and positive tech catalysts. European markets were generally stronger, while Asian markets were mixed, with Japanese and Hong Kong indices underperforming. The sectoral shift in US markets suggests a move towards scrutinizing earnings and cash flow quality, especially within the high-growth tech sector.
Important Risk Factors
Investors should monitor risks from geopolitical disturbances, policy uncertainty related to the upcoming US election, the potential for slower-than-expected rate cuts overseas, and possible delays in the transmission of domestic policy effects in China.
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