Wentz Weekly: A Nonevent Fed Meeting and Intensifying Middle East Conflict

Wentz Weekly Insights
A Nonevent Fed Meeting Had Markets Unchanged Despite Intensifying Middle East Tensions

Stocks were mixed last week but mostly unchanged with the Dow, Nasdaq and Russell 2000 indices squeezing out a small gain while the S&P 500 saw a small decline of 0.15%. There were a lot of moving parts last week but ultimately stocks were lower Friday over the conflict in Iran. Areas like technology (specifically semiconductors), financials, and energy (higher oil prices) outperformed while health care was the clear underperformer.

Health care was down almost 3% and is the worst performing sector over the past several months (second worst year-to-date, only being consumer discretionary) mostly due to the reconciliation bill being pushed through Congress that includes Medicare and Medicaid spending cuts. The House passed their version of the reconciliation bill several weeks ago and this past week the Senate agreed to its version. In the days and weeks ahead, both sides will work on a final version but key sticking points remain around Medicaid cuts, state and local tax deduction caps, and clean energy tax credits.

The most anticipated event of the week was the Fed meeting that concluded Wednesday. The Fed made no changes to monetary policy (no change in interest rates) as was widely expected and markets traded more as if the meeting was a nonevent.

The policy statement had a couple small changes – it said unemployment remains low, instead of it has stabilized at a low level, said uncertainty about the economic outlook has diminished instead of it has “increased further,” and took out the phrase that the risks of higher unemployment and higher inflation have risen, basically upgrades from the prior statement.

Investors were more interested in the updated summary of economic projections (SEP – where officials provide projection for the next three years, summarized in the table below. You will see the current projections then the prior projections from March below that), where there were notable changes. The Fed lowered its projections for economic growth, increased its inflation projection, and increased the unemployment projection, for both this year and 2026. It kept its rate cut projection at two cuts this year, but lowered its rate cut projections for next year to one rate cut instead of two. Most of this was to reflect the more cautious stance from potential tariff impacts

In more detail, there are more officials that expect no rate cuts this year, now at seven up from four at the prior meeting, and less officials expect more rate cuts (only two expect three rate cuts this year).

Chairman Powell’s press conference reiterated a lot of what was said last meeting in the Fed believes policy is in a “good place” but does not have a great deal of conviction on its rate projections and it will remain data dependent. Powell made direct comments on tariffs saying they will boost inflation and “someone has to pay for the tariffs” adding that “meaningful increase in inflation” is expected and projections are moving toward slower growth and higher inflation.

The market’s expectations for future interest rates did not change much after the meeting. The fed funds futures market continues to price in two rate cuts for this year as has been the case all year outside of the period in April when markets started pricing in 3-4 rate cuts due to tariff concerns on economic growth. However, Governor Waller was one of the first Fed officials to speak publicly after the meeting and said on Friday he thinks tariffs impact on inflation will be a one time impact and the Fed should consider cutting rates in July – the Fed’s next meeting. Rate cut expectations have increased slightly since then.

But taking most the headlines last week was the escalating conflict in Iran which has caused little impact to markets to this point. The biggest market impact has been seen in the oil markets where crude oil is over 10% higher since Israel’s initial attack June 13 over concerns of a supply disruption or an escalation in the Middle East.

The latest escalation was over the weekend when the U.S. targeted and struck Iran’s three nuclear facilities including with its “bunker buster” bombs. Markets opened Monday slightly higher, shrugging off the incident but markets remain volatile over concerns Iran may retaliate against U.S. bases in the Middle East.

This week the conflict will receive a lot of the attention, with other events taking place this week including Powell’s semiannual testimony to Congress, housing, inflation, and consumer data, as well as several large cap earnings from key companies like FedEx, Nike, and Micron.

Week in Review:
Stocks saw a 1% up day Monday followed by a 1% down day Tuesday and were basically unchanged Wednesday and Friday (closed Thursday for the Juneteenth holiday) to close the week mixed/unchanged. The four major US indices finished as follows: Russell 2000 +0.42%, Nasdaq +0.21%, Dow +0.02%, and S&P 500 -0.15%. Treasuries saw a small increase with yields falling slightly – the 2-year Treasury yield fell 4 basis points to 3.92% while the 10-year yield fell 3 bps to 4.38%. The volatility index (VIX) moved slightly lower for the week despite unrest in the Middle East. The dollar index increased 0.54% while gold fell 1.84%. Meanwhile Bitcoin fell 2.62%. Oil rose 2.67% after the 13% increase the week prior due to Israel-Iran.

Recent Economic Data

• Retail Sales: Retail sales were a big disappointment for May, falling 0.9% in the month for the largest decline since early 2023. Some of that can be blamed on lower oil prices with gasoline sales falling 2.0%, but the bigger impact was a 3.5% decline in auto sales. Excluding these two more volatile categories, core retail sales still fell 0.1%, lower than the slight increase that was expected. Of the 13 major categories tracked, only six of them saw an increase in monthly sales, led by a 2.9% increase in miscellaneous stores, 1.3% increase in sporting goods/hobby stores, and 1.2% increase in furniture. Declining sales were led by (other than gas and autos) a 2.7% decline in building materials, 0.9% decline in bars and restaurants, and 0.7% decline in grocery stores. Retail sales are up 3.3% from a year ago with core sales up 4.6%.

• Housing Market Index: The housing market index, an index of homebuilder sentiment, dropped another 2 points to 32 and back to pandemic lows. In fact, the index has only seen a lower reading twice since the housing crisis (December 2022 and April 2020). The present sales index dropped 2 points to 35 (down from 50 in January), the index for expected sales dropped 2 points to 40 (down from 59 in January), and the index on traffic of prospective buyers fell 2 points to 21 (down from 32 in January), the lowest since 2023. The report said more builders are cutting prices in attempt to drive sales with 37% saying they have cut prices, the highest share since NAHB started tracking data three years ago, with the average price cut at 5%.

• Housing Starts & Permits: The number of starts on new home construction fell 9.8% in May to a seasonally adjusted annualized rate of 1.256 million units, down 4.6% from a year ago. This is the lowest number of housing starts since the US was recovering from the pandemic shutdown in mid-2020. The number of permits authorized for new home builds fell 2.0% to a seasonally adjusted annualized rate of 1.393 million and down 2.7% from a year ago. The number of homes authorized but not started has been relatively stable over the past year around 282,000 while the number of homes under construction has trended downward for months, at 1.375 million in May which was down from 1.593 million a year ago. The number of houses completed has also trended down as a result of less home permits and starts.

• Empire State Manufacturing Survey: The Empire State Manufacturing index was -16.0 for June, worsening from -9.2 in May. New orders and shipments declined while employment grew for the first time in several months and input price increases slowed but remained “substantial.” An encouraging signal, firms turned positive in June after being more pessimistic the first several months of the year.

• Philly Fed Manufacturing Survey: The Philly Fed Manufacturing index was -4.0 for June, matching the index reading from May. The index for general activity was unchanged which reflected slightly negative activity while new orders fell but remained slightly positive. The employment index was a big surprise by turning negative for the worst reading since May 2020 (20% of firms reported decrease in employment, 70% reported no change, 10% reported an increase). The prices index moved lower (suggesting lower price increases) but still remains quite elevated.

• Industrial Production: Industrial production fell 0.2% in May coming after an unchanged reading in April. The small decline was due to a 0.5% increase in manufacturing production, 2.9% increase in mining, but offset by a 1.6% decline in utilities (which is highly correlated to weather). Capacity utilization was at 77.4% but has fallen for three straight months from 78.0%.

• Jobless Claims: The number of jobless claims the week ended June 14 fell 5k to 245,000 with the four-week average up 5k to 245,500. The number of continuing claims moved down 6k to 1.945 million with the four-week average up 13k to 1.926 million. Both are slightly down from last week’s multi-year highs.

Company News

• AMD: Shares of AMD were higher to start the week after a CNBC report said it received a major win to supply its GPUs to Amazon AWS (Amazon Web Service – its cloud division).

• Meta: Meta will begin monetizing its WhatsApp messaging platform after it said it will start showing ads on its WhatsApp “updates” tab, which is a part of the app separate from the private messaging section. Meta says the updates tab sees about 1.5 billion visitors per day. Meta will also let Channel operators (advertisers) sell subscriptions which will let them create special messages for a group of paying customers. Separately, Meta is making a bigger push into advertising utilizing artificial intelligence by announcing a new image-to-video tool letting marketers use AI to turn their product pictures into video ads. In other Meta news, the company announced an expanded partnership with Luxottica by releasing new versions of its AI-powered smart glasses with Oakley and Prada.

• Nippon Steel/US Steel: Trump officially backed the deal for Japan’s Nippon Steel to acquire US Steel after issuing an executive order to clear the deal. Nippon said it plans to promptly close the $14.9 billion deal. Part of Nippon’s agreement to get Trump’s approval was pledging to invest $11 billion by 2028 and as well as certain governance commitments.

• Roku: Shares of Roku were up over 10% to open the week after the announcement it will be integrated with Amazon Ads that would give advertisers exclusive access to its connected TV platform. ComScore data shows the collaboration will provide access to an estimated 80 million connected TV households, more than 80% of the market share.

• Amazon: Amazon said its Prime Day will run from July 8 through July 11, extending the event to four full days (up from two) for the first time. Also for the first time, it will introduce daily themed deals called “Today’s Big Deals” that will offer limited time deals while supplies last.

• Kraft Heinz: Kraft Heinz said it will remove artificial colors from all its products and brands by 2027 and will not launch any new products that contain the food additives, effective immediately. It said 90% of its portfolio of products are already free of synthetic dyes.

Other News:

• Reconciliation Bill: The Senate release its draft version of the budget bill which would increase the debt ceiling by $5 trillion instead of the $4 trillion increase in the House’s version. It includes much of the House’s bill but reduces the SALT (state and local tax deduction) to $10k, includes business tax breaks that the House bill had expiring, reduces the child tax credit to $2,200 (permanent), several changes regarding Medicaid including deeper cuts, among other changes.

• Israel/Iran War: Israel and Iran continue to go back and forth with airstrikes. Israel has said Iran’s nuclear capabilities have been “set back dramatically, but not enough.”
  • Oil was higher overall last week but lower to start the week as the attacks have left most oil facilities untouched. However, a report said oil assets are increasingly becoming a target.
  • Over the weekend (June 14-15) the Wall Street Journal reported Iran reached out to its Arab neighbors and asked them to help de-escalate the conflict. It added it would be willing to come back to the table to discuss a nuclear deal. It was also reported Iran sent communications to Israel saying it was better to keep the violence contained.
  • Meanwhile, Trump left the G7 meeting in Canada early to return to the US due to escalations in the Middle East, reportedly asking to hold a meeting in the situation room, and said Tehran (Iran’s capital) should evacuate.
  • More on the Israel-Iran conflict with Trump calling for an “unconditional surrender” of Iran. He met with the national security team for a couple hours Tuesday and Trump is now considering sending aircraft to assist Israel in taking out Iran’s nuclear sites.
  • Mid-week, Iran’s Supreme leader said Iran will not surrender to Israel.
  • Trump later in the week he will decide whether or not to strike Iran in the next two weeks, holding off on the chance of negotiations, while saying he would prefer a diplomatic solution but weighing military intervention to keep Iran from obtaining a nuclear weapon.

• Trade:
  • Trump said the US and UK signed a trade agreement, including terms that were agreed upon last month, at the G7 Summit. The deal cuts US tariffs on UK exports and eases the tariffs on cars on each side. However, it did not find common ground on steel tariffs, a key push by the UK, and will continue to negotiate.
  • The US and European Union are reportedly ready to agree to a trade deal where the US would impose a flat 10% tariff on EU goods which would avoid higher tariffs on things like drugs, electronics, and cars. Then, however it was reported the next day Trump said the EU is not offering a fair deal.
  • Trump said at the G7 Summit that a deal with Canada will be made within days or weeks, but when asked what is holding up a deal Trump said himself and (Prime Minister) Carney have different concepts.

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