The War with Iran dominated headlines and markets again this week after reports from last weekend that a deal was forming to reopen the Strait of Hormuz. Equity markets ate up the news with the major indices hitting new all-time highs on optimism that a deal would be reached and the conflict would end. Initial reports from this morning are that the deal would extend the current ceasefire by 60 days while reopening the Strait of Hormuz to commercial traffic. Oil prices fell as low as $92/barrel on the news, but markets will have to adapt to the notion that, even with the reopening of the strait, it will still take weeks for oil supplies to return to "normal" levels.
The FOMC's preferred inflation gauge, CORE PCE, rose 0.2% MoM and 3.3% YoY, slowing down from March yet still well above the Fed’s 2% target and the highest level in 3 years. Fed officials were divided in their commentaries this week with Kansas City President Jeff Schmid saying inflation is "too hot and has been above target for too long," warning the energy shock might not be temporary. Vice Chair for Supervision Michelle Bowman said progress on lowering inflation "appears to have stalled," though she cautioned against overreacting to what may be a temporary supply shock. Former New York Fed President Bill Dudley warned on May 26 that the Fed risks losing credibility after more than 5 years above its inflation target.
The minutes of the most recent FOMC meeting revealed a majority of Fed officials are wary of inflation and would need to consider rate hikes if it remains persistently above their 2% target. To address the possibility of rate hikes, "many participants indicated that they would have preferred removing the language from the post-meeting statement that suggested an easing bias regarding the likely direction of the committee's future interest rate decisions." In other words, the focus of the majority of voting members has officially shifted to taming inflation. Interest rate futures continue to price in a full 25-bp hike for March 2027.
In addition to higher gas prices, consumers may soon face even more expensive food prices. According to the USDA food price outlook, grocery prices are expected to rise another 3.2% this year. Ricky Volpe, an agribusiness professor at Cal Poly State thinks this could lead to inflation levels between 4% and 4.5% and attributes the future price increases to a combination of bad weather, tariffs and a dwindling cattle herds. He also expects the Iran War and a possible El Nino weather pattern in 2027 to exacerbate the issue.
According to the National Foundation for Credit Counseling, on a scale of 1 to 10, Americans report their financial stress at an average of 6.6 for Q1 2026. Their Financial Stress Forecast (FSF) has been rising steadily over the last two years, climbing from 4.7 in 2022 to a peak of 6.8 last year, before slightly easing for Q1. Data cited in the report showed total U.S. household debt rose to $18.8 trillion in Q1, an $18 billion increase from the previous quarter, while credit card balances stood at $1.25 trillion.
KEY INDICATORS THIS WEEK
Housing – Mortgage rates reached an average of 6.65% this week as the Case Shiller Home Price Index fell 0.16% MoM and rose just 0.67% YoY.
Next week – Jobs week!