U.S. Treasury yields fell from recent highs as traders focused on the prospect of a peace deal with Iran and looked ahead to next week's Federal Reserve policy meeting. According to reports from Reuters, yields fell on Thursday after U.S. President Donald Trump said he was calling off new military strikes on Iran because a deal was now ready. The Friday rally was described as purely from a peace optimism standpoint, with the 10-year Treasury yield declining approximately 12 basis points to close near 4.45% (2-year yield at 4.05%). The yield decline reflects the market's response to Trump's announcement that a formal deal could be signed as soon as this weekend, though Tehran has yet to confirm any agreement, keeping headline risk live.
The focus shifted to next week's Federal Reserve policy meeting, which will be the first under the leadership of Kevin Warsh, who replaced Jerome Powell as Fed chief about a month ago. As reported by Reuters, traders are weighing what changes Warsh may make at the June 16-17 meeting, with some speculating he could decline to submit his own rate projections in the 'dot-plot' chart or alter other communication practices given his preference for less forward guidance. The central bank's policy-setting Federal Open Market Committee is widely expected to keep rates on hold and may drop the easing bias from its statement, given that the labor market has improved and inflation remains well above the central bank's 2% target. However, recent softer U.S. core inflation data has eased immediate pressure on the Fed to act sooner, allowing for a "wait and see" approach. The meeting assumes more importance as it comes following the resolution of the Middle East conflict that has been ongoing for over three months now.
Fed funds futures traders price in a 55% chance of an increase by December, according to Reuters reports. Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, noted that markets could react hawkishly if a significant number of Fed policymakers signal expectations for a rate increase. Any discussion of reducing the size of the Fed's balance sheet will also draw attention, with markets focusing on how Warsh communicates at the press conference. Powell will remain at the Fed as governor and will continue to have a vote on the interest rate setting committee. The softer U.S. core inflation reading, with the core CPI's 0.2% rise from April falling short of the 0.3% consensus forecast, has reinforced expectations of higher-for-longer interest rates. Recent economic data showed U.S. consumer inflation in May increased at its fastest pace in three years, along with solid employment data, leading investors to think the Fed will focus on containing inflation. While rates are expected to remain unchanged, investors will be closely watching the Fed's outlook on inflation, growth, and the path of future interest rate cuts.
Wall Street's "fear gauge," the Cboe Volatility Index this week hit two-month highs, while major averages experienced significant daily swings. After torrid runs, major stock indexes have cooled off so far this month, with the benchmark S&P 500 down more than 2% from its record closing high from June 2, and the Nasdaq Composite slipping about 4.5% from its high that day. The S&P 500 remains up more than 8% this year, while the Nasdaq is up over 11%. Technology shares have led the declines, just as they drove indexes higher in scorching rallies off the market's low for the year in late March. Investors are wary of an overheated rally amid soaring optimism about AI-driven profits, despite risks including developments in the Middle East war and its impact on energy prices and inflation. The Iran ceasefire trade has triggered a strong risk-on rally across markets, with the S&P 500 closing Thursday up 1.75% to 7,394, the Nasdaq 100 gaining 3.29% to 29,446, and the Dow rising 1.86% to 50,854. Additionally, investors will follow trading in Elon Musk's SpaceX after the rockets and AI company made its highly anticipated stock market debut on Friday, with SpaceX shares rising 19% on the day, lifting its market valuation over $2 trillion.
Oil prices have dropped to their lowest levels since early March, easing inflationary pressures just as policymakers assess interest rates. Brent crude futures were down $2.02, or 2.4%, at $81.15 a barrel, with the benchmark falling to $80.89 per barrel, the lowest since March 4. US West Texas Intermediate was down $2.22, or 2.8%, at $78.53 a barrel, after dropping to $78.27, the lowest since March 10. The prices had declined around 5% on Monday after Trump announced an interim deal to end the US-Israeli war with Iran, though full details have not been released. The conflict led to the closure of the Strait of Hormuz, which typically carries about one-fifth of global oil supplies. The decline also prompted several major banks to cut their oil price forecasts, citing expectations that global energy flows could normalise faster than previously anticipated. This development is particularly significant as the prolonged disruption in the Strait of Hormuz has kept energy prices elevated, increasing the risk that inflation remains above the Fed's comfort zone for longer than previously anticipated.
