Weekly house view | Peace in the Middle East, war at the Fed

The week in review

US stocks ended last week at record closing highs on trade deal hopes, reinforced expectations of looming interest rate cuts by the Federal Reserve and an Iran-Israel ceasefire. Oil prices duly saw their largest falls since March 2022, though conflicting messages on the damage from US strikes to Iran’s nuclear facilities leaves scope for escalation in the Middle East. A fall in US consumer spending supported the rate cut expectations as did comments from Fed Governor Michelle Bowman, who called for cuts as soon as July. The S&P500ⁱ rose 3.5% (in USD) on the week and the Nasdaqⁱⁱ gained 4.3% (in USD). The dollar weakened on Bowman’s comments and President Trump’s announcement that he will nominate a Fed chair who wants to cut rates. The Fed is widely expected to cut rates twice this year, starting in October, with risks of cuts as early as September. On trade, the US said it and China had resolved issues around shipments of rare earth minerals and magnets to the US, resolving a dispute that stalled a deal reached in May. In Europe, NATO leaders agreed to a defence expenditure target of 5% of GDP by 2035. The German cabinet passed the second draft of the 2025 budget, confirming a paradigm shift in fiscal policy as net borrowing is expected to surge, with an additional EUR 19bn of net issuance for Q3. The yield curve steepened slightly, with a year-end forecast for the 10-year Bund yield at 2.5%. 

Quote of the week

As Trump compared Middle Eastern adversaries to “two kids in a school yard” who “fight like hell,” NATO Secretary General Rutte interjected: “And then Daddy has to sometimes use strong language to get them to stop.”

Key data

US Q1 GDP was revised down to -0.5% annualised on weak consumer spending, which also fell 0.1% in May. Sales of new homes fell 13.7% in May. 

In the euro area, the composite purchasing managers’ index (PMI) held steady at 50.2 in June, with services activity up slightly (+0.3pt to 50.0) and manufacturing down (-0.5pt to 51.0). 

In China, large-scale industrial firms saw a 9.1% year-on-year decline in profits in the January-May period.