Volatility returned to markets last week as rising geopolitical tensions collided with key inflation data. The S&P 500 fell -0.36%, the Dow dropped -1.3%, and the Nasdaq declined -0.61%, with the pullback driven largely by concerns over the Israel preemptive air strike targeting roughly 100 sites across Iran. These included nuclear facilities, IRGC command centers, missile bases, and the residents of senior Iranian commanders. Israeli Prime Minister Netanyahu justified the attacks as necessary to halt Iran’s nuclear weapons ambitions. A surge in oil prices—up nearly 7%—raised fears of a stagflation environment and renewed market focus on inflation risk. While investor sentiment was cautious, fund flows suggested a more balanced tone as cooling U.S. inflation data helped anchor longer-term expectations.

Encouragingly, U.S. inflation data continued to cool. May’s Consumer Price Index rose just 0.1% month-over-month and 2.4% year-over-year—both below expectations. Core inflation also eased, and producer prices declined modestly. Wage growth remained steady at 3.9%, supporting consumer spending without adding inflationary pressure. These trends support the Federal Reserve’s patient approach and reduce the likelihood of further rate hikes in the near term.

With cooling inflation and labor data showing a modest slowdown, the U.S. Federal Reserve is expected to hold rates steady at 4.25–4.50% at its upcoming June meeting this week. Market pricing suggests two rate cuts later this year, though the timing remains uncertain given trade-policy and geopolitical risks.

Despite favorable inflation readings, Treasury yields moved slightly higher last week, reflecting both increased geopolitical risk and the market’s concern that energy price shocks could eventually reheat inflation. Market pricing now suggests that the first potential Fed rate cut could come in the fall, assuming inflation remains contained and growth stays resilient. The yield curve remains inverted, signaling ongoing uncertainty about the macro-outlook and the trajectory of monetary policy.

This week will bring a number of key economic releases that could shape market direction. On Wednesday, we’ll get May retail sales and industrial production— key indicators of consumer health and manufacturing momentum. Also due is the preliminary June University of Michigan consumer sentiment index, which will offer fresh insight into how Americans perceive inflation and their personal finances.

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