Weekly Wrap

The market had a shortened week of trading but also a fitful week of trading that revolved around headines pertaining to the Israel-Iran conflict, central bank decisions, and economic data.

In the end, the major indices fnished the week little changed, reflecting in part the indecision over the Israel-Iran situation. There was some speculation early in the week that the U.S. could get directly involved in the conflict, with President Trump demanding Iran's "unconditional surrender" and saying that his patience with Iran is wearing thin. By the end of the week, he allowed that there was still time for Iran to negotiate and that he will decide on a final course of action with respect to Iran over the course of the next two weeks.

There were several key central banks decisions this week, all of which were expected. The Bank of Japan held its key policy rate steady at 0.50%, the Federal Reserve left the target ramge for the fed funds rate unchnaged at 4.25-4.50%, and the Bank of England stood pat with its policy rate at 4.25%.

The Fed decision was accompanied by a Summary of Economic Projections that featured an increase in the median estimate for PCE inflation, core PCE inflaton, and the unemployment rate in 2025, a decrease in the median estimate for real GDP growth, and an unchanged median estimate for two rate cuts by the end of the year.

The overarching message from Fed Chair Powell at his press conference was that the Fed is going to stick by its wait-and-see stance, largely because the labor market is still in pretty good shape and because the Fed is concernd that tariffs will lead to higher prices. Fed Chair Powell, for his part, said he is expecting a meaningful increase in inflation in the coming months because of the tariffs.

The Treasury market took that inflation talk in stride, as yields across the curve settled modestly lower from the prior week's closing levels. Fed Governor Waller (FOMC) caused a stir on Friday when he said he didn't think there would be lasting tariff inflation and that the Fed, based on his view, could cut rates in July. The fed funds futures market, though, barely moved on his view, with the probability for a rate cut in July edging up to only 16.5% from 12.5% the previous day.

Sector action this week featured only three sectors finishing higher: energy (+1.1%), which followed oil prices higher, information technology (+0.9%), and financials (+0.8%). The health care sector (-2.7%) was the biggest laggard, followed by communication services (-1.7%), and materials (-1.2%). The consumer discretionary sector (-0.7%) also underperformed for the week, which included a report showing total retail sales down 0.9%, and sales excluding autos down 0.3%, in May.

Monday:

The stock market regrouped today and reclaimed a portion of the losses it suffered Friday, comforted somewhat by an understanding that the Israel-Iran conflict remains relatively contained and has not led to any major disruption in oil supply lines.

In a related development, press reports suggested today that Iran is working diplomatic channels to try to negotiate a ceasefire agreement with Israel, although Israel has not expressed similar overtures.

The latter point notwithstanding, the stock market was imbued with a positive bias that was the strongest at today's open, which carried the S&P 500 as high as 6,050. Buyers, though, didn't maintain that early conviction. The major indices trended lower from those opening highs in a gradual manner over the remainder of the session but still ended the day comfortably above the unchanged line.

The gains were fortified by the outperformance of the mega-cap stocks, which registered in the leadership of the information technology (+1.5%), communication services (+1.5%), and consumer discretionary (+1.2%) sectors. The Vanguard Mega-Cap Growth ETF (MGK) was up 1.3% versus a 0.9% gain for the S&P 500.

Separately, the semiconductor stocks were the standout performers, particularly Advanced Micro Devices (AMD 126.40, +10.24, +8.82%), which rallied on a CNBC report that the company might have secured a GPU deal with Amazon (AMZN 216.17, +4.07, +1.92%). The Philadelphia Semiconductor Index surged 3.0%, leaving it up 23.3% for the quarter.

On the flip side, defense stocks and energy shares retreated from Friday's leadership positions as the market's angst about the Israel-Iran conflict eased.

The S&P 500 energy sector (-0.3%) traded lower in conjunction with WTI crude futures (71.83, -1.33, -1.8%). Relative weakness was also seen in the more defensive-oriented utilities (-0.5%), health care (-0.4%), and consumer staples (+0.02%) sectors.

Breadth figures favored advancers over decliners by a less than 2-to-1 margin at the NYSE and Nasdaq, with a narrowing in that edge as the session progressed.

Reviewing today's economic data:

• The Empire State Manufacturing Survey for June was weaker than expected at -16.0 (Briefing.com consensus -6.6; prior -9.2), with the indexes for new orders and shipments both declining. This was the fourth consecutive decline in manufacturing activity in New York State; however, firms turned positive about conditions for the next six months.

Tuesday:

The major indices shifted lower today, unable to build on yesterday's gains as geopolitical worries took over as a primary driver. Specifically, the day started on a cautious-minded note following the news that President Trump left the G-7 Summit abruptly to get back to Washington to attend to an evolving Israel-Iran conflict.

The president said in a Truth Social post that everyone should evacuate Tehran immediately. That set the tone for a soft start, along with the report that retail sales and industrial production were both weaker than expected in May. Selling efforts picked up in the afternoon, however, when the president took to Truth Social again to say that we (the U.S.) know where Iran's Supreme Leader is, that he is an easy target, but that we are not going to take him out (kill!) -- at least not for now. He added that "our patience is wearing thin."

These remarks were made as speculation swirled that the U.S. could possibly get involved in the conflict by dropping "bunker bombs" built by the U.S. and flown by the U.S. to destroy Iran's nuclear enrichment facilities that lie deep underground.

The president's comments quickly led to de-risking behavior that took the S&P 500 back below 6,000 and triggered additional safe-haven buying interest in Treasuries and the dollar. The 2-yr note yield settled the day down two basis points at 3.95%, while the 10-yr note yield dropped seven basis points to 4.39%. The U.S. Dollar Index was up 0.8% to 98.76.

Every S&P 500 sector was down today, with the exception of energy (+1.0%). It deviated from the pack, following WTI crude futures higher (73.27, +1.44, +2.0%), which did an about-face from Monday.

Health care (-1.6%) was the biggest sector laggard amid reports discussing the possibility of stricter disclosure rules and tighter regulations over pharmaceutical advertising and a Senate Finance Committee proposal for larger cuts to Medicaid spending than what was proposed by the House. Eli Lilly (LLY 791.27, -16.31, -2.02%) was caught up in the sector's weakness as it also announced an approximately $1.0-1.3 billion cash acquisition of Verve Therapeutics (VERV 11.38, +5.11, +81.50%).

There was some added attention on the underperformance of the consumer discretionary sector (-1.6%). Many components traded lower in a knee-jerk response to the retail sales report; however, the sector's homebuilding components were down on industry news that included an earnings miss and disappointing outlook from Lennar (LEN 104.61, -4.88, -4.46%) and a dour NAHB Housing Market Index for June, which dropped to 32 (Briefing.com consensus 36) from 34 in May.

Breadth figures reflected today's more risk-averse tone, as did the 12.7% increase in the CBOE Volatility Index to 21.54. Decliners led advancers by a better than 2-to-1 margin at the NYSE and Nasdaq.

Reviewing today's economic data:

• Retail sales declined 0.9% month-over-month in May (Briefing.com consensus -0.6%) following a downwardly revised 0.1% decline (from 0.1%) in April. Excluding autos, retail sales fell 0.3% month-over-month (Briefing.com consensus 0.1%) following a downwardly revised unchanged reading (from 0.1%) in April.
  • This was not a good report in terms of hard economic data. It reflected a more cautious-minded consumer, who, in general, pulled back spending on goods. Clothing and accessories store sales (+0.8%) were a surprising outlier, but otherwise, there was a retrenchment in spending in many discretionary categories, including electronics and appliance store sales (-0.6%) and food services and drinking places (-0.9%). This report will help support arguments that the Fed should be cutting rates soon.
• Industrial production fell 0.2% month-over-month in May (Briefing.com consensus 0.1%) following an upwardly revised 0.1% increase (from 0.0%) in April. The capacity utilization rate was 77.4% (Briefing.com consensus 77.7), down from an unrevised 77.7% in April. Total industrial production increased 0.6% yr/yr while the capacity utilization rate was 2.2 percentage points below its long-run average.
  • The key takeaway from the report is that manufacturing output was little changed in May despite the announcement in early April that the reciprocal tariffs would be paused. The tepid activity is consistent with slower economic growth in its own right and likely also reflects the planning uncertainty that goes hand-in-hand with the tariff uncertainty.
• Import prices were unchanged in May after increasing 0.1% in April, while import prices, excluding oil, increased 0.3% after increasing 0.4% in April. Export prices fell 0.9% after increasing 0.1% in April, while export prices, excluding agriculture, fell 1.0% after rising 0.1% in April.
• The NAHB Housing Market Index fell to 32 in June (Briefing.com consensus 36) from 34 in May.
• Business Inventories were unchanged in April (Briefing.com consensus 0.0%) after rising a revised 0.1% (from 0.0%) in March.

Wednesday:

If one didn't know any better, today was just a run-of-the-mill day for the stock market. The major indices were little changed, but it wasn't an ordinary day. Today was a day filled with geopolitical intrigue and wonderment about the Federal Reserve's outlook.

The Israel-Iran conflict took precedence as an early driver. Stocks moved higher, keying on a remark from President Trump, who said there is still time for Iran to negotiate. The idea that a diplomatic solution has not been written off, despite the president's take yesterday that his patience with Iran is wearing thin, was a welcome headline consideration.

It would be remiss not to add, though, that the president also said Iran cannot have a nuclear weapon and that later this week or next week will be "big." That view mitigated some of the excitement around the first headline, yet stocks held their ground in positive territory leading up to the FOMC decision and release of the Summary of Economic Projections (SEP) at 2:00 p.m. ET.

As expected, the FOMC voted unanimously to leave the target range for the fed funds rate unchanged at 4.25-4.50%, but the SEP was confounding in that it showed a median estimate for two rate cuts before the end of the year, the same as in the March SEP, but an increase in the median estimate for PCE inflation to 3.0% from 2.7% and an increase in the median estimate for core PCE inflation to 3.1% from 2.8% for 2025. The median estimate for real GDP growth, meanwhile, was lowered to 1.4% from 1.7%, and the median estimate for the unemployment rate bumped up to 4.5% from 4.4%.

Fed Chair Powell's overarching message in the press conference, which began at 2:30 p.m. ET, is that uncertainty remains elevated and that the Fed needs more time to assess incoming data before determining its next policy move. He also expressed an expectation for some meaningful inflation in coming months on account of the tariffs.

Stocks retreated from higher levels, and Treasury yields rose, in the wake of the FOMC decision and press conference, but the reaction function was fairly constrained given the magnitude of the event. The S&P 500 finished the day flat, the 2-yr note yield settled unchanged at 3.95%, and the 10-yr note yield settled the session up one basis point at 4.40%.

In brief, while buying efforts faded, there wasn't a lot of conviction on the part of sellers.

Sector performances reflected the reserved action. Four sectors finished higher. The information technology sector (+0.4%) was the biggest gainer. Seven sectors finished lower, with energy (-0.7%) and communication services (-0.7%) in a dead heat for biggest loser, only neither was down that much.

WTI crude futures traded above $75.00/bbl earlier in the day but settled up just 0.4% at $73.56/bbl, coming off the boil as the president dangled the carrot of a possible diplomatic solution.

In other developments, the CBOE Volatility Index declined 6.2% to 20.26; initial jobless claims remained at a relatively low 245,000, and housing starts in May fell to their lowest level in five years.

Reviewing today's economic data:

• Initial jobless claims for the week ending June 14 decreased by 5,000 to 245,000 (Briefing.com consensus 253,000), while continuing jobless claims for the week ending June 7 decreased by 6,000 to 1.945 million.
  • The key takeaway from the report is that it covers the week in which the survey for the June employment report is conducted, and with initial jobless claims still at a relatively low level, there will be a basis for economists to expect another decent gain in nonfarm payrolls (all things considered).
• Housing starts declined 9.8% month-over-month in May to a seasonally adjusted annual rate of 1.256 million units (Briefing.com consensus 1.356 million), while building permits declined 2.0% month-over-month to a seasonally adjusted annual rate of 1.393 million (Briefing.com consensus 1.411 million).
  • The key takeaway from the report is that housing starts are weak, sitting at their lowest level since May 2020; moreover, a 2.7% month-over-month decline in single-unit permits doesn't connote an encouraging outlook for starts.

Thursday:

Market was closed in observance of Juneteenth

Friday:

The major indices started this quarterly options expiration day on a positive note, bolstered by President Trump's remark that he will decide on a final course of action with respect to Iran over the next two weeks and Fed Governor Waller's (FOMC voter) belief that he doesn't think there will be tariff inflation and that the Fed could cut rates as early as July.

Mr. Waller was careful to indicate that this is only his view and that he isn't speaking for the Fed. Fittingly, Richmond Fed President Barkin (non-FOMC voter) came out later in the day and said he sees no rush to cut rates amid the tariff uncertainty and resilient economy. The fed funds futures market continued to see it Mr. Barkin's way. A day ago there was a 12.5% probability of a 25 basis point cut at the July FOMC meeting, and notwithstanding Mr. Waller's more hopeful view, the probability of a 25 basis point cut rose to only 14.5% today, according to the CME FedWatch Tool.

The stock market was unable to sustain the positive demeanor seen at today's open, as many stocks succumbed to some profit-taking interest. Kroger (KR 71.97, +6.45, +9.84%), CarMax (KMX 68.57, +4.24, +6.59%), and Darden Restaurants (DRI 225.78, +3.03, +1.36%) were not among them, as they all responded positively in the wake of reporting earnings results.

Notably, the mega-cap cohort and the semiconductor stocks underperformed today, evidenced by a 0.4% decline in the Vanguard Mega Cap Growth Index Fund (MGK 348.17, -1.94, -0.55%) and a 0.8% decline in the Philadelphia Semiconductor Index.

Semiconductor stocks were undercut by a Wall Street Journal report that the Trump administration is planning to revoke waivers that allow chip companies to use American chipmaking technology in China.

The weakness in the semiconductor stocks weighed on the information technology sector (-0.3%), but it was the communication services sector (-1.9%) that took the biggest hit today as its biggest components traded lower.

Alphabet (GOOG 167.73, -6.25, -3.59%) got clipped in part by the news that the Advocate General in the Google Android case in the EU Court proposed that the Court of Justice dismiss Google's appeal and confirm the new fine of EUR4.124 billion set by the General Court. Meta Platforms (META 682.35, -13.42, -1.93%) was jostled by reports that it had previously considered buying Perplexity and that it had attempted to acquire Safe Superintelligence.

The energy sector (+1.1%) was the strongest performer today, as oil prices moved higher in some anxious trading going into the weekend. WTI crude futures rose $0.38, or 0.6%, to $73.88/barrel.

In related news, AP reported that today's meeting between European ministers for foreign affairs and their counterpart in Iran did not produce any breakthrough but that the European representatives expressed a willingness to meet again in the future.

The Treasury market, for its part, had a bit of a roller-coaster trade. The 10-yr note yield moved as high as 4.44% from an overnight low of 4.36% but settled the session at 4.38%, down two basis points from Wednesday's settlement. The 2-yr note yield went as high as 3.96% but settled the session down three basis points at 3.91%.

Breadth figures reflected an otherwise mixed disposition in today's trade, with neither buyers nor sellers showing a great deal of conviction. Decliners led advancers by a slim margin at the NYSE, while decliners outpaced advancers by a roughly 13-to-9 margin at the Nasdaq.

Reviewing today's economic data:

• The Philadelphia Fed Index hit -4.0 in June (Briefing.com consensus 0.3) unchanged from May.
• The Conference Board's Leading Economic Index was down 0.1% in May (Briefing.com consensus -0.1%) after falling a revised 1.4% (from -1.0%) in April.