Last week, financial markets experienced significant volatility, primarily driven by escalating geopolitical tensions between Israel and Iran. The conflict triggered a widespread "risk-off" sentiment, leading to weekly declines of around 0.50-1.50% in the US major equity indexes. As investors sought safer assets, US Treasury bond yields rallied around 10bps. This geopolitical uncertainty was further compounded by ongoing concerns about Trump's tariff policies and the state of US-China trade talks, adding another layer of caution to market sentiment.
Inflation worries eased after both CPI and PPI inflation indexes came softer than expected. That said, investors remain concerned about inflationary pressures, especially with the approaching expiration of Trump's tariff pause on July 9th. Other economic data showed signs of a slowdown in the services sector and continued contraction in manufacturing.
This week, we have the Fed's rate decision on Wednesday where they are widely expected to hold rates at 4.25%-4.50%. The recent resilience of the labor market led to a shift in market expectations regarding cuts this year, with investors scaling back expectations for larger cuts. Market is pricing now around 50bps of cuts in 2025, from almost 100bps couple of months ago. This adjustment in monetary policy expectations, coupled with the broader geopolitical and economic uncertainties, still contributes to a cautious and volatile trading environment in the short term.
