Relief rally meets a still restrictive Fed

Summary

Last week in markets

Markets ended the Juneteenth-shortened week with a modest improvement in risk sentiment, though investors remained cautious. The S&P 500 Total Return Index closed Thursday at 16,772.64, up 0.96% week over week. However, on a first-to-last trading day basis, the index declined 0.7%, highlighting continued sensitivity to inflation and monetary policy despite a late-week rebound.

With U.S. markets closed Friday, the 10-year Treasury yield finished the week at 4.46%, one basis point below Monday's level. The move suggests investors were not broadly reducing risk exposure. Instead, markets continued to recalibrate inflation expectations and geopolitical risk premiums.

Commodities provided the clearest signal. Brent crude settled near $80 per barrel on Friday, closing around $79.94 after trading above $86 the previous Friday and near $83 on Monday. The decline reflected growing confidence that shipping through the Strait of Hormuz would normalize, easing concerns about a sustained energy supply shock.

Even so, geopolitical risks remain elevated. Israel and Hezbollah agreed to a renewed ceasefire following intensified fighting in Lebanon, while U.S.-Iran negotiations were postponed. Lower oil prices helped alleviate immediate inflation concerns, but unresolved regional tensions continue to support a geopolitical risk premium across markets.

The week ahead

Thursday's inflation and income data will be the primary focus. The Bureau of Economic Analysis will release May personal income and outlays data, including the PCE deflator, alongside the third estimate of first-quarter GDP. For markets, the key question is whether recent energy-driven inflation pressures are easing before they spread more broadly through the economy. A softer PCE reading would strengthen the case that lower oil prices are helping contain inflation and could support expectations for eventual policy easing. A firmer reading would reinforce the Fed's restrictive stance and likely renew pressure on the front end of the Treasury curve. The release will provide one of the clearest signals yet on whether declining energy prices can translate into broader inflation relief. Growth data will help determine how much policy restraint the economy can continue to absorb.

Global flash PMI data arrive Tuesday, including the U.S. survey at 13:45 UTC. New home sales follow Wednesday, with durable goods orders scheduled for Thursday. Together, these releases will help investors assess whether economic activity remains broadly resilient or is becoming increasingly dependent on consumer spending and business investment.

Housing remains one of the most interest-rate-sensitive sectors of the economy and offers a direct read on the impact of higher borrowing costs. PMI data should provide additional insight into whether business activity is stabilizing as energy prices retreat.

Central bank communication and geopolitical developments will also remain in focus.

Federal Reserve Governors Christopher Waller and Michael Barr are scheduled to speak Monday. Bank of England policymakers Alan Taylor and Swati Dhingra will appear Tuesday, while the European Central Bank holds a General Council meeting Thursday.

The key question is whether policymakers view lower oil prices as a meaningful disinflationary development or as a temporary reprieve. That distinction matters across asset classes. Sustained diplomatic progress could keep downward pressure on crude prices and inflation expectations. Renewed disruptions, however, would likely push energy prices higher, support the U.S. dollar, and create additional headwinds for risk assets.

For now, markets appear willing to welcome lower inflation risks, but not yet prepared to assume a more accommodative Fed. That leaves incoming inflation data as the critical test for both policy expectations and market sentiment.