June 18 – It’s Fed Day on Wall Street, but investors are also keeping a keen eye on developments in the Middle East, where the war continues to intensify between Iran and Israel. Stock futures pushed modestly higher in relatively quiet trading overnight, prior to this morning’s housing and jobless claim data, which did little to change sentiment. The VIX is trading near 21, while the dollar index is trading near 98.6. Yields on 10-year Treasuries are trading near 4.37%, while yields on 2-year Treasuries are trading near 3.94%. Crude oil prices are modestly higher once again as the market adds more war premium, while the grain and oilseed markets are mixed to firmer. The markets will be closed for the Juneteenth holiday tomorrow, before reopening for Friday.
First-time claims for unemployment benefits slipped to 245K in the week ending June 14, down from 250K the previous week, but slightly above analyst expectations of 244K. The four-week moving average rose to 245.5K claims, up from 240.75K the previous week. Continuing claims for the week ending June 7 dropped by 6K to 1.945 million, while the four-week moving average for continuing claims rose by 13K to 1.926 million. Initial claims for unemployment benefits filed by former Federal civilian employees totaled 535 in the week ending June 7, down 26 from the previous week. Continuing claims for former Federal civilian employees in the week ending May 31 totaled 7,074, which was an increase of 755 from the previous week. Overall, this week’s data shows the numbers stabilizing a bit after recent softening in the jobs market, but it is still softening, nonetheless.
Housing starts fell to an annualized rate of just 1.256 million units in May, down from 1.392 million in April, and below analyst expectations of 1.360 million. Permits for new housing starts dropped to an annualized rate of 1.393 million, down from 1.407 million the previous month, and below analyst expectations of 1.430 million. The economy is not in a recession, but the housing sector continues to be in a recession. Prospective buyers continue to hang onto hope for lower interest rates, based on what the “experts” are telling them, while consumers also remain reluctant to commit to a 30-year mortgage amid the current uncertainty of the trade war.
President Trump called for Iran’s unconditional surrender as attempts for a diplomatic solution to the Iran – Israel war appear to be quickly evaporating. Much of Iran’s military leadership has been killed already by Israel’s precision attacks, while it also continues to erode away at Iran’s military capabilities. The United States has thus far not joined in on the fight, but President Trump appears to be keeping that door open. The main point of contention is Iran’s ability to produce nuclear weapons after consistently verbalizing its desire to decimate the nation of Israel, while also chanting “Death to America.” Israel initiated this war with Iran, striking at its nuclear capabilities, after international agencies ruled that Iran was in violation of the nuclear nonproliferation agreement that it had signed, and declared that it had enough weapons grade uranium to produce nine nuclear bombs. Israel is determined to destroy Iran’s nuclear war capabilities, while President Trump now seems to have given up on negotiations to do the same, suggesting that he may now join in the efforts to destroy Iran’s capabilities to build nuclear bombs. Iran remains defiant, even as 10 million people seek to flee from Tehran as the war escalates.
Wall Street fears that the conflict will turn into a regional conflict that disrupts the supply of energy being exported from the region. Iran is reportedly considering restricting the movement of tankers through the Strait of Hormuz, where a fifth of the world’s crude oil flows. But there are also questions surrounding its ability to do so. Many of its military leaders are already dead, and many of Iran’s proxy groups in the region have been severely weakened by their recent conflicts with Israel. As such, some analysts see this as a window of opportunity to return Iran to the prosperous country that it was prior to the 1979 regime takeover, but there’s still enough risk to such a move to keep Wall Street on edge. Meanwhile, crude oil continues to flow at similar levels to a week ago prior to the conflict, but fertilizer movement out of the region has already been negatively impacted, sending prices more than 20% higher.
The uncertainty of the Iran – Israeli war, and the uncertainty of the tariff war, are fully expected to keep the Federal Reserve on the sideline later today when it releases its updated monetary policy statement. No significant changes to policy are expected from this week’s meetings, although Fed Chair Jerome Powell will most likely receive a number of questions at his press conference regarding reports that President Trump will soon name his nominee for Powell’s replacement. Powell’s current term as chair expires in May of next year, so it would be highly unusual for the president to nominate his replacement so soon. Trump is not expected to fire Powell. The markets convinced him not to take on that battle. But the drama does create some uncertainty about how it might impact monetary policy decisions going forward.
