Comments based on information available as of 7:45am CT on 6/13/2025
The situation between Israel and Iran is on investors’ minds. As has happened historically, yields fell, oil prices rose, and stock prices fell. Oil prices spiked and that can weigh on growth and move inflation expectations higher. If Iran tries to harass ships going through the Straits of Hormuz, where a quarter of seaborn shipments of oil have to go through, that could keep oil prices higher for longer. However, oil prices are just back to where they were in February, so it’s not as though prices were high to begin with. This is an economic shock that nobody really needs, but it is one that seems more like a shock to sentiment than to the fundamentals of the economy. 
Growth: Up, Down, and All Around
The National Federation of Independent Business Small Business Optimism index for May rose to 98.8. The uncertainty index rose, but thanks tariff policy becoming less extreme, expected business conditions and sales expectations shot higher. In the first quarter, tariff uncertainty led to hesitancy, which caused a decline in gross domestic product. Now that there seem to be upper-bounds on tariffs, a little clarity can lead to economic stability and eventually reacceleration.
Inflation: Seeing Who Pays
The CPI number was a lot tamer than expected. A lot of imported food items had relatively high inflation, like bananas rising 3.3% in price and toy prices rising 2.2%. Egg deflation is taking place with prices falling 2.7%. A little stability with trade policy could go a long way to help keep inflation from derailing. This is another example of why the Fed may shift its balance of risks to focusing more on growth threats than inflation threats. However, now that businesses know tariffs aren’t going away, they may tell consumers that it’s time to pay.
Policy: No, You Go First
The London Agreement between China and the US seems narrow and tentative, at best. China only committed to export rare earths for six months. The US insisted that China send the products first before the US lifts export controls. Many of the stickier and harder issues are still unresolved and with no further meetings scheduled, it is unclear how much more progress will be made this summer. But a narrow and tentative agreement is better than no agreement.
Looking Ahead: Never Underestimate The Power of Low Expectations
According to the New York Fed’s Survey of Consumer Expectations for May, only 36.3% respondents thought stock prices will be higher 12 months from now. That is up 0.6 percentage points from April, but still well below the average level of “bullishness” on the outlook, which is 40%. If investors typically expect stock prices are more likely to fall than to rise, maybe that helps explain why stock prices have historically gone up. If everyone has low expectations, it’s not hard to beat those expectations.
