Back on boil

After a period of intermittent diplomacy, tensions between the US and Iran meaningfully escalated last week. This sent the price of crude oil surging back towards $90 per barrel, after falling below $70 just a few weeks ago. 

Last week’s initial jobless claims report also added more fuel to inflation concerns. The reading, which came in at 187,000, was the lowest in 57 years. While this is an encouraging data point in an already strong labor market, it also highlights an economy that may continue running hot, potentially keeping inflation above target. Combined with renewed concerns about energy prices, that pushed interest rates higher. The 10-year US Treasury yield topped 4.70% for the first time since January 2025, and the 30-year has now logged its longest stretch above 5% since 2007. 

While still unlikely, the odds of a rate hike at this week’s Federal Reserve's meeting appear to have increased because of recent events. The market continues to price in two hikes through the middle part of next year, but forecasting may become more of a challenge as participants adapt to Chair Warsh’s more limited approach to forward guidance.

The stock market also pulled back last week as investors grew more concerned about whether the large hyperscalers can generate strong enough returns to justify their sizable AI investments. These companies continue to commit sizable capital to AI-related spending, likely requiring ongoing financing through debt markets. Positively, this investment appears to be having a broader impact across the economy, extending beyond the traditional technology supply chains. Investors will be listening closely for more detail during the second quarter earnings season, which is still in its early stages.