The price of oil and instability, plus the latest on tariffs, inflation, jobs and the economy.
Upending a week of relative quiet in the financial markets and benign inflation data, Israel launched an unprecedented attack against Iran’s nuclear and missile facilities, killing at least two of Iran’s top military commanders. Israeli Prime Minister Benjamin Netanyahu said that the “targeted military operation” will continue for “many days.” Israel is in a state of emergency in anticipation of retaliation, which appears to have begun. Iran’s Supreme Leader Ayatollah Ali Khamenei said Israel will face “severe punishment” for the attacks.
Secretary of State Marco Rubio asserted the U.S. was not involved in the Israeli operation and warned Iran against targeting U.S. interests or personnel.
As you would expect, financial markets are reacting poorly to the news of the strikes and are growing concerned about Iran’s response, wondering whether Iran will target U.S. forces and whether a critical oil transport route will be disrupted. Some analysts expect oil prices to spike by $7–$9 a barrel if the conflict eliminates Iranian oil from the market. Brent crude, the global benchmark, was up 8% at $75 a barrel in response early Friday. The last time oil jumped that much intraday was in March 2022, a month after Russia launched its full-scale invasion of Ukraine.
Taking to his Truth Social platform, President Trump wrote, “There is still time to make this slaughter, with the next already planned attacks being even more brutal, come to an end.” He ominously warned, “Iran must make a deal, before there is nothing left.” We would view escalation in the form of direct U.S. involvement in the Middle East as a risk to financial market stability and growth, even as Iran’s growing nuclear capabilities is also a serious threat.
In other dealmaking news, investors looking for clear and positive trade terms with China were left disappointed this week as news of the “framework” was thin on details and does not provide as much relief as hoped. On the positive side, China will start granting rare-earth export licenses for U.S. companies immediately. Those materials are vital for automakers, semiconductor manufacturers and other tech companies. But those licenses will only last six months. The U.S. in return will relax new limits that it placed on its own exports of technology and products, as well as walk back threats to cancel visas for Chinese students in the U.S.
Commerce Secretary Howard Lutnick noted tariffs on China won’t change from their current levels, which stand at 55%. But that is still a much higher rate than before Trump took office, though one could see it as good news that we are not going back above 100%. China’s 10% tariffs on the U.S. will remain as well, and the door was not opened for greater U.S. high-tech exports.
Meanwhile, the 90-day countdown clock is still ticking for all the other countries that have to negotiate new trade deals with Trump. Notably this week, Treasury Secretary Scott Bessent told House lawmakers that it’s “highly likely” Trump will push back that July 9 deadline for countries engaged in good-faith negotiations.
Amid all these other headlines, U.S. inflation data was benign, with headline consumer inflation not reflecting much of a spike, though the 2.4% annual growth rate is still above the Fed’s 2% goal. May producer price inflation was also softer, showing a 2.6% annual growth rate and reflecting none of the pressures of a trade war (yet).
Not quite as sanguine was the weekly report on jobless claims, which continue to show elevation, especially as continuing jobless claims are now at 1.956 million, the highest in over three years. There are growing concerns the labor market’s strength is only on the surface as more and more companies are cutting back on hiring plans, though they are holding back on layoffs for now.
Speaking of layoffs, some in the financial markets are questioning the quality of the officially reported economic data, as DOGE job cuts have reduced staff at government agencies like the Bureau of Labor Statistics (BLS). For example, the BLS said it had to cut back on regional collection efforts that went into the consumer price index inflation barometer, and while they said the reduction in sampling sizes should have minimal impact on the accuracy of the data, economists and market watchers are uneasy.
We continue to reiterate that now is not the time to go out on a limb in your asset allocation and the benefits of diversification are real in an environment of heightened geopolitical risk, shifting global trade relationships and uncertainty over long-term debt and deficits. We are still not in the camp of doomsayers calling for a recession, but there will be a cost to this uncertainty with slower GDP.
In fact, according to the Organization for Economic Cooperation and Development (OECD), U.S. GDP growth is forecast to slide to 1.6% in 2025 and 1.5% next year, a sharp reduction from the 2.8% growth in 2024. In this environment of slowing growth, we are prioritizing balance in our asset allocation decisions as well as in growth and value investments. We are hyper focused on quality in the selection of companies with fortress-like balance sheets. We see great opportunity in short- and intermediate-maturity fixed-income investments, especially in municipal bonds that have the benefit of federal and, in some cases, state tax exemption, and are trading at attractive taxable-equivalent yields.
On a final note, cheers to all the fathers, grandfathers, uncles and father figures among our readers, with thanks for who you are to us and all you do for us. Evangelist Billy Graham once said, “A good father is one of the most unsung, unpraised, unnoticed and yet one of the most valuable assets in our society.” Let us all cherish, praise and celebrate you this weekend and always.