No Panic...Yet

Is Dollar Sentiment Too Bearish?

The Iran/Israel conflict is creating tension in the markets, but not panic. The VIX has pushed into the low 20s, but that’s not nearly the level that would indicate a big risk-off shift. There’s an acknowledgement that the crude oil market is unsettled and it’s unclear how high prices might go, but the market doesn’t seem to think that this is going to be much more than a short-term disturbance. The biggest impact is likely to be to energy stocks and oil prices, but unless this turns into a global conflict that pulls some of the world’s larger superpowers into the fold, we might not get much more of a reaction than this.

The lower than expected U.S. inflation readings for May demonstrate that any inflationary pressures from the Trump tariffs still aren’t really showing up on the consumer side just yet. Import prices also haven’t seen any kind of surge, which could be positive in the sense that the anticipated inflation surge resulting from the trade war might not come to fruition at all. If inflation risks are mitigated, that could open the door for the Fed to lower rates a little sooner than expected, but the odds from the Fed Funds futures market really haven’t moved over the past few weeks. The market still thinks there’s about a 65% chance of a rate cut at the September meeting and about the same chance of 2+ cuts by year-end. If inflation remains subdued, the labor market holds on and GDP recovers in Q2, there’s a possibility that the U.S. avoids a recession in this cycle.

Trump’s tax bill looks like it’s probably not going to get put into law by his self-imposed July 4th deadline. The Senate’s version of the bill, which reduces some of Trump’s preferred cuts, could face a long road before it finds common ground with the House-passed version and clears both chambers. I still think it gets passed eventually and the concerns around debt and deficits that are currently impacting the dollar and Treasury yields won’t go away.