Stop Me If You Think You’ve Heard This One Before
Iran and the U.S. made another tentative deal last week. The fresh accord is for a 60-day extension of the truce that’s been in place since early April and for negotiations to restart on Iran’s nuclear program.
Axios reported that the memorandum of understanding states that shipping through the vital Strait of Hormuz would be “unrestricted.” Iran would have to remove all mines from the strait within 30 days, according to the report. Since the war started, traffic through the Strait has all but ground to a halt (Figure 1).
While we are optimistic that a true deal will get done, English band The Smiths may have said it best when they sang “Stop Me If You Think You’ve Heard This One Before.” So far, markets agree, as the pricing action following the announcement of the extension garnered a reaction near “nil”—as the Brits might say—in oil markets, while fixed-income yields drifted lower, albeit from extremely oversold levels.
As we acknowledged in last week’s Talking Points, the Treasury market is largely drafting the oil market. Together, oil prices and Treasury yields are affecting inflationary pressures, pushing some officials at the Federal Reserve closer to the hawkish camp.
Last week, Fed Governor Christopher Waller said that the central bank’s next interest-rate move is just as likely to be a hike as a cut. “Inflation is not headed in the right direction,” Waller said. “I would support removing the easing bias language in our policy statement to make it clear that a rate cut is no more likely in the future than a rate increase.” The reason for the shift toward a true neutral stance arose from the price shocks related to the Iran war (energy, transportation, fertilizer, aluminum, helium, etc.). Waller added that while the oil shock could dissipate soon, “I [Waller] can no longer rule out rate hikes further down the road if inflation does not abate soon.”
Recall that earlier this month, New York Fed President John Williams pushed back on speculation of near-term rate hikes and said that he was “very comfortable” with the current language in the policy statement. He continued: “We will at some point need to be lowering interest rates to reflect the fact that inflation is lower … Inflation is higher this year than previously expected, so that pushes off a date of lowering interest rates, in my view. But it doesn’t change that basic story.”
On Thursday, however, Williams walked back some of that conviction in a statement acknowledging that supply-chain disruptions from the Iran war are worrisome. He estimated that the war’s impact on inflation may peak in a few months and commented that persistently high inflation would require higher rates. As Williams was reading his prepared remarks, the Bureau of Economic Analysis released the scheduled Personal Consumption Expenditures figures for April, which suggested a consensus matching rise in year-over-year inflation (Figure 2). The monthly number rose less than expected, but the trend seems to have been going in the wrong direction over the past six months.
Despite the economic headwinds posed by the energy shock and heightened geopolitical uncertainty, the Bloomberg U.S. Economic Surprise Index climbed to some of its highest levels since September 2023 (Figure 3), before contracting sharply at the end of the week. (The index represents the equal weighted percentage difference between the actual data release, and the median of analysts’ estimates for that release, then smoothed.)
In other words, the economic releases continued to surprise to the upside, though last week’s disappointments in building permits, income, PCE, jobless claims, GDP, and new home sales dented the index’s value. Indeed, Thursday’s misses did some damage to the forecasters’ confidence, no doubt; but the trend nevertheless suggests that the economy is performing well enough, even at its mature stage of expansion.
As the real economy continues to defy investors’ fears of a slowdown, recession odds have retreated from the Q1 extremes, and with it, expectations of monetary-policy accommodation. According to Google Trends, searches for the word “recession” peaked in June 2022 and are currently at just 17% of that peak (Figure 4).
Companies today are also much less worried about recession. For example, we prompted AI chatbot Claude to tally the number of times that “recession” was mentioned in the earnings calls of S&P 500 companies (Figure 5). Outside of the surge around the “Liberation Day” tariff announcements, the current landscape is near the lows of the past five years. In contrast, Q2 2022 set the all-time record (recession was mentioned on the calls of 238 companies), as GDP contracted for the second straight quarter and the Federal Reserve hiked aggressively.
In short, the current macro narrative is pointing toward a suspect reduction of geopolitical tensions, unclear oil prices, and future inflationary pressures. The economic landscape therefore seems to side with the hawks at the Fed: Economic data has been surprising to the upside and recessionary fears seem low.
Meanwhile, the Federal Open Market Committee’s meeting is in three weeks and the FOMC’s quarterly Summary of Economic Projections (SEP) will be released at that time. On the SEP, there is a low bar for the median “dot” to signal no cuts in 2026—only three of 12 policymakers who previously signaled one or more cuts now need to join the “no cuts” camp. Also, the April FOMC decision prompted dissents from three policymakers who objected to the “easing bias” in the post-meeting statement that suggested that the Fed will eventually resume rate cuts.
Taken further, nobody signaled hikes for 2026 in March, yet that will likely change in June. Still, 10 of 19 FOMC officials would need to signal a hike this year for it to be the median outcome. And it would be a tall order for policymakers to pencil in 2026 hikes at this stage, given the Fed’s preference for patience.
So, stop us if you’ve heard this one before: A tone-shift alone toward hawkishness by the Fed would be very manageable as further data is revealed in the coming weeks.
FROM THE DESK
Agency CMBS — Our markets remain somewhat subdued. Activity in Fannie Mae and Ginnie Mae MBS picked up slightly, after the relief in rates and spreads largely held in. We are still hearing angst in the Ginnie REMIC market, which will keep any material tightening in at bay. Fannie MBS continues to trade well.
Municipals — AAA tax-exempt yields were lower throughout the yield curve, week over week. Benchmark MMD yields dropped by 16 to 18 basis points, in concert with Treasury yields and supported by historically strong inflows. Muni funds attracted about $2.3 billion last week, the second largest weekly tally since 1992. Year-to-date inflows have climbed to almost $40 billion, the second highest level on record for this period, according to JPMorgan.
The information contained herein, including any expression of opinion, has been obtained from, or is based upon, resources believed to be reliable, but is not guaranteed as to accuracy or completeness. This is not intended to be an offer to buy or sell or a solicitation of an offer to buy or sell securities, if any referred to herein. Lument Securities, LLC may from time to time have a position in one or more of any securities mentioned herein. Lument Securities, LLC or one of its affiliates may from time to time perform investment banking or other business for any company mentioned.
