• Market Recap

 Markets continued marching higher last week.  The NASDAQ gained 2.4% while the S&P 500 was up 0.9%, the Dow Jones Industrial Average better by 0.7% and the MSCI EAFE Index was also up 0.7%.  The Cboe Volatility Index fell 7.3% and now sits at 16.4 which is right around average.  Bond prices rose slightly, up 0.1%.  The yield curve flattened last week with the 2 year Treasury’s yield climbing 0.07% while the 10 year Treasury and 30 year Treasury yields fell.  The gap between the 2 year and 10 year has fallen to 0.29%.  Broad commodities were down 1.9% with oil plunging 11.5% and gold up 0.2%.  The U.S. Dollar was broadly stronger against major currencies.  This week will bring New Home Sales, Durable Goods Orders, Q2 GDP, Inflation measure PCE, Inventories and University of Michigan’s Consumer Sentiment Survey.  Inflation, Iran and GDP seem most likely to move markets this week.    

 Warsh Takes Reins At Fed

 Wednesday marked the first meeting with Kevin Warsh as the Chair of the Federal Reserve.  Unlike previous Fed Chairs, Jerome Powell is still a member of the Federal Open Market Committee and on the Fed Board of Governors as he continues to serve out his term.  The outcome of no changes to the Fed’s rate was as expected.  During Warsh’s opening statement, he was a bit more forceful than we’ve heard from Powell when Warsh said “We recognize that inflation has been running well over ahead of the Fed’s long-stated inflation goal of 2% that’s been going on for more than 5 years.  Persistently high prices are a burden for the American people.  But the recent past be not prologue.  I am pleased to report that members of the FOMC are unambiguous and unanimous: This committee will deliver price stability.”  We can expect that future statements from the Fed will be more concise.   Warsh addressed this “you might have already noticed something: a difference in today’s policy statement.  It’s a bit shorter – and it dispenses with some older language.  That statement just gives you the facts, as best we can judge it.”  Warsh announced the forming of 5 task forces to look at Fed Communications, Fed’s Balance Sheet policy, use of data sources, productivity and jobs in an era of transformation and the Fed’s Inflation Framework.  The Summary of Economic Projections (SEP) was released, but Warsh did not put in his projections and it sounds like SEP is under the microscope as well.  Given that former Chair Powell, has been downplaying the SEP for the past 3-4 times its been released, I think it is reasonable to expect the SEP is probably going to change and might go away.  I don’t think it was predictive at all, and I also think markets took the rate projections as part of the policy rather than a best guess.  Warsh was very non-committal when asked if the post-meeting press conferences would continue.  He said “I think we’re going to come up with some new and interesting things.  We made some changes today, I expect more changes to come, and some of those might well be worthy of a press conference.”  The follow up to that question was asking Warsh if markets would be harmed from less communication.  Here I could not agree with Warsh more “So I think financial markets perform best when they react to incoming data.  I think financial markets work less efficiently when they ask a question.  How will the Federal Reserve react to that incoming information?  The more that markets are paying attention to what’s happening in the real economy, deciding what’s good data and what’s less good data, the more financial markets can price what they believe is the most likely and what are the tail risks.  Financial market prices are probably the most important source of information to guide central bankers.  But when all the financial markets are doing is reflecting back what we’ve said, then we’re taking the most important source of information and we’re being blind to it.  They’ll come with better information through market prices to us, we can make more informed decisions.”  I think we can see a different personality from Powell for sure.  To me, Powell was professorial and patient.  He would calmly answer every question, even if it was a non-answer.  Warsh looks to be a bit more confrontational (not unpleasant, but direct) and he is probably going to say less.  He referred back to the official statement several times in answering questions.   The press conference was definitely shorter as was the official statement.  I thought it was a pretty strong performance overall, and I’m excited about the changes coming at the Fed.  I also believe that less Fed-speak is probably a good thing too.  (Source: Federal Open Market Committee,  Transcript of Chairman Warsh’s Press Conference Opening Statement June 17, 2026, The Federal Reserve)

 Retail Sales Strong

 Retail sales increased 0.9% in May ahead of consensus expectations although April’s sales were revised lower by 0.1%.  Retail sales have risen 6.9% from last year.  Excluding autos, sales increased 0.8% monthly and are up 7.5% in the past year.  High gas prices were a big part of this as gas stations saw a 3.4% monthly increase as prices were near their highest price since 2022.  Retail sales were still up 0.7% when taking gas stations out of the mix.  In fact, removing volatile auto sales, building materials and gas stations, we see retail sales up 0.6% in May.  We are seeing a material pickup in this core area from Q1 to Q2 where even flat retail sales in June would imply a 6.9% increase quarter over quarter.  Non-store retailers (Amazon and other e-commerce) rose 1.5% which is the 4^th 1.0% gain in the past 5 months.  Non-store sales are up 12.2% in the past year which is the highest for any category.  Restaurants and bars saw a decline of 0.1% for May.  This is similar to last year when fears of tariff inflation led to consumers substituting away from bars and restaurants.  This year, the high gas prices are forcing substitution.  I think Kevin Warsh’s job will be quite a bit easier if we get some lasting peace in the Middle East because March and April inflation numbers will have some built in relief if we can get through a year with no new shocks.  Of course, that seems to be a tall task in the 2020s.  (Source: U.S. Census Bureau, Advance Monthly Sales for Retail and Food Services, U.S. Department of Commerce) 

Two Steps Forward, One Step Back in Iran

 The 14 point memorandum of understanding (MOU) between the U.S. and Iran was signed on Thursday.  It lasted about 36 hours before Iran announced it had closed the Strait of Hormuz again.  Part of the MOU was a cease fire between Israel and Hezbollah.  Shortly after U.S. and Iran signed the agreement, Hezbollah launched rockets towards Israel and Israel responded by bombing northern Lebanon.  Iran claimed this violated the MOU.  About 55 ships were able to transit on Saturday, but that traffic had stopped on Sunday.  Vice President, J.D. Vance, along with negotiators Steve Witkoff and Jared Kushner travelled to Geneva to meet with Pakistan and Oman ahead of meetings with Iran.  The Iranian team led by Iranian Parliament Speaker, Mohammed Bagher Ghalibaf and Foreign Minister, Abbas Araghchi delayed their trip by one day, but still arrived on Saturday for one day of negotiations.  Rather than discussing nuclear weapons or sanctions relief, the two sides will discuss how to end the fighting in Lebanon.  Vice President Vance said “What the president has asked us to do is turn over a new leaf to transform our relationship with the people of Iran, and to extend an outstretched hand that says to the people of Iran that if your leadership is willing to give up being a driver of regional instability.  If they are willing to give up nuclear ambitions for the long term, then the United States is willing to fundamentally transform our relationship with that country.  That is certainly our goal.”  I think it is very likely that we’ll continue down this road of progress followed by retrenchment.  I don’t expect these negotiations will be quick or smooth.  I also believe there is a very good chance that the MOU will be the only thing signed by the countries.  It doesn’t seem reasonable to me that Iran will give up much and it seems more focused on holding power rather than transforming relationships, no matter the benefit.  I hope I’m wrong.  (Sources: Faucon, B., War in Lebanon Casts Shadow Over Renewed Iran-U.S. Nuclear Talks, The Wall Street Journal; King, R., Vance says US willing to ‘fundamentally transform’ Iran relationship, New York Post)  

  Memory Chips Contribute to Inflation

 We have seen so many shortages in so many categories over the past 6 plus years.  Almost all of them were the result of a shock: pandemic, pandemic inflation, tariffs and most recently, oil.  We can go back to good old supply and demand for the current shortage in memory chips.  Microsoft’s new Surface Pro laptops will start at $1,599 about $600 more than the previous model.  The Nintendo Switch 2 console is up $50 to $499.  The iPhone 18 Pro is debuting in September at $1,299 and the Sony PS5 Pro is up to $900 from $750 just two months ago.  The primary driver is the cost of memory and storage chips, especially flash memory chips, known as DRAM and NAND.  You won’t be surprised to find out that these chips are also used by AI frontier labs in data centers.  There are only three major players in the space, South Korea’s SK Hynix and Samsung and American Micron Technology.  Apple CEO, Tim Cook said “There’s less supply at a time when consumers want devices and the memory guys are passing along huge price increases.”  Intel CFO, David Zinsner thinks that constraints on memory chips will lead to less demand for processing chips “We’re prudently planning for PC demand to weaken in the second half of the year.”  Over the past year, Micron’s contract price for its most common data center chips has risen from $350 to $1,300.  More capacity is coming on line, but building those computer chip fabs is no quick and easy task.  Regardless of the price of oil, memory chip prices look likely to head higher for some time.  I think this is yet another constraint on the AI buildout and neither the U.S. nor China has an easy resolution.  (Source: Whelan, R., The Memory-Chip Crisis Is Here – and You’re Footing the Bill, The Wall Street Journal)

 Positioning Your Account

 The Strait of Hormuz was open for a day.  And we’re back to wondering about that.  I have mentioned before that I don’t think markets really care about the Middle East other than the strait being open or not.  We have seen that the U.S. economy look strong and I think it could be very strong if Iran gets settled.  But we’re still here trying to decide if that has happened or not.  I think I’d like to own more stocks, but not at any price.  I would encourage investors holding cash to consider employing a dollar cost averaging approach to purchases.  Specifically, I would encourage investors to look for 3-5% dips and consider purchases there if we see them.  I would encourage investors to consider purchases of large, U.S. technology companies, large, U.S. dividend payers, currencies and commodities for diversification, and bonds for those looking for income.  We’ll let things play out a little bit before considering new purchases for volatile small cap stocks.  I’m in no big hurry as summer kicks off.  We typically see some seasonal weakness over the summer, so I think we ought to get some chances to buy dips.  I wouldn’t mind a few sleepy summer weeks myself.  I was heartened by Kevin Warsh’s approach and I’m very much looking forward to a Federal Reserve that says less.  I think we’ve spent too much time over the past 15 parsing each and every word  while trying to read tea leaves on future policy.  I’ve said it time and time again, but I think it bears repeating again: no government or regulatory group can make decisions as well as the market because they do not have real time price discovery.  I thought it was fantastic to hear the new Fed Chair say the same thing. 

  All the best,

Gary