Middle East de-escalation lifts US markets ahead of pivotal Fed week
United States (US) equity markets closed mixed on Friday night as investors weighed ongoing artificial intelligence (AI) spending concerns against a glimmer of hope for a diplomatic off-ramp in the Middle East. That hope came in the shape of reports that China was pushing to revive stalled peace talks between Washington and Tehran.
This was followed over the weekend by the notable absence of US strikes on Iran after a 13th consecutive night of strikes on 24 July. This development resulted in Iran announcing it had paused its retaliatory strikes, and reports emerged that US and Iranian mediators were exchanging messages.
The combination of these events marks the first concrete sign of de-escalation since tensions began rising earlier this month, which resulted in WTI crude oil surging some 33% into last week’s $93.50 high. A portion of those gains has since been erased with crude oil falling 8% at one point this morning following its reopening and Nasdaq futures jumping by 450 points (1.60%).
This comes ahead of an enormous week of earnings, with around 36% of the Russell 1000 by market capitalisation due to report. Wednesday brings Microsoft (previewed here), Meta, ARM and Qualcomm. Thursday is headlined by Apple (previewed here), Amazon and Coinbase, before energy names Chevron and ExxonMobil round out the week.
Meanwhile, Thursday morning’s Federal Open Market Committee (FOMC) meeting, previewed below, is shaping up as one of the more interesting in recent memory.
US: Fed interest rate decision
Date: Thursday, 30 July at 4.00am AEST
To recap – at its June meeting, under new Chair Kevin Warsh, the FOMC kept the target range for the federal funds rate at 3.50% – 3.75% and delivered a hawkish surprise. The updated dot plot showed nine officials now expecting at least one rate hike by the end of 2026, while the statement removed previous easing language.
Warsh was notably direct in his press conference, repeatedly stressing ‘price stability’ and signalling that he wants markets to react to the data rather than front-run forward guidance.
Since the June FOMC meeting, inflation data has been cooler than expected. The June consumer price index (CPI) report showed headline inflation falling to 3.5% year-on-year (YoY) from 4.2% in May – the first decline in five months and below forecasts of 3.8%. Core inflation eased to 2.6% from 2.9%, below expectations of 2.8%, driven by softer shelter costs and easing in categories such as airline fares, apparel, medical care and household furnishings.
However, the 33.5% rally in crude oil prices this month has reignited inflationary concerns and triggered a hawkish repricing in the US rates market. The US rates market closed on Friday pricing in a 34% chance of a 25 basis points (bp) hike at next week’s FOMC meeting, with two full 25 bp hikes priced by January 2027.
While this means there is a non-negligible chance the Federal Reserve (Fed) delivers its first rate hike next week since July 2023, the most likely outcome is for a hawkish hold – with perhaps two or three members dissenting and voting for a hike.
