The macro outlook may still be precarious, but the Federal Reserve is expected to leave its target rate unchanged at tomorrow’s policy announcement. The new Fed Chair, Kevin Warsh, will preside over his first FOMC meeting and press conference, where he’ll have a chance to reset the tone for expectations—for good or ill.

“Just given the novelty of the moment, because it’s Warsh’s first press conference, there’s really a lot of scope for what you might call a ‘market misinterpretation’ of his message,” says Kris Dawsey, head of economic research at the D.E. Shaw Group, a hedge fund. “It’s going to take some time for the market to really get calibrated on his communications.”

The Warsh era begins during an unsettled period for central banks. Several of the Fed’s counterparts have started raising interest rates, citing inflation as the catalyst.

The Bank of Japan today lifted its main interest rate to a 31‑year high. “After twenty years of deflation, Japan is now in an inflationary upcycle,” says Japan economist Jesper Koll. The European Central Bank raised interest rates last week for the first time since 2023. “We are beginning to see a broadening of inflation throughout the economy,” ECB President Christine Lagarde said, explaining that a “major energy shock” forced its hand.

The Fed, by contrast, is expected to maintain its wait‑and‑see strategy, effectively betting that the recent run‑up in US inflation will be temporary and begin to recede. Fed funds futures are pricing in near‑certainty that the bank will leave its target rate unchanged tomorrow at a 3.50%–3.75% range. Standing pat is also expected to prevail for the next several FOMC meetings.

The Fed’s current policy stance is neutral, based on a simple model using inflation and unemployment. That’s a reasonable posture if inflation has peaked and will start to ease in the months ahead. The risk is that the Fed repeats the mistake of 2021–2022, when inflation surged and the central bank was slow to react.

The doves argue that core inflation remains relatively tame and well below the worrisome jump in headline measures, which reflect the sharp increase in energy prices.

The Treasury market is effectively signaling that the Fed’s cautious approach to rate hikes is wrong. The policy‑sensitive 2‑year yield has climbed far above the median Fed funds rate, which implies expectations for near‑term rate hikes.

Chair Warsh will need to persuade markets that leaving policy steady is still a reasonable course. By contrast, the case for cutting rates—which President Trump has demanded—is far less defensible, if not reckless, at the moment.

The main challenge is that the macro dynamics likely to drive the direction of inflation in the months ahead are beyond the Fed’s power to influence through policy decisions. The key variable is the US–Iran peace deal, which will determine the pace of energy exports through the Strait of Hormuz.

The head of the world’s biggest tanker company says a rebound in shipping through the strait will take weeks at the earliest, as firms decide whether the US–Iran deal is “material,” says Jotaro Tamura, chief executive of Mitsui OSK Lines. Speaking with the FT, he advises:

“What will have to come in place is not just a simple agreement between the relevant countries, but it has to be material and translated into the real situations in the Strait of Hormuz, so that shipping lines can make themselves comfortable to go through.”

By leaving interest rates unchanged at tomorrow’s policy meeting, the Fed is essentially signaling that the Iran conflict is over, energy prices will continue to ease, and the inflationary threat has ended.

Tomorrow’s decision won’t settle the inflation debate, but it will set the tone. The Fed is betting on stability—now the world has to deliver it.

Oil prices are already reflecting optimism. The U.S. benchmark is trading under $80 a barrel today for the first time in three months after President Trump and Iran’s Supreme National Security Council said a deal was reached to end the fighting and lift the blockades of the Strait of Hormuz that have prevented energy exports from the Gulf.

The major asset classes begin trading today with a wide range of performance results since the war started on Feb. 28. Using a set of ETFs highlights that U.S. equities (VTI) have been the performance leader, jumping nearly 8% since the conflict began. Global property shares ex‑U.S. (VNQI) have suffered the most among the major asset classes, slumping 10%.

The Capital Spectator’s Global Market Index (GMI) took a hit early in the war but began recovering in early April and has extended the rally to post a 5.2% gain over the course of the conflict. GMI is an unmanaged, market‑value‑weighted mix of the major asset classes (excluding cash) via ETF proxies and represents a competitive benchmark for globally diversified, multi‑asset‑class portfolio strategies.

A potential end to the U.S.–Iran conflict offers opportunity wrapped in uncertainty. If the war is over, the arrival of peace could unlock meaningful economic tailwinds. A durable ceasefire and a reopened Strait of Hormuz would reduce geopolitical risk in one of the world’s most critical energy corridors, easing pressure on oil prices, stabilizing shipping routes, and lowering volatility premiums across global markets. At the same time, the situation remains fragile: past de‑escalations between Washington and Tehran have unraveled quickly, and markets know that a single misstep can reverse gains overnight. It only takes one missile launch or drone attack to shatter expectations.

That combination of possible scenarios — real upside if calm holds, real downside if it doesn’t — is exactly why this moment feels like a rare but risky inflection point. One reason for caution is that the details of the peace deal have not yet been published. “Pre‑implementation discussions” are set for this week, followed by 60 days of technical talks on the thorny issue of Iran’s nuclear program.

Markets will be watching President Trump’s comments — and the reactions — at the G7 summit that starts today in France. For the moment, a new round of cautious optimism gives fresh hope that the biggest energy crisis in decades is now on track to wind down. But the multiple false dawns over the past several months suggest that time will be the ultimate arbiter of whether today’s headlines represent real progress or another display of fool’s gold.

“The global economy has experienced too much whipsawing in the past 100+ days of war to breathe easy based on a deal with no details,” advises Josh Lipsky, vice president and chair of international economics at the Atlantic Council and the senior director of the GeoEconomics Center. “The first test of those details will come as Trump is pressed by French President Emmanuel Macron and others gathered for the [G7] summit. Trump likely wanted to come to the meeting with a deal in place. Now he has set the terms for the leaders meeting — and they will be reacting to him.”

Is Recession Risk Rising? Monitor the outlook with a subscription to:
The US Business Cycle Risk Report

● Market Wizards: The Next Generation: The world’s top young traders reveal how they beat the market
Jack D. Schwager and George F. Coyle
Summary via publisher (Harriman House)
Market Wizards: The Next Generation continues in the three-decade tradition of the hugely popular Market Wizards series, interviewing exceptionally successful traders to learn how they achieved their extraordinary performance results. The twist in this latest instalment is that the featured traders have the youngest average age of any book in the series. Despite their relative youth, these traders have achieved performance records that rank among the very best Market Wizards of all time.

● Incorruptible: Why Good Companies Go Bad… and How Great Companies Stay Great
Eric Ries
Interview with author via GeekWire
Eric Ries wants to retire the word “profit,” or at least the way we usually define it.
In his new book, “Incorruptible: Why Good Companies Go Bad and How Great Companies Stay Great,” the “Lean Startup” author redefines profit as the maximization of human flourishing. He argues that a lot of what passes for profit in today’s economy is actually a form of corruption.
“We’re supposed to all pretend that we think all the ways of making money are equally good,” Ries told a room of startup founders at Seattle Flow Startup Day in Seattle. “But nobody actually thinks that.”

● The Human Edge: Smarter Decisions in the Age of AI
Cheryl Strauss Einhorn
Summary via publisher (Cornell U. Press)
The Human Edge is a call to action for anyone who wants to lead—and not merely follow—using artificial intelligence (AI) to transform the way we make decisions. But as Cheryl Strauss Einhorn shows, AI can either simplify complex problems or obscure them, expand your thinking or constrain it. With AI becoming more embedded in our work and personal lives, the challenge we face is no longer about using AI—it is about leading AI with clarity, discernment, and a commitment to human agency. This approachable guide for professionals, leaders, and teams who want to make better, more confident choices when using AI systems, offers practical tools to help frame problems and surface solutions, using AI to augment—not replace—your judgment. Urgent, empowering, and grounded in real-world examples, The Human Edge will show you and your organization how to confidently make use of AI’s vast capabilities for smart decision-making by emphasizing the importance of human curiosity, perspectives, values and the courage to define and achieve success.

● The Generational Wealth Code: A Tax-Smart Roadmap to Financial Independence
John J. Vento, et al.
Summary via publisher (Wiley)
In The Generational Wealth Code: A Tax-Smart Roadmap to Financial Independence, four financial professionals, each with a distinct perspective shaped by their own stage of life and area of expertise, provide actionable guidance that helps you and your family create a legacy of wealth, stability, and opportunity. Stagnant wages, crushing student loan debt, rising housing costs, and record levels of consumer debt have made it harder than ever for families to get ahead—this book helps readers become financially independent so that they can make the most informed decisions in all facets of their lives, and thrive at a time when many are simply trying to survive.

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. By purchasing books through this site, you provide support for The Capital Spectator’s free content. Thank you!

From a global asset‑allocation perspective, an aggressive strategy (AOA) relative to its conservative counterpart (AOK) offers a useful starting point. This broad-based measure of sentiment weakened in the early weeks of the war with Iran but has since recovered and continues to point to a risk‑on bias.

Using the 50‑day/200‑day moving averages as a guide for the AOA:AOK ratio has successfully minimized much of the noise in recent years, albeit with some glaring exceptions. During the correction associated with the tariff tantrum in the spring of 2025, for example, a risk‑off signal was triggered, which ultimately proved to be a false alarm. Since then, this indicator has remained risk‑on as a big‑picture guide, supporting the case for looking through the recent chaotic news flow.

The key takeaway: monitoring metrics such as AOA:AOK, while hardly flawless, are useful starting point for evaluating sentiment, and asking the question: Is there a strong case for betting against the crowd?

Similarly, monitoring a broad measure of U.S. stocks (SPY) versus a low‑volatility counterpart (USMV)—a proxy for a relatively conservative equity portfolio—shows a continued risk‑on posture this year via the 50‑/200‑day ratio, albeit one that has pulled back from its recent peak.

Several other measures of the U.S. equity market reflect even stronger risk‑on signaling, including the comparison between the broad equities market (SPY) and a defensive strategy based on a so‑called market‑neutral anti‑beta fund (BTAL).

Skeptics of the risk‑on environment can rightly point to several reasons for caution, including high valuations. The Shiller PE ratio, for example, is approaching a record high, implying that the expected return for the U.S. stock market is relatively low.

But trend—however irrational it may appear—isn’t easily dismissed as a forward‑looking indicator. Contrarians argue otherwise, but the track record of trend‑based signals continues to compare favorably—by a wide margin—against bearish forecasts from a variety of models. How long this lasts is unknown, but the odds still seem to favor trend.

Market conditions have clearly evolved in recent weeks, with the 10‑year yield trending higher and closing at 4.56% in yesterday’s trading (June 10). The current yield is near a 12‑month high.

The market premium is also climbing again. The 10‑year yield now stands 48 basis points above a fair‑value estimate, the highest premium since July 2025, based on monthly data through May via The Capital Spectator’s ensemble model.

The reversal in what had been a declining premium is easier to see in the next chart, which tracks the spread for the current 10-year yield less its fair-value estimate.

Before the war began, the market premium had been trending lower, unwinding the surge tied to the pandemic‑era inflation spike. That normalization phase has now reversed as investors reassess the inflation and macro risks associated with the Middle East conflict.

Is Recession Risk Rising? Monitor the outlook with a subscription to:
The US Business Cycle Risk Report

Growth for the April‑through‑June period continues to track at a 2.5% annualized rate, based on the median nowcast from several sources compiled by CapitalSpectator.com. The estimate points to a pickup in output over Q1’s modest 1.6% increase.

Today’s update is unchanged from last week’s estimate and suggests that the economy continues to accelerate following stall‑speed conditions in Q4, when GDP rose just 0.5%.

The history of the US economy since the war started on Feb. 28 has been a study in resilience. Over the past three months, economic activity has been largely unaffected by the Middle East conflict, with one glaring exception: inflation. It’s unclear whether rising pricing pressure will begin to unleash a deeper round of demand destruction, particularly in the consumer sector, but the effects so far have been modest.

One of the clearest signs of the economy’s strength: US payrolls rose at a robust pace for a third straight month in May.

“I think the job market, for the first time in a while, is moving in the right direction,” says Guy Berger, chief economist at small‑business payroll firm Homebase. “I wouldn’t call this a job market that’s quite ‘booming’—it’s certainly not as hot as the job market in ’21 and ’22—but it’s warming.”

The question is whether inflation will spoil the party in the second half of the year, forcing the Federal Reserve to raise interest rates and take initial steps toward removing the proverbial punch bowl, per the famous analogy by former Federal Reserve Chair William McChesney Martin to describe the central bank’s role in the economy.

Goldman Sachs reports: this week: “Our economists have not yet seen signs that the inflation shock from the war is broadening out — their composite indicator of the risk of more persistent inflation is still at a low level, although a jump in University of Michigan long‑term inflation expectations has pushed it slightly higher.”

The Fed is expected to leave its target rate unchanged at the upcoming meeting later this month, and again in July, based on Fed funds futures. Looking further out is as cloudy as ever and will remain so until something approximating a resolution to the Middle East crisis emerges.

For now, the numbers tell a story of an economy that refuses to flinch. The Q2 nowcast holds firm, signaling renewed momentum even as geopolitical risks swirl. Whether that strength endures into the second half will hinge on inflation’s next move — and on how long global tensions keep the outlook shrouded in fog.

The leading performer by far since the crisis started on Feb. 28 is bank loans. The Invesco Senior Loan ETF (BKLN) is up 2.8% during this period, well ahead of the rest of the field.

The rest of the winners since Feb. 28: floating-rate securities (FLRN), a cash proxy (SHV), standard “junk” bonds (SJNK and JNK), and short-term inflation-indexed Treasuries (STIP). The remainder of the market is nursing losses, led by long Treasuries (TLT), which are currently posting a loss in excess of 5%.

What explains the performance divide? Treasuries are under pressure as inflation concerns lurk due to the run-up in the cost of energy. This spike has raised headline measures of prices and prompted forecasts that the Federal Reserve will be forced to raise interest rates later this year.

That’s hardly a bullish backdrop for fixed-income securities, yet bank loans and junk bonds have managed to post gains. One reason: private credit fundamentals remain strong despite recent market stress, according to Goldman Sachs. Defaults have been low and borrower performance solid. “The fundamentals of private credit still appear strong,” says Vivek Bantwal, global co-head of private credit at Goldman Sachs Asset Management.

Add in the higher yields and the package has been too good to ignore for investors. BKLN’s distribution yield is 6.61% (as of June 9), or nearly two percentage points above the long-bond’s current yield.

But the easy gains may be in the rearview mirror as the lingering inflationary effects of the Iran conflict continue to resonate. With no easy solutions on the horizon for a crisis that continues to keep Gulf energy exports low, the odds still look slim for a return to pre-war pricing pressure in the near term.

BKLN appears to be pricing in the shifting sentiment, driven by fading optimism for a quick end to the conflict and the macro blowback. The ETF is still comfortably ahead of the field since Feb. 28, but the recent peak looks like a ceiling for the foreseeable future without a material change in the outlook for a resumption in shipping through the Strait of Hormuz.

While markets are currently betting against a prolonged conflict, the latest news flow continues to challenge this forecast for the near term. Despite former President Trump’s calls for restraint, Israel and Iran’s recent strikes suggest that a resolution is still nowhere on the horizon.

The latest sign that ending the conflict will be messy and take longer than expected came on Sunday, when Iran and Israel resumed fighting—exchanging missile strikes for the first time since the April cease-fire. President Trump said he would demand that Israel not retaliate, but that effort has failed as renewed fighting continues into Monday. As the Times of Israel reports: “The Israeli military says it is prepared for at least a few more days of fighting against Iran, and potentially a full resumption of the war.”

Unsurprisingly, oil prices spiked, rising 4% in early Monday trading. Crude remains below its peak since the war began on Feb. 28, but a return to pre-war prices looks unlikely anytime soon.

The renewed conflict between Iran and Israel may not be shocking, nor is it likely to radically shift expectations relative to recent history. But this hydra-headed conflict has momentum on multiple fronts, suggesting that the crisis, even if it doesn’t deepen, will endure in one form or another. The macro risk, as a result, is becoming chronic rather than actute.

Depending on one’s view, markets have developed either a degree of acceptance or complacency about the conflict and its macroeconomic implications. Christopher Smart, a former trade adviser and Treasury official in the Obama administration, noted: last week: “With every passing day, the world is learning to live without the Gulf’s seaborne exports.”

True—but that tolerance has always been precarious, built on the assumption that normalcy in the Middle East would soon return. As the crisis drags on, the logic behind that assumption weakens, and the fallout is increasingly spilling into the U.S. economy.

Friday’s upbeat payrolls report is a case in point. In ordinary times, news of solid hiring for a third consecutive month would be celebrated on Wall Street. But in the current climate, good economic news is bad news for the bond market: a robust labor market suggests the Federal Reserve will face growing pressure to raise interest rates to offset the supply‑side energy shock pushing headline inflation higher.

Fed funds futures still price in no change at the next several policy meetings, including the June 17 FOMC gathering, when new Fed Chair Kevin Warsh makes his public debut at the post‑meeting press conference. But the Treasury market is becoming increasingly anxious—the policy‑sensitive two‑year yield continues to climb well above the median Fed funds rate, underscoring the bond market’s expectation that a rate hike is near.

The conflict is becoming harder to end because violence is spreading across multiple fronts, major powers’ goals are diverging, and the political conditions needed for de‑escalation are eroding rather than improving. A key factor that will be difficult to minimize: Iran has discovered that controlling the world’s most important energy chokepoint gives it strategic leverage that even great‑power military pressure cannot fully neutralize. This has emboldened Tehran and reshaped regional deterrence dynamics.

Markets have only partially priced in this risk, assuming that a return to normal was close at hand. Facts on the ground suggest otherwise—a reality that has yet to be fully reflected in asset prices or monetary policy.

Is Recession Risk Rising? Monitor the outlook with a subscription to:
The US Business Cycle Risk Report

Inflation worries weighed on markets last week. Not exactly news at this late date, but the better‑than‑expected US payrolls data for May highlighted that the world’s biggest economy remains resilient in the face of an energy crisis. Treasury yields, unsurprisingly, rose as investors sharpened their focus on the possibility that inflation risk may linger longer than recently expected, supported by a relatively robust economy, which in turn lifts the odds that the Federal Reserve may soon start raising interest rates.

No one should dismiss these concerns, but it’s still early for strategic‑minded investors to assume the worst‑case scenario is baked in. By some measures, a pullback was overdue. The S&P 500 Index had rallied for nine straight weeks, a relatively rare event with only ten prior occurrences to the latest run‑up, according to The Motley Fool. The odds for a pause were high even before Friday’s surprisingly strong jobs report.

Thanks for reading The ETF Portfolio Strategist! Subscribe for free to receive new posts.

Global asset‑allocation strategies suffered on Friday as well. All of our proxy ETFs fell sharply last week. The aggressive strategy (AOA) was especially hard hit, slumping 2.3%.

continue reading at The ETF Portfolio Strategist

● 1873: The Rothschilds, the First Great Depression, and the Making of the Modern World
Liaquat Ahamed
Review via The Wall Street Journal
In one single unforgettable day—Friday, May 9, 1873—prices on the Vienna Stock Exchange plunged by 45%. All at once the world was changed.
“1873,” by Liaquat Ahamed, author of “Lords of Finance: The Bankers Who Broke the World” (2009), is the story of the trans-Atlantic depression that followed the crash. It is the story, too, of a generation-long, befuddling decline in the prices of all kinds of things. In 1878, confronting the lowest prices for pig iron since colonial times, American ironmasters wondered if the smokestacks on their idled blast furnaces might serve a higher use as astronomical observatories.

● Lightning Beneath the Sea: The Race to Wire the World and the Dawn of the Information Age
James M. Tabor
Review via The Wall Street Journal
You’ll rarely know for certain, but when you send an email, check your social-media feed or read this newspaper online, you may be sending pulses of light through a conduit the size of a garden hose resting on the floor of the sea. Around 500 fiber-optic cables, not counting those owned by governments, stretch for more than a million total miles beneath the oceans. They provide the physical backbone for the weightless world of the internet. Life without them would be hard to imagine.

● Contingent Expectations: Uncertainty, Risk, and Economic Behavior in Historical Perspective
Alexander Nützenadel and Jochen Streb
Summary via publisher (Princeton U. Press)
Expectations play a crucial role in shaping economic behavior. But how are expectations actually formed, and how has this changed over time? The financial crisis of 2007–08 cast doubt on traditional theories of expectation formation, particularly the rational expectations framework. In Contingent Expectations, Alexander Nützenadel and Jochen Streb examine the ways that past experiences influence the economic expectations and decision-making of households, investors, and policymakers through history, and offer an alternative perspective. Combining a comprehensive empirical analysis of expectation formation from the eighteenth century to the present day with an assessment of the relevant economic theory, Nützenadel and Streb present a new theoretical framework, contingent expectations, for understanding economic expectation.

Please note that the links to books above are affiliate links with Amazon.com and James Picerno (a.k.a. The Capital Spectator) earns money if you buy one of the titles listed. Also note that you will not pay extra for a book even though it generates revenue for The Capital Spectator. By purchasing books through this site, you provide support for The Capital Spectator’s free content. Thank you!