This Week’s Key Focus- Escalating Middle East Tensions and Central Bank Policy Decisions in the Spotlight

This week, global markets face a dual challenge: rising geopolitical tensions in the Middle East and a series of critical monetary policy announcements from major central banks.

Tensions between Israel and Iran have intensified. On Monday evening, U.S. President Trump abruptly left the G7 Summit in Canada and posted a warning on Truth Social urging: “Everyone should evacuate Tehran immediately.” While French President Macron claimed that Trump had proposed a ceasefire agreement between Israel and Iran, Trump quickly denied this, stating that his early departure had “nothing to do with a ceasefire” and that he had “more urgent matters to address.”

According to White House Press Secretary Levitt, Trump returned to Washington to deal with the escalating Middle East crisis. U.S. Defense Secretary Hegseth and Secretary of State Rubio joined him in the White House Situation Room for high-level security consultations. The U.S. has also redeployed warships and refueling aircraft in the region, preparing for potential further conflict.

Beyond geopolitics, markets are bracing for a wave of central bank decisions this week. The Bank of Japan leads the lineup, followed by the Federal Reserve, Bank of England, and Swiss National Bank.

As expected, the Bank of Japan held its benchmark interest rate steady and announced plans to slow its bond purchases starting next year. The cautious stance comes amid heightened market volatility. Following the announcement, the Japanese yen recovered earlier losses and long-term Japanese government bond yields edged higher.

All eyes now turn to the Federal Reserve’s rate decision on Wednesday. While policymakers are widely expected to keep rates on hold, investors will closely monitor Chair Powell’s comments for any signals on the timing and rationale for potential policy shifts ahead.

Last Week’s Key Economic Data & News Recap

U.S. May CPI Undershoots Expectations for Fourth Consecutive Month, Suggesting Tariffs Have Yet to Impact Inflation

On Wednesday, June 11, the U.S. Bureau of Labor Statistics reported that headline CPI rose 0.1% month-over-month, lower than the forecasted 0.2% and April’s 0.2% increase. Year-over-year, CPI increased 2.4%, in line with expectations and slightly above April’s 2.3%. Core CPI, which excludes volatile food and energy prices, rose just 0.1% month-over-month, missing the expected 0.2% and slowing from April’s 0.2%. On a year-over-year basis, core CPI came in at 2.8%, below the expected 2.9% and unchanged from April, marking the lowest level since March 2021. The softer inflation data reinforced market expectations that the Federal Reserve may maintain its current interest rate stance for a longer period, even as geopolitical tensions continue to rise.

U.S. May PPI Remains Mild Overall; Core PPI Falls to Lowest Level Since August 2024

On Thursday, June 12, the U.S. Bureau of Labor Statistics reported that the Producer Price Index (PPI) rose 2.6% year-over-year in May, in line with expectations and up from the previous 2.4%. Core PPI increased 3.0% year-over-year, the lowest level since August 2024, below the expected 3.1% and down from the prior 3.1%. On a month-over-month basis, May PPI rose just 0.1%, lower than the forecasted 0.2%. Core PPI also rose only 0.1%, with prices for goods excluding food and energy up 0.2%, and services prices rising 0.1%. This PPI report extends the trend of subdued price pressures seen in the May CPI, which marked the fourth consecutive month of softer inflation readings, indicating that tariffs have not yet led to higher costs for consumers and businesses.

U.S. Weekly Jobless Claims Exceed Expectations; Continuing Claims Hit Highest Level Since Late 2021

According to data released by the U.S. Department of Labor last Thursday, initial jobless claims for the week ending June 7 totaled 248,000, slightly above the expected 240,000. The previous week’s figure was revised up from 247,000 to 248,000. Continuing claims for the week ending May 31 rose to 1.956 million, surpassing the forecast of 1.91 million and up from the prior 1.904 million. This marks the highest level of continuing claims since the end of 2021.

University of Michigan Survey Shows Consumer Sentiment Improves in June for the First Time in Six Months

According to data released last Friday, the preliminary reading of the University of Michigan’s Consumer Sentiment Index for June rose sharply to 60.5, marking the largest monthly gain since January 2024. The figure far exceeded expectations of 53.6 and was significantly higher than May’s reading of 52.2. It also beat the forecasts of all economists surveyed by major media outlets. Last month’s reading had marked the lowest level since May 1980. The latest data show a notable decline in consumers’ short-term inflation expectations, with long-term expectations also easing. This indicates that concerns about the economy are beginning to subside.

Israel Strikes Iran as Middle East Geopolitical Tensions Escalate

On June 13, Israel launched a pre-emptive strike on Iran, targeting nuclear sites, missile facilities, and military leaders. Defense Minister Yoav Gallant warned of likely missile and drone retaliation and declared a nationwide emergency. Iran’s Supreme Leader Khamenei confirmed the attack killed several commanders and scientists, promising a strong response. Market reacted with heightened risk aversion. Oil prices jumped, and gold saw strong safe-haven demand.