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Market update
Financial markets continue to be driven by the US-Iran conflict as well as corporate earnings weighed on AI-related sentiment, and a reappraisal of central bank expectations based on economic data releases. In early June, markets shifted from pricing escalation in the conflict to a more constructive outcome, as a ceasefire agreement was reached. Energy markets have remained the key impact on asset prices. With the price of Brent crude falling from recent highs.
The combined impacts of falling energy prices and the signing of the US-Iran agreement drove bond yields lower across developed markets at both ends of the curve, as markets reassessed inflation risks.
Something encouraging: Strong Labor Market Data
In May, nonfarm payrolls rose by 172,000 compared to the 100,000-consensus estimate, with the prior two months revised up by +72,000, lifting the three-month average to ~188,000, which is the strongest period since early 2024. Private payrolls also beat expectations (120,000 v 115,000) which led to higher yields at the short end of the curve, due to lower expectations of a Fed cut.
Something cautionary: Rising Inflation
Even though US inflation data was largely in-line with expectations (headline CPI rising 4.2% year over year and core inflation at 2.9%), Both headline and core producer price data came in stronger than expected, suggesting some ongoing pressures on input prices. Looking at this data together, it reinforces the view that inflation is rising.
Something curious: U.S. Activity Indicators
Recent U.S. activity indicators were stronger than expected with May ISM manufacturing index rising to 54.0 while services also surprised positively. However, prices remained elevated, and survey commentary highlighted energy-driven cost pressures and supply constraints. The Beige Book echoed modest growth alongside higher inflation, but consumer demand was increasingly bifurcated across income groups.
WTW news
Thank you for taking the time to read this edition of What To Watch, brought to you by Jon Pliner, global chief investment officer; Jim Neill, managing director; Garrett Goniea, manager; Madison Rugh, senior analyst and the WTW Investments team.
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