Markets continue to navigate a mix of economic data, policy developments, and investor enthusiasm surrounding major IPOs. In this issue of the Steady Investor, we explore several of the stories driving attention this week, including:
Inflation Rises, But Energy Continues to Distort the Data – Inflation moved higher again in May, with consumer prices rising 4.2% from a year earlier, the fastest pace since April 2023. As has been the case in recent months, the main culprit was energy, as the war in Iran and the prolonged closure of the Strait of Hormuz have kept gasoline prices elevated. Average gasoline prices reached a four-year high in late May before easing somewhat in June. In the May CPI report, energy prices rose 3.9% from the prior month, while gasoline prices jumped 7% and were up more than 40% from a year earlier.Beneath the headline number, however, the inflation report was less severe. Prices rose 0.5% month-over-month in May, down slightly from April and well below March’s 0.9% increase. Core inflation, which excludes food and energy and is often viewed as a better measure of underlying price trends, rose just 0.2% on the month. That was cooler than expected and slower than April’s 0.4% increase.In other words, inflation is clearly elevated, but May’s report did not show a broad-based acceleration across the economy. This read on the data tracks with what we know from previous energy shocks, which while painful, do not always translate into a lasting inflation spiral. Regardless, the Federal Reserve is pretty much painted into a corner on rates, with the debate shifting from how soon the Fed can cut rates to how long it may need to stay on hold—and whether another rate increase could eventually come back into the conversation.1
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With Higher Prices, the European Central Bank Makes the First Move – The European Central Bank (ECB) raised interest rates for the first time in nearly three years, becoming the first major developed-market central bank to tighten policy in response to inflation pressures. The ECB lifted its key rate from 2.0% to 2.25%, a move markets widely expected. But the decision is still notable because it signals a shift in the global policy backdrop. Before the Middle East conflict escalated, many central banks were expected to keep cutting rates or, at a minimum, hold them steady. Now, the renewed surge in energy prices has complicated that path. ECB President Christine Lagarde framed the move as a signal of the central bank’s commitment to containing inflation before it becomes more entrenched. Higher energy prices are already spreading into broader parts of the economy, and policymakers are trying to prevent a repeat of the 2022 inflation cycle, when central banks were widely criticized for waiting too long to respond. This move on rates is challenging for Europe, where growth was already weakening. Unlike the U.S. economy, Europe is not getting strong support from strong AI-related investment and rising energy exports.3
Low Growth Expectations Leave Room for Positive Surprise – The World Bank lowered its global growth forecast for 2026, warning that the war in Iran and disruption in the Strait of Hormuz could weigh heavily on the global economy if energy supplies remain constrained.
In its latest outlook, the World Bank projected global GDP growth of 2.5% this year, down from 2.9% last year and slightly below its January forecast of 2.6%. That baseline assumes shipments of oil, natural gas, and other raw materials through the Strait of Hormuz begin returning to normal in August. The downside scenarios are more severe. If the Strait does not reopen until the fourth quarter, the World Bank expects global growth to slow to 2.1%, with oil prices averaging $115 per barrel. If a prolonged disruption also triggers a sharp drop in equity prices or a spike in bond yields, the bank estimates global growth could fall to just 1.3%. These are sobering projections, but that may actually be good news for investors. Long-range economic projections are rarely precise, especially during periods of geopolitical stress. But the fact that they are moving lower signals that pessimism is building, and expectations are falling. In other words, it signals to us that the bar for a positive economic surprise has been lowered, which means even modestly better-than-expected growth can support sentiment, earnings expectations, and ultimately risk assets like stocks.4
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