Trump Weighs US Strike Against Iran

For the week ending 20 June 2025

As of midday Friday, global equities were modestly lower on the week as Israel and Iran continue to trade airstrikes. The yield on the US 10-year Treasury note edged up to 4.41% from 4.38% a week ago while the price of a barrel of West Texas Intermediate crude oil gained another $1.50 to $75. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), rose to 20.7 from 19.9 last week.

MACRO NEWS

Trump gives diplomacy with Iran a chance

US President Donald Trump said Thursday he will decide within the next two weeks if the United States will join Israel in striking Iran’s nuclear facilities. The US is seen as having the only military capabilities able to penetrate Iran’s heavily fortified Fordow uranium enrichment facility. Iranian Foreign Minister Abbas Araghchi is meeting with European foreign ministers in Geneva on Friday to discuss the push to end Iranian enrichment. Reuters reported that Iran is willing to limit enrichment but not end it, a stance that is unlikely to satisfy Irael or the United States.

Fed remains in wait-and-see mode

US Federal Reserve Chair Jerome Powell was fairly upbeat on the US economic outlook but said the central bank expects to see the price impact from tariffs become clearer over the summer. Powell said the labor market indicators are at healthy levels, with some cooling at the margin, which he characterized as “nothing concerning.” Despite elevated uncertainty, the economy is solid, and policy is well positioned to respond to changes in the outlook, he said. Fed policymakers signaled that they expect to lower rates twice this year and once each in 2026 and 2027, though Powell said those forecasts were not held with great conviction. On Friday, Fed Governor Christopher Waller was considerably more dovish than Powell, saying the Fed is in a position to cut rates as early as the July meeting.

US retail sales mixed in May

US retail sales declined 0.9% in May amid a sizeable drop in auto sales. However, core sales, excluding volatile categories such as food, autos, gasoline and building materials, rose 0.4%. That’s the figure that plugs into the government’s GDP calculation. Auto sales were weak as demand was pulled forward earlier this year as consumers front ran tariffs. On balance, consumer demand remains respectable despite significant economic uncertainty.

QUICK HITS

The Bank of Japan left rates unchanged on Tuesday but will slow the pace of quantitative tightening to ¥200 billion a month from ¥400 billion, starting at the beginning of the new fiscal year in April 2026.

Minutes of the Bank of Canada meeting early this month showed that officials said it would be tough to cut the policy interest rate further if core inflation remains firm, but acknowledged more easing may be needed if the economy continues to weaken.

On Wednesday, Sweden’s Riksbank lowered interest rates, cutting its policy rate 0.25% to 2%. With inflation falling below zero, the Swiss National Bank this week cut its rate to 0%. Norway cut to 4.25% from 4.5% while the Bank of England held rates steady.

At the G7 summit in Alberta, Canadian Prime Minister Mark Carney said the US has agreed to pursue negotiations toward a trade deal within the next thirty days.

Amid a surge of government subsidies, retail sales in China rose 6.4% year over year in May while the country’s unemployment rate fell to 5%. Residential property sales continued to fall.

Bloomberg reported Monday that the US and Vietnam are closing in on a trade deal that could put tariffs on goods from Vietnam in the 20% to 25% range and include tougher enforcement of the transhipment of Chinese products.

President Trump and British Prime Minister Keir Starmer signed a trade deal on Monday but are still negotiating any duties on US steel imports.

The US Supreme Court has been asked to hear an expedited challenge to Trump’s global tariffs under the International Emergency Economic Powers Act.

The Congressional Budget Office estimates that the House version of the One Big Beautiful Bill Act will add $2.8 trillion to the national debt over the next decade. The CBO earlier estimated the bill’s cost at $2.5 trillion. Keep in mind that the estimate is based on current law, with the 2017 tax cuts expiring at the end of this year, not current policy, which suggests a much smaller impact.

Bloomberg reported this week that Chinese exports of rare earth minerals, which are critical to many industrial applications, fell 61% in May to a five-year low due to export controls.

UK CPI declined to 3.4% year over year in May from 3.5% in April while core inflation fell to 3.5% from 3.8%, helping make the case for a rate cut from the Bank of England in early August. The central bank held rates steady this week after cutting rates in May. 

Japanese exports contracted for the first time in eight months in May, falling 1.7% from year-ago levels. Auto and steel shipments were weighed down by US tariffs.

The US Social Security Board of Trustees said Wednesday in its annual report that the Social Security trust funds are on track to be depleted by 2034, one year sooner than previously forecast.

UK retail sales fell 2.7% in May, well below expectations. Paradoxically, consumer confidence reached its highest level of the year, it was reported this week.

Japan’s consumer price index rose 3.5% in May to the highest level in two years amid a surge in fresh food prices.

The US, Russia and Saudi Arabia could act jointly to stabilize oil markets if needed, Kirill Dmitriev, head of the Russian sovereign wealth fund, said this week.

THE WEEK AHEAD

Monday: Global flash PMIs, US existing home sales

Tuesday: Canada CPI, US Case-Shiller Home Price Index, Conference Board Consumer Confidence, Fed’s Powell testifies on Capitol Hill

Wednesday: US new home sales

Thursday: US trade deficit, US final Q1 GDP revision, pending home sales

Friday: Japan retail sales, US PCE, Canada GDP 

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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research.