The Top Line
The economy is still growing, but prices are climbing again and the Federal Reserve looks more likely to raise interest rates than cut them. The big question: will Thursday's inflation report confirm that trend?
We are operating in a late-cycle expansion: resilient growth colliding with reaccelerating inflation and a Fed pivoting toward hikes, not cuts. June flash PMIs held firm (manufacturing 55.7, composite 52.2) and 2026 earnings are tracking roughly 23% growth, yet May CPI hit a three-year high of 4.2% and Thursday's PCE is seen reaccelerating to 4.1% headline. The structural tension: an equity market valued near 212% of GDP—the richest since 1929—now rotating out of mega-cap tech into cyclicals as the policy-sensitive 2-year yield (4.23%) reaches its highest level since February 2025.
Inflation
Prices are rising faster again, not slower. The Fed's preferred inflation gauge is expected to show prices up about 4.1% from a year ago (that's what "year-over-year" means), up from 3.8%. The Federal Reserve—the central bank that sets interest rates to keep prices stable—raises rates to cool inflation, which makes mortgages, car loans, and credit cards more expensive. Cheaper gas is helping a little, but rent and other everyday services are keeping prices stubbornly high. So the Fed is now leaning toward raising rates instead of cutting them.
Key Takeaway
Borrowing for homes and cars could stay expensive a while longer, since the Fed is focused on cooling rising prices.
Inflation is reaccelerating rather than cooling. May CPI printed at a three-year high of 4.2%, and the Fed's preferred gauge is expected to confirm the trend on Thursday: consensus looks for headline PCE at 4.1% year-over-year (up from 3.8%) and core PCE at 3.4% (up from 3.3%), with the monthly core running 0.3%. After a multi-quarter disinflation that stalled in early 2026, the directional shift back upward is the central macro fact driving both rates and Fed expectations.
The pressure points are split. Services and shelter remain sticky, keeping core elevated, while energy has flipped from a tailwind for inflation to an offset: the US Treasury's 60-day license authorizing Iranian crude sales through August 21, plus the reopening of Hormuz transit, drove WTI down 3.42% on the session and roughly 40% from its wartime peak. That energy disinflation is real but lagging—it has yet to filter into the core readings the Fed targets, and goods relief is being outweighed by services stickiness in the near term.
The June 17 FOMC reframed the policy debate. Chair Warsh's Fed held at 3.50–3.75% but flipped its dot plot from a projected cut to a projected hike, with roughly half of officials now penciling a 2026 increase and headline PCE forecasts revised up to 3.6%. Markets responded by lifting September-hike odds to about 68%, from 29% a week earlier; both Deutsche Bank and BofA now carry a September hike in their base case.
Key Takeaway
The Fed's bias is firmly hawkish: with core PCE seen reaccelerating to 3.4% and the dot plot now penciling a 2026 hike, markets price ~68% odds of a September increase, up from 29% a week ago. Conditions are tightening via a firmer dollar and higher front-end yields, leaving little room for a dovish turn unless Thursday's PCE undershoots.
Risk and Positioning
Picture the market's mood as weather: mostly calm, but a few clouds rolling in. The market's "fear gauge" (called the VIX) ticked up, signaling slightly more nervousness, though it's still low. Companies aren't showing signs of trouble—the extra interest they pay to borrow money stays very low. The jitters are really about interest rates, not the health of businesses. A few investors did move money toward safety, nudging gold higher even as big tech stocks slipped.
Key Takeaway
Conditions are mostly calm with a few clouds—watch this week's inflation report, which could stir things up.
Risk sentiment is shifting from complacent to cautious without yet turning defensive. The VIX rose 5.36% to 17.29—still low in absolute terms, but extending the higher-highs, higher-lows pattern that has characterized implied volatility since its 2024 trough. Valuations remain stretched: the forward P/E sits near 20.3 and S&P 500 market cap reached 212% of GDP, the highest since 1929. Critically, that stretch is being supported by genuine profit growth (≈23% expected for 2026) rather than multiple expansion alone, which distinguishes this setup from the 2000 and 2007 precursors.
Credit markets corroborate the "nervous but not distressed" read. High-yield option-adjusted spreads remain near historically narrow levels with no sign of widening—the classic late-cycle warning sign is absent. The market's anxiety is concentrated in rates and duration, not solvency. Beneath the soft headline index, breadth is actually improving: the Russell 2000 rose 0.83% (and is up roughly 21% year-to-date versus single digits for the S&P 500), and the Dow gained 0.29% on a near-4% move in Caterpillar, even as the Nasdaq fell 1.32%.
The session's notable anomaly was the simultaneous bid for gold (+0.87% to 4,191.69) and the dollar (+0.24% to 100.997, a one-year high) while equities and oil fell. Gold rising against the dual headwind of a hawkish Fed and a firmer dollar signals a genuine safe-haven impulse tied to the mega-cap tech wobble—Alphabet fell 5% on AI-talent-departure concerns—rather than a pure rates trade.
Key Takeaway
Implied volatility is rising off historic lows (VIX 17.29, +5.4%) in a higher-highs pattern, yet credit spreads remain near record-narrow—markets are nervous about rates, not solvency. The dominant tail risk is an upside PCE surprise Thursday that hardens hike odds; a second is an Iran-deal breakdown reigniting oil and the geopolitical premium.
Sector and Cross-Asset Analysis
Money moved out of the biggest names and into steadier corners of the market. Tech companies (XLK) led the declines, with giants like Alphabet and Amazon falling on worries about their future. Oil and gas companies (XLE) dropped too, as oil got cheaper. On the brighter side, industrial companies that build machines and equipment rose—Caterpillar jumped nearly 4%—and banks and financial companies (XLF) got a lift from higher interest rates. Smaller companies also did well, a sign the gains are spreading beyond just a few tech giants.
Key Takeaway
The market's winners are shifting from tech giants toward industrial firms, banks, and smaller companies.
Sector leadership rotated decisively away from growth. Technology (XLK) led declines as mega-caps rolled over—Alphabet −5%, Amazon −4.8%, Microsoft −3%, Meta −2.3%—on AI-talent and positioning concerns, dragging the Nasdaq down 1.32%. Energy (XLE) was pressured by the 3.4% drop in crude tied to restored Iranian and Gulf supply. Offsetting both, industrials and other cyclicals led: Caterpillar's near-4% gain anchored the Dow, while financials (XLF) drew support from higher yields and a still-positively-sloped curve.
Cross-asset signals were unusually coherent in their late-cycle tilt. Stocks and bonds sold off together (yields up, equities down), a correlation that reflects inflation-and-rate fear rather than growth fear; the dollar firmed on Fed-ECB-BoJ policy divergence (the ECB hiked 25bps and the BoJ moved to 1.00% in June); gold rose as a haven; and oil fell on supply normalization. Internationally, Europe closed higher Monday (Stoxx 600 +0.7%) on the US-Iran progress, but Asian tech was routed overnight into Tuesday as the memory-chip complex tumbled.
The clearest read is a value-and-size rotation: small caps, industrials, and financials are in favor; mega-cap tech and energy are out. That breadth broadening beneath a soft cap-weighted index is constructive, but it remains contingent on cyclicals sustaining leadership through Thursday's inflation print.
Key Takeaway
Leadership is rotating from mega-cap tech and energy toward industrials, financials, and small caps—a classic late-cycle shift as higher-for-longer rates reward cyclicals and value over long-duration growth. The breadth improvement beneath a soft headline index is constructive, but it hinges on cyclicals holding through Thursday's PCE.
Economic Data & Events
- 7:45 AM MT — S&P Global Flash Manufacturing PMI (a survey of factory activity) — Moderate
- 7:45 AM MT — S&P Global Flash Services PMI (a survey of service businesses) — Moderate
- 7:45 AM MT — S&P Global Flash Composite PMI (factories and services combined) — Moderate
- 8:00 AM MT — Richmond Fed Manufacturing Index (factory activity in the mid-Atlantic region) — Low
Today's reports are business surveys that take the economy's temperature—are factories and service companies busy or slowing down? They matter, but they're not the main event. The report everyone is waiting for comes Thursday: the Fed's favorite inflation measure. That number will heavily influence whether the Fed raises interest rates later this year.
Key Takeaway
The report to watch is Thursday's inflation reading—it could decide whether the Fed raises rates.
Today's Calendar
- 7:45 AM MT — S&P Global Flash Manufacturing PMI (Jun) — Moderate Impact
Consensus: 55.0 | Previous: 55.1
- 7:45 AM MT — S&P Global Flash Services PMI (Jun) — Moderate Impact
Consensus: 52.0 | Previous: 50.7
- 7:45 AM MT — S&P Global Flash Composite PMI (Jun) — Moderate Impact
Consensus: N/A | Previous: 51.5
- 8:00 AM MT — Richmond Fed Manufacturing Index (Jun) — Low Impact
Consensus: 7 | Previous: 13
Week Ahead
Thursday, June 25 is the week's fulcrum: May PCE (core consensus 3.4% YoY) lands alongside final Q1 GDP and durable goods, and is the explicit trigger for any regime reassessment. Micron earnings headline a heavy tech-reporting slate. With no Fed meeting until late July, PCE and Iran-deal headlines will set the tone.
The Bottom Line
Expect a bumpy few days, with pressure on big tech stocks and steadier footing for banks and industrial companies. The real test is Thursday's inflation report—that's the number that could set the market's direction.
Expect a choppy, headline-driven session with a downside tilt into Thursday's PCE. The 10-year (4.51%) is pressing toward 4.55% resistance and the 2-year (4.23%) sits at a multi-year high, leaving the 2s10s spread near +28bps; a hot inflation print would flatten the curve and pressure duration. The S&P 500 (7,473) faces support near 7,400, then 7,350, with resistance at 7,550 and the 7,621 record; overnight Asian tech weakness raises the odds of a soft open. Look for continued pressure on mega-cap tech and energy, with relative support from financials and industrials.
Disclosure — AI-Assisted Content & Regulatory Notice
This briefing was drafted with the assistance of artificial intelligence tools. All content has been reviewed and approved by Thomas MacPherson, Investment Adviser Representative (Series 65) and Chief Compliance Officer, River Rose Financial, LLC, prior to publication. AI systems may produce errors, omissions, or outdated information; readers should independently verify data.
Market Currents does not constitute an investment advisory relationship, does not create a fiduciary duty, and does not include personalized investment advice. Subscribers should not rely on Market Currents as a substitute for individualized financial advice. This briefing is for informational purposes only. Market conditions change rapidly; all data and projections are subject to revision without notice.
River Rose Financial, LLC is a registered investment adviser with the State of Colorado. Registration does not imply a certain level of skill or training. Past performance is not indicative of future results. All investment strategies involve risk, including possible loss of principal.
