The Top Line
Prices are still climbing faster than the Federal Reserve would like, and it's leaning toward raising interest rates rather than cutting them. The real question now is whether the market's gains can spread beyond a few giant tech companies.
We are operating in a late-cycle expansion characterized by sticky inflation and a tightening Fed even as equity leadership narrows. May core PCE held at 3.4% year-over-year, the highest since 2023, and markets now price roughly three Fed hikes this year under Warsh, with ~80% odds of a December move. Friday hinted at rotation: the S&P closed flat at 7,354 (-0.05%), the Russell 2000 edged higher, and the AI/chip complex cooled as oil fell on easing Strait of Hormuz tensions. The open question is whether that broadening is durable, or the first crack in narrow leadership.
Inflation
Inflation — the rate at which prices rise — is still running hot, which means your groceries, rent, and car payments keep getting more expensive. One key gauge the government tracks rose about 3.4% over the past year (a measure called "year-over-year"), well above the roughly 2% pace considered healthy. The Federal Reserve, the nation's central bank that raises or lowers interest rates to keep prices stable, wants to cool this down. Because prices are staying stubborn, it's signaling it may raise rates again rather than cut them. One bright spot: oil prices have fallen, which should ease some pressure at the gas pump in the months ahead.
Key Takeaway
Prices are still rising faster than normal, so borrowing money may stay expensive for a while.
Inflation remains elevated and sticky rather than rolling over. The May PCE report, released June 25th, put headline PCE at 4.1% year-over-year (YoY, the change versus a year ago) and core PCE at 3.4% YoY — the firmest core reading since 2023 — with both prints landing broadly in line with forecasts and personal income and spending beating expectations. The in-line outcome capped the immediate upside surprise risk, but the level itself sits well above the Fed's 2% target.
The pressure mix is shifting. Services and shelter remain the persistent drivers, and wages stay firm against a tight labor market (unemployment near 4.3%). The swing factor has been energy: the Iran-driven Hormuz shock injected a goods-and-energy impulse into recent prints, but with crude retreating toward pre-war levels (WTI spot $71.44, front-month $69.23), that contribution should fade in coming reports — easing one leg of the reacceleration story while leaving the services core intact.
The market reaction was muted and dovish only at the margin: yields drifted lower Friday (10Y -1.4bps to 4.376%, 2Y -2.7bps to 4.096%) as the report removed tail risk, but it did nothing to pull the Fed off its hawkish path. Williams reiterated that inflation remains too high, and Kashkari publicly backed a rate increase by year-end.
Key Takeaway
The Fed's bias is firmly hawkish — the debate is hikes, not cuts. Financial conditions have eased modestly (VIX 18.4, crude lower), but the policy path points higher. The Fed stays data-dependent into July, with Thursday's payrolls and the next CPI as the gating inputs.
Risk and Positioning
Picture the market's mood as a weather forecast: right now, conditions are calm and mostly clear. The market's fear gauge (called the VIX) actually dropped, partly because tensions in the Middle East eased and oil prices fell. But there's a catch — the calm sits on top of some churn underneath, as investors pull money out of the big tech and chip companies that have powered the market. The encouraging sign is that they're moving into other stocks rather than rushing toward safety, which suggests a healthy reshuffle rather than fear. Still, it's only been one quiet day, so it's too early to call it a trend.
Key Takeaway
Markets are calm for now, but keep an eye on whether that holds as money shifts around.
Headline risk appetite reads calm to complacent. The VIX fell to 18.40 (-2.54%), a benign level, helped by the de-escalation in the Strait of Hormuz that removed a live tail risk and sent crude sharply lower. The index itself was dead flat, yet volatility easing into a flat tape suggests a market leaning toward calm rather than one actively de-risking.
Beneath that placid surface, positioning is rich and concentrated. Forward equity multiples remain historically stretched, sustained largely by mega-cap AI and semiconductor leadership; the yield curve is modestly positive (2s10s near +28bps) and credit spreads stay contained, neither flashing stress. The vulnerability is structural, not yet realized: the index's gains rest on a narrow base.
The notable anomaly is the divergence between a tranquil index and a wobbling engine. The AI/semiconductor complex sold off Friday and Citi cut its tech weighting, even as small caps firmed and the VIX fell. Critically, there was no defensive bid — utilities and staples did not lead — which argues this is benign rotation rather than a flight to safety. That is a meaningful shift from recent sessions, but it is one flat day of low-magnitude evidence, and it should not yet be over-read.
Key Takeaway
Implied vol (VIX 18.4) is low and falling, signaling calm, even as realized vol runs hotter inside the AI complex. The two tail risks: a renewed Hormuz flare-up re-igniting the oil-and-inflation impulse, and a disorderly unwind of concentrated AI leadership before breadth can carry the tape.
Sector and Cross-Asset Analysis
Different corners of the market moved in different directions. Tech companies (XLK) and the chipmakers behind artificial intelligence slipped as investors took some profits, and oil and gas companies (XLE) fell along with crude prices. Smaller companies, by contrast, edged higher — a sign money is starting to spread out. Gold rose too, as some investors used it to protect against rising prices. The takeaway is a market rotating away from the few giants it has leaned on toward a wider mix of stocks.
Key Takeaway
Money is moving out of big tech and into a broader set of companies.
Leadership rotated away from the crowded trade. Technology and semiconductors (XLK, SOXX) lagged on the AI cooldown and a Micron-led chip selloff, with Citi trimming its tech weight. Energy (XLE) was pressured by falling crude (WTI spot -1.80%, front-month CL1! -3.74%). Small caps (Russell 2000, +0.07%) modestly outperformed the Nasdaq (-0.24%) — and, tellingly, defensives did not lead, so this was not a classic risk-off rotation.
Breadth is the variable to watch. Mega-cap AI has been the index's load-bearing wall; Friday saw that wall wobble while participation quietly improved. The confirming signal would be equal-weight beginning to outperform cap-weight on a sustained basis — a single session of Russell-over-Nasdaq is suggestive, not decisive.
Cross-asset moves reinforced the de-escalation theme. Crude fell hard as US-Iran talks produced a memorandum of understanding and tanker flows through Hormuz resumed; note that spot WTI ($71.44) trading above the front-month future ($69.23) reflects normal backwardation and roll dynamics, not a data discrepancy. Gold rose +1.53% to $4,088 even as the war premium faded and the dollar held roughly flat (DXY 101.37, -0.07%) — resilience that more likely reflects sticky-inflation and real-rate hedging than a fear bid.
Key Takeaway
Capital is rotating out of crowded AI/semis toward small caps and rate-sensitives as oil and geopolitical risk recede; energy is out of favor on softer crude, tech under pressure. The key tell: breadth is improving without a defensive bid, which tentatively favors rotation over de-risking.
Economic Data & Events
- 8:30 AM MT — Dallas Fed Manufacturing Index (a regional check on how factories are doing) — Low Impact
Today is quiet, with no major reports due. The week's big moment comes Thursday, when the government releases the June jobs report a day early because markets close Friday for the Fourth of July. That report shows how many jobs the economy added — economists expect about 172,000 — and it will heavily influence whether the Federal Reserve raises interest rates. A strong number could push the Fed toward another rate hike.
Key Takeaway
Thursday's jobs report is the week's key event — it could decide the Fed's next move.
Today's Calendar
No major economic releases scheduled today. The lone U.S. item is the Dallas Fed Manufacturing Index (8:30 AM MT) — a low-impact regional survey unlikely to move broad markets. The week's signal is concentrated later.
Week Ahead
Holiday-shortened week. Wed July 1: Fed Chair Warsh speaks (Portugal, ~7:30 AM MT) plus ISM Manufacturing. Thu July 2: June nonfarm payrolls land a day early (6:30 AM MT), consensus +172k, unemployment seen ~4.3% — the week's main event and the Fed's gating input. Fri July 3: U.S. markets closed for Independence Day.
The Bottom Line
Expect a quiet start to a holiday-shortened week, with the real action waiting on Thursday's jobs report. The thing to watch is whether the market's strength can spread beyond a few big tech names.
Treasurys sit in a tight band — 10Y at 4.38%, 2Y at 4.10%, 2s10s near +28bps — with little reason to break range before Thursday's payrolls. Breadth is the story: with AI/semis cooling and small caps firming, watch whether the S&P (7,354) holds the 7,300 area on rotation rather than fading if mega-cap leadership cracks. Expect a quiet, position-squaring Monday into a holiday-shortened week; energy stays heavy on softer crude, while a hot jobs print is the upside-yield, downside-equity catalyst.
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.
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