Mideast Tensions Flare as Israel Strikes Iran

For the week ending 13 June 2025

As of midday Friday, global equities were slightly lower on the week after Israel launched an attack against Iran in a bid to disrupt its nuclear program. The yield on the US 10-year Treasury note fell about 10 basis points from last Friday’s closing level to 4.38%. The price of a barrel of West Texas Intermediate crude oil rose about $10 to $73.35 from a week ago after the Israeli military action. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), barely budged from Friday’s closing levels of 19.9.

MACRO NEWS

Israel strikes Iran

Israeli forces struck military and nuclear sites in Iran early Friday amid concerns that Tehran was close to producing a nuclear weapon. Several of Iran’s top generals were killed in the attacks, which Israel has vowed will continue. Iran launched drone strikes against Israel but the drones were intercepted.

Concerns that Israel, alone or in concert with the United States, would attack Iran over its developing nuclear program rose at midweek after the US ordered the removal of all nonessential embassy staff and their families from Baghdad for fear of reprisals. On Thursday, the International Atomic Energy Agency’s board declared Iran in breach of its nuclear non-proliferation obligations, which increases the risk of snapback sanctions. Iran responded by saying it will build a new uranium enrichment facility in a secure location and take other measures.

Though the US did not directly participate in the raid, US President Donald Trump on Friday morning appealed to Iran to make a deal on ending its nuclear program before it is too late. A spokesman for Iran’s atomic agency said Friday the country’s nuclear activities will continue.

Oil and gold prices surged on the geopolitical instability, and the threat that the Strait of Hormuz could be blocked, while the US dollar edged higher. Bond markets were stable on the news while equities pulled back from recent highs. 

US, China extend trade truce

US Treasury Secretary Scott Bessent, Commerce Secretary Howard Lutnick and US Trade Representative Jamieson Greer met with Chinese Vice Premier He Lifeng in London on Monday and Tuesday where they reaffirmed the framework that the two sides agreed to in May in Geneva. The countries agreed to ease export controls on sensitive goods such as rare earth minerals from China and jet engines from the United States. Tariff levels remain unchanged, with China imposing a 10% levy on US goods while duties on Chinese imports average 55%. 

US inflation remained subdued in May

US consumer prices rose just 0.1% at both the headline and core levels in May from the month before and 2.4% year over year at the headline level, with the core measure coming in at 2.8%. The benign figures were mirrored later in the week by producer prices rising just 0.1% at both the headline and core levels while rising 2.6% overall and 3% ex food and energy on a year over year basis. Odds of two cuts from the US Federal Reserve by the end of this year rose after the data while bond yields fell. In addition to the muted inflation level, solid 10- and 30-year Treasury auctions helped push yields lower along the yield curve. 

Goldman says tariffs less impactful than feared

Analysts at Goldman Sachs said Thursday that three recent developments point to somewhat smaller effects of tariffs on the US economy. This week’s inflation data suggest a slightly smaller impact on consumer prices, real incomes and consumer spending. Also, financial conditions have eased back to roughly pre-tariff levels. Finally, measures of trade policy uncertainty have moderated amid steps toward de-escalation. The firm raised its 2025 GDP forecast to 1.25% from 1%, lowered its forecast for the peak unemployment rate to 4.4% from 4.5% and now sees 25% odds of a US recession over the next 12 months, down from 30%.

QUICK HITS

Canada announced Monday that it will increase defense spending and will hit the 2% minimum target for NATO members.

Chinese CPI fell 0.1% year over year in May and PPI declined 3.3%. Fiscal and monetary stimulus has so far failed to boost domestic prices.

Inflation expectations over the coming year fell to 3.2% in May from 3.6% in April, according to a survey conducted by the Federal Reserve Bank of New York. A separate inflation expectations survey conducted by the University of Michigan showed a sharp decline in year-ahead expectations, to 5.1% in June from 6.6% in May.

Japanese Prime Minister Shigeru Ishiba said Friday that he and President Trump have agreed to accelerate trade talks toward a mutually beneficial deal.

The Investment Company Institute warned US lawmakers this week that Section 899 of the reconciliation bill working its way through Congress risks creating capital outflows from the US if a withholding tax on foreign investors passive income is enacted. The Trump administration expects that countries will repeal measures such as digital sales and corporate minimum taxes, levies US officials see as discriminatory against US companies, in order to keep Section 899 from coming into force.

The unemployment rate in the United Kingdom rose to 4.6% in April, a four-year high, from 4.5% while average weekly earnings growth slowed to 5.3% from 5.5%. Also, the UK economy contracted for the first time in six months in April, shrinking 0.3%. The Bank of England is not expected to cut rates next week, having eased at its May meeting, though odds of an August cut are 82%.

The World Bank reduced its 2025 economic global growth forecast to 2.3% from 2.7%.

A new sanctions proposal by the European Union against Russia seeks to cut Russia’s energy revenues with a $45 oil price cap, down from $60, and impose a ban on more shadow tankers.

President Trump on Thursday called US Federal Reserve Chair Jerome Powell a “numbskull” and said the White House “may need to force something” if the central bank doesn’t lower rates. However, Trump ruled out firing Powell. Rumors circulated this week that Treasury Secretary Bessent could be in line to replace Powell when his term expires next May.

The MSCI World closed at a record high on Thursday.

Fitch Ratings revised down the outlook for global sovereigns to “deteriorating” from “neutral.” The escalation in the global trade war is a significant adverse global economic shock, Fitch said.

Moody’s warned that selling funds with exposure to private assets to retail clients will introduce new risks to private-asset managers, including “reputation loss, heightened regulatory scrutiny and higher costs.”

A US Federal appeals court allowed Trump’s reciprocal tariffs to remain in effect at least until a hearing on the matter is held at the end of July.

The US Treasury Department recorded $23 billion in customs-duties revenue for May, a 270% increase from the same month a year earlier.

British officials hope that the US–UK trade deal could be signed by the end of this week.

The US and Canada have exchanged working documents that indicate progress is being made toward a trade deal, the Canadian Broadcasting Corporation reported.

Data from LSEG Lipper showed equity mutual funds and ETFs domiciled in the United States saw outflows of $24.7 billion in May, the largest in a year. European funds attracted $21 billion in May, lifting year-to-date inflows to $82.5 billion, the highest in four years. Emerging market equity ETFs showed inflows of $3.6 billion last month, bringing total inflows this year to $11.1 billion.

Nikkei reported that stock buybacks in Japan reached a record pace of $83.5 in the period from January to May, a 20% increase over a year ago as companies face increased pressure to lift shareholder returns. 

THE WEEK AHEAD

Monday: US existing home sales

Tuesday: Eurozone ZEW survey, US retail sales, industrial production

Wednesday: Japan BOJ meeting, UK CPI, eurozone CPI, US housing starts, FOMC meeting

Thursday: UK BOE meeting, US closed for Juneteenth

Friday: Japan CPI, UK retail sales, Canada retail sales, US leading indicators

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