Bloomberg Surveillance: Fed Outlook, G7 Trade, and Iran's Future

Federal Reserve and Economic Outlook

• 💡 The FOMC is widely expected to hold rates steady, but will update its economic forecast, with a focus on whether policymakers shift towards a one-cut baseline for the year.
• ⚠️ Fed officials are cautious due to potential persistent inflation from tariffs on intermediate goods and uncertainty about inflation expectations.
• 📈 Market focus is on the Fed's reaction function to labor market softening and inflation data, with the 2-year yield acting as an indicator of market sentiment.
• 📉 The Fed may err on the side of being hawkish to restrain inflation expectations, but recognizes the need to cut rates if the labor market weakens significantly.

G7 Summit and Trade Deals

• 🇬🇧 The G7 summit saw a significant trade deal with the UK on auto parts and aerospace, with future relief on steel and aluminum anticipated.
• 🇨🇦 Canada and the US are set to negotiate a deal within 30 days, while deals with Japan, India, and Mexico were not finalized due to the President's early departure.
• 🤝 The US administration has a dedicated team focused on trade negotiations, operating separately from national security concerns like the Iran-Israel conflict.
• ⏳ There is an expectation that deals with India, Canada, and Mexico could be reached by July 8th, with potential extensions for countries negotiating in good faith.

Iran's Political Landscape and Future

• ✊ Reza Pahlavi believes the current Iranian regime is on the verge of collapse and that a campaign for liberation is approaching its moment.
• 🗺️ He has a plan for a democratic transition and Iran's future recovery and prosperity, emphasizing a secular democracy with a clear separation of religion and state.
• 🌍 Pahlavi seeks global support for the Iranian people's struggle for liberation, arguing that regime change would resolve multiple regional and global problems.
• 🗳️ He advocates for a democratic process where the Iranian people decide their future government, whether it be a republic or a constitutional monarchy.

Consumer Spending and Inflation Risks

• 📊 Retail sales data showed a weaker headline but a stronger control group, indicating a resilient consumer for now.
• ⛽ While oil price spikes pose a risk, their impact on consumer spending is limited unless persistent and significant.
• ⚠️ A consistent slowing in the labor market and potential price increases due to tariffs are key factors that could lead to consumer caution.
• 📉 The current high price levels for goods, a legacy of the pandemic, make consumers sensitive to any additional price increases.

Market Reactions and Fed Policy

• 🎢 Market response to economic data shows a bid to the 30-year yield, potentially signaling a view that the Fed may hold rates longer due to strength in the control group.
• ⏳ The Fed is likely to remain on hold in the near term due to inflation concerns and a stable labor market, with a median dot showing only one cut in 2025.
• 🗣️ Fed Chair Powell is expected to maintain a message of patience, emphasizing data dependency and a lack of rush to cut rates, regardless of political pressure.