By Jamie McGeever

ORLANDO, Florida (Reuters) – TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

Global stocks zoomed to an all-time high on Tuesday and oil sank for a second day as a shaky truce between Iran and Israel sparked a widespread relief rally, while Fed Chair Jerome Powell reiterated that rate cuts can wait while policymakers assess the impact of tariffs.

In my column today I look at why traders’ dovish Fed bets may finally come good – softening U.S. data, plunging oil prices, and a surprise U-turn from a Fed hawk. More on that below, but first, a roundup of the main market moves.

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

1. Big questions loom over Trump‘s announcement ofIsrael-Iran ceasefire deal 2. Central banks eye gold, euro and yuan as dollardominance wanes 3. US migrant halt may wipe potential job growth: MikeDolan 4. Powell is staying at the Fed, with Trump appointmentspossibly limited 5. How Trump could influence the makeup of the Fed

Today’s Key Market Moves

* Wall Street’s main indices rise 1% or more, with the S&P500 and Nasdaq at new 4-month highs. The MSCI World hits a newrecord. * U.S. equity volatility back to pre-war levels, with theVIX below 18.0. The index has its biggest fall since May 12. * As the dollar weakens for a third day, the euro rises to$1.1640, a level not seen since October, 2021. * Oil slumps again. Brent crude settles 6% lower at$67.14/bbl, a day after it fell 7%. * U.S. Treasury yields fall to the lowest since May 8, the2-year down to 3.806% and the 10-year to 4.285%. A $69 billionauction of 2-year notes is well-received.

Truce triggers world equity whoosh

A buying frenzy engulfed world stocks on Tuesday after U.S. President Donald Trump’s announcement the previous evening that Iran and Israel had agreed a ceasefire. Immediate violations from both sides didn’t dampen investors’ spirits, and the ceasefire began to take hold as the day progressed.

The MSCI World index hit a fresh peak, and Asian and emerging market stocks climbed to their highest levels since early 2022. In New York, the S&P 500 and Nasdaq came within 1% and 1.5%, respectively, of their recent all-time highs.

It bears repeating that the situation is fluid, the truce is fragile, and nerves are stretched, reflected by Trump’s expletive-laced rebuke of both countries early on Tuesday before he departed for a NATO summit in the Netherlands.

But the market mood is buoyant. Just look at the oil price – its reversal in the first two trading days of the week has been extraordinary, with Brent crude futures recording a peak-to-trough decline of 18%.

Oil is a smaller input in global industry, economic activity, and inflation today compared with decades gone by, but it is still significant. Oil is now 20% lower than it was this time last year, which is good news for consumers, businesses and, from an inflation standpoint, central banks.

Fed Chair Jerome Powell’s semi-annual testimony to Congress was the other main area of focus for investors on Tuesday, and they will have been relieved there was no hawkish curveball on the rate outlook.

Powell repeated his position from last week’s post-meeting press conference that policymakers can afford to wait and see the impact of tariffs on activity and prices before deciding their next step.

“I do not want to point to a particular meeting. I don’t think we need to be in any rush,” he told lawmakers, distancing himself from some of his colleagues who have said recently they would consider cutting rates next month.

But Powell wasn’t any more hawkish than he was last week, and his steady steer helped pave the way for the rally.

Despite the optimism washing over markets this week, there are reasons to be cautious on the U.S. economy. Figures on Tuesday showed that consumer confidence is falling, with pessimism toward the jobs market at its lowest level in over four years, and the current account deficit widened to a record $450 billion in the first quarter.

Bowman turn, oil plunge challenge Fed’s hawkish tilt

Financial markets have consistently overestimated the Federal Reserve’s readiness to cut interest rates in recent years. But the latest Fed chatter, softening economic data and a dramatic reversal in oil prices suggest they could be right this time.

The central bank last week appeared to pour ice cold water on traders’ hopes for a dovish steer. In the Fed’s summary of economic projections, officials maintained their median ‘dot plot’ projection of two 25 basis point rate cuts this year. But it was an extremely close call, and they lowered their 2026 forecast to one cut from two.

The consensus view in the days that followed was that policymakers’ hawkish tilt reflected their commitment to anchoring inflation expectations. Traders’ projections for rate cuts this year duly slipped to under 50 basis points.

But maybe this read was premature.

First, concerns about rising energy prices due to conflict in the Middle East have disappeared. Even though oil rose as much as 17% in the days after the Israel-Iran war erupted on June 13, it is now back below that level. The price is plunging and late on Monday U.S. President Donald Trump announced that the two enemies had agreed on a ceasefire.

On top of that, a chorus of dovish comments from Fed officials in recent days – and not just from the usual suspects – suggests the U.S. central bank may be closer to cutting rates than thought less than a week ago.

NEGATIVE SURPRISE

There is certainly some justification for a dovish turn.

On a fundamental level, U.S. economic data is softening. Citi’s U.S. economic surprises index has been falling since the end of May and is now negative, meaning that economic data is underperforming consensus expectations. Last week it fell to the lowest since September last year.

Caution is required, of course, when analyzing economic surprise indices after significant moves because expectations may have been too pessimistic or optimistic to begin with. But the current shift seems to be a legitimate red flag.

“We look at both the momentum of reported data and its surprise versus consensus expectations. Both have dropped into negative territory,” Citi’s Stuart Kaiser notes, pointing out that the ‘hard’ activity data index is now negative.

180 DEGREE TURN?

But an even bigger surprise for investors on Monday came from Fed Vice Chair for Supervision Michelle Bowman, who said she would consider voting for a rate cut as soon as July if inflation pressures “remain contained”.

Bowman’s comments are significant. Granted, she has not spoken publicly about the economy or policy for two months, and in March she signaled that labor market conditions would likely become more important in the policymaking debate.

But she has consistently been one of the more hawkish members of the Federal Open Market Committee since her appointment as Fed Governor in 2018.

This came after Governor Christopher Waller, one of the FOMC’s most reliably dovish members, on Friday said a rate cut next month should be on the table. That’s no surprise. But if an FOMC hawk like Bowman is now singing from that same hymn sheet, traders and investors need to take notice.

A cynic might wonder about the timing of Bowman’s seemingly 180-degree turn, coming just as Trump has intensified attacks on Fed Chair Jerome Powell for not cutting interest rates. But there’s no evidence to suggest political pressure is at play.

And the recent oil price plunge will help her argument. On Monday, it tumbled 7%, the biggest decline in three years. This was even more remarkable considering it had opened the day 6% higher and hit a five-month high in response to the U.S. bombing of Iranian nuclear facilities on Saturday.

Moreover, at no point following Israel’s initial June 13 strike on Iran did the price of crude rise on a year-over-year basis. Indeed, oil prices have fallen since January, and are now down 20% year on year. If inflation is proving sticky, it’s not because of energy prices.

This will be music to Waller’s – and now Bowman’s – ears.

And with one of the Fed’s hawks now appearing to draw in their claws, it is possible that traders may not be overestimating the Fed’s readiness to cut rates this time around. Their bets of 125 bps of easing by the end of next year, starting soon, could be close to the mark.

What could move markets tomorrow?

* Israel-Iran situation * NATO summit * Australia CPI inflation (May) * Japan services PPI inflation (May) * Thailand interest rate decision * Bank of England’s Clare Lombardelli and Huw Pill speak * U.S. five-year note auction * Fed Chair Jerome Powell’s Senate testimony

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

(By Jamie McGeever)