Baker Market Update 2026-06-12

Inflation data released this week showed little sign of cooling, with both consumer and producer prices accelerating sharply in May. However, the emergence of a potential peace deal on Thursday between the U.S. and Iran has raised hopes that the energy price pressures driving the latest inflation surge could begin to ease.

Annual headline CPI rose 4.2% in May in line with forecasts, marking the largest increase in three years. The monthly increase was 0.5%, also in line with estimates. Core inflation edged up to 2.9% YoY, in line with expectations. The monthly increase was 0.2%, below estimates of 0.3%. Producer prices climbed even faster, jumping 1.1% MoM (vs. 0.7% consensus) with the annual rate hitting 6.5% (vs. 6.4% consensus), the highest reading in more than three years. Inflation has now exceeded the Fed's 2% target for five consecutive years.

Markets are widely expecting no change at the June 17th FOMC meeting next week, the first chaired by Kevin Warsh, who succeeded Jerome Powell earlier this year. Warsh has previously indicated he believes rates should be lower, though the latest data may complicate that view. Futures markets are currently pricing in a meaningful probability of a 25bp rate hike by December. Warsh has also signaled he may not hold a press conference after every meeting, a departure from recent Fed practice that could reduce reliance on communicated forward guidance and put greater focus on meeting minutes and the Fed’s Beige Book.

On the geopolitical front, a potential breakthrough in the U.S.-Iran conflict appears increasingly possible, even as the week started with an escalation of military action among Iran, Israel, and the U.S. A 14-point draft memorandum was aired on Iranian state television, with President Trump saying Thursday that a deal could be signed as early as this weekend. The proposed agreement includes the reopening of the Strait of Hormuz, the removal of oil sanctions on Iran, and an end to hostilities across the region, including in Lebanon. Tehran said it had not yet made a final decision, but the prospect of an agreement appears the closest it has in weeks. Crude prices fell on the news, with Brent dropping below $90 a barrel on Friday morning.

Next week will be shortened by the Juneteenth holiday on Friday. Housing data fills out the calendar alongside the Fed decision. But the real hinge point may come before markets even open Monday. If a peace deal is announced over the weekend, the energy complex, inflation expectations, and the Fed's calculus could all look different when the FOMC begins meeting on Tuesday.

Have a great weekend!