GM. This is Milk Road Macro, the newsletter that knows that when one billion barrels of oil production are lost and the price stays below $100pb, maybe the whole market is one big fugazzi.
Here’s what we’ve got for you today:
- ✍️ Waller vs Warsh.
- ✍️ Markets rally on hopes of peace (again).
- 🍪 Lenovo expects the memory chip shortage to last through 2026.
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Prices as of 10:00 a.m. ET.
WALLER VS WARSH
It looks like battlelines are being drawn over control of the Fed.
On May 22nd, Federal Reserve Governor Christopher Waller delivered an important speech at an economic forum in Germany. He argued that the central bank must immediately remove the "easing bias" from its policy at the next Federal Open Market Committee (FOMC) meeting.
Waller asserted that holding the Fed funds rate steady will remain the appropriate course of action for the foreseeable future. This was the kicker though, he added that he can no longer rule out rate hikes if inflation does not show sustainable signs of returning to the Fed’s 2% target.
Waller was particularly blunt about monetary easing, stating that it is "just kind of crazy" to talk about rate cuts in the near future. His concern stems from the fact that the Federal Reserve’s 2% inflation target miss is now entering its sixth consecutive year (that’s a lot).
Waller says this poses a severe risk that inflation expectations could become permanently unanchored. If long-term inflation expectations begin to drift upward, Waller said he would support an immediate interest rate hike.
In other words, Trump wants Warsh to cut, but Waller and Powell are going to try to subvert his leadership and push the board toward rate hikes.
The rest of the voting members of the FOMC are going to have to choose sides between the old and new leadership at the Fed. The minutes from the April FOMC meeting showed a growing group who believe rate hikes may be necessary. They are arguing that inflation pressures are going beyond just energy shocks and domestic inflation could be getting worse.
The upcoming June 16-17th FOMC meeting is going to be spicy. If the conflict with Iran is over and the Strait of Hormuz FINALLY opens, maybe energy prices will come down and the Fed will lean dovish or hold rates. If it doesn’t, Warsh’s first meeting as Chairman of the Fed might go down as the most divisive meeting in the history of the institution.
Warsh vs. Waller (Powell) - Round One coming up soon!
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MARKETS RALLY ON HOPES OF PEACE (AGAIN)
Well, it’s not Groundhog day but this macro story keeps coming back. I would love to ignore this and stop writing about it but it’s still the biggest tail wagging the dog when it comes to markets right now.
So…
President Donald Trump announced that a comprehensive peace agreement with Iran is "largely negotiated."
Which is different from “bigly negotiated.”
This comes after spending the weekend in extensive coordination with Pakistani mediators and regional allies. The diplomatic breakthrough establishes a 60-day ceasefire extension. During this time, the Strait of Hormuz will reopen to global shipping without any transit tolls.
The agreement should halt active fighting in both Iran and Lebanon, lift the U.S. blockade on Iranian ports, and unfreeze approximately $25B in overseas Iranian assets.
In return, Iran will negotiate regarding its nuclear enrichment program within a 30-to-60-day window.
The markets reacted swiftly and positively to this news. Crude oil prices tumbled below the critical threshold of $100 per barrel and capital flows seeking shelter in the U.S. dollar began to moderate.
AND THEN THIS HAPPENED
Almost immediately after all this was announced, Iran tried to lay mines in the Strait, Israel hit Lebanon one more time, and the U.S. launched “self-defense strikes” that they claim were not in violation of the ceasefire that had just been agreed to.
Which makes sense if you think about it. I mean if you’re only opening fire so you can knock out our enemy’s ability to fire, then you can trust them to keep the ceasefire, and it’s basically like nobody ever even really fired. Seems legit.
I’m sure this is all covered in the Art of the Deal somewhere.
Anyway, I look forward to writing about all of this again when the next “ceasefire” breaks out.
I broke all this down for our PRO subscribers in discord while it was happening, so if you want to join in the conversation and see how the other Milk Road PRO analysts and I are navigating all of this in our portfolios, try Milk Road PRO for a buck, here.
Wrapping up
The simultaneous arrival of a Middle Eastern ceasefire, a new Fed Chair, and inflation risks make for a volatile market environment.
However, the S&P 500 making new all-time highs means that the bulls are not stopping.
This could change in July if we see a hawkish stance out of the FOMC under Kevin Warsh. Trump appointed him to lower rates, and if he is forced by the rest of the board to keep rates higher for longer, the market won’t like that.
For the time being though, the peace news is bullish and the inflation fears remain on the horizon, so the bullish momentum is likely to continue.
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Hardware giant Lenovo disclosed that it expects the global shortage of memory chips to persist through the remainder of 2026.
In corporate restructuring news, software leader Intuit announced plans to reduce its global workforce by approximately 17%.
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