Super heavyweight week is coming! Focus on the Middle East conflict, the Federal Reserve's interest rate decision joins forces with "terrifying data" to make an appearance

The recent rebound in the U.S. stock market has temporarily stalled, as escalating conflicts between Israel and Iran have led to rising oil prices and dampened risk sentiment. Last week, the S&P 500 Index fell by 0.6%, while the NASDAQ Composite Index dropped by 1%. Meanwhile, the Dow Jones Industrial Average declined by 1.3%, ending the first full trading week of June with a loss.

According to the Zhitong Finance APP, the upcoming week will be relatively busy for the market. First, investors will closely monitor the increasingly tense situation in the Middle East, particularly Iran's response. Second, the Federal Reserve's latest policy statement will be released on Wednesday, including the latest Summary of Economic Projections (SEP)—which includes its "dot plot" (a chart depicting policymakers' expectations for future interest rate movements). Following this, Federal Reserve Chairman Jerome Powell will hold a press conference at 2:30 PM Eastern Time. In other economic news, retail sales data for May will be released on Tuesday, which will also attract investors' attention. The market will be closed on Thursday due to "Juneteenth."

Risk of Soaring Oil Prices

On Friday, Brent crude oil futures surged significantly, reaching about $74 per barrel, while WTI crude oil futures traded close to $73, as investors assessed the impact of Israel's missile strikes on Iran, with both rising by about 12% last week.

There are growing concerns that further deterioration of the situation could lead to even higher oil prices, ultimately affecting inflation.

Although the attacks primarily targeted Iran's domestic energy system rather than its export business to international markets, oil traders and analysts are preparing for the possibility of more turmoil in the future. Last Friday, oil prices experienced their largest increase in three years, although the gains subsequently narrowed. Despite U.S. sanctions, Iran remains the third-largest producer in OPEC.

Helima Croft, head of global commodity strategy at RBC Capital Markets and a former CIA analyst, stated in a report on Friday that if oil supplies are disrupted, Trump is likely to call for the Saudi-led OPEC+ alliance to utilize its vast idle capacity. However, it remains unclear whether OPEC can compensate for the severe and ongoing oil supply disruptions from Iran. Iran's daily oil production is approximately 3.4 million barrels.

This action alone could make Saudi Arabia and the UAE's energy infrastructure targets for attacks. After supporting Trump's crackdown on Iran during his first term, Saudi Arabia's critical oil processing facility in Abqaiq was bombed by Houthi militants in 2019.

Clay Seigle, a senior fellow at the Center for Strategic and International Studies in Washington, D.C., stated, "OPEC can activate some idle capacity to compensate for the reduction in Iranian oil production. However, it would be politically tricky for Saudi Arabia and the UAE to achieve this at the expense of Iran."

More importantly, the biggest concern in the oil market centers around the Strait of Hormuz. The Houthis, allies of Yemen, have been harassing vessels in the region, and Iran has previously threatened to block the Strait of Hormuz, a vital transit route in the Persian Gulf. However, Iran has never actually blocked this critical maritime passage Middle Eastern oil-producing countries deliver about one-fifth of global oil production through this narrow waterway daily. If Iran attempts to block this waterway, oil prices could soar further. JP Morgan predicts that the closure of the Strait of Hormuz could push international oil prices up to $130 per barrel. The rise in oil prices will exacerbate global inflationary pressures.

Given that trade issues no longer affect market trends, Michael Hartnett, Chief Investment Strategist at Bank of America Global Research, wrote in a report to clients on June 13 that as long as the rise in oil prices is temporary, the opportunities for "stock bulls" are "very broad."

The spread between two nearby December contracts in this grade (a key indicator of long-term supply and demand balance) has risen by as much as $1.29 per barrel, reaching $3.48. The options market has also released warning signals, as volatility remains high, and the skew during Asian trading hours still favors bullish options trading. Trading volume is also far above normal levels.

Retail Sales Data

After President Trump implemented tariff policies, the overall economic growth data in the United States has remained strong, and economists expect this trend to continue in the latest retail sales report. Economists predict that retail sales in May will decline, mainly due to a decrease in motor vehicle purchases. However, excluding automobiles and gasoline, the report may show a rebound in sales after a weak start to the second quarter.

The retail sales report for May is expected to be released on Tuesday Eastern Time, with economists predicting a 0.6% decline in sales compared to the previous month. However, retail sales excluding automobiles and gasoline are expected to grow by 0.4%. The retail sales control group, which excludes several volatile categories and factors from the quarterly GDP report, is expected to grow by 0.5% in May. A team of economists at Wells Fargo stated that this report is likely to show that "consumers have not lost their purchasing power."

Federal Reserve Interest Rate Decision

In the coming week, interest rate trends will be the focus. Recent economic data shows signs of a cooling labor market, while inflation levels continue to decline.

This has led some economists to believe that discussions about the Federal Reserve lowering interest rates (especially regarding why the central bank would lower rates this year) may be changing.

Bank of America economist Stephen Juneau wrote in a report to clients on Wednesday: "In addition to the solid performance of the May employment report, the CPI data has reduced the likelihood of severe stagflation." This means that the risk of 'bad' layoffs will decrease (as the labor market may collapse), but the likelihood of 'good' layoffs will increase (as the labor market stabilizes and inflation rates decline).

As the market generally expects the Federal Reserve to keep interest rates unchanged on Wednesday, investors will closely watch the economic forecast summary and Chairman Powell's press conference for clues regarding the Fed's first rate cut this year. Trading pricing indicates that the probability of a rate cut in September is about 80%, while the expectation of a cumulative rate cut of less than 50 basis points by the end of the year has been fully digested.

During the meeting, the market expects the Federal Reserve to make two rate cuts in 2025, which is consistent with the median forecast released by the central bank in March. However, significant changes in tariff policy since then will make any adjustments to the Fed's future outlook a particular focus of attention.

Ryan Sweet, Chief U.S. Economist at Oxford Economics, wrote in a preview report to clients: "Any changes to the chart data will contradict the central bank's recent 'wait-and-see' statements."