Israel attacks Iran, oil spikes

Israel launched a large pre-dawn air assault on Iran early Friday that struck Tehran and the Natanz enrichment complex, killing several of the Islamic Republic’s top officers, including IRGC chief Maj. Gen. Hossein Salami and armed forces head Maj. Gen. Mohammad Bagheri, and at least six senior nuclear scientists, according to Iranian state media and Israeli briefings. The Israeli military framed the operation as a pre-emptive strike to blunt an “imminent” nuclear threat.  The raid reverberated across the region: major airlines rerouted or canceled flights after large swaths of Middle East airspace closed, and crude oil futures spiked by over 6% in early trading.   President Donald Trump urged Tehran to “make a deal before it is too late.” Still, diplomats warn the strike has shattered already-fragile nuclear talks and sharply heightens the risk of a broader regional conflict as Iran weighs retaliation.

• While most saw this as a surprise, Israel has likely been planning this attack since shortly after Oct 7th of 2023
• It seems they allowed the US to attempt to pursue a diplomatic path to disarm Iran before launching the kinetic strike
• At this point, it isn’t clear if this will draw the US and others into a broader conflict, although the US almost certainly gave their green light before the attack
• From a market's perspective, oil prices spiked over 8% on the day, and are now up over 25% from their recent lows
• If the conflict escalates, with the potential disruption of the Strait of Hormuz, expect oil to continue higher
• This will likely lead Saudi Arabia to increase production to help alleviate the supply disruption
• The downstream effect of higher oil prices is higher inflation, as energy is an input cost into almost all goods and services
• Interestingly, as stocks sold off on the back of the attack, money didn't rush into bonds as it normally does, and bonds sold off as well
• The only other asset gaining during the sell-off besides oil has been gold

May inflation data cools, but is it enough for Fed to ease?

Headline consumer inflation stayed soft this week: Thursday’s report showed the May CPI rose just 0.1% month-over-month after April’s 0.2% gain, leaving the year-over-year pace at 2.4%. Core prices (excluding food and energy) also inched up 0.1% and are running 2.8% on the year, with a 0.3% increase in shelter partially offset by another drop in gasoline and natural-gas costs. Thursday's Producer Price Index told a similar story: final-demand prices advanced 0.1% in May and 2.6% over 12 months, while the core PPI measure (less food, energy and trade) matched the 0.1% rise.

• Before the attack on Iran and the subsequent spike in oil prices, the May inflation data came in lower than expected
• Even before the spike in oil prices, it was still unlikely that the Fed would be comfortable enough to begin cutting interest rates again when they meet next week
• The Fed has been consistent in that it remains data-dependent and would like to see a sustainable decrease in inflation before easing
• Before this Israel/Iran conflict intensified, the Fed was concerned about tariffs stoking inflation
• The Fed will now likely add geopolitical risk to its list of concerns going forward

Silver spikes to highest level in over a decade

Silver vaulted past the long-standing $35 ceiling this week, peaking at just south of $37 an ounce on June 10th, its highest print since February 2012 and about 24% higher year-to-date.  The rally completes a decisive breakout of the three-year $22-$30 range and has already compressed the gold-silver ratio to 94 from 105 in April, underscoring renewed relative momentum in the white metal.  Analysts point to a fifth straight year of structural supply deficits, surging industrial demand from solar and electrification projects, and fresh speculative inflows rotating out of richly priced gold as key drivers.

• Unlike gold, silver has many more commercial applications and hence has somewhat different supply/demand dynamics
• However, similar to gold, silver is also viewed as a store of value
• As gold has hit new all-time highs throughout the year, silver has been slow to follow
• The ratio of the price of an ounce of gold to an ounce of silver has historically averaged 50-60 to 1
• Most recently, the ratio hit over 100, as gold rallied and silver failed to keep pace
• It seems silver may be breaking out, rising over 12% over the last month, although still lagging the gains in gold
• If the flight to safety continues into gold, expect silver to continue to participate in the same trend

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