Mag seven lifts markets while Iran 'Oil-for-time' deal sets the clock, hot PCE

Ok – Can we talk? Today is the last trading day of the month – the VIX continues to fall, suggesting everything is just fine, and the Dow, S&P and Nasdaq just won’t stop making new closing highs. At the end of the day, here is what we got… the Dow added 24 pts, the S&P up 43 pts, the Nasdaq added 242 pts, the Russell added 16 pts, the Transports LOST 142 pts, the Equal Weight S&P added 31 pts… while the Mag 7 gained another 318 pts. Hold onto those last two – we’ll come back to them, because they tell the whole story.

So, what gives? Well, it’s not complicated. On one hand Treasury Secretary Bessent announces a 60-day ceasefire deal between the US and Iran – but even he is not completely convinced it holds, saying “the teams have been going back and forth.”

The deal, if it happens, means that the Strait is re-opened and remains free of any tolls (as it is in international waters), Iran can sell oil on the open market, and within 30 days Tehran has to clear out all the mines it laid in the waterway. In exchange, we lift the naval blockade – but only in proportion to shipping coming back online – and issue ‘some’ sanctions waivers so the oil can flow. That’s the half the market fell in love with… because that’s the half that takes the supply shock out of crude.

But here’s the half they conveniently ignored. The HARD stuff – the highly enriched uranium, the dismantling of the nuclear program – doesn’t get RESOLVED by signing this thing. It gets kicked INTO the 60-day window as the very first item to negotiate. And as you know, the two sides are at odds on this. Iran insists on its right to enrich at home; Trump wants the whole program torn down and the uranium destroyed. Sources say Iran has already said ‘no deal.’ And Bessent? He drew the line in the sand – NO broader sanctions relief until “Iranians agree that they have to turn over the highly enriched uranium.” Period, the end.

So, let’s call it what it is: this is oil for time. Iran gets to sell crude, and in return we get a 60-day truce and a pledge to discuss giving up the nukes. So, the thing that actually started the war – and the only thing that can end it – is the exact thing they punted into the negotiating window. And btw, it still needs Trump’s signature. Capisce?

On the other hand – the April PCE, the Fed’s preferred inflation gauge, came in at 3.8% y/y – the HOTTEST since 2023 and well above the famed 2% target. This is a worsening environment, not an improving one. We also got the second revision to 1Q GDP, and it got revised DOWN to a 1.6% annualized pace on softer investment and consumer spending. Again – that should suggest caution.

So, pause right there and sit with it for a second. We’ve got an ongoing conflict in the Middle East that is, at best, a stalemate. We’ve got cooling growth – which might argue for a rate cut – while inflation is re-accelerating, which argues for at least a rate hold, if not a hike. That is what the data shows. It’s not complicated, it is what it is. The culprit? Higher energy costs. And that is exactly what might keep Kevy Warsh backed into the corner. Remember – he’s an inflation hawk, and hotter inflation does NOT scream for a cut. It pushes those potential rate cuts (the ones we were all expecting as we started the year) further out, and maybe off the table for now – and the longer oil stays elevated, the more embedded inflation becomes, and the further out those cuts go.

A 3.8% PCE print into a Warsh Fed is not a backdrop for easy money. It’s a trap. And the ‘trap’ is that everyone’s watching the wrong thing. They’re fixated on the short end, waiting for the cut. But here’s what they’re missing: if Kevy cuts the fed funds rate to satisfy ‘someone,’ he will drain the balance sheet at the same time (he’s already said that – it’s not speculation) – and THAT keeps the long end elevated and financial conditions tight. The cut the market is cheering for doesn’t actually loosen anything. And that is the TRAP. And so – we wait.

Ok, so let’s look under the sheets and see which sectors carried the month of May. Tech is up 13.25% – for the MONTH! – way out in the lead. Then Consumer Discretionary +5%, Healthcare +4.75%, Communications +4.5%, Industrials +1.6%, Real Estate +0.9%, Consumer Staples +0.1%. The losers? Basic Materials -0.5%, Financials -1.25%, Energy -2%, and Utilities down 3.9%.

See the problem? Tech is up DOUBLE DIGITS while everything else is fighting for low single digits – and four sectors are flat-out underwater. Now go back to those two numbers I told you to hold: the Mag 7 added 318 points yesterday while the Transports BLED 142. That right there is your whole month in one line – a handful of mega-cap names dragging the averages to records while the cyclical, economically-sensitive stuff quietly rolls over. Even with the S&P at a record yesterday, only 249 of 503 names finished green. Snowflake’s +37% blowout reignited the AI trade after Wednesday’s cooling-off, and the index got lifted on the backs of a few giants. And here’s ANOTHER potential trap: breadth this thin at all-time highs is not a sign of strength – it’s a sign of concentration. And everybody loves concentration risk… right up until that same concentration risk bites you in the arse.

This morning oil is trading at $87.72 – down $1.20 – so that’s a positive. We’ve now broken through the first trendline at $91.25. The next one sits down at $80. My read: we stay between the two, with a bias toward declining as long as the negotiations continue in good faith. Any disruption to those talks, and oil bursts higher again. Fast.

Now let’s talk bonds for a minute, because they’re whispering something the stock guys are too busy celebrating to hear. Yields fell across the curve – the 2yr at 4.01%, the 10yr at 4.44%, the 30yr at 4.97% – and on the surface that’s the peace trade… oil rolls over, inflation fades, bonds rally. Fine. But bonds rallied on the SAME DAY we printed 3.8% PCE. A 4.44% 10yr against 3.8% inflation is a real yield of barely 60 basis points. That is NOT a bond market bracing for embedded inflation – if it truly believed inflation was a problem, the 10yr would be backing UP toward 4.75%. So right now, bonds are voting WITH the bulls, not against them.

But watch the SHAPE of the curve, not the level. IF the cuts actually start – and that’s a big IF – watch the long end. If Kevy trims the front and the 2yr comes down but the 10yr REFUSES to follow… that’s not easing, my friends. That’s the curve steepening, conditions staying tight – that’s ‘the TRAP’ again, showing up in a different asset.

And what’s gold up to? Because here’s the funny thing – it’s done basically NOTHING all month. May started around $4,545, and it’s trading near $4,539 today. Dead money. And yet – yesterday it jumped $50, and this morning it’s holding those gains… all while stocks tick new highs and the VIX sits at fresh lows. Risk-ON everywhere, and the world’s favorite ‘panic asset’ suddenly wakes up? Now, some of that is just the dollar – the peace headline crushed the greenback, and gold’s priced in dollars, so it gets a mechanical lift. But strip the dollar out, and there’s STILL a bid underneath.

So, here’s what I think. Gold isn’t buying it. Somebody out there is hedging the OTHER outcome – the one where the 60-day handshake falls apart, oil rips higher, and 3.8% inflation keeps eating their lunch. Bonds are voting with the bulls. But gold? Gold is quietly raising its hand at the back of the room, asking the one question nobody at the stock party wants to hear: what if this doesn’t hold?

European markets are ending the month on an up note…. Spain up 1%, while Germany is up 0.2%. Everyone else is somewhere in between.

US futures are higher…. Dow futures +110, S&P’s +10 pts, the Nasdaq +45 while the Russell is -2.

The S&P closed at 7,563 - up 43 pts. As noted it is month end and it is Friday and the cease fire deal is still alive! There is no real eco data to consider, nor are there any earnings either.

Momentum remains stretched. RSI’s across the indexes remain near or are kissing the overbot line and all that is – is a caution flag. And all that says is don’t get forced into making a decision – stick to the plan.

Remember — markets can stay overbought far longer than most people expect. But eventually they need to either pull back, rotate or simply consolidate to digest the move. That’s healthy. That’s normal.

Fettuccine alla pappalina

A favorite pasta in the Vatican. (Pappalina refers to the Pope)

For this you need – Fresh made Fettuccine, Peas (fresh or frozen), prosciutto, scallions, egg, fresh grated Pecorino Romano, s&p.

Begin by blanching the peas in a pot of salted boiling water…do not overcook – just blanche. Remove and set aside – do not throw the water out – we are using that for the pasta.

Slice the prosciutto into small pieces and then add to a sauté pan and allow it to crisp.

While that is happening – slice the scallions – using only the white and lite green part of the stem. Add to the sauté pan – when the prosciutto is crisp. Also add in the blanched peas with that ladle of water. Turn heat to low.

In a bowl – add the egg, season with s&p, scramble…. Now add pecorino and mix. It should be a bit pasty – not dry.

Now add the fettucine to the pot of water and cook for 3 mins if fresh or 8 mins or so if boxed.

When done, add the pasta and the egg mixture to the sauté pan and mix well. You should have a creamy delicious sauce…If you need to – add in a bit more of the pasta water to obtain the right consistency.

Serve immediately on warmed plates – make sure to top with the peas/prosciutto and always have extra cheese on the table.