Summary
Highlights
The market is experiencing a wave of optimism driven by a US-Iran peace framework, leading to a projected reopening of the Strait of Hormuz and a drop in oil prices. Adding to the excitement, SpaceX made its public debut as the largest IPO in history, and the New York Knicks won the NBA championship, creating a celebratory atmosphere on Wall Street. This has led to expectations of lower oil prices, reduced inflation, and impending rate cuts, suggesting a 'soft landing' for the economy.
Despite the market's celebratory mood, a critical overlooked data point from the Bureau of Labor Statistics' May 2026 Producer Price Index report indicates that 'Stage 1 intermediate demand' rose 12.3% over 12 months, the largest increase since June 2022. This represents the raw and semi-processed inputs at the very beginning of the manufacturing supply chain. In May alone, it jumped 3.2%, a record single-month move since tracking began in 2009. This significant cost increase at the foundational level suggests inflationary pressures are still moving through the economy.
The increase in Stage 1 intermediate demand means that higher costs for industrial chemicals, diesel fuel, and other raw materials were absorbed by businesses in Q2. These costs are already embedded in contracts, inventory valuations, and company cost structures. A recent peace deal or other positive news cannot retroactively reverse these incurred expenses. The market's current celebration feels like ignoring the 'floor full of product' already manufactured and priced at peak input costs, which will ultimately reflect in upcoming Q2 earnings.
The speaker advises watching three key things: first, the 'FOMO' (fear of missing out) driven relief rally, as emotional market surges don't change economic realities or reverse locked-in costs. Second, scrutinize the details of the peace deal, which currently appears to be a narrow framework with ongoing contentions (like Iran imposing a service fee for strait passage) and unresolved sensitive nuclear issues, meaning it may not significantly alter the cost curve backward. Third, observe the bond market, which has not drastically lowered its inflation expectations despite the news, indicating that seasoned investors recognize the persistent inflationary pressures that Fed chair Kevin Walsh (attending his first FOMC meeting) will be facing, especially with the 6.5% PPI and record Stage 1 intermediate demand.
While the peace framework is genuinely good news for regional and global stability and will likely contribute to easing oil and shipping costs long-term, 'eventually' is not a Q2 earnings call. The 'conveyor belt' of cost spikes is still running, meaning the products already made at high input costs are on their way to Q2 income statements. Investors should consider the 12.3% 12-month upstream price spike that is already 'baked in' before making new investments, as positive sentiment alone will not negate these fundamental financial realities.