Analysis of the Iran Deal/MOU; Watching for a Change at the Fed

By Victor Sperandeo with the Curmudgeon

 

Introduction:

Last week, the PPI and CPI came in hotter than expected amidst a lot of Trump talk about opening the Strait of Hormuz. 

This weekend, it's about Iran and the U.S. signing a Memorandum of Understanding (MOU) to ultimately end the U.S.-Iran war. 

On Wednesday, at the end of the FOMC meeting, we'll hear from new Federal Reserve Board Chair Kevin Warsh about possible new Fed policies.

We'll review all of those and more in this article with our incisive geopolitical analysis and impact on the markets.

Week in Review:

The Producer Price Index (PPI) for final demand shot up in May to 6.5% year-over-year. While a large portion of these rapid increases continue to be driven by higher oil prices, impacts of broadening price pressures are being felt well beyond the energy sector.

This hot PPI print came on the heels of a higher-than-expected Consumer Price Index (CPI) release earlier this week where the CPI increased by 4.2% year-over-year. These reports are especially troublesome when viewed together as rising PPI typically leads increases in CPI. This is because higher costs throughout the supply chain are historically passed down to the consumer. That was certainly true in 2021 and 2022.

High inflation pinches consumers who may likely decrease spending, which would lower GDP. It also forces the Fed to reevaluate their timeline for rate cuts (and even puts rate hikes on the table) – keeping borrowing costs elevated.

The National Federation of Independent Businesses (NFIB) Small Businesses Optimism Index ticked down from 95.9 to 95.3 which is another sign of a weakening U.S. economy.  Concerns among business owners were concentrated around the labor market and rising prices.

The European Central Bank (ECB) raised its deposit facility interest rate by 25 bps to 2.5%.  The Bank of Canada kept its policy rate unchanged at 2.25%.

Talk the Talk: the "Deal with Iran"???

A great deal of talk about an “Iran deal" was the market mover late last week.  President Trump kept stressing that he would attack Iran hard, unless they signed the deal he wanted. There were strong threats of “taking Kharg Island," where Iran has its primary oil facilities.

That could be done, but at what cost in blood and lives? Victor suggests a 50% casualty rate, as there is no place to hide once ground troops get there. Trump was 100% bluffing, as many marines and sailors dying before an election would be out of the question.

Trump “TACO'd” (Trump Always Chickens Out) at the last minute, which-caused a huge rally in equity markets. He claimed there was a “deal pending and ready to be signed.”  

However, no deal or MOU has been signed as of Sunday, June 14th.  Instead, Israel attacked a Hezbollah command center in southern Beirut, Lebanon while Iran officials said the MOU signing would NOT occur on Sunday, June 14th.


Victor on any U.S.-Iran MOU:

Victor counts the potential MOU as the "39th Iran peace deal."  However, Trump must end the conflict now as his polls and the GOPs are sinking into the abyss, as deep as the Mariana Trench (the deepest part of the world's ocean).

Meanwhile, no one knows the terms of the potential U.S.-Iran deal or the non-binding MOU [1.] that outlines the terms and conditions.

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Note 1.  A Memorandum of Understanding (MOU) is a written document that establishes a shared understanding between parties about their intended actions, responsibilities, and goals without creating a legally enforceable contract. MOUs are commonly used in business deals, government collaborations, international relations, and organizational partnerships to clarify expectations and define the scope of cooperation before formal contracts are drafted.

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Victor, among others, does not believe the deal (whatever it is) will have any legal meaning to the signed terms. What will be signed, if anything, is temporary, and can or will be changed. However, Trump is trapped and this is a way out.

Curmudgeon's Assessment of any "Deal":

Even in the event that a U.S.–Iran agreement succeeds in halting active hostilities; such an outcome is unlikely to resolve the underlying sources of conflict without a fundamental shift in the strategic orientation of the Islamic Republic.

The challenge is structural: the Iran regime’s political identity and internal legitimacy remain closely tied to an Islamic revisionist regional agenda, limiting the durability of any true de-escalation of the conflict. That posture sustains a persistent misalignment with Israel’s security imperatives, reflected in ongoing confrontations involving Hezbollah in Lebanon and broader efforts to counter Iranian influence across Iraq and Yemen, as shown in the map below.


Authority in Iran has shifted decisively toward the Islamic Revolutionary Guard Corps (IRGC), despite the absence of a formal change in the structure of the regime. This consolidation of power has been enabled by the fact that the state is operating under sustained military attacks and increasingly perceives itself to be fighting for its very survival.

Yet even under this apparent centralization, IRGC decision-making remains internally fragmented and constrained by the need to balance competing clerical, political and regular military centers of power, thereby weakening Tehran’s coherence at the negotiating table with the U.S. via Pakistan and Qatar.

Tensions between the U.S. and Iran continue to pose a material risk to global markets, even if diplomacy ultimately limits the conflict to a temporary ceasefire. For investors, the key issue is not only the risk of further military escalation, but also the possibility that any agreement could relieve pressure on Tehran without materially constraining its ability to project power.

And that is the central market concern: sanctions relief or other financial concessions could strengthen Iran’s coercive leverage in the Gulf, raising the probability of renewed instability in a region critical to energy flows and shipping routes.

Reuters reported on June 10th that President Trump said Iran had “taken too long to negotiate” and would “have to pay the price,” after U.S. strikes on Iranian air defenses, radar, and drone-control sites in response to prior attacks around the Strait of Hormuz. Earlier, Reuters noted that oil prices rose on renewed geopolitical risk, reflecting investor sensitivity to any threat to Gulf supply or maritime transit.

Iran’s internal discussions add another layer of uncertainty. The Islamic Republic's leadership may view partial compromise as necessary to preserve the regime and reduce economic stress, but it cannot afford to appear capitulated domestically. That creates incentives for calibrated escalation, including missile launches or proxy activity, aimed at signaling resolve while retaining negotiating leverage.

For markets, higher oil prices would increase inflation expectations, pressure transportation and industrial margins. It would likely support short-term strength in energy equities, defense companies and select commodities. At the same time, broader risk assets could face volatility if investors begin to price in a more prolonged conflict or a disruption to Hormuz-linked shipping and insurance costs.

The bottom line is that even a negotiated pause would not eliminate the structural risk premium tied to Iran. Unless any deal constrains Tehran’s regional reach as well as its nuclear and military presence, investors should expect recurring volatility in crude oil, regional infrastructure assets, defense stocks, and global inflation-sensitive sectors.    

Energy and U.S. Treasury Note Market Review:

The July Crude Oil Futures declined -11.6% in seven trading days from JUNE 3rd -to- JUNE 12th.  Meanwhile, July Heating Oil futures declined by -11.46% during the same period. 

Heating oil, diesel and jet fuel are all derived from crude oil.  They are all critical for industrial use. Thereby, it will be interesting to see Trump’s terms, that he will claim as a win on this "non-deal" with Iran.

It should be noted, that despite a -11+% decline in oil futures prices, U.S. debt yields- from 3-months to 10 years did NOT decline as one would expect.

·        The 2-year yield went up from 4.08% to 4.09%.

·        The 5-year yield went from 4.21% to 4.208% (basically flat).

·        The 10-year yield went down 1 bps from 4.49% to 4.48%.

Inflation Views:

The leaders of today sell the notion that the CPI is the definition of INFLATION, and this is the belief of the public. People like me, who learned reality in the 1960’s and 70’s from the Austrians and Monetarists are exceedingly rare today.

We believe that money supply growth above production causes inflation, not a SUBJECTIVE index, manufactured and run by government bureaucrats (e.g. BLS) for political purposes.

A Change is Coming at the Fed:

New Fed Chairman Kevin Warsh is expected by many, including Victor, to announce a lowering of the FED's balance sheet, which could lead to lower Fed Funds rates. Victor was a strong believer he would lower rates 25-50 bps, but the politics of the current oil price rise, due to the Iran war, will most likely delay the cut till the July 28-29th FOMC meeting. Should oil prices decline substantially, Victor opines that a 25-bps rate cut is in the cards!

The real issue will be a major economic slowdown after July, so although Warsh will almost certainly say the balance sheet will decline, as he does not have the votes yet to cut rates (mostly because the Supreme Court has delayed its vote on whether Lisa Cook can be fired or remains in the FED's kingdom). I should emphasize that nothing in any law makes the FED INDEPENDENT. That is merely a claim as members continue to be influenced by their political views.

If the MOU is signed, then Chairman Warsh might have the cover to promote a Fed Funds rate cut of 25%.  However, that only has a 2.6% probability today, based on the CME Fed Watch Tool.

It will be of great interest what Warsh might say about changes away from Neo-Keynesian economics to the real world of monetarism as per Milton Friedman.

News Flash -Trump says a "deal" with Iran has been reached:

 

“The Deal with the Islamic Republic of Iran is now complete,” Trump wrote Sunday on Truth Social. “Congratulations to all! I hereby fully authorize the toll-free opening of the Strait of Hormuz, and, simultaneously herewith, authorize the immediate removal of the United States Naval blockade. Ships of the World, start your engines. Let the oil flow!”

 

Pakistani Prime Minister Shehbaz Sharif, whose country has helped mediate talks, said a deal was reached and there will be an official signing ceremony in Geneva, Switzerland on Friday.  "Both sides have declared the immediate and permanent termination of military operations on all fronts, including in Lebanon," he said, adding that mediators this week will facilitate meetings to "lay the foundation for the technical talks."

 

It’s not yet clear whether the deal includes an agreement for Iran to abandon its nuclear program and allow its enriched uranium to be removed from the country, as Trump has demanded. In reality, nothing will be known about this "deal" till the Friday signing, if it actually occurs.

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End Quote:

The current U.S. president should ponder this wisdom:

"Pride goes before a fall" is a proverb warning that arrogance and overconfidence often lead to failure or disaster.

Meaning and Interpretation: The phrase originates from Proverbs 16:18 in the Bible (King James Version): "Pride goeth before destruction, and an haughty spirit before a fall." It conveys that excessive pride or arrogance sets the stage for one’s downfall, whether through moral failure, poor judgment, or external consequences. In this context, "fall" refers not just to minor setbacks but to significant ruin or calamity, often as a result of ignoring wisdom or divine guidance.

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Wishing you good health, success and good luck. Till next time....


The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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