Weekly Research Briefing: A Return to Persia

1. Did the US ‘finish the job’?

2. How will Tehran respond?

3. What are the chances of regime change in Iran?

Iran Has Three Options Now. Two Are Terrible. Will the Tehran government “go big” and close the Strait of Hormuz?

Given the apparent success of US strikes on the heart of the nuclear program in Fordow, Natanz and Isfahan, Iran’s leaders need a new game plan to restore their status as a regional power, if not their former glory. What are their options, and what will they likely choose from a diminished set of choices?

In the press conference, Powell said four times that monetary policy is in a “good place.” While he acknowledged the favorable recent inflation news, he also made it clear that he still expects to see meaningful further tariff effects on consumer prices over the summer. We likewise expect a sizeable further tariff effect that is only partially offset by other disinflationary forces, and we have a slightly higher end-2025 core PCE inflation forecast than the median FOMC participant.

In part for this reason, we continue to expect just one cut this year in December followed by two more in 2026 to a terminal rate of 3.5-3.75%. While an earlier cut is possible, we continue to expect that the peak tariff effects on monthly inflation will show up over the summer and that FOMC participants will want a bit more distance from them before they resume rate cuts.

@ernietedeschi: Change in the FOMC Summary of Economic Projections, March to June 2025

Fed's Barkin: There is nothing urgent in the data warranting a rate cut at this point.

"The job market and consumption are holding up. Firms say they expect to raise prices later in the year as more expensive imported goods work into their inventories. We can't ignore a spike in inflation if it comes, price indexes are still above target."

Fed governor Chris Waller continues to stake out the most dovish position among his colleagues on the FOMC.

"I’m all in favor of saying maybe we should start thinking about cutting the policy rate at the next meeting, because we don’t want to wait till the job market tanks before we start cutting the policy rate.”

Waller hints at the committee dynamic—there isn't support for a July cut on the FOMC given current data. Which raises a question: Is he setting up to dissent in favor of a cut in July? Among those who want to be considered as Fed chair, Waller has arguably presented so far the most intellectually rigorous case for cutting rates.

Fed governor Miki Bowman signals she could support a July rate cut.

“Should inflation pressures remain contained, I would support lowering the policy rate as soon as our next meeting in order to bring it closer to its neutral setting and to sustain a healthy labor market.”

Bowman had been very focused on inflation risks through last year. She says she sees tariffs as likely to present a “small and one-off increase” in prices because she expects increased economic slack this year.

She describes the labor market as solid and near estimates of full employment. But cites evidence of fragility (reduced labor-market dynamism, slower economic growth, and a narrow concentration of job gains) warranting that the Fed put “more weight on downside risks to our employment mandate going forward.”

@RickPalaciosJr: Rough week for housing so far. The main theme across our housing coverage lately (homebuilders & existing home market) is that the for-sale housing slowdown is spreading geographically. Showed up clearly in this month’s homebuilder and resale agent surveys, along with hard data.

"The home furnishings industry continues to navigate a challenging environment driven by persistent softness in the housing market, higher mortgage rates and declining consumer sentiment. Existing home sales remain well below pre-pandemic levels and the sharp rise in borrowing cost has dampened housing mobility, which traditionally fuels furniture demand." – Hooker Furnishings CEO Jeremy Hoff

@KevRGordon: Restaurant & bar retail sales down by -0.9% in May ... worst since February 2023.

@KevRGordon: Another weak print for the Philly Fed Manufacturing Index in June ... headline unchanged at -4; new orders slipped; workweek back in contraction; employment at its lowest since May 2020.

Investor confidence in Germany’s economy improved more than anticipated as a forthcoming surge in public spending outweighs fears over looming US tariffs.

An expectations index by the ZEW institute increased to 47.5 in June from 25.2. the previous month. That’s way above the 35 median estimate in a Bloomberg survey. A measure of current conditions also gained.

The outcome “seems to strengthen the assessment that the fiscal policy measures announced by the new German government can provide a boost to the economy,” ZEW President Achim Wambach said Tuesday in a statement. “Combined with the recent interest-rate cuts by the European Central Bank, this could bring economic stagnation in Germany, which has lasted for almost three years, to an end.”

@lisaabramowicz1: Investors are the most underweight US dollar in 20 years: Bank of America Global Fund Manager Survey for June

"Evercore is most skewed to large-cap deals among our coverage and should benefit most from a more transparent and predictable antitrust approach. More than 30% of 2017–2019 deal revenues were skewed to deals over $5 billion in value, and over 70% to deals over $1 billion. In 2021, EVR’s skew to $5 billion-plus deals was over 40% and $1 billion-plus over 80%, highlighting EVR’s ability to partake in large deals when such deals rebound. This year, EVR advised on three of the top six mergers."

"At our US Financials Conference, Moelis struck an optimistic tone on the deal backlog, with the environment potentially moving back towards where initial expectations were at the start of the year. Moelis' deal pipeline is up versus April and sitting at record levels. Rate cuts would be beneficial but not a contingency point for the pipeline to convert."

Amazon.com Inc. is ordering some corporate employees to move closer to their managers and teams, roiling a workforce already worried about job cuts and warnings from the top that artificial intelligence will shrink their ranks in the coming years.

Workers are being told to relocate to such cities as Seattle; Arlington, Virginia; and Washington DC, which in some cases would require them to move across the country, according to people familiar with the situation. Amazon is mostly rolling out the mandate in one-on-one meetings and town halls rather than sending out a mass email, said the people, who requested anonymity because they aren’t authorized to discuss company plans…

One employee said their manager informed the team of the need to relocate and told them they had 30 days to make a decision. Then they had 60 days to either resign or begin their relocation process, according to the person, who said they were told there would be no severance for employees who resigned in lieu of relocating.

HSBC Holdings Plc is forecasting hundreds of millions in extra real estate costs as it considers asking more of its employees to return to the office, potentially hindering the bank in its bid to find $1.5 billion in annual cost savings.

Chief Executive Officer Georges Elhedery will have to make a series of decisions in the coming weeks over whether to acquire more desk space for the lender’s staff in London, Bangalore, Hyderabad and Guangzhou, people familiar with the matter said, asking not to be identified discussing internal deliberations. Securing the required space to support a return to three days a week in those cities would cost around $200 million a year, one of the people said…

Europe’s largest financial group is already facing a potential 7,700-desk shortfall when it moves to a new headquarters in the City of London. It also needs to square up to the challenge of finding more space for its employees in India and China…

Failure to acquire the additional capacity would mean HSBC’s return-to-office mandate could be dead on arrival, with thousands of staff unable to find desk space at the bank’s buildings.

Conversions of office space into apartments held an obvious appeal. But the cost of acquiring an office building and addressing structural obstacles made these conversions too expensive to work in most cases.

Analysts had expected the office glut to take many years to shrink, not unlike the decade-plus it took for many U.S. cities to work off their excess of retail properties after e-commerce ascended.

Now, the pace of office conversions is picking up, thanks to the rapidly falling prices of obsolete office buildings, changes to zoning rules that allow for more residential construction, and government incentives that help bring down costs. At the same time, more companies are summoning their employees back to the office after years of tolerating remote work, sparking new demand for workspace.

The acceleration of office conversions won’t sharply reduce the overall supply of office buildings any time soon. But conversions are already starting to benefit neighborhoods where they take place. By bringing in new residents, these projects are restoring street life, shopping and entertainment venues where obsolete office buildings used to stand.

It is transformational,” said Jessica Morin, the head of U.S. office research for CBRE Group.