The image captures rising stock indices, falling international oil prices, and the trends of the US Federal Reserve and Treasury yields against the backdrop of the New York financial market and a world map. It illustrates that while oil prices have declined due to expectations of an end to the US-Iran conflict, the burden of US interest rates remains a key market variable. [Photo=Hanmi Daily Graphic]

War Premium Has Dissipated, But Rate Warning Light Remains

Last week, Money Radar's checkpoints were three-fold:

Whether US-Iran peace negotiations would lead to an actual agreement, whether international oil prices would fall enough to ease inflationary pressures, and whether US 10-year Treasury yields would exceed 4.5% and continue to rise.

The outcome was a partial resolution.

As the US and Iran signed a memorandum of understanding for peace and normalization of passage through the Strait of Hormuz became visible, WTI dropped by 9.8% from $84.88 to $76.60. The risk premium on energy prices, inflated by the conflict, rapidly dissipated.

The theme for this week's trend is "Deconstruction of the War Premium and Persistence of the Rate Premium."

This week, Money Radar has one question:

"If oil prices have fallen, has the burden of interest rates that was weighing down the stock market also disappeared?"

Judging by prices alone, the market chose risk mitigation. The S&P 500 rose by 0.9% weekly, the Nasdaq by 2.4%, and the Dow Jones by 0.7%. The VIX also decreased from 17.68 to 16.40. Although the US stock market was only open for four trading days due to the Juneteenth holiday on the 19th, it managed to sustain its weekly gains solely on the easing of the conflict and strength in semiconductors.

However, the signals from the bond market were different.

US 10-year yields fell by 3 basis points from 4.48% to 4.45%, while 2-year yields rose by 10 basis points from 4.08% to 4.18%.

The decline in long-term yields was influenced by falling oil prices, while the rise in short-term yields reflected the possibility of further interest rate hikes by the Federal Reserve. Consequently, the yield difference between the 10-year and 2-year maturities narrowed significantly from 39.8 basis points to 27.7 basis points.

At the FOMC meeting, chaired for the first time by Chair Jerome Powell, the benchmark interest rate was held steady. However, the median projection for the policy rate by the end of the year was raised from 3.4% to 3.8%. The projection for core personal consumption expenditures (PCE) inflation in 2026 also increased from 2.7% to 3.3%.

This implies that even if oil prices fall, the Fed may still raise rates if service prices, wages, and tariff costs remain elevated.

The dollar also reflected this. The dollar index rose by 1.1% weekly, and the dollar-won exchange rate increased by 1.5% from 1517.22 won to 1540.47 won.

The fact that risk assets rallied while the dollar also strengthened suggests that this rally was not predicated on monetary easing.

The conclusion in one sentence is as follows:

"The oil price shock caused by the war has subsided, but the interest rate shock stemming from a strong economy and high inflation has not yet ended."

Next Week's Checkpoints Are Three-Fold

First, the US May Personal Consumption Expenditures (PCE) price index, due on the 25th. If core PCE rises again, the warning of interest rate hikes from this FOMC could solidify into an actual policy path.

Second, the actual transit volume through the Strait of Hormuz. More important than the 60-day toll exemption are the clearing of mines and the normalization of insurance premiums. If shipping operations do not normalize, oil prices could once again incorporate a geopolitical premium.

Third, US 2-year Treasury yields. If 2-year yields rise faster than 10-year yields, the stock market will reflect the possibility of immediate tightening more significantly than expectations of long-term growth.

※ This article is informational content that analyzes publicly available market data and is not an investment recommendation for any specific financial product.