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Three months into the Iran-Israel conflict, markets have stopped treating it as breaking news and started treating it as the new wallpaper. Brent oil chopped between US$94 and US$98 a barrel last week as the latest Israel-Lebanon ceasefire wobbled, Hezbollah rejected the framework, and an Iranian oil tanker was hit in the Gulf. The Strait of Hormuz remains closed. The "rolling three weeks until resolution" narrative is now in its fourth month, and a long tail of higher input costs is feeding quietly into producer prices around the world.

Despite all that, US risk assets pushed to fresh highs. The standout was Friday's May payrolls report, which added 172,000 jobs against a consensus of 88,000, with another 93,000 of upward revisions to prior months. Unemployment held at 4.3%, ISM services jumped to 54.5, and JOLTS (Job Openings and Labor Turnover Survey) openings hit a two-year high. Strikingly, futures now price a 25 basis-point Fed rate hike by year-end — a remarkable flip from cut-pricing only weeks ago. Incoming Chair Kevin Warsh inherits a stagflation-lite dilemma: above-target inflation, a labour market that refuses to crack, and an oil shock that may not fully wash through until late 2026.

US equity leadership remains uncomfortably narrow. AI capex — roughly US$700 billion from the hyperscalers alone — is doing the heavy lifting for both GDP and the S&P. SpaceX's expected 12 June listing could be twice the size of any IPO in history and triggers near-immediate forced buying from passive funds. Market strategists are starting to flag frothy sentiment verging on outright euphoria — a market still climbing, but on fewer shoulders. Real wages have now contracted for two consecutive months, and the K-shaped consumer story is also becoming harder to ignore.

Closer to home

Australia's Q1 GDP came in soft at 0.3% q/q (annual 2.5%), shy of the RBA's May forecast track. The headline was distorted by a 2.1% surge in imports as data-centre equipment landed onshore — flattering business investment (+5.6%) but dragging net exports by 0.8 percentage points and tipping the trade balance into deficit for the first time since 2017. Household consumption rose 0.5%, but stripping out the unwind of electricity subsidies, the underlying figure is closer to 0.2% — with most of that spent on essentials, not discretionary.

The RBA is in an unusually awkward position. Governor Bullock's Senate testimony described a "moderate impact on growth" and saw no wage-price spiral, yet RBA Board member Ian Harper used his first public address in his new role to warn that long-term inflation expectations are becoming unanchored. Market pricing for an August hike has moved up to around 45% even though Sydney house prices fell 0.9% and Melbourne 0.8% in May, the first time in memory that rate hikes and a significant investor-tax change are biting together. The ECB is 99% priced to hike this week, and the Bank of Japan looks set to follow in June.

What it means 

The single most useful message this week is that the easing bias is gone, globally. Australian advisers should be preparing variable-rate borrowers for the possibility (not certainty) of another hike, reviewing equity concentration in any portfolio leaning heavily on US mega-caps, and reminding clients that diversification — including recently unpopular themes like healthcare and international ex-US — might be needed if the rider were to change. In this week’s What We Are Working on segment we discuss the areas in the Australian market that have been under pressure but might be exhibiting higher than average long-term expected returns as a result.  The AUD around 71.4 US cents reflects the same uncertainty: not a green light, not a warning, but a reminder that the next move is genuinely two-sided.