in the coming week of how sprawling the war in the Middle East
will become and how much it will disrupt energy supplies, as
they chew over fresh inflation data.
A U.S.-Israeli campaign against Iran that entered its
seventh day on Friday was consuming markets, with a jump in oil
prices headlining volatility across assets.
U.S. stocks swung sharply following the Middle East escalation,
leaving the benchmark S&P 500 down 2 per cent for the week. The
Cboe Volatility Index, Wall Street’s most-watched gauge
of investor anxiety, on Friday hit its highest level in nearly a
year.
Compounding woes for stocks was Friday’s weak U.S. jobs
report. The data for February showed a surprise drop in payrolls
and the unemployment rate rising to 4.4 per cent.
Investors were balancing the historic tendency for equities
to rebound in the wake of major global developments against a
lack of clarity about the Iran situation.
“This is a very big event and it seems incredibly uncertain
where it’s headed,” said Rick Meckler, partner at Cherry Lane
Investments. “To some extent, it’s left investors as neither
sellers nor buyers.”
How high will oil prices go?
One focal point for markets was the surge in energy prices
stemming from the conflict and its significance for inflation
and economic output. The fighting has paralyzed shipping through
the Strait of Hormuz, a key artery for around a fifth of the
world’s oil and liquefied natural gas supply.
Brent crude on Friday topped $90 a barrel, up from
$70 before the weekend strikes. Higher oil prices can dampen the
outlook for equities in several ways, including by translating
into higher gasoline prices that weaken consumer spending.
In the near term, Michael Arone, chief investment strategist
at State Street Investment Management, said changes in oil
prices will be “a good barometer for whether risk assets will do
well or they will do poorly.” Oil breaching $100 a barrel, he
said, would be a psychological milestone that “would spook
markets more.”
Even with the weekly decline, the S&P 500 remained just over 3 per cent
from its all-time closing high set in late January.
Expectations of a solid economic backdrop and strong corporate
earnings growth this year have supported stocks, countering
worries about artificial-intelligence-driven disruptions and
private credit.
Heading into next week, “developments in the Middle East
will move really all financial markets,” said Dominic
Pappalardo, chief multi-asset strategist for Morningstar Wealth.
Is the past a prologue with inflation data?
Inflation data will also be in Wall Street’s spotlight. The
consumer price index for February is due on Wednesday, following
a cooler-than-expected January report for the closely watched
inflation measure.
CPI for February is expected to show a 0.2 per cent increase on a
monthly basis, according to a Reuters poll. Investors said
markets may discount any report that is tame, because it covers
a period almost entirely before the Middle East conflict. But a
surprise spike in inflation could be particularly problematic.
“If we get upside surprises to the inflation data next week,
that could further fuel fears about inflation expectations
rising and that would be bad for markets,” Arone said. “The
concern is that higher oil prices will only feed into higher
inflation dynamics going forward.”
Higher inflation could threaten rate cuts
Such worries about energy-induced higher inflation have
contributed to investors pushing back their estimate for the
Federal Reserve’s next interest-rate cut, although the weak jobs
data on Friday revived easing expectations somewhat.
Market-based expectations for a cut of at least 25 basis
points at the Fed’s June meeting stood at 45 per cent late on Friday,
according to LSEG data.
After the central bank lowered rates last year to shore up a
weakening labor market, hopes for further easing this year of
about two standard quarter-percentage-point cuts have been a
crucial part of the bull case for stocks. Investors generally
associate lower interest rates with higher prices for stocks and
other assets.
“If we continue to see increasing energy prices sparking
inflation concerns, it will be much more difficult for the Fed
to implement those two forecast rate cuts in 2026,” Pappalardo
said.
Published on March 7, 2026