Surging oil prices and job losses raise stagflation risk

Summary

Last week in markets

Equity markets were choppy, with the S&P 500 and Nasdaq lagging as investors rotated out of technology and software. The move was driven in part by a fresh wave of research suggesting artificial intelligence could displace more white-collar roles than previously expected, with some forecasts pointing to longer-term structural unemployment risk.

For the week, the S&P 500 fell 2.0%, and the 10-year Treasury yield rose 18 basis points to 4.15%.

Labor market contraction

The U.S. labor market surprised to the downside. The BLS reported a loss of 92,000 jobs in February, versus expectations for a 50,000 job gain, and it followed downward revisions to December and January. The unemployment rate edged up to 4.4%.

Job losses were broad-based, including notable declines in healthcare, manufacturing, and construction. Weakness in construction was partly attributed to severe winter weather.

U.S.-Israel-Iran conflict escalation

The macro backdrop darkened further as conflict between the U.S., Israel, and Iran escalated. After strikes targeting Iranian leadership, retaliatory threats led to the practical closure of the Strait of Hormuz, a critical route for roughly 20% of global oil and liquefied natural gas flows.

Markets responded quickly. Oil moved above $100 per barrel over the weekend for the first time in more than three and a half years, while domestic gasoline prices jumped more than 30 cents per gallon over the week. The surge in energy costs adds a new cost-push inflation risk, complicating the outlook for consumer demand and business operating expenses.

The Fed’s nightmare

A softer labor market alongside rising, energy-driven inflation is a difficult mix for the Federal Reserve. With the March 17 to 18 FOMC meeting approaching, policymakers face a narrow path: cutting rates could help support employment, but easing too soon could also reignite inflation pressures.

Markets largely expect the Fed to hold the benchmark rate at 3.5% to 3.75% this month. Expectations for a June cut moved within the 40% to 50% range over the past month. Meanwhile, Kevin Warsh was formally nominated to succeed Jerome Powell as Fed chair.

The week ahead

This week’s inflation and activity data will be closely watched as key inputs ahead of the March 17 to 18 FOMC meeting. Wednesday’s February CPI report is the focal point, with particular attention on whether the jump in energy prices is starting to flow into broader core services inflation. Thursday’s PPI report will add perspective on upstream price pressures and the input-cost environment for manufacturers, especially amid ongoing shipping disruptions.

Labor market data will also remain front and center after February’s surprise job losses. Investors will look to JOLTS and weekly jobless claims for evidence of additional softening or signs that hiring dynamics are shifting more structurally. Friday brings the second estimate of fourth-quarter GDP, which is expected to confirm moderate growth, along with the preliminary March University of Michigan Consumer Sentiment index, an important read on how households are responding to higher gasoline prices and geopolitical uncertainty.

While the Fed enters its traditional blackout period later in the week, early-week remarks from officials including New York Fed President John Williams and Governor Christopher Waller will be parsed for signals. Markets will listen for whether policymakers are placing more weight on labor market fragility or on the inflation risks tied to Middle East developments. With equities already in a defensive rotation, the coming week’s data will help determine whether the AI-driven repositioning deepens or whether a clearer path toward potential June rate cuts can steady the Nasdaq and S&P 500.