In the coming week, investors will scrutinize new inflation data while closely monitoring the situation in the Middle East to gauge the potential scale of the conflict and its impact on energy supply disruptions. The military engagement between the United States, Israel, and Iran entered its seventh day on Friday, weighing on markets, with a sharp rise in oil prices being a primary driver of volatility across various assets. Following the escalation in the Middle East, U.S. stock markets experienced significant swings, leading the benchmark S&P 500 index to decline by 2% for the week. The Cboe Volatility Index, a closely watched gauge of investor anxiety on Wall Street, reached its highest level in nearly a year on Friday. Weaker-than-expected U.S. employment data on Friday also contributed to the stock market's challenges. The February report showed an unexpected decline in payrolls and an increase in the unemployment rate to 4.4%. Investors are balancing the historical tendency for stock market rebounds after major global events against the current uncertainty surrounding the Iran situation. How high could oil prices climb? A key focus for the market is the surge in energy prices resulting from the conflict and its implications for inflation and economic output. The hostilities have disrupted shipping through the Strait of Hormuz, a critical passageway for approximately one-fifth of global oil and liquefied natural gas supplies. Brent crude surpassed $90 per barrel on Friday, up from around $70 prior to the weekend attacks. Rising oil prices negatively impact the stock market outlook in several ways, including translating into higher gasoline prices, which can dampen consumer spending. Michael Arone, Chief Investment Strategist at State Street Global Advisors, stated that in the near term, oil price movements will be a "barometer for the performance of risk assets." He noted that oil breaching $100 per barrel would be a psychological milestone "that would cause more panic in the market." Despite the weekly decline, the S&P 500 remains just over 3% away from the record closing high it set in late January. Expectations for a solid economic backdrop and strong corporate earnings growth this year have supported equities, easing concerns about AI-driven disruptions and private credit. Dominic Pappalardo, Chief Multi-Asset Strategist at Morningstar Wealth, said, "Heading into next week, developments in the Middle East will truly influence all financial markets." Inflation Data: Is the Past a Prologue? Inflation data will also be a focal point for Wall Street. The Consumer Price Index (CPI) for February is scheduled for release on Wednesday, following a closely watched January report that came in below expectations. A Reuters survey indicates that the February CPI is expected to increase by 0.2% month-over-month. Investors suggest the market might discount any subdued report, as the data period almost entirely predates the Middle East conflict. However, a surprise surge in inflation could pose significant problems. Rising Inflation Could Threaten Rate Cuts Although the weak employment data on Friday somewhat revived expectations for monetary easing, investor concerns about energy-driven inflation have already led them to push back expectations for the Federal Reserve's next interest rate cut. Data from LSEG shows that market expectations for a Fed rate cut of at least 25 basis points at the June meeting stood at 45% by late Friday. Hopes for further policy easing this year, following the Fed's rate cuts last year aimed at supporting a softening labor market, have been a key factor supporting the bull market in stocks. Investors typically associate lower interest rates with rising prices for stocks and other assets.
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