Wall Street's three major indices concluded the week with significant losses, impacted by unexpected weakness in the U.S. labor market and escalating Middle East conflicts that pushed international oil prices above $90 per barrel.
Amid signs of a potential cooling in the U.S. economy, heightened geopolitical tensions in the Middle East are substantially increasing energy costs. This situation could constrain the Federal Reserve, complicating its path to interest rate cuts and reigniting concerns about a resurgence of inflationary pressures. With numerous uncertainties remaining unresolved, U.S. stocks are likely to maintain a volatile pattern in the coming week.
The Federal Reserve's Dilemma This week saw the release of several key U.S. data points, with the core focus being the February non-farm payrolls report. U.S. businesses unexpectedly cut 92,000 jobs last month, marking one of the largest monthly declines since the pandemic. Data for the previous two months was also revised downward by a total of 69,000 jobs, while the unemployment rate rose from 4.3% in January to 4.4%. Average hourly earnings increased by 0.4% month-over-month, surpassing the expected 0.3%.
On the positive side, the ISM Non-Manufacturing PMI recorded 56.1, its highest level in over three years. Weekly initial jobless claims remained low, and ADP private payroll figures exceeded expectations. The Atlanta Fed's updated GDPNow forecast significantly revised down first-quarter U.S. economic growth from 3.1% to 2.1%, a reduction of 1.0 percentage point.
A senior economist at Oxford Economics commented that while the January jobs report might have overstated any signs of labor market recovery, the February data similarly misrepresents a worsening situation. He analyzed that despite the sharp job decline last month, the average growth rate for private sector employment over the past three months remains positive. Furthermore, some job losses in February were attributed to one-time factors like healthcare worker strikes and weather, effects which are expected to reverse later. He anticipates that the unemployment rate will not begin a sustained increase from this point.
As the Federal Open Market Committee enters its blackout period ahead of the March meeting, the weak February jobs report has intensified disagreements among committee members regarding the monetary policy path. The Presidents of the Cleveland Fed and Boston Fed stated last week that the Fed should keep monetary policy unchanged "for some time" to seek evidence of cooling inflation. The President of the San Francisco Fed noted that despite weak February data, it should be analyzed in conjunction with the strong January figures, as a single month's data does not constitute a trend. Conversely, a Federal Reserve Governor reiterated that labor market conditions are deteriorating, arguing the February data proves the need for further rate cuts rather than adhering to a false inflation narrative.
U.S. Treasury yields jumped across the curve last week, with the 2-year and 10-year yields both rising approximately 18 basis points. The sell-off was primarily linked to soaring oil prices and their potential inflationary impact. Market expectations for Fed rate cuts in 2026 changed little, remaining at relatively moderate levels. The probability of a 25-basis-point cut in March held steady near 5% over the past week, while the probability for April edged up slightly from 20% to 23%, and for June increased from 57% to 60%.
The senior economist stated that the surprising February non-farm payrolls report does not immediately alter his judgment—that the labor market has at least stabilized, allowing the Fed to maintain its current monetary policy while assessing the economic impact of the Middle East conflict. He expects the Fed to implement two rate cuts this year, with the first occurring in June. "If the scale of military action remains limited, the impact of this event on U.S. GDP and inflation should be relatively mild, and the Fed might be able to overlook short-term fluctuations for now," he analyzed.
Market Volatility Likely to Persist As investors digested the Middle East situation, U.S. stocks trended downward for most of the past week. The Dow Jones Industrial Average recorded its worst performance in nearly a year.
Most sectors declined. According to data compiled by Finviz, the energy sector led gains, while the basic materials sector fell the most. The communication services and technology sectors were among the top three performers. Notably, over the past quarter, communication services and technology were among the worst-performing sectors.
Institutional analysis from Stifel noted: "The weaker-than-expected February jobs report increases uncertainty about the underlying labor market trend and will undoubtedly exacerbate divisions within the Fed. Simultaneously, while inflation has retreated significantly from its peak, it remains well above the Fed's 2% target, with upside risks from factors like further passthrough of tariff-related costs and recent overseas conflicts."
The Chief Investment Strategist at State Street Bank's investment management division stated, "We are inching closer to a scenario where oil prices reach $100 per barrel, which is triggering greater market volatility and anxiety." The CBOE Volatility Index, a closely watched gauge of investor fear, surged 25% late in the week, approaching the 30 level and closing at its highest point since April 2022.
Substantial capital outflows occurred as investors, worried about the Middle East situation and its potential impact on inflation and interest rate prospects, reduced their risk exposure. Data provided to a financial news outlet by LSEG Lipper showed investors net sold $21.92 billion in U.S. equity funds for the week, the largest weekly net selling since January 7. U.S. growth funds experienced outflows of $11.15 billion, the largest weekly outflow since December 17, 2025. Driven by safe-haven demand, money market funds saw net inflows expand to $22.51 billion for the week, an eight-week high.
Charles Schwab wrote in its market outlook that U.S. major indices faced pressure due to rising oil prices, market volatility, and Treasury yields driven by U.S.-Middle East dynamics. Additionally, the U.S. Treasury Secretary indicated that global tariff rates would increase from 10% to 15%, with U.S. tariff levels returning to their pre-Supreme Court ruling state by August. Concerns also persist on Wall Street regarding the发酵 of the private credit crisis.
Looking ahead to next week, the institution believes that while no one knows how long the Middle East conflict will last or how high oil prices will climb, the associated uncertainty is clear. Key market catalysts for the coming week include monthly inflation data and important corporate earnings reports. However, for now, the Middle East conflict and oil price trends will dominate trading logic. Recalling the oil price surge following the 2022 Russia-Ukraine conflict, equities eventually stabilized but only after a period of turbulence. Therefore, a gradual stabilization and rebound in stocks is likely only once oil prices hit a short-term peak, an event probably accompanied by signals of de-escalation in the Middle East. Predicting the exact timing remains challenging, as such external events and price shocks are difficult to forecast. The market is expected to maintain its volatile pattern next week.
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