Markets ended the week lower, with the S&P 500 suffering its worst week since October, as events in the Middle East continued to unfold. The selloff was further exacerbated by the weak February jobs report which, combined with higher energy prices, reignited stagflation concerns. With few signs of a let up in the Middle East fighting, oil prices jumped 36%, their largest weekly increase on record. In the US, according to AAA, the national average for a gallon of unleaded gasoline rose from $2.98 to $3.32. Though geopolitical events often have a fleeting impact on markets, the current conflict has the potential to be different due to the significant supply of energy products that move through the Straits of Hormuz, which Iran has effectively closed. Should the fighting conclude relatively soon, and energy prices return to prior levels, the economic impact will be limited. However, should the fighting drag on, and energy prices remain elevated for an extended period, that could put upward pressure on inflation, a concern for both consumers and the Federal Reserve.
The specter of higher inflation and weaker labor markets, as suggested by the February employment report, leaves the Fed in a difficult position regarding its dual mandate of price stability and maximizing employment. For now, markets seem to think the potential for higher inflation is the Fed’s greater concern. Prior to the outbreak of fighting, markets were pricing in a 57% chance of a June rate cut, and 44% chance of three rate cuts by year end. By Friday, the odds of a June rate cut had fallen to 33%, and the odds of three rate cut by year end had dropped to 17%.
Concerns about the private credit industry continued to swirl, after BlackRock announced it is limiting client redemptions in one of its largest private credit funds to 5%, despite aggregate shareholder requests of 9.3%.
