Stagflation Watch: Oil Shock Meets a Weakening US Labour Market

The conflict in the Middle East entered its second week with the Strait of Hormuz effectively shut to commercial tanker traffic. 

WTI crude witnessed a 35.6% weekly gain, the largest in the history of the futures contract,  settling at $90.90 on Friday, 6 March.  On the same day, the US Bureau of Labour Statistics reported that nonfarm payrolls fell by 92,000 in February, against expectations of a 59,000 gain. 

The combination of a supply-side energy shock and a weakened labour market has brought stagflation back into focus for traders across asset classes.

Here’s what traders may want to know about the uncertain week ahead:

TL;DR

• Supply-Side Shock: WTI and Brent surged sharply as the Strait of Hormuz blockade halted global energy transit.

• Labour Market Crack: February NFP unexpectedly contracted (-92,000 jobs), bringing stagflation fears to the forefront.

• Data Focus: This week’s upcoming US CPI (Wednesday) and Core PCE (Friday) are this week's defining macroeconomic events.

• Central Bank Outlook: The Fed is widely expected to hold rates in its March meeting, though Governor Waller has left the door open for shifts depending on the data.

• Oil has surged above $100 a barrel on supply fears (for the first time in four years).

How the Middle East Tensions Are Affecting the Energy Market

The Strait of Hormuz disruption is the dominant market driver. Iran's Islamic Revolutionary Guard Corps issued warnings prohibiting vessel passage through the strait, and tanker traffic dropped to near zero from 2 March onward. Iraq shut in 1.5 million barrels per day of production. Qatar declared force majeure on LNG exports after drone strikes on its Ras Laffan facility, affecting roughly 20% of global LNG supply. JPMorgan estimates that production cuts could approach 6 million bpd by the end of this week if the Strait remains closed. No ceasefire talks are underway, and Trump has demanded Iran's unconditional surrender. (Source: Bloomberg)

On the labour side, Friday's payroll report was the second negative print in three months after December was revised to -17,000. Healthcare employment fell by 28,000, partly reflecting the Kaiser Permanente strike that affected 30,000 workers during the survey week. Federal government payrolls declined by 10,000. Average hourly earnings rose 0.4% month-on-month, above consensus. This persistent wage pressure, combined with contracting employment, may be the exact mathematical friction that creates stagflation. The three-month payroll average is barely above zero.

What Is Stagflation and Why Does It Matter Now?

Stagflation describes a period of weak economic growth, rising unemployment, and elevated inflation occurring simultaneously. The term gained prominence during the 1970s oil crisis when energy price shocks fed into consumer prices while economic output slowed. It presents a difficult challenge for central banks because the tools used to fight inflation - higher interest rates - tend to worsen unemployment. The current situation carries signals of that era. Wolfe Research estimates that a $20 per barrel rise in oil adds approximately 0.4 percentage points to headline inflation and subtracts 0.1 percentage points from GDP. US retail gasoline prices rose $0.43 in one week to $3.41 per gallon; diesel hit $4.51. The Atlanta Fed GDPNow model fell from 3.0% to 2.1% in five days. 

However, the 2020s economy differs from the 1970s in important ways: energy intensity per unit of GDP is lower, and the US is now a net exporter of petroleum. While a global oil shock hurts the US consumer at the pump, it directly benefits domestic energy producers, softening the aggregate blow to GDP compared to the 1970s Arab oil embargo. Furthermore, the Kaiser strike accounted for a significant portion of the healthcare job losses, meaning the headline February NFP miss may overstate underlying labour weakness.

What to Watch This Week

• Today, G7 finance ministers are reportedly expected to discuss a coordinated release of oil from emergency reserves, organised by the International Energy Agency.

• US CPI, February (Wednesday, 11 March): Consensus is 0.3% m/m, 2.5% y/y headline. Because this data covers February, it will not reflect the March energy shock. Instead, traders will watch to see if inflation was already accelerating before the conflict. A hot print here means the current oil spike will act as a vicious multiplier, cementing the stagflation reality.

• US Core PCE (Friday, 13 March): This is the preferred inflation measure by the Fed. Consensus is around 2.8% y/y. A surprise over 3% would limit rate-cut options significantly.

• US Initial Jobless Claims (Thursday, 12 March): A move above 225,000 would validate the NFP miss. Below 210,000 would suggest it was temporary.

• Hormuz shipping activity (daily): Arguably the single most significant factor this week. Any resumed tanker traffic would indicate de-escalation and likely lower-pressure oil. Continued blockade risks pushing WTI above $100.

Cross-Asset Snapshot: The Week in Numbers

Across equity markets, the S&P 500 fell 0.70% for the week to 6,740.02 while the Dow Jones Industrial Average declined 3%. The Nasdaq 100 edged up 0.24%, aided by large-cap technology names acting as quality havens. Defence stocks climbed sharply, with Lockheed Martin up 6% and Northrop Grumman up 5-6%. Airlines were the biggest losers across Asia-Pacific markets. South Korea's KOSPI fell as much as 12% in a single session, triggering a circuit breaker.

Gold settled near $5,158 after trading in a range exceeding $400 during the week. The dollar index gained 0.95% on the war's first trading day, benefiting from safe-haven flows. Gold and the dollar rising simultaneously is unusual and signals a stress regime rather than normal inter-market behaviour. European natural gas rose 38% in a single day following Qatar's force majeure. 

Conclusion

This week brings a dense data calendar while the conflict in the Middle East continues and appears unlikely to be resolved anytime soon. Wednesday's CPI and Friday's Core PCE will test whether the economy is heading into a state of stagflation or not. But more than any data point, the situation in the Strait of Hormuz may have more global market implications.

*Past performance does not reflect future results. The above is for marketing and general informational purposes only, and are only projections and should not be taken as investment research, investment advice or a personal recommendation.