Macro
Recent U.S. data continue to point to an overall resilient economy but are becoming increasingly uneven across sectors. Business surveys still indicate ongoing expansion, with ISM manufacturing at 50.7 in February and new orders rising to 55.8, while ISM services climbed to 56.1, its strongest reading since mid-2022. Taken together, the data suggest growth has not rolled over despite tighter financial conditions, though activity is becoming more sensitive to shocks and increasingly dependent on productivity gains and household balance-sheet resilience.
The labour market delivered the week’s most notable surprise. Total non-farm payrolls fell by 92,000 in February, a sharp reversal from January’s already modest gain of 126,000 and far below expectations for continued job growth. The unemployment rate increased to 4.4% from 4.3%, while the labour-force participation rate edged down to 62.0% from 62.1%. The broader U-6 measure of unemployment, which includes underemployment, declined slightly to 7.9% from 8.1%, but the report’s composition was clearly softer. Private-sector employment fell by 86,000 during the month, and manufacturing payrolls declined by 12,000, reinforcing the view that hiring momentum has slowed.
Despite the weak payroll print, other labour indicators remain more stable. Initial jobless claims held steady around 213,000, and the Federal Reserve’s latest Beige Book continued to describe the economy as resilient but cautious, with employment largely steady and activity expanding modestly across several districts. Taken together, the data suggest a labour market that is cooling rather than collapsing. Policymakers are therefore likely to focus on whether softer hiring reflects temporary volatility in monthly data or the beginning of a more sustained moderation in labour demand.
Inflation risks, meanwhile, have shifted back toward energy markets. Even before the latest geopolitical escalation, ISM manufacturing showed a sharp rise in input costs, with the prices-paid index jumping to 70.5 in February from 59.0 in January. The conflict involving Iran, the United States and Israel has since intensified oil-market stress, with Brent and WTI moving above $110 and briefly approaching $120 as shipping through the Strait of Hormuz was severely disrupted and several regional producers began reducing output. This raises the risk that higher energy costs feed through to headline inflation and household purchasing power in the months ahead.
For policymakers, the macro picture has become more complicated but not necessarily more hawkish. The softer labour backdrop strengthens the case for eventual policy easing, yet the oil shock raises the risk of a temporary inflation rebound that could delay confidence that price pressures are sustainably moving lower. Still, markets continue to treat the current surge in energy prices primarily as a supply shock rather than the start of a new inflation regime, particularly as longer-dated oil expectations have moved less than spot prices and the U.S. economy remains structurally less oil-intensive than in previous decades.
Geopolitics has therefore become the dominant macro transmission channel. The Strait of Hormuz normally handles roughly one-fifth of global oil shipments, and disruptions to traffic through the waterway have already begun to tighten global energy flows. Several Gulf producers have faced transport constraints or reduced output while governments consider measures to stabilise shipping and insurance markets. For investors, the key question is whether the disruption proves temporary or evolves into a more persistent supply shock that could lift inflation, tighten financial conditions and weigh on global growth. For now, the U.S. economy remains resilient, but the balance of macro risks has become increasingly externally driven.
Rates
Treasuries sold off sharply over the week as the market moved from a late-February rally into a more defensive repricing driven by energy, geopolitics, and a less certain policy path. The Federal Reserve remains on hold ahead of the March 17–18 FOMC meeting, but the expected easing profile has become noticeably flatter. Market pricing now implies roughly 39 bps custs for 2026, down from around 55 bps a week earlier, as investors reassessed how much room the Fed would have to respond if higher energy prices begin to feed more visibly into inflation expectations. The near-term policy message remains one of patience, but the bar for resuming a cleaner easing narrative has risen.
Treasury yields reflected that shift in sentiment. Over the week, the 2Y rose 17 bps to 3.56%, while the 10-year increased 18 basis points to 4.14%, leaving the curve little changed in shape but materially higher in outright yield terms. The move was notable because it combined front-end repricing of the Fed path with broader term-premium pressure, rather than a simple growth scare. Cross-asset price action also pointed to tighter financial conditions, with the dollar index up 1.4% on the week, its strongest gain since August 2025, while traditional inflation hedges delivered a mixed signal, with gold falling 1.7% and silver declining 2.6%.
The primary catalyst was the sharp escalation in tensions in the Middle East and the resulting energy shock. Markets initially absorbed the attack relatively calmly, but risk sentiment deteriorated as the week progressed and oil continued to climb. WTI surged 35.6% over the week, the largest weekly increase in data going back to the early 1980s, while crude briefly traded above $90 per barrel for the first time since October 2023. That move quickly became the dominant macro transmission channel for rates, not only because of the direct CPI implications, but because it increased the risk of a more difficult policy mix in which growth softens while headline inflation reaccelerates.
The domestic data flow added to that tension rather than resolving it. February payrolls surprised materially to the downside, reinforcing the view that labour-market momentum is cooling and that the economy is becoming less robust beneath the surface. Under normal conditions, a report of that nature would likely have supported a stronger rally in the front end. Instead, the bond market only partially absorbed the weaker employment signal, as investors focused on the possibility that a sustained rise in oil prices could delay policy easing even if labour conditions continue to soften. The result was a market increasingly uneasy with the stagflationary direction of travel, even if that outcome is not yet the base case.
Fed communication remained cautious and somewhat divided in emphasis. Kashkari and Williams both suggested that policymakers could afford to pause while assessing how persistent the energy shock proves to be, reinforcing the idea that the Committee is not inclined to react quickly to a single geopolitical event. Waller, by contrast, appeared more willing to look past the inflation impact if the broader data weaken, arguing, in effect, that the Fed should not ignore softer underlying conditions. That split does not yet imply a policy fracture, but it does highlight a more complicated reaction function, particularly as market attention turns to a more hawkish FOMC composition and the political difficulty of delivering cuts into an energy-driven inflation scare.
Looking ahead, supply will matter. Next week brings $77 billion of 2-year notes on Tuesday, $78 billion of 5-year notes on Wednesday, and $49 billion of 7-year notes on Thursday. Those auctions will provide an important test of whether investors are prepared to add duration at higher yields or whether the market needs further concessions before demand stabilises. For now, the rate backdrop remains defined by a weaker labour signal on one side and a renewed inflation shock on the other, leaving Treasuries sensitive to both incoming energy headlines and any evidence that higher oil prices are starting to pass through more durably into the macro data.
Credit
Credit markets remain orderly at the index level, but the gap between stable public spreads and rising internal stress continues to widen. Investment-grade yields near 5% and strong income demand are anchoring public credit, while risk is building in private credit structures, software-linked lending, and redemption-sensitive vehicles. The environment increasingly reflects dispersion rather than broad beta stress.
Private credit remains the main fault line. Blue Owl halted redemptions at one retail credit fund and sold about $1.4 billion of assets across three funds, marking the first meaningful test of liquidity assumptions in the sector. The pressure then spread across the industry. Blackstone’s $82 billion BCRED received $3.7 billion of redemption requests and allowed 7.9% withdrawals, supported by roughly $400 million of firm and employee capital, including about $150 million from senior executives. BlackRock capped withdrawals from its $26 billion HPS Corporate Lending Fund at the 5% quarterly limit after investors sought $1.2 billion of redemptions, equal to 9.3% of NAV. The shift from discussing redemption mechanics to actually using them is the key signal.
The core structural issue is liquidity mismatch. Private credit vehicles hold loans that cannot be sold quickly without disrupting prices, yet a growing share of capital now comes from wealth and retail channels that are far more redemption-sensitive than pensions or sovereign funds. Industry data show redemption requests at non-traded BDCs have exceeded the typical 5% quarterly limits, forcing managers to choose between enforcing gates or weakening liquidity discipline by allowing larger withdrawals.
Scale makes the issue more important. Private credit expanded from roughly $2 trillion in 2020 to around $3 trillion by early 2025, and Morgan Stanley estimates the market could reach $5 trillion by 2029. The IMF warns that rapid growth has shifted credit creation away from transparent bank balance sheets into a more opaque ecosystem where interconnected structures can amplify stress and where underwriting standards may weaken as competition for deals intensifies.
Insurance balance sheets are a key transmission channel. The IMF estimates that private credit accounts for about one-third of insurers’ investments in North America, while the Wall Street Journal reports that life and annuity insurers held roughly $1.8 trillion in private credit in 2025, equal to 46% of their debt portfolios, with approximately $980 billion considered relatively illiquid. Regulators warn that risk misclassification, particularly below-investment-grade assets appearing as investment grade, could magnify losses during a downturn.
Credit fundamentals are also deteriorating. Fitch reports the U.S. private-credit default rate reached 5.8% in the 12 months through January 2026, while defaults across its monitored universe climbed to a record 9.2% in 2025, exceeding the 8.1% peak recorded in 2024. Most defaults occurred among smaller middle-market borrowers with floating-rate debt and limited hedging capacity, the segment most exposed to persistent high borrowing costs.
Software exposure remains the market’s primary concern. Software and services represented 13% of the assets Blue Owl sold, while software accounts for roughly 19% of BlackRock’s HLEND portfolio. The risk is less about immediate operational collapse and more about uncertainty around refinancing as AI reshapes pricing power, growth durability, and customer retention. Even if operating performance remains stable, weaker sentiment can still reduce sponsor support and complicate refinancing.
Idiosyncratic failures are reinforcing that concern. Recent credit collapses and loan write-downs have shifted investor focus from isolated events to underwriting discipline across private markets. Jamie Dimon recently warned that rivals are doing “dumb things” in credit, highlighting the risk of aggressive underwriting late in the cycle. At the same time, official banking data still looks stable. The FDIC reported industry net interest margins rising to 3.39% in Q4 2025, and overall bank credit quality metrics remain broadly healthy. The divergence between stable bank data and rising private credit anxiety is a key feature of the current cycle.
Public credit continues to appear considerably healthier. Liquidity remains functional, and primary markets are absorbing supply. However, positioning has turned more defensive. Europe’s iTraxx Crossover widened to around 270 bp, and iTraxx Main moved to about 57 bp, reflecting geopolitical tensions and private credit concerns. Bloomberg reports bullish positioning in high-grade CDS indices has declined by roughly 20% in recent weeks, while BNP indicators suggest investors have shifted short credit risk, and Barclays has recommended buying CDS protection, with hedges remaining relatively inexpensive.
Consumer credit trends add another layer of caution. New York Fed data show rising transition-to-serious-delinquency rates in credit cards, auto loans, and HELOCs, while FDIC figures indicate past-due rates for credit cards and auto loans remain above pre-pandemic levels. The deterioration remains manageable but reinforces the pattern of gradual weakening beneath otherwise stable macro indicators.
Overall, credit markets remain liquid and supported by income demand, but internal vulnerabilities are building. Public investment-grade continues to provide liquidity and relatively stable funding conditions, while private credit is confronting the consequences of rapid growth, retail distribution, concentrated software exposure, and illiquid asset pools. Index spreads remain calm. Beneath the surface, investors are positioning more defensively.
Equities
U.S. equities finished the week sharply lower across the major benchmarks as geopolitical tensions and rising energy prices weighed on investor sentiment. The Dow Jones Industrial Average declined 3.01%, the S&P 500 fell 2.02%, the Nasdaq Composite dropped 1.24%, and the small-cap Russell 2000 underperformed with a 4.07% loss, marking its weakest weekly performance since late April. The S&P 500 recorded its second consecutive weekly decline and its steepest drop since October, reflecting a more cautious risk environment.
Sector performance was broadly negative, with energy the only sector to post gains (+0.97%), supported by the sharp surge in oil prices. Technology declined 0.36%, outperforming the broader market, while consumer discretionary (-1.44%) and financials (-1.76%) also held up relatively better than other sectors. Losses were more pronounced elsewhere, led by materials (-7.15%), followed by consumer staples (-4.91%), health care (-4.64%), and industrials (-4.09%). Real estate (-2.30%), utilities (-2.14%), and communication services (-2.07%) also finished lower, highlighting broad risk reduction across most sectors.
Within equities, industry performance showed notable dispersion. Semiconductor stocks and other AI-related hardware companies weakened sharply, with the semiconductor index falling more than 7% during the week. Large technology companies were mixed, with Microsoft rising 4.1% while Alphabet declined 4.3%. Software stocks were a notable exception and extended their recent rebound, outperforming most other technology segments. Outside technology, several economically sensitive industries, including homebuilders (XHB -8.5%), building materials, machinery, transportation, and travel-related companies, also declined materially. Banks weakened alongside the broader cyclical complex, with BKX down 3.6% and KRX down 2.7%, while relative resilience was visible in energy producers, commodity chemicals, telecommunications companies, discount retailers, and grocers.
Global equities also weakened as the surge in oil prices and escalating Middle East conflict triggered a broad risk repricing. European markets were particularly hard hit, with the STOXX Europe 600 falling 5.55% and the Euro STOXX 50 declining 6.82%, their largest weekly drops since April. Major country indices posted similarly steep losses, including France’s CAC 40 (-6.84%), Germany’s DAX (-6.70%), and the UK’s FTSE 100 (-5.74%). The selloff was broad-based, with banks, semiconductors, and luxury goods leading the declines, while energy stocks outperformed amid the spike in crude prices. Japanese equities also experienced heightened volatility, with the Topix falling as much as 3.4% intraday and the Nikkei 225 dropping over 3%, led by weakness in automakers and other exporters sensitive to higher energy costs.
Geopolitical developments were the dominant catalyst for the week’s volatility. Escalating conflict involving Iran following U.S. and Israeli military actions raised fears of major disruptions to global oil supply. Iran responded with attacks on U.S. installations and regional infrastructure, while the Strait of Hormuz, through which a large share of global oil shipments transit, was effectively closed, triggering concerns over potential production disruptions. Regional officials warned that a prolonged conflict could force Gulf energy exporters to halt production, raising the possibility of significantly higher oil prices.
The geopolitical shock also triggered a sharp repricing in equity volatility. The VIX briefly surged to 28.15 intraday early in the week and ultimately closed at 29.49, its highest level since late 2025 and approaching the threshold historically associated with extreme market stress. The move represented one of the largest multi-day volatility spikes since the April 2025 tariff-driven selloff. The VIX futures curve inverted, signalling heightened demand for near-term hedging. Volatility increases were also visible across other benchmarks, with the Dow VIX rising to 34.22, the Nasdaq-100 VIX reaching 31.44, and the Russell 2000 VIX climbing to 32.63. Options activity reflected the shift in sentiment, with VIX options volume reaching roughly 1.8 million contracts, well above typical levels, while flows into volatility-linked ETFs increased as investors sought downside protection.
Markets initially absorbed the geopolitical shock with limited reaction but weakened as the week progressed, as higher oil prices, a stronger U.S. dollar, and rising bond yields tightened financial conditions. Expectations for Federal Reserve policy also shifted modestly, with markets reducing the amount of easing priced for the remainder of the year to roughly 39 basis points, down from 55 basis points the previous week. Several Federal Reserve officials suggested policymakers may wait for greater clarity on energy-driven inflation pressures before adjusting policy further.
Macroeconomic data during the week produced mixed signals. Early indicators were constructive, with manufacturing expanding for a second consecutive month and services activity reaching its strongest pace in more than two years. However, sentiment deteriorated later in the week after the February payrolls report unexpectedly showed a 92,000 decline in employment, alongside downward revisions to prior months. Retail sales data were mixed, with weaker headline figures but relatively stable underlying demand.
Corporate developments added further dispersion. Retail earnings were selectively supportive rather than broadly strong. Target (+6.2%), Best Buy (+7.6%), and Ross Stores (+3.0%) rallied after results and guidance exceeded expectations, reinforcing the view that value-oriented retailers continue to benefit from price-sensitive consumer behaviour. By contrast, Abercrombie & Fitch (-13.1%) declined sharply after softer growth guidance and tariff-related margin pressure disappointed investors. Outside retail, Pinterest (+16.8%) surged after Elliott Management announced a $1 billion investment, while Day One Biopharmaceuticals (+100%) jumped following an acquisition agreement with Servier.
The artificial intelligence theme was more mixed. Semiconductor sentiment softened after reports that the U.S. administration is drafting broader export-control rules that could require authorization for a wider range of AI chip shipments, creating additional uncertainty for companies such as Nvidia and AMD. At the same time, policy scrutiny expanded beyond hardware to model developers after Anthropic became entangled in a dispute with the Pentagon over restrictions on military applications of its models, highlighting growing geopolitical and regulatory sensitivities around AI supply chains. Despite these concerns, underlying demand signals remained strong. Broadcom (+3.4%) highlighted robust demand for custom AI chips and projected more than $100 billion in AI-related revenue by fiscal 2027, while continued infrastructure investment across the sector underscored the scale of capital required to support the next phase of AI deployment.
Looking ahead, markets will focus on several key data releases, including the NFIB small business index, CPI inflation, housing starts, jobless claims, durable goods orders, the second estimate of Q4 GDP, core PCE inflation, consumer sentiment, and JOLTS job openings. The Treasury will also conduct large auctions of 2-year, 5-year, and 7-year notes, which will be closely watched following the recent rise in yields.
Taken together, the week’s market moves reflected a rapid repricing of geopolitical risk following the escalation of the Iran conflict and the effective closure of the Strait of Hormuz. The surge in oil prices drove energy stocks higher while rising yields, tighter financial conditions, and a sharp increase in market volatility weighed on the broader equity market. At the same time, historical market behaviour suggests that such shocks are often temporary. Strategists note that the S&P 500 has historically risen roughly 2%, 6%, and 8% over 1, 6, and 12-month horizons following major Middle East geopolitical events, while past conflicts such as the first and second Gulf Wars were followed by equity rallies of roughly 16% and 14%, respectively. As a result, while near-term sentiment remains highly sensitive to developments in the Middle East and the trajectory of oil prices, investors are also weighing the possibility that geopolitical-driven selloffs may ultimately present longer-term buying opportunities.