Oil prices surge, inflation fears grip global markets as Federal Reserve rate cut expectations fall sharply amid persistent economic uncertainty
Global stocks experienced a mixed performance on Friday as oil prices remained elevated around $100 a barrel, prompting investors to focus on inflation risks and leading traders to significantly reduce expectations for Federal Reserve rate cuts this year, while the U.S. dollar gained ground. The ongoing uncertainty surrounding the Iran conflict continued to disrupt energy supplies, intensifying concerns over fuel inflation and interest rates, with Brent crude futures rising to $101.47 a barrel and West Texas Intermediate crude at $96.77 a barrel, both substantially higher than at the start of 2026.
On Wall Street, the S&P 500 fell 0.25% and the Nasdaq Composite dropped about 0.6%. The Dow Jones Industrial Average was little changed but faced its hardest week, tracking its biggest monthly losses since December 2024. European shares extended their declines, with the STOXX 600 down 0.5%, and MSCI's gauge of stocks across the globe fell 0.7%. The U.S. dollar emerged as a safe haven, putting pressure on most other currencies and was set for its second consecutive week of gains, up 0.6% against a basket of other currencies.
President Donald Trump stated the U.S. would be hitting Iran "very hard over the next week," following a partial 30-day waiver for purchases of sanctioned Russian oil, an effort to ease prices fueled by the U.S.-Israeli war on Iran. Traders are actively trying to predict the duration of the disruption to oil supplies.
"Headlines are coming at the market like water from a fire hose, which is impacting the price of oil, and consequently, financial markets," said Mitch Reznick, group head of fixed income at Federated Hermes.
With Iran escalating attacks across the Middle East and its new Supreme Leader Mojtaba Khamenei vowing to keep the Strait of Hormuz shipping lane closed, investors are preparing for a prolonged conflict and higher oil prices. The prospect of rising inflation has caused markets to rapidly reprice their expectations for central banks this year. Traders now anticipate only 20 basis points of easing from the Federal Reserve, a significant reduction from the 50 basis points of cuts priced in last month.
Two-year Treasury yields, which typically move in tandem with Fed interest rate expectations, reached a six-month high on Thursday. The Personal Consumption Expenditures index, the Federal Reserve's preferred inflation gauge, rose 0.3% in January on a monthly basis, aligning with economists' estimates. Concurrently, U.S. economic growth slowed more sharply than initially thought in the fourth quarter, with downward revisions to consumer spending and business investment, according to government data released on Friday.
"With markets laser-focused on oil prices and geopolitics, today’s numbers may mostly fly under the radar," Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, said in an email.
"Despite signs of economic softening, more sticky inflation data simply strengthens the idea that the Fed will remain on the sidelines."
Interest rate futures that had previously priced in two quarter-point cuts by the end of the year before the conflict began are now barely pricing in one. For U.S. government bond trading on Friday, the two-year note yield fell 3.5 basis points to 3.727% after reaching its highest level since August 22 on Thursday. U.S. 10-year notes ticked up to 4.281%.
Investor focus is set to shift to a series of policy meetings next week, involving the Federal Reserve, the Bank of Japan, the European Central Bank, and the Bank of England, with most expected to maintain current interest rates. The Reserve Bank of Australia is broadly anticipated to increase rates next week.
In currency markets, the euro fell 0.6% to $1.144, on track for a weekly decline of over 1%. The yen hit its weakest point since July 2024, reaching 159.69 per U.S. dollar on Friday, as Japan issued a warning of its readiness to take action to protect against yen declines. It was last trading at 159.59. Analysts suggest the threshold for intervention is higher this time, as any action now could prove ineffective against persistent dollar buying. Gold was 0.6% lower at $5,047 per ounce on Friday and was poised for a weekly drop.