Week ahead: Middle East War, US CPI, Core PCE, UK GDP, China trade balance, CAD unemployment

Weekly recap:

US major stock indices finished a volatile week in the red as investors digested the escalating conflict in the Middle East in the wake of US and Israeli military strikes on Iran, lifting energy-driven inflation risks as well as some economic data. While the Dow Jones underperformed, tech stocks held up best, but the Nasdaq still declined 1.2%.

Oil prices soared 35% last week on concerns about potential supply disruptions and broader geopolitical spillovers. Treasury yields rose as investors reassessed inflation risks and the outlook for Federal Reserve policy.

On the data front, the US non-farm payroll report showed the US economy lost 92,000 jobs, and unemployment unexpectedly rose to 4.4%. The weaker-than-expected report could complicate decision-making at the Federal Reserve as policymakers balance signs of labour market cooling against potential rising inflation.

Geopolitical tensions

The Middle East conflict was the main driver of market moves last week, and with no signs of de-escalation, the conflict will remain the main focus for the market this week. Oil prices surged by the most on record last week and have jumped to a 4-year high on Monday, up 15% and 50% since the start of the conflict. Rising oil prices have investors fretting about the impact of global inflation on treasury yields.

Meanwhile, the safe-haven of choice remains the US dollar, while Gold struggles amid the dollar’s strength after a year of impressive gains. The Strait of Hormuz remains a closed military zone, impacting not only oil but also fertiliser, which will likely impact food prices.

Any sense of de-escalation could see these price moves unwind; however, should the Strait remain closed for two weeks, oil storage in the Middle East will be full, and oil-producing countries will start to turn off production, creating a more serious structural shift in oil prices.

China trade balance (Tuesday)

China trade data for the first two months of the year will be released on Wednesday, in line with standard practice to smooth Lunar New Year distortions. After posting a $1.2 trillion surplus in 2025, markets will be watching closely to see whether export demand can hold up amid intensifying global trade tensions.

Whole strength in semiconductors and EV vehicles remains supportive for exports, and on the import side, Beijing has pledged to actively increase imports following last week’s Two Sessions meeting.

However, subdued domestic demand could limit the pace of recovery. Solid data could help support sentiment and therefore the Hang Seng, although surging oil prices are likely to remain a key driver, given that China is the largest importer of crude oil.

US CPI (Wednesday)

Headline CPI is expected to rise 0.2% MoM in February, in line with January, whilst core CPI is also expected to rise 0.2%, down from 0.3% in January. Prior to the start of the Middle East conflict, officials were already warning that prices remained elevated above the central bank’s target level and, barring any downside in the labour market, policy was in a broadly good place.

However, the conflict in the Middle East has made officials more cautious about further rate cuts. The situation remains fluid, and there is little clarity over the duration of the conflict; as a result, the medium-term impact on energy prices and supply chains also remains uncertain.

Concerns here that it could add a stagflationary impact, complicating the Fed’s position, given the two differing policy responses required to slow growth and contain rising inflation. Hot data will make it difficult for the Fed to sound dovish at the March 18 rate decision and could further boost the USD.

UK GDP (Friday)

Expectations are for the UK economy to grow 0.3% month on month in January, up from 0.1% in December, as the UK economy showed signs of breaking out of the stalling pattern seen in the second half of last year. However, that’s unlikely to impact the BoE rate decision. UK data, as with other data this week, is likely to be overshadowed by the Middle East conflict, which has led to a sharp hawkish repricing amid BoE rate cuts.

Following the conflict and the jump in oil prices, the markets have pushed back expectations for a BoE rate cut from March to possibly April or even May. The market is pricing in just a 5% probability of a March rate cut, down from 20 basis points this time last week. Stronger growth could help to support GBP/USD.

US Core PCE (Friday)

Expectations are for PCE to rise 0.3% MoM, down from 0.4%, with the annual rate unchanged at 2.9%. Meanwhile, core PCE, the Federal Reserve’s preferred inflation gauge, is expected to rise 0.4% MoM, in line with the December monthly reading, while the annual reading is expected to edge up to 3.1% from 3%.

It’s worth noting that this data comes before the Middle East conflict, which has clouded the inflation outlook. If the jump in energy prices persists, it is likely to impact inflation, with the market pushing back Fed rate cut expectations. This could keep the USD supported, which is weighing on Gold.

Canada unemployment (Friday)

February’s labour force survey is expected to show the unemployment rate edged higher to 6.7% from 6.5% in January and 6.8% in December, with employment expected to rise by 10,000 after falling by 25,000 in January. The expected increase in unemployment in February will partially reverse the prior decline and leave a downtrend from the peak of 7.1% in September intact.

Wage growth will also be closely watched for signs of continued easing and pay increases. Average hourly wage growth has been declining consistently with most surveys. Rising unemployment could weigh on the CAD, although the currency finds support from soaring oil prices.

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