The Top Line
Stocks fell for the fourth straight day last week, and markets are now about 5% below their January highs. The big story this week is the Federal Reserve — it meets Wednesday, and investors will be watching closely for any signals about the future of interest rates.
We are operating in a stagflationary transitional regime—the most challenging macro configuration for policy and portfolios—defined by simultaneously decelerating growth and re-accelerating inflationary pressure, now compounded by an external energy shock. The second estimate of Q4 2025 GDP came in at just 0.7% annualized, cut in half from the 1.4% advance reading and representing the weakest quarter since the pandemic recovery stalled in 2022; private final sales to domestic purchasers grew only 1.9%, signaling that underlying demand was softening well before the Iran conflict began. Against this backdrop, January core PCE printed 3.1% year-over-year and +0.4% month-over-month—the highest reading since March 2024—placing the Fed's preferred inflation gauge at 55% above its 2% target even before energy-driven pass-through costs are captured in the data. The closure of the Strait of Hormuz has pushed Brent crude above $100 per barrel for the first time since 2022, a supply shock that is set to accelerate inflation well into Q2 while simultaneously crushing real consumer purchasing power—the worst possible combination for a central bank already paralyzed between a cooling economy and sticky prices.
Inflation
The U.S. is dealing with a difficult combination right now: prices are rising at the same time that economic growth is slowing down. Last week, the government confirmed that the economy grew at just 0.7% in the final quarter of 2025 — about half of what was first reported. At the same time, inflation (the rate at which prices rise overall) remains above the Fed's 2% target, sitting at 2.8% on the measure the Fed watches most closely. A lot of that pressure is coming from energy costs, which have surged as the conflict in the Middle East disrupts oil supplies through the Persian Gulf. Until energy prices stabilize, inflation is unlikely to cool — and that makes it very hard for the Fed to cut interest rates any time soon.
Key Takeaway
Rising energy costs are keeping inflation stubborn — and that means cheaper borrowing rates are likely still a long way off.
The January 2026 PCE release confirmed that inflation was deteriorating independent of the Iran war, making the energy shock a second-order amplifier rather than the primary cause. Headline PCE rose 2.8% year-over-year while core PCE—excluding food and energy—climbed 3.1% annually and +0.4% month-over-month, the hottest monthly reading in nearly a year. Services inflation remains the structural sticking point, with services prices up 3.5% year-over-year, and the three-month annualized rate for core PCE running at 3.7%, approximately double the Fed's target. Goods prices are showing renewed upward pressure as well, with durable goods up 2.2% annually in January—a reversal from the disinflationary tailwind that characterized most of 2024 and early 2025.
The Strait of Hormuz closure introduces a forceful new inflationary impulse that the January data cannot yet capture. Brent crude has crossed $100 per barrel and WTI settled near $98.71 on Friday, with the IEA's emergency 400-million-barrel release failing to meaningfully suppress prices. Gasoline, diesel, fertilizer, and freight costs are all moving higher in tandem, and Nationwide chief economist Kathy Bostjancic has warned that the inflation trajectory "will only steepen in the coming months." The GDP price deflator for Q4 came in at 3.8%, hotter than expected, confirming that nominal growth is being eroded by price increases rather than expanded by real economic activity. The pre-war data alone pushed the Fed into a corner; the post-war data will compound that pressure significantly.
Markets have aggressively repriced the Fed's easing path in response. Per the CME FedWatch tool, traders now price just one rate cut in all of 2026, pushed to December at the earliest—a dramatic reversal from January, when three cuts were priced by mid-year. The Fed's updated Summary of Economic Projections at Wednesday's FOMC will likely show upward inflation revisions and downward growth revisions, but analysts at Wells Fargo expect the updated dot plot to hold the policy path steady, as the competing forces roughly offset one another on paper. The danger is that this "holding steady" posture obscures a fundamental policy trap: cutting risks reacceleration, but holding—or hiking—risks converting a slowdown into a hard landing.
Key Takeaway
The Fed is in "hawkish pause" mode, trapped between 3.1% core PCE and 0.7% GDP growth with a live energy shock still working through the pipeline. No rate changes are expected at Wednesday's FOMC; the updated SEP will be closely parsed for any shift in the 2026 dot-plot median. Markets price one cut, in December, with non-trivial risk that even that is removed.
Risk and Positioning
Markets are nervous right now — not panicked, but clearly unsettled. The VIX (the market's fear gauge) closed Friday at 27, well above the calm readings we saw earlier this year, meaning investors are bracing for more turbulence. The S&P 500 has now fallen three weeks in a row. The dollar has climbed to its highest level since last spring, which often signals that investors are moving toward safety. Oil prices remain above $98 a barrel — near their highest levels since 2022 — and that alone is enough to keep markets on edge heading into a Fed week.
Key Takeaway
Markets are on edge, not in free-fall — but the combination of high oil and a nervous Fed meeting makes this a week to watch closely.
Risk sentiment is decisively risk-off, and the technical structure of Friday's session reinforces that designation with disturbing clarity. The S&P 500 closed at 6,632—a new 2026 low, now -5.0% from its January 28 all-time high of 7,002—completing a four-day losing streak and a third consecutive week in the red. What makes this session particularly concerning is the breakdown in the normal defensive rotation: nine of eleven S&P 500 sectors finished lower, and Consumer Staples and Real Estate—traditionally safe-haven segments—actually led the decline. This sector inversion signals that investors are not simply rotating defensively; they are questioning whether any segment of the market is adequately priced for a stagflationary outcome. When defensive sectors fail to catch a bid during broad selloffs, it often precedes an acceleration of the drawdown rather than a stabilization.
Volatility metrics are consistent with a regime shift toward sustained elevated anxiety. VIX closed at 27.19 on Friday, having spiked to 35.30 as recently as this month per Investing.com's four-week high reading, and is now 24.9% higher than a year ago. The 52-week range of 13.38 to 60.13 reflects how violently the volatility regime has changed in 2026. Intraday Friday range of 24.67 to 28.47 suggests active hedging flows even on a day where the index nominally closed down less than 0.4%. The DXY holding above 100 for the first time since November 2025 confirms safe-haven demand is accruing to dollars rather than to equities—a classically risk-off configuration. Gold, however, closed near $5,062, having pulled back 1.25% on the day but remaining well above pre-conflict levels, providing a mixed signal on genuine safe-haven conviction versus profit-taking.
Credit markets are flagging meaningful deterioration in the risk appetite of institutional investors. High-yield spreads have widened materially in the stagflationary repricing, though the real stress test will come in the weeks ahead as Q1 earnings reports force companies to quantify the energy cost impact on margins. The 2s10s Treasury spread—with the 2-year at 3.73% and the 10-year at 4.28%—sits at +55 basis points, a steepening curve that reflects not a benign economic recovery but rather a bear-steepening dynamic: short rates anchored by a cautious Fed while long rates are pushed up by inflation expectations. This configuration is historically unkind to credit, duration, and equity multiples simultaneously.
Key Takeaway
VIX at 27.19 and a bear-steepening yield curve signal a risk-off regime with no clear near-term catalyst for reversal. The failure of defensive sectors to hold ground is the most alarming internal signal; it suggests positioning is not yet fully adjusted for stagflation. Wednesday's FOMC and the updated SEP are this week's pivotal risk event.
Sector and Cross-Asset Analysis
Friday's broad sell-off hit nearly every part of the market. Tech companies — which had been carrying the market through much of last year — continued to slide as higher interest rates make their future earnings look less valuable. Everyday goods companies and real estate companies, which usually hold up better when investors are worried, actually led the declines — a sign that the pressures of rising costs are being felt everywhere. Oil and gas companies were the one bright spot, benefiting directly from the surge in crude prices. International stocks also underperformed, weighed down by the global ripple effects of higher energy costs.
Key Takeaway
Almost nowhere was safe on Friday — the only winners were oil and gas companies riding the energy surge.
The sector rotation underway reflects a market being repriced around a stagflationary thesis rather than a simple cyclical slowdown. Energy (XLE) is the single clear winner, up approximately +22% year-to-date per available data, as Brent above $100 directly fattens integrated major earnings and reinvigorates exploration and production cash flows. ExxonMobil and Chevron have outperformed sharply, and the energy sector's dominance is the inverse of its underperformance in the 2023–2024 disinflation cycle. On the losing end, Technology (XLK) closed at $136.80 on Friday, -0.75% on the session, and is in a clear corrective phase as AI-related capital expenditure narratives collide with rising discount rates and an "AI fatigue" reassessment of when massive infrastructure spending converts to earnings. Adobe's 7.6% collapse after a CEO departure and guidance miss crystallized the fragility beneath large-cap tech.
Market breadth continues to deteriorate in ways that argue against calling a durable bottom. The S&P 500 has been below its 50-day moving average since February 27, though it remains above its 200-day moving average—a key level that will be closely watched in coming sessions. The Nasdaq's -0.93% decline on Friday outpaced the broader market's -0.61%, consistent with the ongoing growth-to-value rotation that accelerates when inflation expectations rise. Consumer Staples and Real Estate leading the decline rather than serving as shelter is not a positioning anomaly—it reflects real economic pressure. REITs face double jeopardy: rising long rates compress valuations while slowing consumer activity threatens rent growth. Consumer Staples face genuine margin compression from energy and commodity input costs that cannot be fully passed through to a consumer already stretched by 3.1% core PCE.
Cross-asset dynamics present a challenging mosaic for multi-asset allocators. Dollar strength—DXY above 100 on safe-haven flows and reduced rate-cut expectations—pressures international earnings and emerging market debt denominated in USD. WTI crude near $99 and Brent above $100 are acting as a tax on global growth, particularly damaging for energy-import dependent economies in Europe and Asia. European equities are navigating a compounding headwind: the January Eurozone industrial production miss of -1.5% precedes energy cost impacts that hadn't yet hit the data. Domestically, the Michigan Consumer Sentiment edged down to 55.5, with the pre-Iran surveys showing improvement that was entirely erased once hostilities began—a psychological deterioration that will take months to reverse even if energy prices stabilize.
Key Takeaway
Energy (XLE) is the sole clear outperformer in a stagflationary environment, while Technology, Real Estate, and Consumer Staples face compounding headwinds from rising rates, margin compression, and slowing demand. Market breadth is deteriorating and concentrated in commodity-linked sectors. Dollar strength adds a further drag on international exposure.
Economic Data & Events
Monday is a lighter day for data, but the week as a whole is one of the most important of the year:
- 5:30 AM MT — Empire State Manufacturing Index — Moderate Impact
- A monthly survey of factory conditions in New York State
- 6:15 AM MT — Industrial Production — Moderate Impact
- Measures how much the nation's factories, mines, and utilities produced last month
- 7:00 AM MT — NAHB Housing Market Index — Moderate Impact
- A survey of homebuilders rating conditions for new home sales
- Wednesday, 12:00 PM MT — Federal Reserve Interest Rate Decision and Press Conference — High Impact
Monday's data will give us an early read on how manufacturers and homebuilders are holding up under the pressure of higher energy costs and borrowing costs. But the main event is Wednesday — the Fed meets and will release its updated interest rate decision and economic forecasts. No change to rates is expected, but the press conference could move markets significantly depending on how the Fed describes the outlook.
Key Takeaway
Wednesday's Fed meeting is the week's biggest event — watch for signals on how policymakers are weighing inflation against slowing growth.
Today's Calendar
- 5:30 AM MT — NY Empire State Manufacturing Index — Moderate impact
- Consensus: 3.2 | Previous: 7.10 (February)
- 6:15 AM MT — Industrial Production & Manufacturing Output — Moderate impact
- Consensus: +0.1% | Previous: +0.6%
- 6:15 AM MT — Capacity Utilization Rate — Moderate impact
- Consensus: 76.2% | Previous: 76.2%
- 7:00 AM MT — NAHB Housing Market Index — Moderate impact
- Consensus: 37 | Previous: 36
- 8:30 AM MT — 3-Month & 6-Month Treasury Bill Auctions — Low impact
- Previous 3M: 3.605% | Previous 6M: 3.535%
Week Ahead
This is the most consequential FOMC week of the year so far. The Federal Reserve convenes Tuesday–Wednesday (March 17–18), with a policy statement, updated Summary of Economic Projections (dot plot), and Chair Powell press conference at 2:00 PM ET Wednesday—this is a SEP meeting, making it a higher-volatility event than typical holds. Wednesday's SEP will be parsed intensely for any revision to the 2026 rate path, inflation projections, and the growth forecast given the 0.7% Q4 GDP print. No rate change is expected, but the language around the balance of risks is the critical variable. Housing starts and building permits also report this week, and February retail sales are due Thursday.
What We're Watching
FOMC March 17–18: SEP Is the Signal
No rate change is expected, but Wednesday's updated dot plot and Powell presser are the week's pivotal risk event. Watch for any upward revision to the 2026 inflation median or downward revision to growth—either alone is hawkish, and both together crystallize the stagflation trap markets are pricing.
Rates & Duration: Bear-Steepening Trap
The 2s10s spread at +55bps reflects a bear-steepening regime—not a recovery signal. The 10Y at 4.28% is being held up by inflation expectations even as growth collapses to 0.7% GDP. Avoid extending duration until the oil shock's inflation pass-through is quantified; stay defensive in short-to-intermediate maturities.
Equities: When Defensives Don't Defend
Friday's failure of Consumer Staples and Real Estate to catch a bid is the most important internal signal of the week. It implies the market is not in a standard risk-off rotation but is repricing the entire earnings and multiple framework for stagflation. The 200-day moving average near 6,450–6,500 is the critical technical support.
Key Risk: Oil & Inflation Pass-Through Timeline
Brent above $100 and Strait of Hormuz blockage have not yet appeared in PCE or CPI data. The January core PCE of 3.1% was pre-war. The Q1 inflation prints—beginning with February CPI in April—will be the first true measure of the energy shock's inflationary impact and could force a fundamental re-rating of the Fed's 2026 path.
The Bottom Line
Markets enter the week in a fragile state after three straight weeks of losses, with oil prices and Fed uncertainty keeping investors cautious. Wednesday's Fed decision and press conference will be the moment that defines the week — and possibly the month.
Treasuries are in an unusual and uncomfortable configuration: the 10Y yield sits at 4.28%, down 2bps Friday on modest growth-scare relief from the GDP miss but still up 13bps on the week as oil-driven inflation expectations keep long rates elevated—a bear-steepening dynamic that simultaneously punishes duration and compresses equity multiples. The S&P 500 closed Friday at a new 2026 low of 6,632, now -5.0% from its January peak, with the 50-day moving average acting as a ceiling rather than support; the 200-day near 6,450–6,500 represents the next meaningful technical support zone should selling continue. Today's session will likely be driven by pre-FOMC positioning with Empire State Manufacturing and Industrial Production providing early directional cues; any reading confirming manufacturing weakness will reinforce the stagflation narrative and could push equities lower. Energy remains the only sector with a credible fundamental tailwind, while mega-cap tech faces a difficult path to re-rating higher against 4.28% 10Y yields and a 0.4% monthly core PCE trend.
Disclosure — AI-Assisted Content & Regulatory Notice
This briefing was drafted with the assistance of artificial intelligence tools. All content has been reviewed and approved by Thomas MacPherson, Investment Adviser Representative (Series 65) and Chief Compliance Officer, River Rose Financial, LLC, prior to publication. AI systems may produce errors, omissions, or outdated information; readers should independently verify data.
Market Currents does not constitute an investment advisory relationship, does not create a fiduciary duty, and does not include personalized investment advice. Subscribers should not rely on Market Currents as a substitute for individualized financial advice. This briefing is for informational purposes only. Market conditions change rapidly; all data and projections are subject to revision without notice.
River Rose Financial, LLC is a registered investment adviser with the State of Colorado. Registration does not imply a certain level of skill or training. Past performance is not indicative of future results. All investment strategies involve risk, including possible loss of principal.
