Middle East conflict enters final countdown, inflation data this week becomes a "wait and see" key period for the Federal Reserve, global economy faces "stress test".

Due to the ongoing escalation of the Middle East war and its impact on the global energy economy, the US stock market fell again last week, leading to all three major US stock indices turning negative for the year. Data shows that the Dow Jones index fell by about 1.0% last Friday, the S&P 500 index fell by 1.5%, both with declines of over 5% for the year; the Nasdaq Composite index, dominated by technology stocks, fell by 2% last Friday, accumulating a decline of about 7% for the year. The bond market also faced sell-offs, as traders began to anticipate new inflation pressures as oil prices surged, prompting the possibility of the Federal Reserve raising interest rates this year. After a third consecutive week of declines in US Treasury bonds, yields rose to multi-month highs - the 2-year Treasury bond yield rose 18 basis points to 3.90% last week; the benchmark 10-year US Treasury bond yield surged 13 basis points to 4.38%, the highest level since late July last year. As the conflict in the Middle East enters its fourth week without any signs of easing, global markets continue to be under pressure. US President Trump issued a 48-hour ultimatum to Iran last Saturday, demanding the reopening of the Strait of Hormuz, or else facing strikes on its power plants. Iran responded by stating that any such attack would prompt an indefinite closure of the waterway, as well as targeting the US and Israeli energy infrastructure in the region, indicating the risk of both sides escalating the conflict. Furthermore, reports indicate that the Trump administration has begun initial talks on "negotiations" with Iran through a third party "messenger". US officials believe the conflict will continue for another two to three weeks. Meanwhile, Trump's advisory team is seeking to end the conflict through diplomatic means. The US demands that any agreement must include the reopening of the Strait of Hormuz, handling of Iran's high-enriched uranium, and long-term commitments on Iran's nuclear program, ballistic missile projects, and support for regional "proxies". In a relatively light economic data week, market focus may be on any clues related to inflation and the labor market conditions, especially after Federal Reserve Chair Powell's more hawkish comments following last Wednesday's rate decision. Key data on Friday, including the University of Michigan's short-term and long-term inflation expectations, as well as market sentiment indicators, will be crucial. Investors will also be looking at data from S&P Global, Inc. on Tuesday and the Kansas City Fed on Friday to understand the industrial economic situation. In terms of corporate earnings, the highlight will be Jefferies Financial Group Inc. (JEF.US) on Wednesday and Carnival Corporation (CCL.US) on Friday in what will be a relatively quiet earnings season. Oil prices remain above $100 With the Middle East conflict now in its fourth week, hopes on Wall Street and among the general public for a resolution measured in days rather than weeks or months have been shattered. As of writing, Brent crude rose by 0.29% to $106.72 per barrel. Last Thursday, oil prices briefly declined as Israeli Prime Minister Netanyahu announced at a press conference that Israel would assist the US in reopening the nearly stalled transport in the Strait of Hormuz, prompting a brief drop in oil prices. US and Israeli leaders also stated that energy infrastructure would be removed from the list of targets by their militaries. However, oil prices quickly rebounded to previous levels. The CEO of Qatar's energy company stated last Wednesday that it may take several years to repair the attack on its largest Ras Laffan LNG terminal. On Friday, Trump said, "We can talk, but I don't want to cease-fire." As a result of the escalating conflict between the US and Iran, shipping in the Strait of Hormuz is currently at a standstill, with over 150 oil tankers and cargo ships forced to anchor outside the strait. JPMorgan warned that the strait's closure is not a simple inflation fluctuation but a structural shock that could potentially lead to a global economic slowdown. An analysis by Deutsche Bank Aktiengesellschaft showed that if the blockade leads to substantial damage to energy infrastructure, the theoretical surge in oil prices to $200 per barrel could become a reality. Bank of America Securities' head of commodities and derivatives research also warned that if the blockade in the Strait of Hormuz persists for months, the global economy will unavoidably slide into a deep recession, with Brent crude and WTI crude prices likely to soar above $200 per barrel. Paul Sankey, head of Sankey Research, summed up the current situation succinctly in a recent report to clients saying, "You break it, you pay for it." He added, "This is a frightening problem in the short term... either Iran controls the Strait of Hormuz or the US does." As Bridgewater Associates founder Ray Dalio wrote on March 16, the conflict between the US, Israel, and Iran will center on a decisive confrontation over the Strait of Hormuz, with repercussions far beyond just oil prices, affecting the survival of the US-led global order. In a lengthy post on the X platform, Dalio wrote, "Everything depends on who controls the Strait of Hormuz." He believes that if Iran still has the ability to control the strait, and even participate in negotiations on who can pass through it, the US will be seen as having lost the war no matter how the conflict is resolved. On March 19, France, the UK, Germany, Italy, the Netherlands, and Japan issued a joint statement announcing their readiness to take appropriate measures to ensure the safety of navigation in the Strait of Hormuz. Canada later joined and issued the joint statement as well. The South Korean Ministry of Foreign Affairs announced on the evening of March 20 that the South Korean government has decided to join the joint statement on the Strait of Hormuz issued by the seven countries including the UK, France, Germany, Italy, Japan, the Netherlands, and Canada. As the current focal point of the conflict, both the US and Iran are showing great concern over the Strait of Hormuz. It is reported that the US military is currently deploying additional troops to the Middle East, with a focus on the Strait of Hormuz. Three US warships, including the amphibious assault ship "Boxer," and about 2,500 Marines have left San Diego, California, to head to the Middle East. The US Department of Defense had previously deployed the USS Tripoli from Japan to transport the 31st Marine Expeditionary Unit to the Middle East. It is revealed that this troop increase will provide Trump with more military options, including launching an operation to "unblock" the Strait of Hormuz, which would require deploying air and naval forces off the Iranian coastline. Additionally, the Trump administration is also considering sending ground troops to the Iranian oil export "lifeline" the island of Khark as part of a plan to seize the island as leverage to compel Iran to restore passage through the Strait of Hormuz. In response to the US military's plans to seize Khark Island, sources from the Iranian military stated that if the US launches "military aggression" against Khark Island, it will face an "unprecedented counterattack" since the attacks by the US and Israel on Iran. Fed stays put, but rate cut expectations shift The Federal Reserve decided last week to keep interest rates unchanged, a result that was largely in line with market expectations. However, the cautious policy tone of the Federal Reserve is prompting Wall Street to reassess the timing of rate cuts. In remarks to reporters last Wednesday, Federal Reserve Chairman Powell acknowledged that the oil crisis sparked by the Middle East war could push inflation higher. The rise in energy prices not only affects overall inflation, but if sustained for long enough, could further push up so-called "core inflation" through increases in prices of goods and services. This has forced the Federal Reserve to reevaluate the path previously believed to be gradually transitioning to rate cuts - now this outlook is being redefined as a longer pause, and even a potential return to rate hikes if price pressures accelerate once again. When asked about the next policy meeting, Powell stated that the data to be released in the next six weeks would be "critical to the performance and changes in outlook of the economy", but for now, "all we can really do is watch and wait". Data shows that bond traders currently estimate a 50% probability of a rate hike by the Federal Reserve by October. This assessment represents a remarkable reversal from market expectations before the outbreak of the conflict, and also sharply contrasts with the latest "dot plot" released by the Federal Reserve - the dot plot predicts one rate cut this year and another in 2027. AI enters the "performance speaks" phase At the same time, do not overlook the AI trading theme. Last Tuesday, NVIDIA Corporation (NVDA.US) CEO Jensen Huang announced at the annual GTC conference that the company will achieve $1 trillion in revenue solely from the Grace Blackwell and Vera Rubin chips. However, this news was not enough to stem the sell-off in the technology industry. NVIDIA Corporation fell by about 4.1% throughout the week, while the broader tech sector (IGV) fell by 1.4% in the five trading days, with a decline of over 20% for the year. Micron Technology, Inc. (MU.US) announced last week its plans to expand capital spending by $5 billion in the 2026 fiscal year, but this also failed to impress investors. Jeffrey Favuzza, a tech analyst at Jefferies Financial Group Inc., wrote in a client report last Thursday, "This is the second time (the other being NVIDIA Corporation) that outstanding performance data has been treated by the market as a 'sell on good news event'." In other words, even with impressive data, it is becoming increasingly difficult to support the high valuation levels of leading technology companies. According to Neha Khoda, a credit analyst at Bank of America Corp, AI has officially entered the "performance speaks" phase, where the positive impact of AI is increasingly offset by its negative effects. She said, "From a fundamental perspective, we may be at a turning point driven by AI."