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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
A stronger stagflationary wind is blowing through the global economy as oil prices surge past $100 a barrel. The latest US employment data on Friday provided evidence — albeit mixed — of a weakening labour market just as the Iran conflict sparks concerns about a price shock from rising energy prices and disrupted supply chains.
The US economy shed 92,000 jobs in February as the unemployment rate climbed to 4.4 per cent. This followed a big “beat” a month earlier, which, as I feared, proved an anomaly. After a 2025 marked by the weakest average monthly job increases outside a recession in more than two decades, the employment landscape remains challenging.
It’s not just about the labour market. Inflation was also flashing cautionary signals before the start of the US-Israel attacks on Iran. Data released earlier showed the personal consumption expenditures price index — the Federal Reserve’s preferred measure of inflation — rose to 2.9 per cent in December, its highest level since March 2024. Meanwhile, core producer price inflation, a measure of input prices, rose to 3.6 per cent, well above the consensus forecast.
And now many economies face the dual pressures of surging energy costs and renewed supply chain disruption across maritime and aviation routes. Despite this set of mounting risks, many market segments had been treating the spread of war in the Middle East as a “flesh wound” — a temporary and quickly reversible disruption to an otherwise resilient global economy. After all, this was the profitable approach for a 2025 that involved one shock after the other.
The 10-year US Treasury yield was trading at 4.13 per cent on Friday, roughly where it was in the middle of last month. In between, it had sunk to about 3.95 per cent. To a casual observer, this “round trip” suggests that the overall influence of the competing forces on what is arguably the world’s most important financial benchmark is essentially de minimis. Yet this netting approach dismisses too readily the history of “tipping points”, underappreciating the mounting risks that demand the attention of policymakers and long-term investors. In the real economy and finance, the negative factors do not net out; they compound.
It is notable that while a geopolitical earthquake such as the Iran war would have traditionally triggered a flight to safety into US government debt, yields have risen due to inflation worries.
How great a shock the world faces will depend on the duration and spread of the Iran war. More disruption to supply chains will no doubt spur a further shift away from “just-in-time” efficiency to the more costly, yet necessary, “just-in-case” approach to inventory management. It’s a structural evolution that bakes higher costs into the system at a time when affordability is already an economic, political and social issue.
The financial outlook is also challenging due to three distinct risks. Each does not appear large enough to cause systemic risk. Together, however, they can form a self-reinforcing, destabilising force.
The first relates to private credit in advanced economies. What began as idiosyncratic stress at some companies is at risk of evolving into a broader issue as some investors head for the exits in an asset class that, according to Marc Rowan of Apollo, is facing a “shakeout”. There have been textbook signs of an overextended industry — poor underwriting, questionable valuations, ill-suited investment vehicles and fraud. It is unlikely that the rise of questionable “continuation vehicles” — where private capital groups move assets between funds — can delay the inevitable valuation reckoning.
The second relates to risks around the rational bubble that drove massive funding to the development of AI. The technology remains an extremely exciting transformative force with a tremendous productivity promise. But there will be a few big winners and lots of losers. And the much-publicised decision by payments company Block to slash its workforce by 40 per cent has provided a reminder that AI’s adoption risks dislocation in the workforce.
A third risk is that with inflation heading higher, the global bond market’s ability to absorb record supply is likely to be tested. Already, three of the seven G7 economies — France, Japan and the UK — have been challenged by the “bond vigilantes” in the past few years. If they are not careful, they and many highly indebted companies could well find their funding conditions less hospitable.
The global economy is not just looking at a volatile 2026. It is on the road to further fragmentation and greater dispersion of outcomes for households, sectors and countries.