Financial Markets                      03/06 09:29

   

   NEW YORK (AP) -- U.S. stocks are falling sharply Friday after getting a 
whiff of a worst-case scenario for financial markets: a weakening economy 
combined with high inflation.

   The S&P 500 dropped 1.6% after a report showed U.S. employers cut more jobs 
last month than they created and after oil prices jumped to their highest level 
in nearly two years because of the Iran war. It's a combination that investors 
hate because no one in the world has a good tool to fix both a weak economy and 
high inflation at the same time.

   The Dow Jones Industrial Average was down 823 points, or 1.7%, as of 10:10 
a.m. Eastern time, and the Nasdaq composite was 1.4% lower.

   "You can't sugarcoat this report," according to Brian Jacobsen, chief 
economic strategist at Annex Wealth Management. "A negative payrolls number 
combined with a big jump in oil prices will have traders worrying about 
stagflation risks."

   Stagflation is what economists call a stagnating economy combined with high 
inflation, and a separate report released Friday added to the sour mix after 
showing that U.S. retailers made less money last month than economists 
expected. It raised the disconcerting possibility that spending by U.S. 
households, the main engine of the economy, may be stretched near its maximum.

   Usually when the economy is unsteady and the job market is weakening, the 
Federal Reserve cuts interest rates to give things a boost. Lower rates can 
make it more affordable for households to get mortgages and companies to raise 
money to build factories, while also helping prices for stocks and other 
investments. The Fed cut its main interest rate several times last year and had 
indicated more were to come this year.

   But lower interest rates can also make inflation worse. And the Fed's hands 
may be increasingly tied because spiking oil prices are pushing inflation 
higher due to disruptions for the energy industry because of the war.

   The price for a barrel of Brent crude, the international standard, jumped 
another 6.9% to $91.35 and touched its highest level since April 2024. A barrel 
of benchmark U.S. crude climbed 9.2% to $88.45.

   Oil prices have surged, with Brent up from near $70 late last week, as the 
war has expanded and included areas critical to the production and movement of 
energy in the Middle East. Much will depend on what happens with the Strait of 
Hormuz. Roughly a fifth of the world's oil typically sails through the narrow 
waterway off Iran's coast.

   If oil prices spike further, like to $100 per barrel, and stay there, some 
analysts and investors say it could be too much for the global economy to 
withstand.

   To be sure, the U.S. stock market has a history of bouncing back relatively 
quickly following conflicts in the Middle East and elsewhere, as long as oil 
prices don't jump too high for too long. Uncertainty about what will happen has 
caused frenetic swings across financial markets this week, sometimes hour by 
hour.

   On Thursday, for example, the Dow dropped more than 1,100 points before 
paring it to a loss of 784. On Monday, the S&P 500 erased a loss of 1.2% 
entirely to end with a tiny gain.

   President Donald Trump's most recent signal on the war was that he wants an 
"unconditional surrender" of Iran, apparently ruling out negotiations.

   In the bond market, Treasury yields rose further as the jump in oil prices 
pushed inflation pressures upward. More traders are betting on the possibility 
that the Fed will cut interest rates just once this year, instead of at least 
twice, according to data from CME Group.

   The yield on the 10-year Treasury climbed to 4.17% from 4.13% late Thursday 
and from just 3.97% before the war with Iran started.

   Smaller companies often feel the bite of high borrowing costs more because 
many need to borrow to grow. Smaller companies can also be more dependent on 
the strength of the U.S. economy than big multinational rivals, and the 
smallest stocks on Wall Street took the sharpest dives Friday.

   The Russell 2000 index of small stocks fell a market-leading 2.2%.

   It was a near wipeout among the biggest stocks on Wall Street as well. More 
than 90% of the stocks within the S&P 500 index dropped.

   Companies with high fuel bills led the way. Old Dominion Freight Line sank 
7%, Norwegian Cruise Line Holdings fell 6.1% and Southwest Airlines lost 5.7%.

   In stock markets abroad, indexes slumped in Europe following a better finish 
in Asia. France's CAC 40 fell 1.3%, and Germany's DAX lost 1.5%, while Hong 
Kong's Hang Seng jumped 1.7% and Japan's Nikkei 225 added 0.6%.

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   AP Business Writers Chan Ho-him and Matt Ott contributed.

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