Global equity markets fell in March. Geopolitical tensions in the Middle East escalated, pushing up energy prices and raising concerns that high inflation will reemerge. Investors faced more uncertainty, which led to an exit from risk assets over the month. With the Strait of Hormuz effectively closed, oil prices rose by over 50%.

The Bank of Canada (BoC), U.S. Federal Reserve Board (Fed), Bank of England, European Central Bank and Bank of Japan also held their policy interest rates steady at their respective March meetings. All expressed caution that inflation could move higher in the coming months, so they are carefully analyzing how Middle East tensions are impacting prices and their domestic economies.

In Canada, the S&P/TSX Composite Index declined, hindered by weakness in the materials sector. U.S. equities also dropped. Yields on 10-year government bonds in Canada and the U.S. increased over the month on higher inflation expectations, which raised the possibility that central banks will be forced to raise interest rates this year. The price of gold declined over March.  

Fears of rising inflation amid conflict in the Middle East  

At the end of February, the U.S. and Israel struck Iran, setting off a conflict that persisted over the entire month of March. The U.S. and Israel were at odds with, among other things, Iran’s nuclear weapons program, which the countries were looking to end. The heightened tensions in the Middle East effectively closed the Strait of Hormuz. The strait is a critical waterway in the area for the global distribution of oil. Over 2024 and 2025, an average of 20 to 21 million barrels of oil pass through the strait on a daily basis, according to the International Energy Agency (IEA). As the global supply of oil came into question, the price of oil surged higher, raising concerns that inflationary pressures were building. Despite the IEA releasing a record 400 million barrels of oil reserves to the market and several countries pledging to stabilize the oil market, energy prices still went higher. The longer the conflict persists, markets were beginning to worry about global economic activity. As the tensions lingered, the U.S. and Iran were reportedly communicating, exchanging plans to come to a ceasefire. However, a deal could not be reached and the military strikes from both sides intensified. Markets have begun shifting expectations to the possibility of major central banks raising interest rates this year in response to higher inflationary pressures. Financial and economic uncertainty heightened in response to escalating geopolitical tensions.

Canada’s labour market struggling  

It’s been a rough start to 2026 for Canada’s labour market. After showing signs of stabilizing near the end of 2025, the Canadian economy lost jobs over January and February. As reported in March, the Canadian economy lost 83,900 jobs in February, which was the largest decline since January 2022. The decline in jobs was driven by a sharp fall in the full-time sector, which lost 108,400 jobs. Conversely, the part-time sector added jobs in the month. There are several factors that could continue to weigh on Canada’s labour market. Trade tensions with the U.S. persist, which has slowed economic activity, particularly in several key sectors, such as manufacturing. Meanwhile, higher energy prices have negatively impacted Canadians at the gasoline pumps. With higher inflation expected, discretionary income could come down and weigh on consumer demand. At its March meeting, the BoC held its benchmark overnight interest rate steady at 2.25%. The BoC expressed some caution that inflation could move higher amid the conflict in the Middle East. Canada’s central bank noted it is closely monitoring developments in the conflict in the Middle East and how it may impact Canada’s economy, inflation and labour market. Expectations are growing that the BoC may need to raise interest rates this year if inflation does spike as expected in response to higher energy prices.

U.S. inflation remains elevated before climbing oil prices  

Before the conflict in the Middle East began, inflationary pressures in the U.S. remained relatively elevated. As reported in March, the annual inflation rate in the U.S. was 2.4% in February, which was unchanged from January. An increase in energy prices was offset by a decline in prices for used cars and trucks. The core inflation rate, which excludes more volatile items, also held steady at 2.5%. This all came ahead of the Middle East conflict, which sent energy prices skyrocketing. Meanwhile, the personal consumption expenditure price index (PCE) was 2.8% year over year in January. The PCE is the preferred inflation gauge for the Fed. Over March, markets have grown concerned about inflation moving higher. Higher energy prices can have a broad-based impact on overall prices, affecting manufacturing and shipping costs, to name just a few. At its March meeting, the Fed held its federal funds rate steady at a target range of 3.50%–3.75%. The Fed noted the rate hold was warranted given inflation remains elevated and U.S. job gains were relatively robust. However, the Fed did note that it is carefully assessing the impact of tensions in the Middle East on the U.S. economy. The Fed said inflation could pick up in the coming months. However, at an event late in the month, Fed Chair Jerome Powell said long-term inflation expectations have not changed, at least not yet. Markets shifted expectations over the month, now assessing the possibility of a rate hike this year. The Fed will have to carefully navigate its policy interest rate through the potential for higher inflation against the possibility of slower economic growth.

China targets slower growth in 2026

In China, the National People’s Congress held meetings during the month of March. A key announcement coming from the meetings was the government’s 2026 gross domestic product growth target of 4.5%–5.0%. This is down slightly from the 5.0% growth target in 2025, reflective of ongoing trade tensions with the U.S., escalating geopolitical tensions and ongoing weakness in the country’s property market and domestic demand. Regarding trade, U.S. President Donald Trump and Chinese President Xi Jinping have scheduled a summit for mid-May. Before that, however, both sides launched investigations into the other’s trade practices. The U.S. and China reached a one-year trade truce last year and are hoping to agree on a more permanent trade deal. Meanwhile, China continues to grapple with soft domestic demand. The government has implemented several stimulus measures to help boost demand, but growth has not reached the desired levels. However, retail sales got off to a relatively strong start to the year, boosted in large part by the Lunar New Year holiday. As reported in March, over the January to February period, retail sales rose 2.8% year over year, topping expectations. China hopes improvements in demand and industrial output can help put the country on track for better-than-targeted economic growth.