Volatility in stock, bond and oil prices persisted this week amid new developments in the Middle East and a dynamic outlook for the war’s economic impact. With Brent crude holding around $100 per barrel in midweek trading, market moves across asset classes reflected shifting sentiment around how much the war will ultimately change the trajectory for inflation and growth. Federal Reserve Chair Jay Powell told students at Harvard University on Monday that inflation expectations “do appear to be well anchored beyond the short term.” The central bank tends to look beyond fleeting oil shocks, given monetary policy’s lagging effects on the economy. However, Powell cautioned that households and businesses could be more sensitive to inflation risks after witnessing a series of supply shocks, from the pandemic to the Iran war. Meanwhile, looking ahead to the Labor Department’s March employment report on Friday, economists forecast a gain of 59,000 jobs for the month, according to estimates compiled by Dow Jones. The U.S. lost 92,000 jobs in February. The stock market will be closed for Good Friday.

Europe, a large buyer of liquified natural gas from the Gulf, is among the most exposed regions to the ongoing energy crisis. The war has reignited concerns around inflation, but the current energy shock is more likely to hit growth than spark a 2022-style inflation spiral that mirrors the aftermath of the invasion of Ukraine. The global economy should be able to absorb the shock if oil prices stabilize. A sustained move higher would raise the risk of stagflation and recession.

PGIM’s Katherine Neiss, Deputy Head of Global Economics and Chief European Economist, and Guillermo Felices, Global Investment Strategist, take a closer look at Europe’s exposure to the energy shock and potential headwinds to growth that may follow.