Tonight! The first non-farm payroll report under Middle Eastern conflict: Will the Federal Reserve lean towards cutting rates or raising rates?

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Source: Caixin Global

The U.S. Bureau of Labor Statistics (BLS) will release March nonfarm payroll employment data at 8:30 PM Beijing time tonight. As the first U.S. nonfarm report affected by the fighting in the Middle East, investors will undoubtedly scrutinize the detailed data in the employment report to assess the Federal Reserve’s specific interest-rate path later this year.

It’s worth noting that due to the Good Friday holiday, U.S. stock markets will be closed tonight, so the impact of the nonfarm data may not become fully apparent until next Monday. Of course, the foreign exchange and bond markets will still be trading normally tonight when the nonfarm data is released; in a holiday atmosphere with relatively low liquidity, traders in the bond and FX markets may be more in need of guarding against market volatility being amplified.

How is the market expecting tonight’s nonfarm to perform?

According to an economic survey of economists by the media, the number of new nonfarm jobs added by the U.S. in March is expected to reach 60,000, reversing the unexpected drop of 95,000 jobs in February caused by a large-scale strike by healthcare workers.

If the data meets expectations, this month’s increase will be roughly in line with last year’s March figure, and it may be sufficient to reach the current U.S. labor market’s “breakeven point”—the number of jobs needed to keep the unemployment rate stable despite a sharp decline in the number of immigrants.

At present, Wall Street institutions are broadly divided in their estimates for tonight’s data—the most optimistic expects March nonfarm employment to rise by 150,000, while the most pessimistic expects it to fall by 15,000, marking a second consecutive month of “negative nonfarm.”

In terms of the unemployment rate, economists expect the U.S. unemployment rate in March to hold steady at 4.4%. Although, by past standards, when U.S. nonfarm data in a given month grows only at a “low double-digit” level, it may look quite weak, similar numbers might now be enough to keep the unemployment rate stable—or even result in a reasonably good data performance.

Guy Berger, chief economist at Homebase, which provides workforce management services to small businesses, said: “We must recalibrate how we understand good and bad employment data.”

In a press conference last month after the Federal Reserve’s decision, Fed Chair Powell had also said that the U.S. labor-market breakeven point for employment growth is currently low. The figure the Fed previously cited was about 50,000, but he implied it could now be as low as zero—reasonable in the context of a collapse in illegal immigration (which affects both employment as the numerator and the labor force size as the denominator).

It should be noted that the nonfarm reports over the past two months have been extremely volatile—January saw an increase of 126,000 nonfarm jobs added (far stronger than expected), while February unexpectedly recorded job losses of 92,000. Therefore, what kind of revisions will be made to the data from the first two months in tonight’s nonfarm report is a major focus for market participants.

Was February nonfarm unusually weak, or distorted?

Overall, industry insiders generally believe the nonfarm data showing a reduction of 92,000 jobs in February is indeed not good—but there may be some distortion behind it: about 30,000 workers from Kaiser Health and Starbucks were on strike at the time and were not counted in the labor force, while harsh winter weather severely affected the construction industry as well as the leisure and hotel industries.

If these two factors are excluded, potential job creation is actually close to a reduction of 30,000 to 40,000 jobs. Even though it is still soft, it would not be as extreme.

Looking ahead to March nonfarm, many investment banks are also currently expecting that many of the adverse factors in the February employment data described above will be alleviated, and may even, to some extent, boost the performance of the March data. A strategist at TD Securities pointed out that they expect nonfarm payroll employment in March to rise moderately by 30,000.

“The reversal of the impact from weather and strikes should lead to an employment composition similar to the end of 2025, with larger support from the healthcare sector this month. We also expect the unemployment rate to remain at 4.4%, despite the risk of an increase. Average hourly earnings month over month could grow mildly by 0.2%, translating to year over year growth of 3.6%,” TD added.

Automatic Data Processing Company (ADP) reported earlier this week that March employment in the private sector increased by 62,000. In evaluating the report, ADP Chief Economist Nela Richardson said that overall hiring remained steady, while employment growth that month was tilting toward certain industries, including healthcare (which saw a sharp decline in February).

Goldman Sachs estimates that March nonfarm payrolls will be slightly higher than the market consensus expectation—at 70,000.

Goldman Sachs’ favorable factors for nonfarm, including a 32,000 boost from the end of worker strikes; a seasonal rebound after growth was dragged down by poor weather in February; and the average number of first-time applications for unemployment benefits in March falling to 211,000, below February’s 220,000.

On the downside, Goldman Sachs expects government-sector employment to fall by 5,000 people (the federal government falling by 10,000, partially offset by an increase of 5,000 from state and local governments).

Mixed/neutral factors are that other indicators tracking employment growth in March are mixed. The employment indicators that Goldman tracks average an expectation of 69,000 jobs added in March.

Will the Middle East conflict impact be limited for now?

As the first nonfarm report under the impact of the Middle East conflict, one thing many investors want to know tonight is, undoubtedly, just how big the impact of this conflict will be on the U.S. labor force. However, industry participants generally believe that it is still too early to judge how large an impact the conflict will have on the U.S. fragile labor market; at least, the March report is unlikely to show a major shock.

Nancy Vanden Houten, chief economist at Oxford Economics, said in a statement on Thursday: “The war between the U.S./Israel and Iran makes the labor market more fragile, but any impact will take time to become apparent. The latest data on unemployment benefit claims confirms this—these data show that the labor market conditions are stable.”

Goldman Sachs is currently the only firm that explicitly models the impact of an oil shock on the labor market. The bank estimates that by the end of the year, the average number of employed people in the U.S. will be dragged down by about 10,000 per month, mainly concentrated in the leisure and hospitality industry as well as retail, because energy costs erode households’ real income.

However, Goldman Sachs noted that the key is that the transmission of the war’s impact often lags by 4 to 8 weeks. Hiring during the nonfarm survey week in March mainly reflects sentiment from late February to early March—so March data may still look fine, while April and May are when the real damage will show.

Of course, given that this Middle East war has already caused markets to swing the expectations for the Federal Reserve’s rate path between more hikes and cuts, the strength or weakness of tonight’s nonfarm data may still, to a large extent, influence the tilt of the Fed’s interest-rate balance.

In terms of rate pricing, before the Iran-U.S. conflict broke out on February 28, overnight index swaps (OIS) had priced in at least two rate cuts by the Fed this year (each 25 basis points). After that, those expectations were erased due to concerns about inflation, and traders started pricing in the possibility that the Fed’s next move could be a rate hike. But recently, the market has begun pricing again that the Fed may be closer to rate cuts.

Tom di Galoma, Managing Director at Mischler Financial Group, said, “This nonfarm data is very likely to be stronger than the bond market’s expectations. Before the four-day Easter holiday in the U.K. and Europe, the whole week has been about risk reduction and closing positions.”

The Fxstreet analyst team also noted that if the number of nonfarm payrolls comes in unexpectedly stronger than 70,000, it could prompt the market to reassess the likelihood of Fed rate hikes and boost the U.S. dollar. Conversely, if the data is below 50,000, especially with the unemployment rate rising, the dollar may struggle to outperform other currencies.

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Editor: Zhu Hunan