Jobs Miss and Oil Spike Signal Stagflation Risk for U.S. Economy

Weak Jobs Report Rattles Markets as Fed Faces Twin Threats of Soft Labor and Soaring Oil

Stock futures are steady but lower, but Treasury yields fell on Friday after the U.S. labor market showed unexpected weakness in February as total nonfarm payrolls fell by 92,000, a sharp reversal from January’s upwardly revised gain of 126,000. The unemployment rate rose to 4.4% from 4.3% and average hourly earnings matched the previous month at 0.4%.

Payrolls Miss by a Wide Margin

To look at it another way, the payrolls change was well below the 58,000 forecast. The unemployment rate was higher than the 4.3% estimate and average hourly earnings exceeded the 0.3% forecast.

Fed’s Dual Mandate Is Now at Risk

I think the data reveals that our hopes for a steady labor market may have been a little too optimistic. Meanwhile, we’re likely facing a jump in inflation due to soaring crude oil prices, so the economy is looking a little bleak at this time. But we really can’t judge inflation yet because we don’t really know how long crude oil will stay at current levels. Nonetheless, the Fed’s mandates for labor and inflation are both at risk.

Fed Likely to Hold in March but Traders Are Pulling Forward Cut Expectations

With the release of this report, Fed officials are likely to maintain their cautious approach at their March 17-18 policy meeting. They are currently advocating a wait-and-see approach as they consider both the impact of rate cuts and geopolitical factors such as tariffs and now, the U.S.-Iran war.

Meanwhile, traders have a slightly different view of the developing situation. After the NFP report, financial futures traders actually pulled forward expectations for the next cut to July and priced in a greater chance of two cuts before the end of the year, according to the CME’s FedWatch tool. A March cut is definitely off the table and the June cut is slowly losing support.

Fed Officials Split on How to Read the Data

The immediate reaction from a pair of Fed officials was mixed. Mary Daly, president of the Federal Reserve Bank of San Francisco, cautioned to CNBC that the labor market data has been volatile. “I don’t think you can look through this report, but I also don’t think you should make more of it than one month of data,” she said.

Fed Governor Christopher Waller said that a weak jobs report could impact policy. He’s been on the minority side of the FOMC, calling for rate cuts sooner rather than later.

Dow Futures Down 600 Points as Oil and Jobs Data Combine

Dow futures are now down by 600 points ahead of the cash market opening. While most of those losses can be attributed to soaring oil prices, we have to think that some are related to the weak employment data.

More Information in our Economic Calendar.