Rising oil prices elevate inflation expectations; the stronger the non-farm payroll tonight, the better. Otherwise, the "stagflation trade" may return!

Against the backdrop of rising energy prices due to the Iran conflict and significantly elevated market inflation expectations, the non-farm data released tonight is expected to be "the stronger, the better." JP Morgan's trading desk believes that the rise in energy prices is pushing up inflation expectations, and if the non-farm data is weak, the market may increase bets on interest rate cuts, but the risk of stagflation will follow.

At 9:30 PM tonight, the U.S. will release the February non-farm data, with market consensus expecting an increase of about 55,000 jobs, far lower than January's 130,000, but slightly above the Federal Reserve's breakeven line of about 50,000. Analysts' predictions vary widely, ranging from -9,000 to +113,000, reflecting the current high uncertainty of the data. The unemployment rate is expected to remain at 4.3%, and the month-on-month wage growth rate is expected to slow from 0.4% to 0.3%, while year-on-year it remains at 3.7%.

The options market is pricing in a volatility range of about ±1.14% for tonight's data. JP Morgan believes that under the uncertainty surrounding the U.S.-Iran situation, the distribution of outcomes for the S&P 500 index is skewed to the downside; Goldman Sachs macro researcher Vickie Chang pointed out that geopolitical shocks have not yet dissipated, and the market-driving force of the non-farm data may be weaker than usual.

Worker Strikes and Federal Government Hiring Freeze Weigh on Non-Farm Expectations

The February non-farm employment expectation is an increase of 55,000, significantly cooling from January's 130,000, with private sector employment expected to increase by about 65,000, far below January's 172,000. The unemployment rate is expected to remain at 4.3%, and the month-on-month wage growth rate is expected to slow from 0.4% to 0.3%, while year-on-year it remains at 3.7%.

Goldman Sachs estimates that the new jobs added will only be 45,000, below market consensus. The main drag factors include: new striking workers bringing about a downward effect of approximately 31,000, and severe winter weather causing a reduction of about 5,000 jobs in the construction industry; the firm also expects the suppressive effect of the federal government hiring freeze to continue.

Additionally, when the data is released tomorrow, there will be a simultaneous population control adjustment. Goldman Sachs estimates that due to the continued slowdown in net immigration growth over the past year, the population base may be overestimated, and the labor force size and employment numbers may each be adjusted down by about 300,000 to 400,000; however, the impact on the unemployment rate and labor participation rate is expected to be very limited, both less than 2 basis points.

A new variable worth noting is the AI-driven layoff trend. Financial technology company Block announced layoffs of about 4,000 people, accounting for 40% of its total workforce, prompting the market to begin to be wary of the possibility of companies accelerating the replacement of human labor with AI. This trend will be worth continuous tracking in the coming months and even years.

Oil Prices Disturb Inflation, Fed in a Dilemma

The overall impact of the Iran conflict on the U.S. economy is currently difficult to assess, but the potential supply disruptions in the Strait of Hormuz have already caused inflation expectations to continue to rise. The 5-year breakeven inflation rate has risen to 2.46%, and the 10-year rate has risen to 2.29%, indicating that market inflation pricing has quietly changed The Federal Reserve typically tends to ignore one-time energy price shocks, but if the conflict becomes prolonged and supply disruptions persist, the timeline for interest rate cuts may be delayed (the market currently generally expects rate cuts to restart as early as this summer).

If the labor market shows significant deterioration, it will somewhat offset inflation concerns, but the current situation leaves the Federal Reserve in a dilemma.

It is reported that the United States has announced its willingness to provide insurance assistance and U.S. Navy escorts for vessels transiting the Strait of Hormuz. If this mechanism can operate effectively, it will help maintain the smooth flow of global supply chains and energy, thereby mitigating the impact on the global economy, but its actual effectiveness remains to be verified.

JP Morgan: The stronger, the better; weak data may trigger stagflation

According to JP Morgan's trading desk, "for this non-farm payroll report, the stronger, the better." In the current environment where energy prices are driving inflation expectations, strong data may suppress rate cut expectations but simultaneously confirm economic resilience; weak data may lead the market to increase bets on rate cuts, but with inflationary pressures rising alongside cooling employment, stagflation trades may resurface.

JP Morgan provided a market reaction matrix for tonight's non-farm payroll data:

An increase of over 105,000 (probability 5%), the S&P 500 may rise by 50 to 125 basis points;

An increase of 75,000 to 105,000 (probability 25%), the market will be basically flat or slightly up;

An increase of 45,000 to 75,000 (probability 40%) is a neutral range, with the index fluctuating by 50 basis points in either direction;

An increase of 15,000 to 45,000 (probability 25%), the index will drop by 1% to rise slightly by 25 basis points;

Below 15,000 (probability 5%), the index will drop by 0.5% to 1.5%.

JP Morgan also believes that if the U.S.-Iran situation eases, and the U.S. economy remains resilient, a decrease in uncertainty regarding tax and tariff policies will help improve corporate hiring intentions, driving consumption-driven super trend growth, supporting profits and risk assets, but the corresponding cost may be zero rate cuts this year.

Disagreements within the Federal Reserve, data will influence March decisions

The Federal Reserve is currently holding steady, with clear internal disagreements within the FOMC. Governor Waller stated that if the January employment data is significantly revised down or the strong momentum fades, he would support a rate cut in March; if the downside risks to employment have weakened, then maintaining the current interest rate would be more appropriate. Governor Miran holds a more dovish stance, hoping for four rate cuts this year, and the sooner, the better.

New York Fed President Williams stated, if inflation continues to decline, rate cuts will continue to advance. Goolsbee (who does not have a vote this year) is optimistic about rate cuts this year but emphasizes the need to see clear evidence of inflation returning to target, especially being cautious of persistently high core services inflation.

The Federal Reserve's latest dot plot expects one rate cut in 2026, lowering the target range for the federal funds rate to 3.25% to 3.50%; the next economic forecast update will be announced at the March 18 policy meeting Goldman Sachs interest rate trader Brandon Brown pointed out that the addition of 50,000 jobs and an unemployment rate of 4.4% are basically in line with the current market pricing; if the addition exceeds 75,000 and the unemployment rate remains stable or declines, short-term rates will face further selling pressure; if the unemployment rate rises to 4.5% or the addition is below 25,000, the market will increase the pricing of rate cut premiums, providing support for the short end.

Market expectations are inconsistent, and data releases will bring clearer trading paths

Citigroup and Morgan Stanley currently have significant differences in their unemployment rate forecasts. The current consensus unemployment rate expectation is 4.3%. Citigroup believes that the strong employment data from September to February of the following year is influenced by seasonal adjustments under a "low hiring/low firing" model. This false stability is expected to shift starting in March, with significant weakness anticipated in the second quarter, and the unemployment rate is expected to rise to 4.7% within the year.

Morgan Stanley, on the other hand, believes that the weak data in February is a temporary disruption (such as weather), and the labor market has actually stabilized without continuous deterioration. They expect the unemployment rate to remain unchanged at 4.3%. Amidst the divergent expectations, the release of real data will provide the market with a clear trading path.

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