The U.S. February non-farm payrolls report fell significantly short of expectations, with the unemployment rate edging higher. Overall performance: Non-farm payrolls decreased by 92,000, far below the expected increase of 55,000. The unemployment rate rose to 4.4%, exceeding both the forecast and the previous reading of 4.3%. The labor force participation rate dropped to 62.0%, below the expected and prior figure of 62.5%. Average weekly hours held steady at 34.3 hours, matching expectations and the previous value. Average hourly earnings increased by 0.4% month-over-month, surpassing the 0.3% expectation. Overall, the February report was markedly weaker than market forecasts, although wage growth maintained some resilience. The data indicates a clear slowdown in employment momentum and suggests that January's figures contained significant noise, with labor market loosening continuing its uneven progression.
Sectoral performance: Government employment continued to decline, shedding 6,000 jobs. Most private sector industries also contracted: Education and health services (-34,000) and leisure and hospitality (-27,000) saw the largest declines, constituting the primary sources of the monthly employment drop. Manufacturing (-12,000), construction (-11,000), transportation and warehousing (-11,000), and information services (-11,000) all experienced reductions to varying degrees. Only a few sectors maintained growth, with financial activities adding 10,000 jobs and wholesale trade increasing by 6,000. Retail trade and utilities also saw modest gains of 2,300 and 1,300 jobs, respectively. Structurally, the employment decline was broad-based, extending beyond the previously supportive education and health services sector. This reflects a confluence of factors, underscoring the underlying fragility of the job market.
Following the jobs report release, U.S. equities and the dollar declined, while Treasury prices and gold advanced, with market expectations for Federal Reserve rate cuts increasing. Asset class performance: After the data, U.S. stock indices, the dollar, and Treasury yields moved lower, while gold prices rose. As of the March 6 close, the S&P 500, Nasdaq, and Dow Jones indices fell by 1.33%, 1.59%, and 0.95%, respectively. The 10-year Treasury yield decreased by 0.77 basis points to 4.13%. The U.S. Dollar Index dipped 0.09% to 98.96, and spot gold climbed 1.64% to $5,168 per ounce. Shift in rate cut expectations: The weak report led to a slight升温 in market expectations for Fed easing. The probability of a rate cut by June, as implied by interest rate futures, rose from 37.8% to 56.7%. The anticipated timing for the first cut remains September, with the total number of cuts expected for 2026 increasing from 1.58 to 1.76.
Four primary reasons account for the significant drop in payrolls, with a potential easing window anticipated in the second half of the year. Reasons for the sharp decline: The major factors behind the substantial miss include: 1) The healthcare sector, a consistent supporter of job growth recently, performed poorly, largely impacted by the Kaiser Permanente healthcare workers' strike that began in late January, involving over 30,000 participants. 2) A winter storm and extreme cold in early February caused temporary disruptions to weather-sensitive industries like construction, transportation/warehousing, and leisure/hospitality. 3) Layoffs at some internet companies and ongoing reductions in government staffing also weighed on employment. 4) Technical updates to the business birth/death model amplified the pro-cyclical nature of the payrolls data. Ultimately, the large miss underscores the continued fragility of the U.S. labor market and the ongoing, albeit bumpy, loosening process.
Outlook: Since the start of 2026, public comments from several Fed officials have been notably cautious, with the "Fed Speak" sentiment indicator rebounding from its year-start level. From the current standpoint, considering persistent service inflation stickiness and rising oil prices amid Middle East geopolitical tensions, the labor market now also signals weakness. This creates a challenging "tight spot" for the Fed's dual mandate, likely refocusing attention on employment data. The Fed is expected to maintain a wait-and-see stance in its first-half meetings, awaiting more data. For financial markets, however, this significantly weaker-than-expected jobs report, coupled with January's soft CPI (though core inflation pressures remain), supports expectations for future rate cuts. A key inflection point for policy space is likely to occur after the Fed Chair transition in May. Following the leadership handover, any marginal policy adjustment under a Warsh-led Fed, combined with a gradual slowing of economic momentum in the first half, could significantly open the door for rate cuts in the second half. As noted in the annual report "Weak Recovery and Rebalancing - 2026 Overseas Macro Outlook," the U.S. economic fundamentals in 2026 do not necessitate aggressive rate cuts. However, against the backdrop of the Fed Chair change in May and mid-term Congressional elections in November, the Fed's independence faces challenges. Current market expectations for approximately 1.8 rate cuts in 2026 align with economic fundamentals but may underprice risks to Fed independence. Beyond the rate path, dollar liquidity remains a key focus. Without substantial balance sheet expansion in 2026, underlying dollar liquidity is unlikely to re-expand significantly, leaving the U.S. non-bank sector and offshore dollar system vulnerable to periodic liquidity risks. The volatility of risk assets like the Nasdaq and commodities may not decline substantially. Risks include potential surprises in U.S. economy/inflation, Fed policy, and geopolitical conflicts.
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