On April 3 at 20:30 Beijing time, the US Department of Labor released the March non-farm payrolls data. The core view is that the situation with Iran has persisted for over a month without signs of a quick ceasefire, indicating that high oil prices will likely persist for some time, with undoubtedly more severe impacts on the economy, policy, and markets. As the US labor market loosens further and the economic impact of high oil prices becomes more apparent, signs of "stagnation" will gradually emerge. Raising interest rates could push the US economy into recession, while cutting rates might reignite inflation, leaving the Federal Reserve's actions still constrained. A genuine shift in policy space will likely occur only after a change in the Federal Reserve chair. A continued warning: given the potential scenario of "rising oil prices—increasing inflation—the Fed pausing rate cuts or even hiking—increased risk of stagflation or even recession," current asset prices appear under-priced. Caution is warranted against potential deep adjustments ahead, with close monitoring of oil prices and developments in the Iran situation in the short term.
1. US non-farm payrolls increased by 178,000 in March, significantly exceeding the expected 65,000. The unemployment rate was 4.3%, below the expected and prior reading of 4.4%.
2. By sector, positive contributions mainly came from the Education and Health Services sector (+91,000), with Healthcare adding 76,000 jobs. Negative contributions were primarily from Government (-8,000) and the Financial Activities sector (-15,000).
3. Following the non-farm payrolls release, US stocks fell, the US dollar rose, US Treasury yields increased, and expectations for rate cuts cooled. Interest rate futures implied slight expectations for hikes in September and October, while the probability of a rate cut by the end of 2026 decreased from 27.4% to 18.6%.
4. How to interpret this data? Four points deserve attention: > Establishment Survey: The significant non-farm payroll increase was mainly due to the resolution of weather and strike disruptions, while technical model updates amplified the rebound. > Household Survey: The unexpected drop in the unemployment rate was primarily due to significant declines in both the number of unemployed persons and the total labor force. The labor force participation rate fell below expectations, hitting its lowest level since late 2021, indicating the "quality" of the unemployment rate decline is not high. > Survey Timing: The employment survey was conducted in the middle of the month, reflecting only the first two weeks' impact before the US-Iran conflict. The full effect of the Iran situation on "stagnation" may not yet be apparent, and the actual impact on the labor market needs to be verified with Q2 data. > Overall: The US labor market is currently in a "tight balance" (short-term reductions in labor supply have offset weakening labor demand, resulting in a mild unemployment rate). Under the influence of the Iran situation, risks of a future rise in the unemployment rate remain.
5. After the March FOMC meeting, market expectations briefly shifted toward rate hikes amid evolving Middle East tensions, later adjusting following Chair Powell's Harvard speech and signals of a ceasefire from Trump. Currently, with this relatively robust non-farm payroll report and recent "ultimatums" to Iran from Trump, combined with persistently high oil prices and sticky inflation, the Fed faces greater difficulty in cutting rates in the short term.
Details are as follows:
1. US March non-farm payrolls rebounded strongly, far exceeding market expectations, while the unemployment rate edged down. > Overall Performance: US non-farm payrolls increased by 178,000 in March, significantly above the expected 65,000. January non-farm payrolls were revised up from +126,000 to +160,000, while February was revised down from -92,000 to -133,000. After revisions, combined non-farm payrolls for January and February were 7,000 lower than previously reported. The March unemployment rate was 4.3%, below the expected and prior reading of 4.4%. The labor force participation rate was 61.9%, below the expected and prior 62.0%. Average weekly hours worked were 34.2 hours, below the expected and prior 34.3 hours. Average hourly earnings rose 0.2% month-over-month, below the expected 0.3% and prior 0.4%. > Sectoral Performance: Positive contributions mainly came from Education and Health Services (+91,000), with Healthcare adding 76,000 jobs, followed by Leisure and Hospitality (+44,000), Trade, Transportation, and Utilities (+33,000), Construction (+26,000), and Manufacturing (+15,000). Negative contributions were primarily from Government (-8,000) and Financial Activities (-15,000). Among 14 major industries, 9 showed employment gains while 5 declined, a clear improvement from the previous month.
2. Following the non-farm payrolls release, US stocks fell, the US dollar rose, US Treasury yields increased, and rate cut expectations cooled. > Major Asset Performance: After the release, US stock futures declined, the US dollar and Treasury yields rose, while gold was relatively unchanged. As of the close on 04/03, S&P 500 futures fell 0.28%, the 10-year Treasury yield increased 3.57 basis points to 4.34%, and the US Dollar Index rose 0.19% to 100.19. > Changes in Rate Cut Expectations: Following the release, market expectations for Fed rate cuts cooled. The probability of a June rate cut implied by interest rate futures fell from 8% to 3.2%, with slight expectations for hikes emerging for September and October. The probability of a rate cut by the end of 2026 decreased from 27.4% to 18.6%.
3. Despite strong data, underlying concerns persist; closely watch oil prices and Iran developments in the short term. > Interpreting the Data: 1) From the establishment survey perspective, as weather improved and the Kaiser Permanente strike ended, negative disruptions from February were resolved. Construction and manufacturing employment turned positive, while ambulatory healthcare services added 54,000 jobs, including 35,000 workers returning after the strike ended. Combined with pro-cyclical adjustments from business birth-death model updates, these factors significantly amplified the March rebound. 2) From the household survey, the unexpected drop in the unemployment rate was mainly due to significant declines in both unemployed persons (-332,000) and the total labor force (-396,000). Meanwhile, the labor force participation rate also fell below expectations to its lowest since late 2021, indicating the "quality" of the unemployment rate decline is not high. 3) Regarding survey timing, the March employment survey was conducted mid-month, so it only reflects impacts from the first two weeks before the US-Iran conflict. The effect of Middle East tensions on US economic "stagnation" may not yet be apparent, and the actual impact on the labor market needs verification with Q2 data. 4) Overall, the US labor market is in a "tight balance" where short-term reductions in labor supply have offset weakening labor demand, resulting in a mild unemployment rate. We believe the US labor market will continue to cool amid fluctuations, especially with ongoing Middle East tensions. Cost pressures may dominate business decisions; if hiring continues to slow and layoffs gradually increase, it could suppress wage growth and consumer demand, raising the risk of higher unemployment. > Rate Cut Outlook: After the March FOMC meeting, market expectations briefly shifted toward rate hikes amid evolving Middle East tensions, later adjusting following Chair Powell's Harvard speech and signals of a ceasefire from Trump. Currently, with this relatively robust non-farm payroll report and recent "ultimatums" to Iran from Trump, combined with persistently high oil prices and sticky inflation, the Fed faces greater difficulty in cutting rates in the short term. Looking ahead, the Iran situation has persisted for over a month without signs of a quick ceasefire, suggesting high oil prices will continue, with increasingly severe impacts on the economy, policy, and markets. As the US labor market loosens further and the economic impact of high oil prices becomes more apparent, signs of "stagnation" will gradually emerge. Raising rates could push the economy into recession, while cutting rates might reignite inflation, keeping the Fed constrained. A genuine shift in policy space will likely occur only after a change in the Federal Reserve chair. A continued warning: given the potential scenario of "rising oil prices—increasing inflation—the Fed pausing rate cuts or even hiking—increased risk of stagflation or even recession," current asset prices appear under-priced. Caution is warranted against potential deep adjustments ahead, with close monitoring of oil prices and developments in the Iran situation in the short term.
Risk提示: Ongoing surprises in the US economy and inflation, Federal Reserve monetary policy, and geopolitical conflicts.
