Non-Farm Payrolls Miss, Oil Prices Surge. Fed Mired in Dilemma of Rising Inflation and Soaring Unemployment.

TradingKey - US non-farm payrolls saw a net decrease of 92,000 in February, far below expectations and marking the second monthly contraction since 2020. Meanwhile, the unemployment rate rose to 4.4%. The Bureau of Labor Statistics also revised previous figures downward by a combined 69,000.

While employment showed broad weakness, average hourly earnings accelerated to 3.8% year-on-year, indicating that labor cost pressures remain unabated.

Coupled with rising oil prices due to intensifying Middle East tensions, the coexistence of employment contraction and resilient wages has placed Federal Reserve policy in a dilemma. Concerns over stagflation risks have intensified, prompting global markets to adopt a "sell first, watch later" approach for various assets.

The market is currently focused on what decision the Federal Reserve will make in such a quandary.

If the Federal Reserve maintains its current tight policy, it will not only exacerbate employment issues but also further pressure the already fragile capital markets, particularly liquidity-sensitive tech stocks.

Meanwhile, surging oil prices are exposing inflation to the risk of a rebound. On the 8th local time, international oil prices surpassed $110 per barrel for the first time since 2022. According to data from the AAA, gasoline prices have jumped 19% over the past month, with the national average reaching $3.45 per gallon, the highest during Trump's two terms.

Previously, Trump stated in a February speech in Texas that maintaining low oil prices was key to defeating inflation. However, following the Trump administration's military strike against Iran on February 28, the narrative of maintaining low oil prices has been shattered.

Trump previously posted on social media attempting to reassure the American public, claiming the rise in oil prices was only temporary. However, the market did not seem to buy into this.

Investment bank Goldman Sachs warned in an analysis report that if oil prices continue to rise, the inflation rate could climb from 2.4% in January to 3% by the end of the year.

What is the probability of an early rate cut by the Federal Reserve?

Given the current situation, we believe that the weak employment data is insufficient to support an early rate cut by the Federal Reserve.

Following the release of the February US non-farm payroll data, the market did not significantly adjust its expectations for the rate-cut path. According to CME data, the probability of no rate cut in March remains hovering around 96.3%.

On one hand, strike actions in the US may have had a one-time impact on the February employment data, the reliability of which should be assessed by excluding such factors.

On the other hand, high wage growth combined with energy price hikes driven by geopolitics could lead to a resurgence of US inflation, prompting the Federal Reserve to re-evaluate the risks between inflation and unemployment.

At present, the risk of stagflation in the US has risen sharply. The combination of a weak employment report and high oil prices could exacerbate existing internal disagreements within the Federal Reserve over whether to prioritize price stability or employment. Against a backdrop of widening divisions, the Fed tends to adopt cautious measures; therefore, an aggressive policy such as an early rate cut is typically not their choice.