The US-Iran conflict has sparked a surge in inflation concerns, sending 2-year UST bond yields soaring by 21bps this week. The OIS market reflects a shift in rate cut expectations, now priced at 25bps with a 50% probability of another cut. However, the underlying economic fundamentals remain crucial, especially with the release of February payrolls data today. The consensus predicts a modest gain of 55k, following the January surprise of +130k. Retail sales data for January will also be unveiled, adding to the economic narrative. Yet, the backdrop of rising inflation risks and potential economic damage casts a shadow over these data points.
The labour market, however, shows resilience despite potential disruptions. ADP employment data and the ISM Services employment index for February both indicate continued strength, with the latter surpassing expectations at 51.8. The NFIB Small Business Optimism survey reveals a concerning trend: the percentage of companies finding it difficult to fill positions has risen from 31% to 33%, surpassing the long-term average of 24%. This suggests that while hiring plans are improving, the labour market remains tight.
The Beige Book further supports this notion, stating that labour market conditions are generally stable in most districts, with wage growth rising at a modest rate. However, the potential impact of the US-Iran conflict on inflation and economic sentiment cannot be ignored. A stronger jobs report with elevated wage growth could trigger a market reaction, potentially reducing rate cut expectations and bolstering the US dollar.
The Trump administration's decision to issue a temporary waiver for India to resume purchases of Russian crude oil until April 4th is seen as a strategic move. While it may have limited impact on crude oil prices, it underscores the administration's focus on mitigating economic risks and consumer sentiment. The waiver's short-term nature suggests a calculated effort to find an off-ramp from the conflict, which could have broader implications for US businesses and households.
In conclusion, the US-Iran conflict's impact on inflation and economic sentiment is a critical factor in shaping market dynamics. The labour market's resilience, despite potential disruptions, highlights the complexity of the situation. As the conflict persists, the jobs data will likely remain a key indicator, with sustained periods of risk-off on the horizon if the conflict drags on. The Trump administration's strategic moves, such as the temporary waiver, further emphasize the delicate balance between economic stability and geopolitical tensions.
