Labor market swoon

Stagflationary fears resurfaced last week after a spike in energy prices due to the escalating war with Iran set off inflation worries and a surprisingly weak jobs report raised doubts about the health of the labor market. Rising risks at both ends of the Fed’s dual mandate could put it — and the incoming chair — into quite a bind. At the start of the week, the market was firmly pricing in two rate cuts this year but the level of confidence behind that view wavered as the week progressed.

Brent crude surged more than 25% last week, touching $90/barrel as key supply chains were disrupted. Rather than benefiting from a flight to safety, US Treasuries sold off on inflation fears, pushing yields higher and sending the 10‑year back above 4.15%. Given all the recent developments, this week’s Consumer Price Index (CPI) print may have lost some of its near-term significance, though it will provide a baseline heading into a potentially turbulent period.  

Employment data added to the unease as it was reported the US lost 92,000 jobs in February, much lower than market expectations for a gain of around 55,000, and the unemployment rate increased to 4.4%, from 4.3%. Despite the headlines around AI displacement, last month’s decline seemed to come from a variety of traditional factors like weather and strikes. Manufacturing jobs also continued to decline, hitting their lowest level since January 2022.

Still, it may not be all doom and gloom for the US economy. The ISM Services Purchasing Managers’ Index (PMI) Index, which tracks the health of the service industry, accelerated to the highest level since 2022, noting that the sector is “heating up.” Strength was apparent across business activity, new orders and employment, suggesting certain parts of the economy remain resilient despite the headline noise.