One Week Later

Key Takeaways

A surprise 92k decline in February nonfarm payrolls and a rise in the unemployment rate to 4.4% signal some labor market softening, though stronger ISM manufacturing and services readings and still-low jobless claims suggest the broader U.S. growth backdrop remains intact.
Oil prices moving above $100 per barrel amid Middle East tensions have pushed gasoline prices higher and added to inflation concerns, but if the conflict proves short-lived, energy markets—and related inflation pressures—could reverse course.
Treasury yields have been volatile, falling below 3.95% on safe-haven demand before rebounding toward 4.20% on rising energy prices, with the 10-year yield expected to trade in a 4.0%–4.5% range as the Fed likely stays on hold while monitoring inflation and geopolitical risks.

Over the last week or so, the money and bond markets have been greeted with a plethora of news, both geopolitical and economic in nature. Obviously, the headlines surrounding the Middle East conflict have taken center stage and will more than likely continue to garner the lion’s share of attention in the weeks ahead. At the same time, investors have also been provided with ‘fresh’ macro news that has provided insights as to how the economy was performing about mid-way through the first quarter. Against this backdrop, it’s useful to provide some perspective and ‘mark to market’ where things stand and offer some thoughts on where things could be going.

Macro News

Certainly, the headliner here was the disappointing February employment report where total nonfarm payrolls fell an unexpectedly -92k and the jobless rate rose a modest 0.1pp to 4.4%
While some of the payroll weakness can be attributed to strike activity and weather, the tenor of the report was still on the soft side
Meanwhile, the ISM gauges for manufacturing and services for February surprised to the upside, with both now residing squarely in ‘expansionary’ territory. The manufacturing prices paid component rose to its highest level since June 2022
Jobless claims continue to reside at relatively low levels, suggesting the labor market backdrop is probably not as weak as the monthly employment report would infer
Without any ‘challenging’ developments and/or headlines emanating from the Middle East conflict, our US macro-outlook for moderate growth (potential One Big Beautiful Act tailwinds) and inflation staying above the Fed’s 2% target remains in place

Energy Prices

As of this writing, West Texas Intermediate crude oil had pierced the $100.00 per barrel threshold to the upside, pushing gasoline futures prices higher as well
While prices at the pump are, will be, on the rise, we have not yet entered a ‘tax on the consumer’ territory yet
In fact, futures prices (Sep) for WTI have experienced a far smaller increase as compared to the current contract
If the Middle East conflict does prove to be relatively short-lived, with no ‘challenging’ headlines, the rise in crude oil and gasoline prices will most likely be temporary and reverse course

Fixed Income – Credit

Interestingly, prior to the U.S./Israeli strikes on Iran, private credit-related anxieties in the financial markets had taken center stage and recent headlines suggest this development may not be going away in the near-term
U.S. investment grade and high yield corporate bond spreads have increased somewhat from their historically narrow readings, and could continue to widen from the private credit-related headlines, but so far, there are no signs of contagion

Fed Watch

Before, and now after, the Middle East news, we are operating under the assumption that the Fed is either near, or at the end, of this rate cut cycle
The jobs numbers and recent inflation reports (PCE Deflator/PPI) put the Fed in a difficult spot, but given the uncertainties surrounding the Middle East and rising energy prices, I still think Powell & Co. sit the March FOMC meeting out and stay on hold, but keep the guidance still tilted towards potential rate cuts

The Treasury Market

Prior to the Middle East conflict, the UST 10-year yield had fallen to below 3.95% due to safe-haven buying emanating from the aforementioned private credit-related headlines
The war-related surge in energy prices and unwinding of ‘long’ positions pushed the 10-yr yield up by more than 25bp pre-jobs report to almost 4.20%
We still see the UST 10-yr near-term trading range to be in that roughly 4%-4.50% band

Conclusion

Headlines surrounding the Middle East conflict will continue to carry the potential of elevated uncertainties and volatility in the near-term. Once the hostilities come to an end, we would expect the bond market and the Fed to return to their pre-war status and focus on incoming employment and inflation data.

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