The first month of the Israel-Palestine conflict saw non-farm payroll data far exceeding expectations, with an increase of 178k jobs being just the surface. Gasoline prices in California soared to $5.88, and the Federal Reserve's rate cut expectations have been reset to zero, but rate hikes remain far away.

The reporter for 每经: Gao Han The editor for 每经: Wang Jiaqi

In local time on April 3, labor market data released by the U.S. Bureau of Labor Statistics showed that March’s nonfarm payroll employment results significantly exceeded market expectations: new employment added 178k jobs, far higher than the roughly 65k that the market had broadly expected earlier, and in sharp contrast to the 92k jobs decline in February.

At the same time, the energy shock has quickly heated up. The national average retail price of gasoline rose to $4.02 per gallon, with some regions surpassing $5. California, in particular, reached as high as $5.88.

Two seemingly contradictory signals are pointing to the same question—whether the Federal Reserve will shift to rate hikes.

Impressive nonfarm payrolls are hard to equate with a recovery; Fed rate-cut expectations are zeroed out

In local time on April 3, data from the U.S. Bureau of Labor Statistics showed that March nonfarm payrolls increased by 178k, far above the 65k expected by economists surveyed by Bloomberg, the largest monthly gain since the end of 2024. February employment declined by 92k jobs (revised to a decline of 133k).

Meanwhile, March’s unemployment rate fell to 4.3%, below the 4.4% forecast, and also better than the prior 4.4%.

The strong rebound in March quickly sparked discussions in the market about whether the U.S. economy has started strengthening again.

In a research report released recently, Everbright Securities noted that March’s “eye-catching” employment data is more based on the low base in February, and the durability of the rebound remains to be observed. On one hand, more than 30k medical professionals participated in a strike in February; after the strike was resolved, employment in the medical sector added 90k in March, which was the main driver of this nonfarm payroll data. On the other hand, a large-scale winter storm swept across the U.S. Northeast at the end of February; as weather improved, employment numbers in construction and in leisure and hospitality also rebounded noticeably.

Therefore, the rebound in March nonfarm payrolls, to a large extent, is a “technical correction” of temporary disruptions.

Everbright Securities also emphasized that the February employment data was further revised downward—from the initial figure of -92k to -133k. Nonfarm payroll revisions have been frequent over the past year, and most of them have been downward; it cannot be ruled out that the initial value of this nonfarm payroll data may also be revised downward.

In addition, the U.S. labor market is in a new normal of “low hiring and low layoffs.” The further deterioration of the situation in the Middle East in March and the rapid rise in oil prices could both break the current “calm equilibrium” in the employment market, and there is a risk that employment data could worsen again in the future.

Against this backdrop, after the March data was released, the market has basically erased expectations of the Fed cutting rates this year, whereas before the outbreak of the Middle East conflict, the market had at one point priced in an easing expectation of 55 basis points.

Janney Montgomery Scott’s chief investment strategist, Mark Luskini, said, the overall performance of this data is robust enough to allow the Federal Reserve to remain on hold. “The data revisions weaken how ‘eye-catching’ the numbers look, and at the same time, wage growth has slowed, which may indicate that the labor market has shown some signs of easing. But the key point is that the unemployment rate has not risen sharply, which is a positive signal for the economy.”

The CME “FedWatch” tool shows that currently, the market assigns essentially a zero probability that the Federal Reserve will raise or cut rates at the Federal Open Market Committee (FOMC) meeting on April 28–29, and there is more than an 80% probability that the Federal Reserve will keep interest rates unchanged for the rest of this year.

National average gasoline price breaks $4: rate-hike expectations heat up, but the bar remains high

If employment data suppressed the room for rate cuts, then the surge in oil prices has reignited the market’s discussion about rate hikes.

Since the outbreak of the Middle East conflict on February 28, the global energy supply pattern has been significantly disrupted. The Strait of Hormuz—an essential passage for transporting about one-fifth of the world’s crude oil—has currently been closed to most oil tankers, directly driving a sharp jump in international oil prices. Since the conflict began, the benchmark oil price has risen by more than 50% cumulatively.

Multiple institutions have issued bullish forecasts for the oil price trend. Société Générale (France) believes that a long-lasting war pushing oil prices to $150 per barrel is a “credible” outcome. Most analysts expect crude oil prices to reach $130 to $140 per barrel.

Macquarie Bank in Australia also predicts that if the war lasts until June, crude oil prices will reach $200 per barrel. This still does not take into account risks that the Strait of Hormuz closure could overlap with an attack on the Khark Island (most of Iran’s crude oil production is exported through it), or disruptions to another important trade route such as the Strait of Mandeb.

U.S. domestic energy prices have reacted quickly as well.

According to data from the American Automobile Association, as of March 31, the average price of regular gasoline across the U.S. rose to $4.02 per gallon, the highest in nearly 4 years, up more than $1 from before the U.S. and Israel launched military actions against Iran on February 28. Some states have already surpassed $5, with California reaching the highest at $5.88 per gallon.

In addition, the national average retail price of regular diesel is approaching $5.45 per gallon, according to figures by Philp Lazardini. Before the U.S.-Israel-Iran conflict began, diesel’s average price was about $3.76 per gallon.

Oil price increases are transmitted through the transportation, production, and consumption chain, intensifying concerns in the market about a rebound in inflation. This is also an important background for the market’s recent renewed discussion on whether the Federal Reserve might restart rate hikes.

From the perspective of market pricing, this concern has already been reflected to some extent. In its latest research report, Goldman Sachs stated that the implied probability of rate hikes in 2026 in the current interest-rate market is about 45%, up significantly from 12% before the conflict. However, it also emphasized that this probability may be overestimated, and rate hikes are still not the base case.

First, in terms of the nature of the shock, this oil price rise is a supply-side shock, and both its magnitude and scope are weaker than those of typical inflation events in history. Compared with the 1970s oil crises, the economy back then relied more heavily on oil. Compared with the global supply chain disruptions in 2021–2022, this shock has a more limited coverage. Therefore, its ongoing upward push on overall inflation may be relatively weaker (although while the war continues, the outlook for both magnitude and scope remains uncertain).

Second, the current economic starting point suggests that inflation is unlikely to produce a significant second-round transmission effect. At present, medium- to long-term inflation expectations are firmly anchored, which is completely different from the situation in the 1970s. During 2021–2022, inflation expectations also remained stable throughout, which is one of the reasons the Federal Reserve’s Open Market Committee does not need to suppress inflation by triggering a recession, as it did in the 1980s.

In the 1970s, medium- to long-term inflation expectations stayed high; in 2021–2022 they remained generally steady; current expectations are solid

Third, the initial monetary policy baseline makes the likelihood of rate hikes relatively low. The federal funds rate is 50–75 basis points higher than the midpoint of the FOMC’s estimate of the neutral interest rate, and it is broadly consistent with the level suggested by standard policy rules. In addition, since the conflict began, financial conditions have tightened by nearly 80 basis points, further reducing the necessity for additional tightening. By contrast, in early 2022 the federal funds rate was zero, while in the 1970s it was far below the neutral interest rate and the levels suggested by policy rules.

Current monetary policy is approaching neutral, unlike the 1970s and 2021–2022

Fourth, from historical experience, the Federal Reserve typically does not tighten policy solely because of an oil price shock. In speeches by Federal Reserve officials, they have mentioned that there is no significant linkage between oil price shocks and tightening monetary policy (but in speeches by European Central Bank officials, such a linkage is much stronger). Similarly, Federal Reserve officials have not systematically changed their projections for the federal funds rate in response to changes in oil prices.

Most institutions also believe that the likelihood of the Federal Reserve switching to rate hikes in the near term remains limited.

Everbright Securities said that compared with February, the more “eye-catching” employment data in March reduces the urgency of rate cuts in the near term. To respond to the oil supply shock, the Federal Reserve is not in a rush to cut rates, but the bar for rate hikes is also high.

Galaxy Securities also said that although there is upside risk to near-term inflation, over the long term, “temporary” inflation has a higher probability than persistent inflation. “We still believe that the probability of at least one rate cut occurring in 2026 is high, and there is no need to worry about the Federal Reserve turning to rate hikes.”

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