As the Middle East situation reignites inflation, tonight's non-farm payrolls may rebound sharply!

The US March non-farm employment data will be released tonight. The market expects a strong rebound from February’s sharp contraction, but the ongoing turmoil in the Middle East is pushing up inflation pressures, adding complexity to the Federal Reserve’s policy outlook.

The market consensus expects 65,000 new non-farm jobs in March, a sharp recovery from February’s steep drop of 92,000. Predictions range from a decrease of 16,000 to an increase of 150,000. Goldman Sachs expects a 70,000 increase, above the market consensus, with the end of strikes and improved weather respectively contributing about 32,000 jobs; Barclays is more conservative, expecting an increase of 50,000. Meanwhile, the ADP employment data for March reports 62,000, exceeding the market expectation of 40,000, laying some groundwork for tonight’s data.

The Iran war has been ongoing for over a month; the continued blockade of the Strait of Hormuz has caused violent fluctuations in oil prices, raising inflation risks. Fed Governor Waller admitted that if not for this conflict, he might have leaned toward an interest rate cut after the last FOMC meeting; he also warned that if oil prices remain high, it will seep into core inflation, greatly narrowing the Fed's room to "look through" one-off shocks. The Fed is currently maintaining policy rates, remaining in a wait-and-see mode.

The importance of tonight's data lies in its role as a key reference for the Fed's assessment of labor market resilience—amid renewed inflation pressures from geopolitical conflicts, the strength or weakness of employment data will directly affect market expectations of the timing for rate cuts.

Expected sharp rebound, but analysts warn of revision risk

The core expectation for the March non-farm employment data is an increase of 65,000, forming a stark contrast to February’s steep drop of 92,000. Private sector employment is expected to rebound from -86,000 to +73,000. The unemployment rate is expected to remain unchanged at 4.4%. Average hourly earnings are forecast to rise 0.3% month-on-month (previous 0.4%), with the year-on-year growth rate holding at 3.8%.

Worth noting, analysts broadly urge attention to revised data. According to ING, January’s data may be overestimated, while February’s could be underestimated, and the distortion in both directions reduces the reference value of single-month readings. ING maintains its expectation of 65,000, noting that if hiring stalls amid relatively stable conditions, motivation for increased recruitment will only weaken as geopolitical and economic uncertainty rises.

Forward-looking indicators are mixed. ADP reported a 62,000 job increase in March, better than expected; initial jobless claims during the survey week fell to 205,000, below the expected 215,000; continuing jobless claims declined slightly from 1,833,000 to 1,819,000. However, the ISM manufacturing employment component edged down from 48.8 to 48.7, and both manufacturing and service employment indicators remain in contraction territory, with weak signals from employer surveys.

Strike resolution and improved weather: Two main drivers of the rebound

Goldman Sachs points out that two technical factors will provide substantive support to March employment data.

First, strikes ended. According to the US Bureau of Labor Statistics strike report, the end of strikes will contribute about 32,000 additional jobs to March non-farm employment; Second, improved weather. In February, adverse weather reduced employment in climate-sensitive industries by 38,000; in March, improved conditions are likely to restore jobs in these sectors.

Additionally, jobless claims data also provide positive signals. During the March survey week, average initial claims fell from February’s 220,000 to 211,000. Challenger, Gray & Christmas reported a month-on-month rise in announced layoffs by 12,000 to 61,000, but overall figures remain in a relatively mild range.

Federal employee downsizing and AI layoffs: Structural resistance to employment

Goldman Sachs expects government employment to decrease by 5,000, including a reduction of about 10,000 in the federal government, partly offset by an increase of 5,000 in state and local governments. The federal government’s hiring freeze is ongoing and is expected to continue restraining employment numbers in the public sector.

AI-driven layoffs in the tech industry also pose a potential drag. Block announced plans to cut around 40% of staff; the market is increasingly alert to the pace at which companies are replacing human labor with AI. Oracle, after large-scale AI investment, has laid off up to 10,000 employees, though it remains unclear whether the layoffs are directly related to AI.

Conference Board data shows consumers’ assessment of the current job market remains stable—27.3% believe jobs are "plentiful" (previous 26.7%), while 21.5% deem jobs "hard to find" (previous 21.0%). However, expectations for future job prospects have deteriorated: 15.4% expect more jobs in the future (previous 16.0%), and 27.9% expect fewer (previous 26.2%).

The Fed remains cautious, inflation concerns overpower employment considerations

The Fed is currently keeping policy rates unchanged. Only Miran, noted for a distinctly dovish stance, expressed dissent at the last meeting; all other members generally agree that current policy is at a "appropriate position". Chair Powell said a "considerable majority" of the FOMC are worried about "very low" employment growth, and the labor market—especially private sector employment—is under close watch, but employment risks have not dominated policy directions.

It is worth noting changes in the non-farm employment "breakeven point." Powell and Waller both suggest that a sharp drop in illegal immigration has pushed this critical level close to zero—the reduced immigration lowers both employment (numerator) and labor supply (denominator). A recent St. Louis Fed study estimates the breakeven point between 15,000 and 87,000, noting "the wide range reflects high uncertainty in migration flows."

Waller made it clear that if the labor market weakens noticeably in the second half of the year, he will support a rate cut; Williams expects the unemployment rate to decline slightly this and next year, and believes labor market signals are "mixed".

Blockade of the Hormuz Strait persists, inflation risk is the biggest variable

The Iran war has lasted about a month. The blockade of the Hormuz Strait has caused violent swings in the oil market, and its influence on inflation and monetary policy remains highly uncertain. Fed official Schmid warns that inflationary pressures from rising oil prices may not be temporary, causing mild drag on economic growth. Waller also notes that if oil prices remain high, they will pass through to core inflation, limiting the Fed’s space for maintaining an accommodative stance by "looking through temporary shocks".

Some signs of easing have emerged diplomatically. Trump said Iran’s new president has sought a ceasefire, and the US indicated it would consider accepting if Hormuz reopens, adding that America would "withdraw from Iran rather quickly". Iran’s president added that Iran does not intend to prolong the war and is willing to end the conflict provided it can obtain security guarantees against further attacks.

Progress in ceasefire talks will be a key window for oil price trends and the Fed’s policy space, and its importance may rival that of tonight’s non-farm data itself.

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