Hiring Contracted in February

MACRO FRAME

Renewed geopolitical tensions add another layer of uncertainty to global markets, while February’s nonfarm payrolls report keeps the case for a summer Fed rate cut intact but offers limited clarity on the extent of easing.

TREASURY FUTURES

Treasury yields had a knee-jerk reaction following the release of February’s nonfarm payroll figures, which showed an unexpected contraction in employment growth and a move upwards in the unemployment rate. The 10-Year yield fell to 4.113% but has since risen to 4.146%. Headline payrolls declines by 92,000, while December and January saw a combined downward revision of 69,000 jobs. The headline figure marks a clear cooling in job growth, though the decline was partly driven by temporary factors, particularly healthcare strike activity. The unemployment rate edged up to 4.4%, though remained largely stable suggesting the labor market remains broadly stable.

Healthcare saw a net loss of 28,000 jobs, which was attributed to labor strikes, IT, Federal government, and Transportation and Warehousing all saw job declines. Meanwhile, hiring for manufacturing, construction, retail, and finance was largely flat. The only sector that recorded a job gain was social assistance. Despite the obvious weakness in the headline figure and poor distribution of job gains, the headline figure likely overstates labor market weakness due to strike distortions.

The labor force participation rate and employment-population ratio were unchanged, while wage growth remained firm. However, a notable sign of weakness in the labor market is the rise in long-term unemployment, which rose to 1.9 million, up from 1.5 million a year ago. The figure suggests weak hiring conditions attributed to slowing labor demand. For the Fed, the question about how fast/slow labor demand is cooling is likely to be central to the timing of the next rate cut. Still, the figure does reinforce the case that policy will remain unchanged into the summer.

Markets have shifted back to favor easing later in the summer with July cut now priced more favorably. The probability of a June rate is now at 46% after falling to 31% on Thursday. Total easing for year-end has widened to 43 bps, still below 46 bps on Wednesday and 53 bps last week.

Watch point: A weak headline NFP figure supports the case for Fed easing later in the summer, but questions as to how slow labor demand is cooling will likely determine further policy at the Fed.

The spread between the two- and 10-year yields is 55.90 bps, while the two-year yield, which reflects short-term interest rate expectations, is 3.587%.

STOCK INDEX FUTURES

Equity indexes are lower as the conflict in Iran continues to weigh on risk sentiment, while February’s weak payroll report added to selling pressure. Nonfarm payrolls declined by 92,000, with December and January revised lower by a combined 69,000 jobs. The headline figure points to a cooling in job growth, though part of the decline reflects temporary factors, including healthcare strike activity. The unemployment rate edged up to 4.4% but remains broadly consistent with a stable labor market.

The negative tone reinforces a broader risk-off backdrop for equities, as oil prices approach $90 per barrel, heightening concerns that the conflict could add to inflationary pressures. The S&P 500 is on track for a weekly decline, while the Dow has fallen more than 2% and moved into negative territory for 2026. The Nasdaq is also set to end the week lower.

Watch point: Further escalation in the Middle East or a sustained move in oil above $90 could deepen the current risk-off tone across equities

CURRENCY FUTURES

US DOLLAR: The USD Index is little changed at 99.25 following a knee-jerk reaction to February’s weak hiring numbers, suggesting that safe haven demand is outweighing the dovish figures. For the dollar, the key driver will ultimately be the scale of the energy price shock. A sustained rise in oil prices will remain supportive for the dollar. Demand for the dollar is also likely to remain firm amid the conflict in Iran.

The one-year euro cross-currency basis swap rate, a gauge of dollar funding stress, which measures the cost of swapping euro funding into dollar for one year, fell to 8.75 on Friday morning. A lower reading indicates stronger demand, as the basis swap rate falls when demand conditions tighten.

Near-term price action is likely to remain headline-driven; any signs of de-escalation could weigh on the dollar as safe-haven demand fades, while continued fighting and tighter energy markets would likely reinforce dollar strength through higher inflation expectations.

Watch point: Dollar direction is likely to remain driven by geopolitical headlines and energy markets in the near term.

EURO: The euro fell 0.30% to $1.1574 as the conflict in Iran continues to favor flows to the dollar despite a weak headline payrolls figure. Also weighing on the euro was a downward revision to Q4 2025 GDP, which showed the eurozone economy expanded just 0.2% in the quarter, below the earlier estimate of 0.3%. Annual growth was revised down to 1.2% from an initial 1.3%, marking the slowest pace of expansion in a year as spending growth softened across all major categories. Despite the weaker revision, the figure is unlikely to materially alter the European Central Bank’s outlook, with the ECB projecting growth of 1.2% in 2026 and 1.4% in 2027.

Recent eurozone data has otherwise been supportive for the currency and has sparked some discussion that the ECB’s next move could ultimately be a rate hike rather than further easing. Labor market conditions remain firm, with the unemployment rate falling to a record low of 6.1% in January, while inflation data has surprised to the upside, with headline inflation rising to 1.9% year-over-year and core inflation reaching 2.4%, both above forecasts.

ECB President Christine Lagarde reiterated last week that inflation is expected to move toward the 2% target over the medium term, though geopolitical tensions continue to cloud the outlook. For now, money markets still price no policy change from the ECB through 2026.

Watch point: euro direction will likely remain sensitive to global risk sentiment and dollar dynamics.

BRITISH POUND: Sterling is little changed at $1.3351, as a weak nonfarm payrolls figure out of the US offered limited support. Rising oil prices continue to fuel inflation concerns, particularly for energy-importing economies such as the UK, prompting markets to push back expectations for Bank of England easing. Traders now price roughly a 15% probability of a rate cut this month, down sharply from around 75% last week. Market pricing now suggests no policy action from the BoE for the remainder of the year. However, the energy price shock is likely to outweigh any support for sterling from the central bank delaying rate cuts.

Given the uncertainty surrounding the Middle East conflict and its potential impact on energy prices and inflation, policymakers are likely to prefer to keep rates on hold while assessing how the situation evolves before making further adjustments to policy.

Domestic factors have also weighed on the currency. Data last month showed sluggish economic growth in the final quarter of 2025. Finance Minister Rachel Reeves’ budget update on Tuesday reinforced the modest growth outlook, with the economy projected to expand 1.1% this year. However, the budget did include lower borrowing costs, which markets viewed as a modest positive.

Watch point: Policy decisions from the Bank of England are now on hold with renewed geopolitical risks and a potential sustained rise in energy prices.

JAPANESE YEN: The yen fell 0.20% to 157.89, with the weak hiring figures out of the US offering little to no support. Safe-haven flows have continued to favor the USD and pressure the yen. Bank of Japan Governor Kazuo Ueda warned that the Middle East conflict could significantly affect Japan’s economy, signaling the central bank is likely to keep rates steady for an extended period. Finance Minister Satsuki Katayama said authorities are monitoring markets with an “extremely strong sense of urgency” and reiterated that Japan maintains an understanding with the US regarding currency stability, keeping intervention risk in focus. Meanwhile, Bank of Japan Deputy Governor Ryozo Himino reaffirmed that the central bank will continue raising rates, though without committing to a timeline.

Watch point: A move beyond the ¥160 range would likely intensify intervention rhetoric, while sustained energy-driven inflation could keep tightening expectations intact despite political pressure.

AUSTRALIAN DOLLAR: The Aussie fell 0.30% to $0.6985 as the conflict in Iran continues to favor the USD. However, stronger-than-expected growth data, has supported a tightening bias from the Reserve Bank of Australia. Australia’s economy expanded 0.8% in Q4 2025, lifting annual growth to 2.6%, the fastest pace since 2023. Markets currently imply around a 25% probability of a rate hike at the March meeting, while a quarter-point increase is fully priced for May and again in November.

RBA Governor Michele Bullock said the March meeting would be “live” for a potential rate increase, marking a shift from her recent patient tone. She warned that an oil price shock linked to Middle East tensions could reignite domestic inflation pressures, underscoring the sensitivity of the outlook to global developments.

Watch point: Wage figures, capacity utilization, PMI readings, and other signals on economic momentum will dictate market sentiment over future timing expectations.

 

 

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