Non-farm rebound could become a "hot potato": Why could strong employment data make the market even worse?

With the Middle East conflict ongoing for over a month, the current focus of the market is no longer on the employment situation, but on oil prices and inflation. This significant shift comes just before the release of the March non-farm payroll report. The market expects this data to reverse the weakness seen in February, but according to Michael Kramer, founder of Mott Capital Management, even if the employment data rebounds, the actual effect may be the opposite, further worsening the situation. Market expects significant warming Analysts generally expect that the US non-farm payroll population will increase by 55,000 in March, reversing the decrease of 92,000 in February; the unemployment rate is expected to remain unchanged at 4.4%; and the average hourly wage growth rate is expected to drop slightly from 0.4% to 0.3%. Kramer pointed out that if the weakness in February was just a one-time occurrence, and the results in March meet or exceed expectations, the Federal Reserve will ease the pressure on employment responsibilities and refocus on inflation. Considering the sudden rise in oil prices, inflation is rapidly becoming a more difficult problem in the coming months. Expectations for inflation are rising sharply Currently, inflation expectations have risen sharply, with the year-on-year inflation rate expected to climb to around 3.4% in March, approaching 3.9% in May, before easing. However, this forecast is based on the premise that the most severe phase of the oil shock has passed. If oil prices continue to rise, the CPI swap market may gradually raise inflation expectations. Expectations for rate cuts have faded, while expectations for rate hikes have increased As a result, the market has ruled out the possibility of rate cuts in 2026. Currently, the trading price of the December 2026 federal funds futures contract is 3.7%, very close to the upper limit of the federal funds target rate range of 3.5% to 3.75%. At least based on the current data, the market believes that the Federal Reserve will not cut rates in 2026. Other indicators of monetary policy paths also show that not only will the Federal Reserve not cut rates in 2026, there is even a possibility of rate hikes. Currently, the 3-month Treasury bill 12-month forward-rate is 24 basis points higher than the 3-month Treasury bill spot rate, the largest yield spread since the beginning of 2023. "It seems that if employment data is strong, especially against the backdrop of no relief in sight for oil prices, expectations for rate hikes will further increase. This will undoubtedly be a strong positive for the already bullish US dollar index," Kramer said. Trend of the US Dollar Kramer pointed out that the US dollar index is currently under pressure below the resistance level of 100.30, but more importantly, its pattern seems to have broken out of the bullish flag consolidation. Such patterns typically indicate a continuation of the trend, suggesting a higher possibility of an upward breakout for the US dollar index. At the same time, the relative strength index is also showing an upward trend, indicating bullish momentum is building up, and once it breaks out, the US dollar index is expected to test around 102.5. For risk assets, this will be the most unfavorable situation, only exacerbating the pressure they are already under. A stronger US dollar combined with expectations for rate hikes means that the financial environment will tighten further. Kramer stated that while weak employment data may not necessarily be a positive, it can at least alleviate market concerns about Fed rate hikes, reduce upward pressure on the US dollar, and avoid further tightening of the financial environment, bringing greater impact to risk assets. Therefore, "the current market is in a delicate stage, and the core of everything lies in the impact of oil on the financial environment," Kramer concluded.