Weekly Update 3/6/2026: Payrolls Decline
- Cadence Design Systems added to Core
- Apple launches new products
- ISM figures release
Geopolitics
The headlines this week focused on the conflict in the Middle East after the U.S. and Israel carried out joint strikes against Iran, leading to the deaths of its Supreme Leader Ayatollah Khamenei as well as numerous high-ranking political, religious and military leaders. Iran has struck back, launching more than 500 ballistic missiles and 2,000 drones at 11 countries across the Middle East. While the U.S. and Israel say they have destroyed hundreds of missiles and launchers, attacking mobile targets as well as “missile cities” which house weapons underground, the true tally of how many weapons Iran has left is unknown. According to Farzan Sabet, an arms control researcher and Iran expert at the Geneva Graduate Institute, Iran produces thousands of low-cost, one-way attack drones quickly. Thus, with its arsenal of long-range ballistic missiles dwindling, Iran is likely to turn to more drone attacks which can still wreak significant damage, especially when it concerns highly flammable energy targets. Drone technology is constantly evolving. In Ukraine, some drones use artificial intelligence to guide its payload and attack in swarms. Such advances are likely either already in the Middle East or soon to be incorporated.
That threat is what has spooked the markets the most. The price of a barrel of oil on the Intercontinental Exchange has risen 25% this month, while natural gas has seen a sharper rise of over 65%. There is virtually no traffic passing through the Strait of Hormuz which typically carries approximately 20% of the daily flows of crude oil and gas. Vessels that have tried have been hit by Iranian projectiles, and ship captains are deciding not to pass even with guarantees of protection offered by the U.S. military. Domestically, that has translated into a $0.27 increase in the cost of a gallon of gas to $3.25, according to AAA. That is an increase from the $3.11 a year ago with little end to the increases in sight. Meanwhile, the national average per kilowatt hour of electricity at a public EV charging station stayed the same at 39 cents.
We actually saw an increase in the domestic equity bourses on Monday as investors thought that this would be a repeat of the recent conflict in Venezuela. With leadership in Iran gone, traders assumed, military conflict will wrap up quickly and things would progress in a similar manner as in South America. That thinking quickly turned when the Strait crossing volume started to dwindle and crude oil prices continued to climb. What makes this situation different than Venezuela is that Iran is a bigger country with larger munitions and a better skilled fighting force. Plus, they sit at a crucial choke point to energy flows and have the means and will to use its artilleries to hit U.S. allies. The Iranian Revolutionary Guard is a part of Iran's regular army, yet constitute a separate fighting force within that body. Over decades it and local militia have integrated into the daily lives of many Iranians making removal exponentially more complicated. Its structure is decentralized meaning one faction could decide to target a neighboring state with its supply of missiles and drones while another does nothing. This means that this conflict is not going to be over in a week. U.S. Defense Secretary Pete Hegseth said it will last “as long as needed” but did offer a rough timeline of three to eight weeks. That’s not exactly what the markets were thinking when trading opened this past Monday.
What is likely to happen going forward? It is clear that as long as the Strait of Hormuz is under threat, oil and natural gas markets will remain under pressure. There is just not enough spare capacity in OPEC or the United States to make up for the amount lost which is likely to lead to higher prices. While the U.S. and Isreal have undisputed air superiority over Iran, that will not be enough unless both countries commit to endless supervision. Such “forever war” scenarios are exactly the type of conflicts that Hegseth and President Trump said they would not be pulled into. They may have no choice if the president says he wants unconditional surrender given the complex and deep roots the Revolutionary Guard hold over the country. Meanwhile, beyond energy markets, the war’s ramifications are being felt by airlines, defense contractors and materials companies most prominently. This is a swiftly moving and constantly shifting situation which is infusing equity and bond markets with uncertainty. Markets do not like uncertainty.
Futures markets have reduced the probability of more than one Fed rate cut this year as a result. In fact, currently there is not a single month this year which is showing a probability of a single cut higher than 34% (in June). We are closely watching the bond markets in particular because, as we saw last spring during the unveiling of broad tariffs, bond traders are quite powerful. When rates reached 5.0% last year, it sent a powerful signal to equities and helped convince the president to ease talk of higher levies. Intraday, the 30-year Treasury bond is hovering near 4.8% which means that the so-called bond vigilantes are beginning to flex their muscles. We will monitor the situation as it unfolds and report back meaningful insights.
Employment and retail sales
After initial jobless claims data was released by the Labor Department yesterday showing applications held steady last week, investors turned their focus to the monthly payroll report for signs of labor market activity. Nonfarm payrolls fell 92,000 in February according to the Bureau of Labor Statistics. The unemployment rate rose to 4.4%. Both figures were worse than the consensus estimates, which called a gain of 55,000 jobs and a steady unemployment rate of 4.3%. Month-to-month average hourly earnings rose 0.4%, also above expectations which called for a figure of +0.3%. The labor force participation rate completed the group of disappointing metrics as it settled at 62.0% in February, below the revised 62.1% in the month prior. That was the lowest participation rate since 2021. Of particular concern was the fact that prime-age workers, those between the ages of 25-54, also declined. Weather likely played a role in the subdued figures as declines were seen in construction and leisure and hospitality sectors. Manufacturing and transportation also saw pullbacks in hiring. Health care and social assistance saw a 19,000 decline in jobs, which was likely affected by strikes by more than 30,000 Kaiser Permanente employees.
The Commerce Department reported retail sales for the month of January. That figure fell 0.2% after no change in December. Excluding car dealerships, sales were unchanged. Seven out of 13 categories posted declines led by motor vehicle sales. Gas stations, apparel merchants and health & personal care stores also registered decreases. Here, too, weather likely played a role as winter weather across a large swath of the country was marked by arctic blasts and significant ice buildup that hindered mobility. The storms caused the most flight cancellations since the pandemic. Nonstore retailers—i.e., online shopping—notched a gain during the month which was not a surprise given the weather.
The main takeaways are that the assumed stabilizing of the labor market may not be happening after all. The “low hire, low fire” environment has been influenced by a sharp decline in immigration numbers, but signs are pointing to the fact that the massive build in data centers and all things AI seems to be the one growth engine for the entire economy, with little else providing support. The first few months of the year have always been influenced by weather-related events, and this year seems to be no different. The question is whether the economy can bounce back during the remaining three quarters of the year as it has done many times before? As mentioned above, the momentum for interest rate cuts is rapidly disappearing day-by-day as the war continues and prices rise. A 4.4% unemployment figure is not enough to get the Fed to move off its current pause in monetary policy. Wages for the majority of employees are not rising fast enough to provide a boost as we see from the tepid retail sales figures. All eyes turn to the next Fed meeting, scheduled for March 18, to see the path forward.
ISM
The Institute for Supply Management released its manufacturing and services indices this week. The ISM Manufacturing index fell to 52.4 in February from 52.6 in January but still managed to beat the consensus estimate of 51.5 from a survey of economists taken by Bloomberg. A reading above 50.0 indicates expansion. The new orders sub-index also reached expansionary territory, coming in at 55.8. Inventories were the main source of support for the headline figure, contributing nearly 0.25 index points. The prices-paid index, a measure of inflationary pressure, was more concerning. It rose to the highest level since June 2022, following Russia’s invasion of Ukraine. This week’s events in the Middle East are predicted to provide further pressures in the cost pipeline. Producer price data last week showed that the cost of unprocessed goods, excluding food and energy, rose more than 15% in January from a year ago, also the steepest gain since the Russian invasion. Said one computer and electronic products producer in the survey: “Continue to be impacted by tariffs. Seeing metals prices rise, too. Business is steady, but domestic growth is slower than expected.”
On Wednesday, the ISM Services index was released. That figure rose 2.3 points to 56.1, exceeding all projections in a Bloomberg survey of economists, and expanding at the fastest rate since mid-2022. Robust orders growth and business activity fueled the rise, which also fueled strong demand for services employment. Fourteen service industries reported growth last month, led by mining, information and real estate. In contrast to the ISM manufacturing survey, inflationary pressures subsided at service providers. The index of prices paid for services and materials fell to an almost one-year low. One wholesaler commented: “Overall, our business performance in January and February has been solid (minus some winter storm hurdles). Our upstream oil and gas business has stalled for two years and is not supporting our growth. On the other hand, all data center-related activities continue to grow substantially.” Meanwhile, a rental and leasing contributor wrote: “The business climate remains solid overall, but significant unknown risks from further potential tariff actions by the U.S. government are dampening business investment.” Our main takeaway is that the report highlighted that services, the main engine of the U.S. economy, saw demand accelerate last month and price pressures become less pervasive. How and if that momentum changes in light of geopolitical events are, however, yet to be determined.
Company Events
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