The fallout Operation Epic Fury continues to dominate market action. Crude oil prices are breaking higher following comments by Qatar’s energy minister, Saad al-Kaabi. Kaabi told the FT that Qatar (the world’s second-largest producer of LNG producer) will not restart production until there is a complete cessation of hostilities, adding that even if the war ended immediately it would take Qatar “weeks to months” to return to a normal cycle of deliveries. Kaabi also warned that crude prices could soar to $150 a barrel in two to three weeks if tankers and other merchant vessels were unable to pass through the Strait of Hormuz.
USD is firmer against most major currencies except the oil-sensitive NOK and CAD. US equity futures are down, and global bond yields continue to edge higher. Markets have sharply lifted rate expectations for the Fed, and other central banks, as the war-induced surge in crude oil prices boosts inflation expectations.
Even without the war, this week’s US data alone would justify the Fed’s patient easing approach. The ISM manufacturing Prices Paid index soared in February to the highest level since June 2022, indicative of upside risk to inflation. However, with productivity and unit labor cost both up 2.8% q/q in Q4, wage growth is offset by efficiency gains, limiting upside inflation pressure.
Meanwhile, the ISM Services index rose in February to the highest level since May 2022 consistent with solid private sector activity, and the details showed diminishing tension between employment and inflation. The February Fed Beige Book was also encouraging with Districts on balance reporting that “economic expectations were optimistic”; “employment levels were generally stable”; and “firms expected prices to rise at a somewhat slower pace in the near term.”
But the real test for Fed funds rate expectations comes today with the February nonfarm payrolls (NFP) report (1:30pm London, 8:30am New York). The data will reveal whether the US labor market is truly on a more solid footing or if January’s strong NFP number was merely a blip. Consensus is looking for +55k job gains vs. +130k in January and the unemployment rate is seen unchanged at 4.3% in February, a tick below the FOMC 2026 median projection (4.4%). Focus on the sector generating the job gains and the extent of the revision to the January number.
In January, job gains were concentrated in the non-cyclical health care and social assistance sector, suggesting broad labor demand remains weak. Excluding the health care and social assistance sector, which constitute around 20% of total employment, nonfarm payrolls were up only +6.5k in January.
Meanwhile, in the past three years, the second preliminary January payrolls estimate has been revised downward from the initial estimate. The January job gains in 2025, 2024, and 2023 were revised down between the first and second estimates by -18k, -124k, and -13k, respectively.
The risk is a big revision downward to the solid NFP gains last January because of conflicting signal in private sector job gains. The Bureau of Labor statistics (BLS) reported the private sector added +172k jobs in January while ADP and Revelio private payrolls were up just +11k and +17.4k, respectively.
Bottom line: if the NFP data for February are consistent with the stronger job creation and low unemployment rate initially reported in January, it would reinforce the Fed’s cautious easing guidance and add a tailwind to the USD safe haven bid. But a weak February NFP and/or a significant downward revision to the good labor market news of January would rekindle Fed funds rate cut expectations and curb safe haven demand for USD.
The US January retail sales data will be overshadowed by the NFP print. Nominal retail sales are expected to decline -0.3% m/m vs. 0% in December while the retail sales control group, used for GDP calculations, is projected to rise 0.3% m/m vs. -0.1% in December. January is typically a soft month for retail sales after the holiday season and cold weather.
