Market Update
Last week the market was initially pricing in an off-ramp to the Iran conflict after President Donald Trump told aides he is willing to end military campaign. However, Trump’s address to the nation coupled with recent posts failed to provide a clear path toward resolution, driving oil prices higher to $110/barrel as of Sunday night. The markets remain highly headline driven as prolonged conflict could materially weaken both U.S. and global economic prospects. On the economic front, the jobs report for March came in stronger than expected, although there has been a lot of volatility in the monthly reports that makes it difficult to gauge the true state of the labor market. February retail sales surprised to the upside, supported by rising wages and tax refunds. However, this strength reflects a pre-conflict backdrop. A prolonged conflict could cause shoppers to adjust their spending as gasoline prices remain above $4 a gallon. Manufacturing activity remains resilient, with the ISM index rising to 52.7, supported by stronger production. That said, supply chain pressures are beginning to re-emerge due to the conflict, as evidenced by worsening supplier delivery times. Some of the increases in manufacturing may reflect front-loading behavior, with firms increasing purchases to mitigate potential disruption, while inflation pressures are also building at the margin. While we do not expect a repeat of 2022-style inflation, given the absence of the large fiscal impulse, the risk is a prolonged conflict that could act as a tax on the consumer, ultimately slowing spending and weighing on overall economic growth. The main economic event for this week will be the CPI numbers for March, which come out on Friday. We should begin to see the conflict’s impact on inflation, although the full effect will take a while to feed through the data.
March Jobs Report
The March jobs report headline number came in sharply above expectations, with payroll gains of 178k versus consensus estimates of 60k. A large portion of the strong job growth in March was due to the jump in healthcare and social assistance jobs, which increased by 90k, more than reversing the decline we saw the previous month which was largely due to a strike from hospital workers. Other industries that saw healthy job growth were leisure and hospitality (+44k) and construction (+26K). Additionally, the unemployment rate ticked down slightly, which when rounded down fell to 4.3% from 4.4%. However, this was mostly due to a tick down in the labor force participation rate. Average hourly earnings increased 0.2% for the month, bringing the year-over-year rate to 3.5%, which is lower than the 3.76% rate in February. One worrying metric is the percent of unemployed that have been unemployed for 15 weeks or more, which reached 42.3% in March, the highest number since December 2021.
Given the volatility in the headline payroll numbers so far this year, it’s hard to feel confident that the labor market is in a good position despite this healthy print. The headline number for February was revised down to -133k from -92k, and January was revised up from 146k to 160k. In addition to the volatility in the data, there’s also the issues of response rates for the household survey that are making it difficult to have confidence in the data. Response rates have been historically low for a while now, and the response rate for the household survey this month was 63.9%, all-time low which is lower than even during the initial months of the pandemic. If we see healthy jobs numbers in the coming months then we would start to see a trend and feel more confident, but for now we remain cautious on the strength of the labor market.
February Retail Sales
The February retail sales report came in ahead of estimates, with both the headline and ex-auto figures beating estimates by 10 basis points, coming in at 0.6% and 0.4% on a month-over-month basis (MoM), respectively. Looking under the hood of the report, 10 of the 13 listed categories showed MoM increases, with notable strength in health & personal care, clothing & accessories, and motor vehicles. Meanwhile, weakness was noticeable in both furniture and grocery, with the former being sensitive to the current rate environment and the latter being impacted by higher prices from tariffs. Overall, the report gives us a prewar snapshot of a robust consumer, driven by real wage increases and OBBA stimulus, as the average tax refund was $350 higher than last year. Moving ahead, it will be crucial to closely monitor the increasing gas prices' impact on consumers, particularly on the lower end, since it makes up a much larger portion of their income, and meanwhile, for the higher-income consumers, if turbulence in the equity markets last month caused a change in spending as the wealth effect plays a large role in this groups spending habits.
ISM Manufacturing
The ISM manufacturing survey continued to show steady growth into the end of the first quarter as it increased from 52.4 to 52.7 in March. However, given the conflict in the Middle East has caused a spike in headlined inflation due to higher energy prices. Input prices from the PMI survey surged 3.7 points, while output prices increased 4.7 points, with the latter marking the largest single-month gain since April 2022. Similarly, the ISM price index rose to its highest level since June 2022. Supply chain stress is building as delivery times worsened across both surveys, drawing down finished goods inventories to the lowest levels since September 2023. At the same time, firms have increased the purchase quantities in order to stack up inventory ahead of potential further disruption. On the employment front, the indexes remained steady with the PMI slipping to 50.1 in March from 50.4 in February.
Sources:
https://www.census.gov/retail/sales.html
https://www.reuters.com/business/us-retail-sales-increase-solidly-february-2026-04-01/
https://www.bloomberg.com/news/articles/2026-04-01/us-manufacturing-expands-by-most-since-2022-input-costs-jump https://markets.jpmorgan.com/jpmm/research.article_page?action=open&doc=GPS-5253318-0
https://www.bloomberg.com/news/articles/2026-04-01/us-companies-added-62-000-jobs-in-march-adp-says
https://www.bls.gov/cps/methods/response_rates.htm
https://www.bls.gov/news.release/pdf/empsit.pdf
