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GM. This is Milk Road Macro, the newsletter that connects wars, oil, and your job prospects faster than the market can say βno rate cutsβ. |
Hereβs what weβve got for you today: |
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WHAT IMPACT IS THE IRAN WAR HAVING ON THE AMERICAN ECONOMY? |
The Iran war continues, entering its fifth week. |
And the resulting energy price shock continues to reverberate around the world. |
Energy prices, including crude oil and natural gas, have surged higher as the vital Strait of Hormuz trade waterway remains effectively closed. |
But is this energy price jump having any measurable effect on the U.S. economy? |
Weβre now seeing βwartimeβ economic data starting to trickle in. |
Including important labor market data for March. |
So, whatβs the latest with the labor market? |
Whatβs the latest with the Fedβs next move? |
And what will happen with inflation? |
Letβs take a lookβ¦ |
The latest labor market data |
The Iran war began in late February, with the subsequent energy price shock starting to take hold in early March. |
But still, America added a relatively impressive 178,000 jobs in March, according to official Non-farm Payroll data, nearly triple the consensus estimate of 65,000. |
Thatβs a big improvement from Februaryβs negative payroll print. |
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Even more impressively, this March number was driven entirely by a surge in private workers, which added 186,000 in March. |
While Government workers continued to drop, sliding by 8,000 in March. |
However, as has been the case for some time, the composition of those March jobs was subpar. |
Job growth was once again heavily dominated by healthcare, a sector largely insulated from economic activity. |
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Still, total job growth is now rising on a three-month and six-month average basis, potentially βbottomingβ in late 2025. |
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The official unemployment rate (the percentage of people in the labor force who do not have a job but are actively looking for one) also continues to fall, sitting at 4.26% for March. |
The unemployment rate had previously been deteriorating throughout most of 2025, but it has now been improving since November. |
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On an unrounded basis, the recent one-month decline in the unemployment rate was the largest since December 2021. |
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However, looking ahead, job growth may slow again in the coming months. |
NFIB hiring intentions (the share of small businesses planning to increase employment in the near future) are edging lower. |
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But while hiring has generally been muted for some time, firing has also been muted. |
Initial Jobless Claims (the number of people claiming unemployment benefits for the first time) is hovering around its lowest level in years. |
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According to the Challenger survey, American employers announced 60,000 job cuts in March, above February's 48,000, but generally on a downward trajectory since early 2025. |
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WHAT IMPACT IS THE IRAN WAR HAVING ON THE AMERICAN ECONOMY? (P2) |
Overall, itβs the same picture as it has been for some time for the American labor market - not deteriorating, but probably not yet conclusively improving either. |
Weβre still in a βlow hire, low fireβ environment. |
However, leading indicators for the labor market still look promising. |
That includes the ASA Staffing Index, a private weekly measure of temporary employment, which has been rising on a year-on-year basis since early 2025. |
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Temporary employment data often historically leads headline labor market data, sometimes by a relatively long period of time. |
From a long-term cycle perspective, businesses see more activity, so they increase temps before committing to costly full-time hires. |
But will the energy price shock change things? |
Weβve seen some small, promising signs for the labor market in recent months. |
Or at least, thereβs been no further significant deterioration. |
But that could be under threat as the energy price shock continues. |
If energy prices remain significantly elevated, it will take time for any potential effects on the labor market to occur. |
Michael Pugliese, senior economist at Wells Fargo, said: |
βIf the conflict had not happened in the Middle East, I think the stabilization narrative would be gaining momentum. The problem, though, is we now have this new shock working its way through the economy.β |
Goldman Sachs analysts think the energy shock will have an effect on the labor market, but not a massive impact. |
They estimate the oil shock could raise the U.S. unemployment rate by about 0.1 percentage point and reduce payroll growth by roughly 10,000 jobs per month on net through year-end. |
One scenario analysis by Oxford Economics says the labor market hit becomes meaningfully worse if oil stays very high for long enough. |
The analysis concludes that Brent crude oil averaging about $140 for two months would be enough to push parts of the global economy into mild recession, with the U.S. nearing a temporary standstill and layoffs pushing up unemployment. |
In a milder case of oil around $100 for two months, Oxford says growth would slow, but recessions would likely be avoided. |
A 2025 paper from the IMF on oil shocks (written pre-war) estimates that a 10% oil price increase tends to weaken labor market conditions persistently: employment-to-population falls, and unemployment rises. |
But the paper also adds that the damage can build up over several quarters rather than immediately. |
Whatβs the latest on the Fedβs next move? |
The Federal Reserve meets in late March for Jerome Powellβs last official meeting as chair. |
And then, subject to confirmation, Kevin Warsh will take up the chair role for the next meeting in June. |
While it's predicted that Warsh might be relatively dovish on interest rates, he faces a backdrop of: |
A labor market that may be slowly improving, or at least stabilizing. An energy price shock and a jump in inflation.
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Not exactly an environment for cutting rates. |
And interest rate traders are currently pricing a 79% probability of zero Fed rate cuts in 2026. |
Earlier this year, as many as three cuts had been expected. |
However, traders are also pricing a less than 10% chance of a rate hike this year. |
So the market's overwhelming expectation is no change for interest rates in 2026, after the Fed last cut rates in December 2025. |
Inflation data on deck |
On Friday, weβll also see the first big inflation print since the war started when we get the March inflation report. |
Headline CPI in the U.S. has been falling for several months since Q3 2025 as fears over inflationary pressures from tariffs cooled. |
But this downward slide will almost certainly end when we see the latest inflation data on Friday. |
WTI crude oil is roughly 80% more expensive than it was in February, alongside a spike in prices of natural gas and many other vital substances that are transported through the Strait of Hormuz. |
We could well see year-over-year CPI surge to 3%+, up from 2.4% in February. |
A rise in headline inflation is probably now βbaked inβ for the next 3-6 months, even if the war ends tomorrow. |
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Currently, market-derived expectations of near-term inflation have risen from 2.3% pre-war to 3.3%. |
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This means the market currently expects headline U.S. inflation to be 3.3% on average over the next 12 months. |
The national average βgas at the pumpβ price in America is already the highest since 2022. |
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On a rate-of-change basis, this is the fastest shift in gas prices for decades. |
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Wrapping up |
There are some very small, promising signs that the U.S. labor market might be improving. |
But this could now be in doubt as an energy price shock takes hold. |
The most important datapoint of the week will be the inflation report on Friday. |
This is likely to show a significant reacceleration in prices. |
But this is expected, so how fast prices are accelerating will probably dictate the market reaction. |
And what does this all mean for the Fed? |
Well, almost certainly no rate cut later this month. |
And potentially no change in rates at all in 2026. |
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BITE-SIZED COOKIES FOR THE ROAD πͺ |
Two loaded LNG carriers seemingly aborted an attempt to exit the Persian Gulf via the Strait of Hormuz. Analysts have been keenly monitoring traffic in the Strait as a tiny trickle of vessels passes through the waterway, but the vital trade passage is still effectively closed. |
President Trump took a significant step back on one key issue for energy markets: a U.S. campaign to control Iranβs oil. He said, βIβd like to take the oil because itβs there for the taking. Unfortunately, the American people would like to see us come home.β |
The number of American homes that went under contract in March rose 4.6% year over year, according to Zillow. The jump comes even as mortgage rates rose steadily amid new fears about oil prices and inflation. |
Tax season is just around the corner. If youβre not sure how to go about it, SUMM is a tax software built specifically for crypto. |
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