February Payrolls Preview: “For This Print, The Stronger The Better”

The February jobs report is expected to show 55k jobs added to the US economy in the month, a sharp drop from 130k in January but slightly above the Fed’s 50k breakeven estimate. Private payrolls are expected to rise by 60k versus the prior 172k. The unemployment rate is expected to remain unchanged at 4.3%, while wages are seen rising 0.3% M/M and 3.7% Y/Y. According toi Newsquawk, the data will be used to gauge Fed rate cut expectations, while some on the FOMC, including Waller, will use it to decide whether to vote for a rate cut or hold in March, although the Fed is expected to keep rates on hold barring any drastic change in the current situation or outlook.

Recent proxies have been mixed: the ADP report was strong, while the ISM PMI employment sub-components showed improvement in both manufacturing and services, though manufacturing remained in contractionary territory. Initial jobless claims for the reference week were steady over comparable periods, while continuing claims rose slightly. The Conference Board reported a modest improvement in labor market perceptions. The Chicago Fed unemployment model expects the unemployment rate to remain at 4.3%.Earlier today, RevelioLabs reported 16.7k jobs lost in February versus a 13.3k gain in January. Challenger layoffs fell notably.

Expectations:

• Headline NFP is expected to show 55k jobs added in February, cooling from Januaryʼs 130k increase. Analyst forecasts range between -9k and +113k.
  • Private payrolls are expected to rise by 65k from the prior 172k, with forecasts ranging between +25k and +110k.
  • The Fedʼs current estimate of the breakeven rate is around 50k.
  • Goldman estimates payrolls rose by 45k in February, below consensus. On the negative side, the bank expects a 31k drag from newly striking workers and a modest headwind from poor winter weather after it likely boosted January payroll growth. The bank expects unchanged government payrolls, reflecting a 5k decline in federal government payrolls that is offset by a 5k increase in state and local government payrolls. 

• The unemployment rate is expected to remain at 4.3%, with the range of forecasts between 4.2-4.4%.
  • Wages are expected to rise 0.3% M/M, easing from the prior 0.4%, with forecasts ranging between 0.1-0.4%.
  • Average earnings growth Y/Y is seen at 3.7%, matching the prior rate, with forecasts between 3.5-3.7%.

Proxies:

• The February ADP data showed jobs rising by 63k, beating expectations of 50k and up from the prior 11k, which was revised down from 22k. The 63k print is the highest since November 2025.
• In the ISM PMI reports, manufacturing employment edged up to 48.8 from 48.1, while 45% of respondents still said managing headcount rather than hiring was the norm at their companies. The services employment PMI rose to 51.8 from 50.3. Respondent comments included: “we are expecting activity to increase from 2026 to 2030, so we are hiring” and “ICE activity has caused some staff to not come into work.” There is also growing focus on AI-related job cuts, following Blockʼs decision to lay off 40% of its staff, around 4,000 people, raising concerns over how quickly companies may turn to AI instead of human employees. Some view this decision as premature, but it bears monitoring in the months and years ahead to see whether the pace of AI-driven replacement accelerates.
• The Chicago Fedʼs February labor market indicators are tracking unemployment at 4.27%, little changed from 4.28% into the January jobs report.
• Weekly initial jobless claims were steady over the comparable survey periods (208k versus 210k), while continuing claims rose slightly (1.833mln versus 1.819mln).
• The Conference Board reported a modest improvement in labor market perceptions, with the labor market differential increasing; some 28.0% of consumers said jobs were “plentiful”, up from 25.8% in January. Meanwhile, 20.6% said jobs were “hard to get”, up from 19.0%.
• RevelioLabs reported 16.7k jobs lost in February, while Challenger layoffs eased to 48k from 108k. January

Iran: Given recent developments in the Middle East, it is still too early to assess the impact on the US economy, though it could have implications for prices and, by extension, monetary policy. The Fed generally prefers to look through one-off energy-related price increases. However, if the war is prolonged and disruption persists in the Strait of Hormuz, there is a risk this could delay the resumption of rate cuts, which are currently expected in the summer. A sharp deterioration in the labor market would likely offset these concerns, but the situation keeps the Fed in a difficult position. The US has offered to assist shippers and tankers transiting the Strait by paying for insurance and providing US Navy escorts. This is a new announcement and its effectiveness remains to be seen, but if successful it could help shield the global economy by keeping supply chains and oil flows open. Market-based inflation expectations remain anchored. As of 4th March, the 5-year breakeven rate stood at 2.46%, up from 2.40% on 27th February, while the 10-year rate is at 2.29% versus 2.25% at the end of last-week

Arguing for a weaker-than-expected report:

• Strikes. The BLS’s strike report noted that newly striking workers will exert a 31kdrag on February job growth.
• Government hiring. Goldman expects unchanged government payrolls, reflecting a 5k decline in federal government payrolls offset by a 5k increase in state and local government payrolls. The bank expects the ongoing federal government hiring freeze to continue to weigh on federal government payrolls.
• Winter weather. Winter storm Fern likely formed too late to meaningfully impact January job growth—the impact of weather actually likely boosted job growth in January after greater-than-usual snowfall likely weighed on December job growth—but lingering snow coverage and colder-than-usual weather in the February reference period are likely to exert a modest drag on job growth in weather-sensitive industries. We assume a 5k decline in construction employment

Arguing for a stronger-than-expected report:

• Layoffs. Initial jobless claims increased to 220k on average in the February payroll month from 206k in January but remained low. Announced layoffs reported by Challenger, Gray & Christmas declined by 60k (or 72% year-over-year) in February to 48k (NSA), following a 72k increase in January.

Mixed/neutral factors:

• Employer surveys. The Goldman manufacturing (-0.4pt to 48.6) and services (-0.4pt to 49.1) survey employment component trackers both edged lower in February and remained in contractionary territory. However, the signal from survey data has been less useful—and at times misleading—during the post-pandemic period and thus has little bearing on our payrolls forecast.
• Big data. Alternative measures of employment growth were mixed in February: the indicators we track averaged +58k.

Updated Population Controls: Tomorrow’s update will re-anchor the survey’s population estimate to the newly released Census population estimate, resulting in one-time adjustments to the levels of the labor force, employment, and other series in February. The household survey has likely overstated population and employment growth over the last year because the survey’s population assumptions quickly became outdated as immigration continued to fall sharply. We estimate that this will result in downward adjustments to the labor force and employment of 0.3-0.4mn (Chart below, left panel). The annual update will also likely have a tiny composition effect on ratios like the unemployment rate. That because recent immigrants are more likely to be young Hispanics and young Asians, who tend to have higher labor force participation and unemployment rates than the population average. As a result, a disproportionate decline in the population size of these groups will lower these rates. However, because the magnitude of the revision is relatively small, the participation rate and employment-population ratio will decline by only 1-2bp and the unemployment rate to be essentially unchanged (Chart below, right panel).

Fed: The Fed is currently on hold and views among FOMC participants remain mixed, with some officials objecting to further rate cuts while others would prefer the easing to continue. Overall, the outlook largely depends on incoming data and how far the Fed is from both sides of its mandate. The labor market has stabilized in recent months, while inflation remains above target, largely supporting the case for rates to remain at current levels. This report will be key in assessing whether Januaryʼs labor market strength is sustained and whether the view that the labor market has stabilized still holds. Large downward revisions or a notably weak report would boost dovish rate expectations and strengthen the case among doves for cuts to resume sooner rather than later. Fed Governor Waller, a dovish dissenter, said he would support a cut in March if Januaryʼs labour market strength is revised away or fades, though it may be appropriate to hold if downside labour market risks have diminished. Governor Miran, an uber dove, wants four 25bps cuts this year, sooner rather than later. New York Fed President Williams has said rate cuts will continue if inflation ebbs. Goolsbee (non-voter this year) is optimistic about more cuts this year but wants clear evidence inflation is returning to target first, specifically warning about persistently high core services inflation.The Fedʼs median dot plot pencils in one rate cut in 2026, taking the target range for the federal funds rate to 3.25-3.50% by year-end, though the Summary of Economic Projections will be updated at the next Fed decision on March 18th.

Market Reaction: 

For options expiring on March 6, the market is pricing +/-1.14% move, as of market close on March.

JPM Market Intel: According to the JPM trading desk, the range of SPX outcomes is skewed lower given the uncertainty around the US / Iran war. The heightened oil market and general market vol is not bleeding into the NFP print, which may be muted given the expectations for a weaker Retail Sales number. For this print, the stronger the better given the increase in inflation expectations due to energy prices. A weaker number will increase rate cut expectations, but the risk is stagflation in the near-term given the expected increase in inflation. If the US / Iran war were to resolve overnight, the US economy is on solid footing with positive growth momentum, evidenced by the ISM prints. JPM remains of the view that reduced uncertainty on taxes and tariff rates that continue to trend lower benefits the economy and is likely to translate into improved hiring. If that comes to fruition then consumer will continue to drive the economy to above-trend growth, benefiting earnings and risk assets. The trade off is zero rate cuts this year.

Below JPM’s trademark market reaction matrix:

• Above 105k. SPX is up 50bp – 1.25%: odds 5%
• Between 75k – 105k. SPX is flat to up 75bp: odds 25%
• Between 45k – 75k. SPX loses 50bp to gains 50bp: odds 40%
• Between 15k – 45.  SPX loses 1% to gains 25bp: odds 25%
• Below 15k. SPX is down 0.5% to 1.5%: odds 5%

Finally, some thoughts from traders around the Goldman trading desk:
    
Vickie Chang (Global Macro Research): Given the strikes in Iran and the shocks that has sent through markets, the payrolls print is not likely to be as important a focus as usual. Our economists’ forecasts for +45k on NFP and a tick up in the unemployment rate to 4.4% are not likely to awaken the recession tail or to lead the market to price faster cuts, especially given the uncertainty around the future path of energy prices. Absent a meaningful surprise, the market is likely to be driven more by the geopolitical situation and the distributional effects of those shocks. The risks around the jobs data look two-sided. On the one hand, the market is not priced for recession—our estimates suggest that the market is pricing growth at ~1.6% vs. our 4q-ahead forecast of 2.3%. So there is still room to worry about the growth picture on a properly bad report (and to pull forward cuts), though that would likely require a bigger jump in the unemployment rate. On the other hand, with the inflation and policy tightening shock that the market has priced in recent days, and amidst renewed worries that we could see higher energy prices and/or increased fiscal spending, a stronger report and lower unemployment rate could lead the market to worry about the cuts that it is still pricing through this year and next. But as with the robust services ISM, it could also provide reassurance that the economy was more resilient heading into the Iran shock. 

Brandon Brown (Rates Trading): While AI fears, credit worries, and uncertainty around the effects of the war in Iran have led investors to reach for interest rate hedges and duration, recent economic data has been solid. This has allowed the front end to price somewhat fewer cuts in 2026, while some of the cut premium has extended into 2027.  We think a 50k headline with a 4.4% unemployment rate is a report that will meet the market’s current pricing. Greater than 75k with a stable or falling unemployment rate will put pressure on the front end to cheapen further, while a 4.5% unemployment rate or below 25k headline will allow the front end to price more cut premium.  

Joe Clyne (Index Vol Trading): It’s been an extremely choppy and volatile market over the last few days, but the result of all that chop has been an index that remains extremely rangebound. Skew remains extremely steep and continues to realize extremely well. Sitting at 6880 in SPX cash, we expect to see the straddle for payrolls go out at roughly 80 bps. We don’t think that NFP will be a major driver for index level movement, unless you see a complete whiff and a market pullback. We think the main drivers remain geopolitical fears, AI disruption narratives, and (at an implied volatility level) crowded positioning in short downside and long topside. We think it is hard to have a strong break through all time highs in SPX with a lot of dealer positioning set up long gamma around the 7k level in SPX. For those who are looking for convex hedges, we think VIX optionality looks relatively cheap as compared to the fixed strike downside options. 

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