The stock market should continue to be dominated by developments in the Iran war this week. In addition, it will likely contend with a high March CPI. Much of the CPI's jump this month is tied to the war-related surge in oil prices. So, this Report should not affect Fed policy and will likely be forgotten quickly by the market.
Consensus looks for +0.9% m/m Total and +0.3% Core CPI for March. The risk is for an even higher print. Pass-through of higher energy prices will likely show up in a jump in airfares, as well as in other components. Used Car Prices also could move up sharply, as the CPI measure does not appear to have caught up to the increases seen in the Manheim Used Car Price Index so far this year. (Used Car Prices have a negligible impact on the Fed's favorite inflation measure, the PCE Deflator.) The y/y is expected to shoot up to 3.4% from 2.4% for Total and move up to 2.7% from 2.5% for Core CPI.
Consensus also expects a high print for the February PCE Deflator. Consensus sees 0.4% m/m for both Total and Core. These estimates seem too high, based on the more moderate February CPI (0.3% Total, 0.2% Core). However, Fed Chair Powell had predicted a near-consensus print, having estimated a steady 2.8% y/y for Total and a dip to 3.0% from 3.1% for Core at the March FOMC Meeting.
The Fed is not likely to be moved by these reports, even if they come in higher than expected, as officials already have said they are waiting to see whether these war-related price hikes prove temporary. Similarly, the Fed will not be swayed by the March Employment Report, in which some key components were on the stronger side.
Even though the Employment Report will not likely move the Fed, it should be a positive for the stock market inasmuch it mostly argues against the idea of stagflation. Using the 22.5k m/m 2-month average of Payroll changes to adjust for strike and weather impacts, job growth over the past two months has been more than double the anemic 10k pace of 2025. The decline in the Unemployment Rate to 4.3% from 4.4% confirms that economic growth is solid so far in 2026, despite the m/m volatility in Payrolls.
Wage inflation, moreover, remains subdued. The 0.2% m/m increase in Average Hourly Earnings lowered the y/y to 3.5% from 3.7%. The 0.4% m/m prints in the prior two months now look to be part of a volatile pattern around a 0.3% trend. The latter is the Q126 average (0.27% m/m unrounded) and is within the 0.2-0.3% range seen since Q125.
The soft part of the Report was the dip in the Nonfarm Workweek. It pushed down Total Hours Worked enough that the March level is 0.6% (annualized) below the Q126 average -- a weak take-off point for Q226. However, the decline in hours worked could reflect business caution or shortages related to the Iran war or bad weather. If so, the decline could point to a bounceback this Spring as these problems dissipate. It may join military arms replenishment as a catalyst for growth ahead.
