Developments in the Middle East continue to be, without a doubt, taking center stage for the financial markets. However, it’s important to keep tabs on the U.S. macro-outlook, especially the labor market and inflation aspects. At some point, when the situation in the Middle East does de-escalate, the markets, and of course the Fed, will be turning their undivided attention back to the fundamental backdrop.

As we go to press with this edition of Minds on the Markets, investors were beginning to see the first glimpses of economic-related data for the month of March. While it is important to also consider how the growth and inflation stories were playing out prior to the war, the March data provide a small look into the backdrop once the war began. We would agree it is too early to draw any conclusions, but nevertheless, some perspective is always in order.

One of the first sets of reports that get released when the calendar flips to a new month is the ISM Manufacturing Survey. This monthly report comes from a private survey with the nation’s factory base, hence the name. It is based on a diffusion index where the level of 50 is essentially considered neutral. Anything above 50 falls into the expansionary category, while a number below this threshold is put into contractionary territory.

For the month of March, the ISM gauge came in at 52.7, the third month in a row this figure was in the expansion zone. Indeed, it has been a rather nice turn of events because it had been in contraction territory for nine consecutive months over the last twelve observations. Interestingly, the Middle East war did get mentioned in some areas in terms of increasing costs already and implications for delivery times for certain items. It also stated how global customers were looking to both North and South America as alternative sites to alleviate supply chain concerns.

That brings us to the all-important monthly Employment Situation report. The March data was taking on heightened significance to the markets given the weaker than expected showing for November, and it didn’t disappoint. Total nonfarm payrolls rose by a visibly stronger than expected +178k, or more than 100k above the consensus estimate. While some of this gain did reflect a reversal of the prior month’s strike and weather-related negative influences, the underlying pace of new job creation was still relatively solid. In fact, the three-month moving for nonfarm payrolls rose to +68k, the highest reading in almost a full year.

The unemployment rate did drop -0.1pp to 4.3%, but that was due to a decline in the participation rate. Without that impact, the jobless rate would have been essentially unchanged. Also, the timing of the payroll survey period for the employment data may have been a bit too early to really see any visible impact from the more recent run-up in oil prices to over $100 per barrel. However, the weekly jobless claims data continued to remain historically low, suggesting the labor markets were still in a relatively favorable place.

That brings us back full circle to our opening remarks. At some point, hopefully in the not-too-distant future, the war in the Middle East will wind down and the Fed and the markets will shift their focus back to the usual suspects. While the data could be a bit cloudy from the energy price impact, we still see a moderate U.S. growth setting and inflation that will remain above the Fed’s preferred target.