By Yasin Ebrahim

Investing.com – A goldilocks jobs report will be needed to fight off stagflation fears, and keep the Federal Reserve on a cautious rate hike path at a time when the Russia-Ukraine conflict has pushed inflation expectations to record levels.

Friday will see the release of February’s Labor Department report. Analysts have estimated that approximately 400,000 jobs were created during February. The expected decline in unemployment is below 4%.

This month’s jobs report is due to arrive just in time. The odds of aggressive Fed rate increases are decreasing. But the prospect of red-hot inflation running even hotter – in the wake of the Russia-Ukraine conflict that has boosted the price of oil, wheat and precious metals – just as economic growth is expected to slow has many on the lookout for stagflation.

The five-year breakeven rate on Treasury inflation protected securities – a closely watched gauge of inflation expectations — jumped to 3.23%, a record high.

To avoid tipping the scale, the jobs report must strike the perfect balance between optimism and pessimism.

“This jobs number tomorrow will have to be a pitch perfect,” John Luke Tyner, portfolio manager at Aptus Capital Advisors, said in an interview with Investing.com on Thursday. “If it’s too hot — 600,000 to 700,000 jobs created, and the unemployment rate falling to 3.7% –  then the market is going to take Powell’s words that a 50 bps is on the table at later meetings and then maybe even price in 100 bps by July.”

Federal Reserve Chairman Jerome Powell said earlier this week that he would back a 25-basis points rate hike at the March meeting, but said that increased rate hikes were on the table at subsequent meetings if inflation doesn’t subside as expected.

“I could see us in a position where the market then starts to revert back to the pricing of those six or seven hikes this year that were taken away by the Russia-Ukraine conflict,” Tyner added.

Bloomberg reported that the market’s expectations of Fed rate increases for 2022 fell by 112 basis point, compared to 162 last month.

Weak jobs data that meaningfully undershoot expectations will flag economic growth concerns and add “to the stagflation fears that I think spooks the market,” the portfolio manager said.