The latest US jobs report delivered a significant surprise, with non-farm payrolls rising 172,000 versus the 88,000 consensus expectation, according to reports from Investing.com India, Bloomberg, and the Financial Times. The report also included 93,000 upward revisions to the past two months' data, marking the strongest three-month advance in more than two years. The unemployment rate remained steady at 4.3%, though wage growth showed some moderation, slowing to 3.4% from 3.6% in the previous period, matching the slowest pace since 2021. The advance in hiring was led by leisure and hospitality, which added 70,000 jobs - the most in more than three years, while the healthcare and social assistance sector continued to hire at a firm pace. However, analysts note that the remarkably strong leisure & hospitality number may have been boosted by the World Cup starting next week, and the 51k rise in local and state government appears too strong for the current economic environment. The report also revised March and April payroll figures higher by a combined 93,000 jobs, reinforcing the view that the labor market remains relatively stable despite broader macro uncertainty.
Despite the strong jobs data driving rate hike expectations to 68.4%, Raymond James Chief Market Strategist Matt Orton believes markets may be overestimating Federal Reserve tightening. Speaking exclusively to ET Now, Orton said shorter-end bonds look attractive because rate hike expectations have gone too far, with resilient economic growth and persistent inflation pressures reducing the chances of interest-rate cuts this year. "With respect to bonds, I think shorter-end bonds look a little bit more attractive because I think rate hike expectations have gone a little bit too far," Orton stated. He noted that geopolitical tensions revive focus on safe-haven bonds, with any escalation in Middle East tensions potentially reinforcing demand for Treasuries, even as higher oil prices complicate the inflation outlook for central banks. Despite his relatively constructive view on short-term bonds, Orton remains positive on equities over the longer term and would use market pullbacks as buying opportunities, particularly in sectors supported by strong fundamental growth trends.
Investors were quick to dial back odds of a rate cut and dial up the odds of a hike following the blowout jobs report. The odds that the Fed would cut rates at all by the end of the year shrank to 0.6%, according to the CME FedWatch tool, while rate hike odds increased to 68.4%, considered the worst-case scenario for stocks. US Treasury yields reflected this shift, with the 10-year US Treasury yield rising to 4.53%, breaking above the key 4.5% psychological threshold. Interest-rate swaps showed that traders are now fully pricing in a quarter-point rate increase by year-end. As per Bank of America, the possibility of a "hawkish Fed shift" has been flagged, with Ron Temple from Lazard noting that "any hopes of a Fed rate cut have effectively been eliminated with this morning's strong jobs report." Treasuries sold off after the release, sending two-year yields up about 9 basis points to 4.13%, while S&P 500 futures added to losses. The S&P 500 fell 1.7% to 7,454.35, Dow Jones dropped 0.81% to 51,143.77, and Nasdaq 100 plummeted 3.2% to 29,427.11, as investors dumped high-flying growth stocks across tech and AI sectors.
The job creation was primarily concentrated in three sectors, as reported by Investing.com India, Bloomberg, and the Financial Times. Leisure & hospitality added 70,000 jobs, government employment increased by 52,000, and private education and healthcare services contributed 40,000 positions. This means that every other sector of the US economy combined added only 10,000 jobs in total. The analysis notes that these three sectors have accounted for every single job added since December 2022, while manufacturing, technology, energy, retail, transport and logistics, financial services, and business services have collectively lost jobs over the past three and a half years. The lack of breadth to the job creation story remains an important theme, with the 'big 3' sectors generating all employment gains while other sectors continue to decline. At the same time, financial activities employment declined by 22,000 jobs during the month and has now fallen by 107,000 positions from its May 2025 peak, highlighting continued weakness in the financial sector.
Higher oil prices are adding to inflation concerns and complicating the Federal Reserve's policy outlook. In the past six months, both major crude benchmarks have rallied sharply, with Brent crude futures gaining about 55.7% and US West Texas Intermediate (WTI) crude futures surging more than 60%, as reported by ET Now. This surge underscores investor concerns over supply risks and the potential inflationary impact of higher energy prices. Orton noted that oil prices add to inflation concerns and can fuel inflation, increasing the likelihood that central banks maintain restrictive monetary policy for longer to contain price pressures. The strong economy clouds the rate-cut outlook, with Orton stating "I don't think that we're going to see rate hikes from the Fed, but I do think it greatly limits Fed Chair Kevin Warsh's ability to institute or advocate for rate cuts this year."
