Stock market today: Fed rate hike in sight after blowout jobs report

Good news is bad news for markets on Friday.

It was another amazing month for the US job market, but that wasn’t really what investors wanted to hear. US employers added 172,000 jobs in May, far more than the 88,000 economists were expecting. The unemployment rate was unchanged at 4.3%.

It’s a positive signal for the US economy, suggesting that employers haven’t yet been deterred by hotter inflation and lingering uncertainty over the US-Iran war.

But for markets, a red-hot jobs report has come to mean one thing: say goodbye rate cuts.

The logic goes like this: Investors have been waiting for months for lower interest rates, something that’s expected to boost the price of risk assets, like stocks. But there are two things that stand in the way of the Fed loosening monetary policy: higher inflation, and a strong labor market.

On the inflation side, markets already knew that the central bank had less room to cut rates than it did prior to the start of the US-Iran war. Inflation accelerated to its hottest pace in about three years in April, largely due to the recent surge in energy prices.

But now, hiring looks it’s tipped out of the favor for rate cuts as well . If the job market were struggling, there may be more of a case for the Fed to cut rates to boost economic growth.

Investors were quick to dial back odds of a rate cut and dial up the odds of a hike.

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. That compares to a 68.4% chance of a rate hike, which is considered to be the worst-case scenario for stocks.

The major indexes also sank as traders weighed the potential impact of higher rates on equities. The tech-heavy Nasdaq 100, which was hit by a wave of selling in the chips sector on Thursday, dropped more than 1%.

Here’s where US indexes stood shortly at 10 a.m. opening bell on Friday:

• S&P 500: 7,503.06, down 1.07%
• Dow Jones Industrial Average: 51,357.52, down 0.40% (-204.41 points)
• Nasdaq 100: 26,332.495, down 1.86%

US Treasury yields, another reflection of interest rate expectations in the economy, also increased.

The 10-year US Treasury yield to 4.53%, breaking above the key 4.5% psychological threshold suggests investors see higher interest rates for longer and which can weigh on stocks.

The 20-year and 30-year US Treasury yields also ticked higher, pushing further above 5%.

Bank of America flagged the possibilitiy of a “hawkish Fed shift” in a note published after the jobs report.

“Any hopes of a Fed rate cut have effectively been eliminated with this morning’s strong jobs report,” Ron Temple, the chief market strategist at Lazard, wrote in a note. “While I still view a rate hike as unlikely, the case for easing has been invalidated with headline CPI inflation next week likely to top 4%,” he added of the coming May inflation report.

Chris Zaccarelli, the CIO of Northlight Asset Management, said a rate-hike wasn’t a done deal in markets yet, though rate cuts were likely off the table for 2026.

“The Fed won’t be able to cut rates with inflation this high, but if it is staying under control — especially with the disruptions in the Strait of Hormuz — then they won’t feel pressure to raise rates either,” Zaccarelli wrote in a note on Friday.