The Bureau of Labor Statistics just handed the market exactly what it didn't want to hear: 172,000 jobs added in May, double the consensus estimate of 85,000 and up from a revised 179,000 in April. The S&P sold off at the open and the 10-year Treasury yield spiked to 4.54%, because in this tape good news is catastrophically bad news again.
The May payrolls report crushed expectations that had been lowered to just 85,000, and upward revisions to March and April suggest the labor market remains healthier than anyone pricing rate cuts wanted to believe. Markets now put an 85% probability on a quarter-point Fed rate hike by year-end, up from 60% a week ago. Read that twice: the market isn't pricing cuts anymore. It's pricing hikes. Oil is still above $95, inflation is stuck, and the economy just proved it doesn't need help—so the Fed's next move is tightening, not easing.
Kevin Warsh takes the podium for his first post-FOMC press conference on June 17, and it's been more than eight years since anyone besides Powell ran these briefings. The change in personalities will matter. When Powell replaced Yellen in early 2018, stocks fell sharply during his first presser as investors heard a more hawkish tone than they'd priced. That's the setup here: a new chair walking into a data stream that's running too hot, with hike odds climbing and a market that spent two months convincing itself the soft landing was locked in. Warsh's first test is whether he validates what the bond market already knows—that policy is going the other direction.
The 10-year yield is doing the talking the equity market doesn't want to hear. As of June 3 the 10-year was at 4.49%; this morning's number sent it to 4.54%, within sight of the one-year highs touched earlier this week. Treasury yields have found support from escalating Middle East tensions that have kept oil prices elevated and added to inflationary pressures. The setup is textbook policy tightening: strong labor, sticky inflation, geopolitical oil premium, and a Fed that's out of excuses to stay dovish. At the April meeting, a majority of FOMC participants said policy firming would likely become appropriate if inflation continues to run persistently above 2 percent. That was the signal. This morning's print is the confirmation.
The irony is that six months ago this number would have been celebrated—solid hiring, low unemployment, no recession. Now it's a selling catalyst, because the market climbed 20% in nine weeks on the assumption that strong data would arrive just weak enough to justify easier policy. Instead, the data arrived strong enough to justify the opposite, and the repricing is brutal. Stocks reacted poorly in a "good news is bad news" scenario driven by Treasuries, and the move isn't subtle: the benchmark dragged equities lower at the open, chip stocks extended yesterday's losses, and volatility is creeping higher.
What to watch now:
- Warsh's June 17 presser: his first as chair, with the updated Summary of Economic Projections. If the dot plot shifts hawkish and he doesn't push back, hike odds will climb past 90%.
- The 4.60% level on the 10-year: a break above puts yields at fresh one-year highs and pressures equities further. The bond market leads; stocks follow.
- Oil's refusal to break below $95: Brent is holding near $97 despite ceasefire talk. If crude stays elevated into the June CPI print, inflation stays sticky and the Fed has no choice but to lean hawkish.