The May jobs report from the U.S. Labor Department showed that the economy added 390,000 jobs during the month while the unemployment rate held at 3.6%. Crucially for stock-market investors, buried in the report were two major positives: the first that average hourly earnings rose less than economists had forecasted, rising 0.3% from the previous month and 5.2% from the year ago period. This was a decline in wage gains of 5.5% from April.

Secondly, the labor force participation rate inched slightly higher to 62.3%, a sign that more Americans are entering the job market. Taken together, if these early leading indicators bear out, inflation may finally start slowing, while the labor market remains robust. Additionally, government jobs remain roughly 630,000 lower than the pre-pandemic levels and some jobseekers may be able to find positions in that sector.

Economists surveyed by Dow Jones had been looking for nonfarm payrolls to expand by 328,000 and the unemployment rate to edge lower to 3.5%. Importantly, there are signs that the job market remains healthy and competitive. Furthermore, jobs gains were broad-based and across industries. Leisure and hospitality added the most jobs during the month at 84,000, while professional and business services increased by 75,000 positions.

Transportation, warehousing, construction, and healthcare were the other sectors where job-gains were the strongest. Retail trade jobs, however, declined sharply during the month, with job losses totally 61,000. This was particularly true of big-box stores such as Walmart and Costco that have started cutting back on labor expenses to keep prices and margins stable.

The stock market dropped, with the S&P 500 trading off 1% in the mid-morning session and bond yields rose moderately. The yield on the 10-year U.S. Treasury Note was up to 2.94%, rising 3.6 basis points from yesterday’s close. 10-year notes started the year trading at a yield of 1.51% and have now almost doubled in the first five months of the year.

One of the negatives of the robust jobs report may be that the Fed could be more inclined to continue with its pace of 50 basis points rate hikes for the foreseeable future. While the market was already pricing in a 50bps hike during the FOMC’s meeting in June and July, the probability of another 50bps move in September too now seems considerably higher. Next week Friday’s CPI report would be a key indicator in gauging how much front-loading the Fed is likely to undertake to bring inflation under control.

There are also other signs that the labor market may not be as healthy as it seems. Yesterday’s ADP report showed that jobs at small businesses, defined as those with 50 or less employees, declined by 91,000 for the month, with the brunt of the cuts coming at businesses with fewer than 20 employees. That report likewise showed that private-sector jobs only increased by 128,000, versus the 300,000 figure that economists were expecting.

Anecdotally, companies in some sectors have also highlighted that they will either slow or freeze hiring in the short-term, while a select few companies have started laying-off employees to get ahead of a possible recession. Companies in the technology and communications sectors, especially, are pausing hiring, while some in the construction and financial services space have started rationalizing costs.

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