Jobs Report Catches Market Off Guard, Drives Interest Rate Expectations

Although the May jobs report showed that hiring was trending lower and that employers were cautious, the numbers were better than expected, with the unemployment rate steady at 4.2%. Once again, market players were out of position for good news, and that helped to spark another day of upbeat action. 

The S&P 500 gained 1%, but the Russell 2000 IWM small-cap index was the big winner with a gain of 1.6%, which drove almost three-to-one positive breadth.

News that Treasury Secretary Bessent and his team will be meeting with Chinese negotiators on Monday in London added to the positive mood. The concerns that tariffs will lead to economic disaster are still gaining little traction.

The stronger-than-expected jobs numbers were not so friendly to the bond market. Interest rates jumped with the 20+ Year Treasury Bond Fund wiping out two days of gains.

Much to the ire of President Trump, the better-than-expected jobs numbers are giving the Fed additional time to wait and see what the impact of tariffs will be further down the road. Trump wants a rate cut now, but this is exactly the sort of data that the Fed wants to see as it suggests an economic soft landing while inflation continues to trend lower. Currently, the market is betting on two rate cuts starting in the fall.

The dollar moved higher, and Bitcoin rallied more than 2.4% but finished near the lows of the day.

The most notable aspect of this action is that there continues to be a high level of skepticism. Market participants keep waiting for tariffs to drive softer economic data. While there are some signs of slowing, it isn’t close to the doomsday levels that many economists were predicting. As a result, many investors are badly out of position and have to keep adding long exposure or risk being left behind as the market rolls over shorts.

Strong markets stay sticky to the upside and don’t make it easy for folks who are waiting for pullbacks. That is the dynamic at work right now, and there is no indication when it might end.

Have a great weekend. I will see you on Monday.

At the time of publication, DePorre had no positions in any securities mentioned.