Employment growth accelerates, rate cuts less likely

Summary

Last week in markets

Markets ended the week reassessing the path of monetary policy after a stronger-than-expected May employment report challenged expectations for near-term Federal Reserve rate cuts.

The Labor Department reported that the U.S. economy added 172,000 jobs in May, more than double consensus expectations. The data reinforced the view that labor market conditions remain resilient and reduced the likelihood of near term policy easing. As a result, investors shifted their focus from wondering when the Fed might cut rates to whether inflation and growth conditions could keep policy restrictive for longer.

Treasury yields moved higher throughout the week. The 10-year Treasury yield closed Friday at 4.55%, up from 4.47% at the start of the week. Higher yields weighed on equity valuations, particularly in sectors that benefited most from falling rate expectations. The S&P 500 Total Return Index declined approximately 2.8%, ending a nine-week winning streak.

The pullback was concentrated in large-cap growth stocks. Companies valued at more than $1 trillion lost an average of 5.3% on Friday alone, collectively shedding roughly $1.1 trillion in market capitalization. Semiconductor companies tied to artificial intelligence were among the weakest performers, with Nvidia falling about 6%, Broadcom nearly 8%, and Micron approximately 13%.

Commodity markets were also volatile. Brent crude oil settled at $92.90 per barrel, down 2.2% from Monday's close. Prices briefly rose above $97 during the week before reversing as markets balanced supply disruption concerns against signs that geopolitical tensions may not significantly impair global production.

The week ahead

This week's primary focus is inflation.

May CPI will be released Wednesday, followed by PPI on Thursday. Together, these reports will help determine whether last week's labor market surprise represents a one-time adjustment in rate expectations or the beginning of a broader repricing of financial conditions.

With Federal Reserve officials in their pre-meeting blackout period ahead of the June 16-17 FOMC meeting, economic data will play an outsized role in shaping market expectations. Investors will pay particular attention to core services inflation, shelter costs, transportation-related categories, and the extent to which higher energy prices are flowing through to broader inflation measures. Persistent inflation could keep real yields elevated and continue to pressure equity valuations.

Global central banks will provide additional context. The Bank of Canada announces its policy decision on Wednesday, while the European Central Bank concludes its meeting Thursday. Markets will watch for signs of how policymakers are evaluating recent increases in energy prices and whether they view them as a temporary supply shock or a potential risk to inflation expectations.

A more hawkish tone from either central bank could reinforce upward pressure on global yields and support the U.S. dollar. Conversely, a more patient approach could help stabilize risk assets, particularly if U.S. inflation data show continued progress toward lower inflation.

Treasury supply will also be in focus. Auctions of 10-year and 30-year Treasury securities on Wednesday and Thursday will provide an important test of investor demand following the recent rise in yields.

The week concludes with the University of Michigan's preliminary June consumer sentiment survey. While headline sentiment remains important, markets will focus on inflation expectations, particularly given consumers' sensitivity to gasoline prices.

Geopolitical developments remain a key variable. Alongside this week's economic releases, investors continue to monitor the potential for disruptions to global oil supply. Any meaningful change in the energy outlook could have significant implications for inflation, interest rates, and broader market performance in the months ahead.