The US jobs market delivered a far stronger-than-anticipated performance in May, providing the clearest signal yet that the labor market may be shaking off a prolonged period of subdued hiring. The robust non-farm payrolls data has led traders in the interest rate futures market to almost fully price in a 25-basis-point rate hike by the Federal Reserve by December this year, a significant shift from earlier expectations for a March hike with only a 60% probability. Some traders are even betting on a potential rate increase as early as October, as the Fed under new leadership steers a new course.
The yield on the benchmark US 10-year Treasury note, often dubbed the "anchor for global asset pricing," surged past 4.5% following the jobs report, cooling the red-hot AI-led bull market. Data released by the Bureau of Labor Statistics on Friday showed non-farm payrolls increased by approximately 172,000 in May, following significant upward revisions for the prior two months. This marks the strongest three-month stretch of job growth in over two years.
This data has substantially bolstered market bets for a more hawkish Federal Reserve monetary policy stance, raising the possibility that the central bank could consider raising interest rates this year to combat inflation. The report indicates the labor market is strengthening across multiple sectors after last year's near-zero job gains, despite recent concerns over rising energy prices which have pushed US consumer confidence to record lows.
The May jobs report shifts the market narrative from a "Goldilocks" scenario of slowing growth enabling policy easing to a more problematic "anti-Goldilocks" framework for Fed policymakers. Excessively strong jobs data reinforces rate hike expectations, pushing up both short and long-term Treasury yields, particularly pressuring longer-dated yields like the 10-year and above. This raises market funding cost expectations and threatens the valuations of popular AI technology stocks. Conversely, overly weak data would trigger fears of stagflation and an earnings recession.
Following the report's release, futures for the three major US stock indices fell, while yields on the 2-year and 10-year Treasuries moved higher together. This initial market reaction suggests a focus on the data providing ammunition for Fed hawks rather than viewing economic resilience as a positive for equities. The yield on the 10-year Treasury, after declining for seven consecutive sessions, began climbing again earlier this week. With the jobs data exceeding all expectations, the upward trend in the 10-year yield is likely to persist, at least in the near term.
Previously, on May 19th, the 10-year yield had spiked violently to 4.7%, its highest level since January 2025, briefly dealing a blow to the AI-driven super bull market and global equity momentum. As the risk-free rate anchor in the denominator of DCF stock valuation models, a persistently high 10-year yield does not necessarily end the AI bull market but subjects it to near-term downward pressure and a potential shift from a "valuation expansion" to an "earnings verification" phase.
The unexpectedly strong jobs data has reignited Fed rate hike bets on Wall Street trading desks. Following the data release, US Treasuries, especially longer-dated bonds, continued to be sold off. This pushed the 2-year yield up about 9 basis points to 4.13%, while the 10-year yield broke through the key 4.5% level and is currently hovering near 4.53%. S&P 500 index futures extended their losses. Interest rate swaps indicate traders are now almost 100% priced for a 25bp hike by year-end, with some beginning to price in an October move.
As shown in the data, US non-farm payrolls have surged for three consecutive months—marking the best three-month growth pace in two years. Christopher Hodge, Chief US Economist at Natixis, stated Friday's data is "further strong evidence that the labor market is not a concern." He added, "We deeply doubt this strength can persist indefinitely, but for now, the focus of Fed policymakers will remain firmly on fighting inflation."
Statistical data shows hiring growth was led by the leisure and hospitality sector, which added just over 70,000 jobs, the most in over three years. The healthcare and social assistance sector, a primary driver of job growth over the past year, maintained a steady hiring pace. Non-residential construction employment grew for a seventh consecutive month, likely fueled by strong labor demand from the nationwide AI data center construction boom. A separate report this week showed data center construction spending surpassed $50 billion for the first time in April. Manufacturing also added jobs in May.
Recent reports indicate a rebound in US factory activity, driven by strong demand for data centers, defense production, and broader inventory building as clients rush to purchase ahead of potential war-related price increases. Employment in air transportation saw its largest decline since 2020. The BLS noted this "primarily reflected the closure of a single firm," likely referring to last month's shutdown of Spirit Airlines.
The report also contains signs of AI's ongoing impact on hiring. The information sector—including software publishers, social networks, and internet search portals—saw employment decline again in May, the 16th drop in the past 17 months. Major tech companies like Meta Platforms Inc. and Microsoft Corp. are conducting layoffs, partly to offset massive spending on AI.
The US economy still faces potential headwinds in the coming months, especially if geopolitical conflicts in the Middle East are not resolved quickly, keeping the Strait of Hormuz effectively blocked and oil prices elevated. In such a scenario, consumer spending, particularly among lower-income households, could come under greater pressure as budgets tighten. Furthermore, a sustained US stock market pullback under the pressure of rate hike expectations and a rising "global asset pricing anchor" could dampen spending by wealthier households. Continued large-scale corporate deployment of AI agent product lines may also pose a greater threat to hiring trends as the year progresses.
Economists are closely watching how labor supply and demand dynamics affect wages, especially as inflation begins to outpace wage growth. The report showed average hourly earnings rose 3.4% from a year ago, matching the slowest pace since 2021. The jobs report consists of two surveys—one of businesses and government agencies generating the payrolls figure, and another of households used to calculate the unemployment and labor force participation rates. The household survey's own employment measure rose in May for the first time this year.
The labor force participation rate—the share of the population working or looking for work—remained unchanged at 61.8%. The participation rate for workers aged 25 to 54, known as the prime-age rate, edged higher. A broader measure of unemployment, which includes part-time workers for economic reasons and discouraged workers, declined slightly.
Other detailed metrics from the report show: the median duration of unemployment rose to 11.6 weeks, the highest since 2021; the Black unemployment rate fell to 6.6%, the lowest since May 2025; and the unemployment rate for those with a bachelor's degree or higher fell to 2.7%, the lowest since August 2025.
New Fed Chair Kevin Warsh will preside over his first FOMC monetary policy meeting on June 16-17. The Fed is widely expected to hold the benchmark rate steady at that meeting. However, as more officials call for the Fed to formally signal in its post-meeting statement that a rate hike is as likely as a cut, investors have increased the probability of a rate hike in the second half of the year.
Other recent reports have sent mixed signals about whether the labor market might be emerging from the "low hiring, low layoff" environment that has dominated in recent years. Job openings in April jumped to their highest level since 2024, though the increase was concentrated in a narrow range. Layoffs remain near historic lows, but consumer views on job availability are slightly more pessimistic than in recent years, and small businesses are scaling back hiring plans.
The strong jobs data collides with the "Fed's path of change" under Warsh. As the "global asset pricing anchor" dances higher, the AI super bull market faces another "stress test." Recent media reports citing informed sources suggest Warsh may steer the Fed away from the strong forward guidance framework of the Powell era towards a "counter-guidance" central bank that makes fewer promises, relies more on data, and tolerates more market volatility.
With the jobs data exceeding all economist expectations coinciding with the new Fed Chair's push for a so-called "path of change," it is bound to drive the "global asset pricing anchor" even higher, subjecting the AI super bull market to another "stress test." This year, Warsh himself has publicly opposed the dot plot and forward guidance path on multiple occasions, suggesting the dot plot, a key communication tool between the Fed and markets, could become a relic of the past under his tenure.
Warsh has stated he wishes to stop "spoon-feeding" predictions to investors. Eliminating the dot plot and removing easing/tightening biases from statements would deprive the market of a key interest rate path anchor, likely increasing policy uncertainty and volatility in the 10-year Treasury yield, with a strong bias towards an upward trend.
For global risk assets like tech stocks and cryptocurrencies, a key threshold lies roughly in the 4.5%–4.8% range for the 10-year yield. Technical analysis suggests that a break above the 4.70%–4.80% zone could reconfirm an uptrend in yields. When the risk-free rate continues to rise, the equity risk premium compresses, significantly limiting the room for valuation expansion in stocks. This means that as long as the 10-year yield stays around 4.5%, the market can rely on the AI infrastructure boom driving earnings revisions and risk appetite support. However, if the yield effectively breaks above 4.70%–4.80% or even approaches 5%, high-valuation AI-related tech assets will face stronger discount rate shocks.
An increase in the discount rate in the DCF denominator will undoubtedly bring "repricing pressure" to high-valuation tech stocks closely linked to AI computing power. As the risk-free rate anchor in DCF models, a persistently high 10-year yield does not necessarily end the AI bull market but subjects it to near-term downward pressure and a potential shift from a "valuation expansion" to an "earnings verification" phase.
If the Warsh-led Fed downplays forward guidance, strong jobs data continues to lift rate hike probabilities, and oil prices remain high, the tech stocks within the AI infrastructure chain with the fullest valuations, highest leverage, and most distant cash flows will likely bear the brunt of the pressure first. Rising yields would significantly compress the valuations of high-duration assets like high-PE semiconductors, AI software, unprofitable AI infrastructure, power fuel cells, quantum computing, and space tech. However, for leading AI hardware assets with locked-in orders, pricing power, buyback capacity, and cash flows, the impact would manifest more as periodic volatility rather than a collapse in industrial logic.
If corporate earnings are sufficiently strong—for instance, if AI leaders continue to deliver profits—stock prices could still rise. However, the margin for error in valuations would shrink. Any disturbance in profit expectations, returns on AI capital expenditure, oil prices, or the fiscal deficit would prompt the market to rapidly reprice using higher discount rates and risk premiums.
Morgan Stanley strategists recently noted that with long-term Treasury yields entering a "danger zone," the overall US stock market still relies on AI and strong earnings for support. However, the risk assets that can truly navigate a high-yield environment must simultaneously possess high free cash flow, pricing power, low leverage, genuine earnings growth, and a sufficiently strong AI-related revenue generation path/productivity realization logic.
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