May payrolls beat at 122,000 as yields climb toward 4.5%

Private hiring accelerated in May, pushing Treasury yields higher and reducing the odds of a near-term Fed rate cut.

U.S. companies added 122,000 workers in May, the strongest month since January, as broad-based hiring across sectors and firm sizes signaled a labor market that shows no signs of cooling into the summer.

"Hiring was more broad-based in May than we've seen in the last few years," Nela Richardson, chief economist at ADP, said. "The labor market continues to show sustained momentum going into the summer hiring season."

The 10-year Treasury yield rose 3 basis points to 4.489 percent, while the 2-year yield climbed 2 basis points to 4.078 percent. Stock futures traded mixed as traders recalibrated expectations for the Federal Reserve's June 16-17 meeting, where markets price a virtual certainty that the central bank will hold its benchmark rate in the 3.50 percent to 3.75 percent range.

The data complicates the Fed's path. Inflation accelerated at its fastest pace in three years in April, and a resilient labor market reduces the urgency for rate cuts. OIS markets now see rates staying in the current range into next year, with the next catalyst being Friday's Bureau of Labor Statistics nonfarm payrolls report, where economists expect growth of 80,000 to 85,000.

Education and health services led May's gains with 57,000 new hires, followed by trade, transportation and utilities at 36,000. Professional and business services contributed 11,000, while construction and leisure and hospitality each added 8,000. Information services lost 9,000 jobs — a decline ADP attributed partly to artificial intelligence's impact on the sector — and natural resources and mining shed 3,000.

Small businesses with fewer than 50 employees accounted for 67,000 of the new positions, or more than half the total. Large firms with 500 or more workers added 40,000, while medium-sized companies contributed 17,000. ADP's Richardson noted that 42 percent of May's hires were part-time, a share higher than the firm tracked five years ago.

Annual pay for workers who stayed in their jobs rose 4.4 percent, unchanged from April. Job switchers saw wage growth edge down to 6.5 percent from 6.6 percent, a sign that the labor market is generating opportunities without fueling the kind of wage-price spiral that would alarm the Fed.

A Cautionary Read on the Data

Despite the headline beat, some economists urged restraint. The ADP report has been a poor predictor of the BLS's official private payrolls estimate, and other indicators point to a stabilizing rather than accelerating market. "The indicators with a better track record of forecasting payrolls — the hiring intentions indexes of the NFIB and regional Federal Reserve surveys, as well as the job availability differential of the Conference Board's survey — have weakened in recent months," said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics. "Evidence that the labor market is regaining momentum remains unconvincing."

Tuesday's Job Openings and Labor Turnover Survey showed a surge in openings to 7.6 million in April, the highest since May 2024, but the gain was concentrated in a single sector. Hiring decreased while layoffs fell, suggesting April's solid nonfarm payrolls gain of 115,000 was driven more by lower separations than by new job creation.

The May jobs report arrives against a backdrop of elevated geopolitical risk. U.S. and Iranian forces exchanged missile fire overnight, further threatening a fragile ceasefire and pushing oil prices higher. West Texas Intermediate crude closed at $96.02 a barrel, up 2.41 percent, while Brent settled at $97.81. Rising energy costs feed into inflation measures and could keep the Fed on hold longer than markets currently anticipate.

For the central bank, the calculus is straightforward: a labor market adding more than 120,000 jobs per month, combined with inflation running at multiyear highs and commodity prices climbing, provides no mandate for easing. The last time the 10-year yield traded near current levels in early April, the S&P 500 fell 3 percent over the following two weeks as rate-cut expectations were pushed back. A repeat of that dynamic would test the resilience of an equity market trading near record highs.

This article is for informational purposes only and does not constitute investment advice.