U.S. equity markets resumed their upward climb last week bolstered by a surge in technology stocks. Meanwhile, another stronger than expected monthly jobs report continued to throw cold water on the prospect for rate cuts near-term. Bond yields lifted higher in response, which weighed on more rate-sensitive sectors of the stock market, like real estate and utilities. For the week, the tech-heavy Nasdaq Composite led the way with a 2.4% return while the S&P 500 and the Dow Jones logged gains of 1.4% and 0.3%, respectively.

The U.S. labor market continued to defy expectations with last week’s update that the economy added 272k jobs in May, compared to the consensus economist forecast for 180k payroll additions. That brings net job additions over the last 12-months to an impressive 2.75 million (or roughly 230k per month). Despite the substantial gain, the unemployment rate ticked higher to 4.0% from 3.9% in the prior month and the cycle low of 3.4% in April of 2023. Job demand has also tempered a bit lately as last week’s release of the April Job Openings and Labor Turnover Survey (JOLTS) showed a sharper than anticipated drop in job postings to 8,059k (though that still implies over 1.2 openings per unemployed job seeker). Wage inflation also surprisingly reaccelerated from 4.0% to 4.1%, which is another indication that the labor market remains tight.

In response to the undeterred labor market resilience, rate cut prospects dimmed further ahead of this week’s June Federal Reserve meeting. According to the CME FedWatch Tool, futures markets are only pricing in 1 to 2 rate cuts by year end with a 12% chance of no rate cuts this year compared to expectations for 6 to 7 cuts in 2024 at the start of the year with no probability assigned to rates staying at current levels. The next important data point for the Fed will be the May CPI report released Wednesday morning, which is anticipated to show core consumer inflation moderating to a 3.5% annual rate from 3.6% in April.

While healthy employment prospects and wage gains above the rate of inflation are broadly supporting consumer spending, incoming data increasingly suggests growing difficulties among lower income households who have exhausted excess stimulus savings and are feeling the pinch on higher borrowing costs. Last week’s release of consumer credit outstanding for the month of April from the Federal Reserve showed that revolving credit balances (including credit cards) actually declined for the first time in three years as households try to keep credit card balances in check. That coincides with reports from discount retailers of weakening demand for discretionary items and shoppers trading down to lower cost substitutes. Consumer delinquency rates have also ticked higher, but now are just at more normal historical levels after several years of subnormal rates due to support from pandemic-related government aid. The rising spending challenges to lower income consumers bear watching despite healthy broad-level readings of U.S. consumer activity.