The Bureau of Labor Statistics reported that the U.S. economy added 390,000 jobs in May which was better than the consensus estimates of a gain of 328,000 jobs. The unemployment rate held steady at 3.6%, while wage growth was a bit cooler than expected at 0.3% monthly and 5.2% compared to last year.

Although the headline figure was positive and is not consistent with an economy in recession, stocks had a negative reaction. The S&P 500 (SPY  ) finished the day lower by 1.6% with the Nasdaq down by 2.5% as Treasury yields rallied following the jobs release. Most likely, traders were positioned for softness in wages that would increase the odds of a Fed pause following 2 50 basis point hikes in June and July. However, such a strong and steady jobs report reduces the chances of this.

While the job number was better than expected, it was a drop from last month's gain of 436,000 jobs and the lowest monthly figure since April 2021. One factor is that the economy is continuing to normalize especially in the hospitality and travel & leisure areas.

These areas added 84,000 jobs in May, while professional and business services rose by 75,000, transportation and warehousing added 47,000, and construction jobs were up by 36,000. The retail sector lost 61,000 jobs in May which is consistent with what we are seeing in earnings reports and economic data. But, it's also clear that it's more about increased spending on food, energy, and services rather than an overall decline.

Overall, the U.S. economy remains short of 440,000 jobs from the pre-pandemic economy. The labor force participation is 1.1% below pre-pandemic levels as well. In terms of the Fed, the jobs report shows that the economy could probably absorb more hiking if inflation doesn't fall on its own accord.

It does slightly increase the odds of a 'soft landing' as tightening conditions haven't yet had an impact on the jobs market. According to recent FOMC speakers, the Fed's ideal course would be to reduce the number of job openings without increasing the unemployment rate.