The US labor market still looks like it's running hot.
Thursday's ADP data was double economists' estimate, with a headline gain of 497,000 jobs.
The reading suggests further rate hikes from the Fed and pain ahead for stocks.
The stock market is not loving Thursday's jobs data.
Private payrolls jumped by 497,000 in June, ADP reported, the biggest monthly gain since last July and more than twice what was expected by economists.
The massive beat shows that after months of sidestepping warnings of more monetary policy tightening to come, stock market bulls might be over their skis, and that Federal Reserve Chair Jerome Powell was right to say that more needs to be done to cool down the economy.
"The labor market is not loosening at all according to this ADP report," Oanda senior market analyst Edward Moya said. "The data-dependent Fed will look at the labor market and that should support the case for much more tightening. "
Stocks were down across the board midday on Thursday, with the Dow Jones Industrial Average lower by almost 500 points, and the S&P 500 and the Nasdaq Composite both down more than 1%.
Bond yields also surged as traders placed bets that the Fed is about to resume rate hikes after pausing in June to let more data roll in. The two-year Treasury yield topped 5% for the first time since 2007.
"The ADP number came out strong, and yields are breaking out above recent highs, with the two-year crossing above 5% and the 10-year passing 4%," New York Stock Exchange senior strategist Michael Reinking said. "So you're seeing that psychological response in equities."
Thursday's market response illustrates the disconnect between the Fed and the stock market. Optimistic that rate hikes are almost over, bullish traders have jump started a new bull market this year, even as Powell and his Fed colleagues have said over and over that there's more work to be done to take the heat out of the economy.
Reinking notes that a strong labor market is a better reason to hike rates than, say, inflation coming in at multi-decade highs. In any case, he doesn't see Thursday's ADP report changing much for the Fed.
"I don't think this necessarily changes the path of monetary policy," he said. "From my perspective this doesn't change that 25 basis points in July is in the cards."
Investors are betting there's a 95% chance of a quarter-point hike this month, according to the CME FedWatch Tool, but there's room to tighten even more if the labor market stays this hot.
"If job growth and/or inflation continue to come in hotter than expected in the second half of 2023, the Fed could make not just one but two more quarter percentage point rate hikes before going on hold through the first half of 2024," Bill Adams, chief economist at Comerica Bank, said in a note.
Meanwhile, separate data released Thursday showed ISM Services index for June climbed from 50.3 to 53.9, beating estimates.
On Friday, economists expect to see that 240,000 non-farm payrolls were added last month, a slowdown from May's 339,000.
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