The U.S. labor market just threw the Federal Reserve a curveball. After a six-week delay caused by the government shutdown, Thursday's September jobs report revealed stronger-than-expected hiring that's making traders rethink whether the Fed will cut rates again in December.

Non-farm payrolls climbed by 119,000 in September, according to the long-awaited data release. That's a solid rebound that suggests the economy still has momentum, even if the numbers aren't exactly screaming overheating.

Here's the twist though: unemployment actually edged higher, moving from 4.3% to 4.4%. That's the highest jobless rate we've seen since October 2021, which adds some nuance to the "strong jobs" narrative. Meanwhile, wage growth came in a bit softer than expected on a monthly basis, with average hourly earnings rising just 0.2% versus the 0.3% forecast. But zoom out to the annual picture and wages are still climbing at 3.8%, up from 3.7% in August.

So where did the jobs come from? Health care dominated the hiring landscape, adding 43,000 positions—split between ambulatory services (up 23,000) and hospitals (up 16,000). Food services and drinking establishments contributed another 37,000 jobs, while social assistance gained 14,000 positions, primarily driven by individual and family services adding 20,000 roles.

On the flip side, transportation and warehousing shed 25,000 jobs, with warehousing and storage down 11,000 and couriers and messengers falling by 7,000. Federal government employment also declined by 3,000 in September and has now dropped 97,000 positions since its January peak.

Jobless Claims Hold Steady While Rate Cut Expectations Crater

The Labor Department also released weekly unemployment data that paints a picture of relative stability. Initial claims for the week ending November 15 came in at 220,000, down from 228,000 the prior week. The four-week moving average held near 224,250, suggesting that mass layoffs remain off the table for now.

Continuing claims—which track people receiving ongoing unemployment benefits—did tick up to 1.974 million in the week ending November 8, compared to 1.946 million the previous week. That's worth watching, but it's not exactly a flashing warning sign yet.

Here's where things get interesting for Fed watchers: the stronger jobs data basically torpedoed expectations for a December rate cut. Before this report dropped, markets were pricing in a 35% chance of a 25-basis-point cut. Just a week before that, the odds were essentially a coin flip at 50-50.

Now? Fed fund futures show just a 28% probability of a rate cut, with a 72% chance that the Fed keeps rates parked at 3.75%-4.00%. That's a pretty dramatic shift in sentiment in a short period of time.

Stocks Surge Despite Fading Rate Cut Hopes

You might expect stocks to slump when rate cut odds evaporate, but Wall Street had a different reaction entirely. Investors interpreted the jobs data as confirmation that recession fears have been overblown, and that's apparently more important than getting another quarter-point rate reduction.

Futures on major indices jumped in premarket trading, with Nasdaq 100 contracts soaring 2.2% and S&P 500 futures climbing 1.6%. To be fair, some of that enthusiasm came from Nvidia Corp. (NVDA) delivering blockbuster earnings and guidance that got the tech crowd excited all over again.

Among S&P 500 components, Super Micro Computer Inc. (SMCI) led the gainers with a 6% jump, followed by Nvidia at 5% and Palantir Technologies Inc. (PLTR) up 4.5%.

The market's takeaway seems to be this: a resilient labor market beats the uncertainty of needing aggressive Fed intervention. Growth optimism is trumping monetary policy anxiety, at least for now. Whether that sentiment holds as we get closer to the December Fed meeting is anyone's guess.