Will disappointing jobs report curtail June rate hike?

Job creation in the U.S. slumped last month after Friday's jobs report showed that far fewer Americans found work in May than economists expected. Still, the report showed that the economy added enough jobs to suppress unemployment to its lowest level in 16 years.

The labor market added only 138,000 new jobs in May, a far cry from the 185,000 or so analysts forecasted, and down from the robust numbers that had been reported in April. Hourly earnings rose 2.5 percent, and the average work week remained unchanged at 34.4 hours.

Stocks rose to new record highs and treasury yields fell to the lowest level of the year, causing investors to start to contemplating whether the data can support another rate hike this year after June.

Undoubtedly, the report's most encouraging metric was the unemployment rate, which, according to several news sources, fell to 4.3 percent, the lowest it's been since 2001. At the height of the recession, unemployment peaked at 10 percent. But even this number is a double-edged sword: the unemployment rate fell because the labor force shrunk.

Friday's report had been touted for weeks as the best indicator of how the Fed would move on a rate hike come June.

Along with disclosing May's weak numbers, the Labor Department revised previous job data — all of it downward. Numbers for March were revised to 50,000 jobs, down from the 70,000 that had been reported. And April's bumper crop of 211,000 jobs was pushed downward to 174,000.

Those figures suggest employers may not be as confident as believed in the economy's overall recovery, and may slow down on hiring at the onset of summer — typically a period of subdued market activity (short of any major world events).

The Fed will have to weigh those factors when it meets in New York on June 14 and considers the prospect of raising interest rates. If employment stays on trend and continues to slide, it begs the question whether the market can bear another rate increase.

Yet, analysts aren't shying away from predictions that the Fed will keep course and raise rates to keep a lid on economic growth.

Ahead of Friday's job numbers, researchers with Goldman Sachs said the chance of a rate hike was 90 percent. Eric Winograd, an economist at AllianceBernstein, told CNBC that he doesn't expect May's weak job numbers to alter the Fed's plans.

"The cumulative improvement of the labor market year-to-date is enough for (the Fed) to move forward with the June rate hike," he said. "There's still some evidence of slack that allows the Fed to go slowly or very slowly with rate hikes."

What we'll have to keep our eyes on, though, is the rest of the year. If employment doesn't bounce back, it might be difficult for the Fed to justify another rate hike when it convenes in September.

Housing prices on the move

U.S. home prices hit a 33-month high after rising in March, putting an even tighter squeeze on would-be borrowers already contending with a dwindling inventory of homes for sale.

This week's report from the S&P/Case-Shiller U.S. National Home Price Index shows home prices went up 5.8 percent in March, soaring at their fastest pace in nearly three years. Seattle, Portland and Dallas reported the highest year-over-year price gains among the 20 metropolitan cities assessed for the index.

What's the reason for the rise? It's simple: the market just doesn't have enough homes for sale.

Since there are so few houses on the market, demand is surging as more buyers clamor for a place to call their own. That's good news for sellers, who currently have all the leverage as buyers come to the table with aggressive — i.e., high — offers.

"People are staying in their homes longer rather than selling and trading up," David M. Blitzer, managing director of the index committee at S&P Indices, said in a statement.

While news of housing prices going up can make borrowers skittish about buying, let's put this in context. Yes, it's a seller's market but interest rates are still relatively low. Borrowers can still lock in a good rate to buy the home of their dreams.

As the Fed continues to raise rates, longer-term rates, such as the 10-year Treasury note, will continue to grind lower in yield to 2.167% (see chart below). Mortgage rates tend to follow the 10-year Treasury and are now at the lowest level since November. Lower mortgage rates will help offset the increase in housing prices.