The economy just won't slow down, and it's the worst possible outcome for markets right now

• The US economy is running hot and markets are in a panic about it. 
• The September jobs report blew past economists' expectations, with 336,000 jobs added last month.
• Stocks slumped and bond yields surged as investors brace for higher for longer interest rates. 

The US economy is still burning hot – and it's the worst possible thing for markets to take in right now.

The labor market grew faster than expected in September, with the economy adding an eye-popping 336,000 jobs, the Bureau of Labor Statistics reported on Friday. That's nearly double the 170,000 jobs economists  were expecting. 

But in the weird world of sticky inflation, that strength is bad news for investors, who are now in a panic about the prospect of interest rates staying high for a lot longer than they were expecting earlier in the year. 

The red-hot labor market could influence the Fed to push on with aggressive interest rate hikes, after having already raised rates aggressively in the last year to lower inflation and cool down the economy. 

Investors are repricing their interest rate expectations through the rest of the year. Markets are now pricing in a 45% chance that interest rates will end the year higher than their current level, according to the CME FedWatch tool, up from just a 33% chance yesterday.

Stocks immediately dropped off as investors took in the September jobs data. Major indexes slid lower, with the Dow Jones Industrial Average shedding about 200 points. Treasury yields also jumped, with the yield on the 10-year US Treasury note rising 14 basis points to 4.849%, reclaiming the highest level in 16 years after edging slightly lower earlier in the week. 

"Friday's job report suggests that the labor report remains very strong and cements the case for an additional Fed rate hike this year, and it also likely delays the pace of eventual rate cuts. Investors will need to get used to the higher for longer narrative on interest rates given the strength of the economy," Blanke Schein Wealth Management CIO Robert Schein said in a note on Friday.

Higher rates, and in turn higher bond yields, present a triple whammy, hitting stocks, bonds, and the wider economy. The 10-year yield is among the most closely watched market signals and it's flashing red right now for investors. 

"Long dated yields continued their march higher as this reading reiterated the message of yields potentially needing to remain higher for longer," Global X ETFs strategist Michelle Cluver said in a note. "While encouraging for the resilience of the US economy, this exceptionally strong reading is a challenge for markets."

The latest slump in markets reflects the running trend of good news for the economy is bad news for investors, with stocks likely facing resistance unless inflation falls closer to the Fed's 2% target and other areas of the economy show more signs of weakness.

The New York Fed says there's 56% chance the US will slip into a recession by September of next year. Meanwhile, some key bond yields that have been inverted for much of the past year have started to flatted. The the 2-10 Treasury yield curve, a notorious recession indicator, often de-inverts when a downturn is likely in the near term, experts say.