Traders appeared to be lying in wait for Friday's employment report all week, but when it finally hit the tape, they ran for cover.

The report appeared to be a good one, with payroll growth of 211,000 jobs in March and the unemployment rate dropping to 4.7% from 4.8%. Inflationary data looked benign, with wage growth of just 0.2% for the month. But with interest rates rising and the commodity market on fire, stock traders who can't seem to take their eyes off the

Federal Reserve's

punch bowl seemed to conclude that the money supply would continue to dry up in the months ahead.

"Today's employment report adds to the case that the Fed may have to tighten short-term rates to at least 5% and maybe higher," says Joe Liro, equity strategist with Stone & McCarthy Research Associates. "We're at a point where equity investors are hoping we've reached the end of this long tightening cycle. As long as the economic data remains strong and the Fed has to worry about the economy overheating and the potential for inflation, they're going to continue to ratchet up short-term rates. Investors are worried they're going to overdo it and cause a recession."

Last week, the Fed raised its fed funds target rate by a quarter-point to 4.75%, its highest level in five years.

The major stock indices rolled over Friday, leaving the Dow up just 0.1% for the week, while the S&P scratched out a 0.05% gain and the Nasdaq edged 0.03% lower.

Meanwhile, the yield on the 10-year Treasury note resumed its climb toward levels not seen since before the last U.S. recession. It ended down 14/32 in price to yield 4.96%, its highest level since mid-2002. The 30-year bond yield breached 5% for the first time since 2004.

"We're marching to 5% now on the 10-year, and I think we'll end up a little bit above that," says Paul Nolte, director of investments with Hinsdale Associates. "Capital flows are definitely going to gold and energy. My guess is that you're seeing a lot of hedge fund activity there as those investors chase performance. It's a buy-what's-hot mentality."

Some gold-futures contracts topped $600 a troy ounce on Thursday for the first time in 25 years, helped by a weaker dollar and rising energy prices. Silver hit a 22-year high earlier in the week. Crude oil futures hit two-month highs on Thursday, briefly crossing the $68-a-barrel mark. Light, sweet crude for May delivery on the New York Mercantile Exchange lost 49 cents on Friday to close at $67.45 a barrel.

While stock investors may worry that the Fed will go too far with rate-tightening, others view the sky-high commodities market as a sign that inflation is on the way and the Fed isn't being hawkish enough. Whatever action the central bank takes, long-term interest rates could continue to rise, marking the end of a long period of cheap credit in the American economy.

The economic consequences of such a shift could prove to be a negative for the stock market. While most market watchers think first-quarter GDP growth will mark a strong rebound from the fourth quarter's tepid pace of 1.7%, it's hard to find anyone who doesn't suspect there will be some sort of slowdown later this year.

"Stocks are still expensive, and the economy is slowing," says Nolte. "So, stocks could sell off soon. We could finally get that 10% correction that we haven't seen since 2003, and that may be scaring investors here. It's been a very narrow and quiet market for a while now."

Liro says there's a "distinct possibility we'll see a squeeze on profits towards the second half of the year."

Paul Desmond, president of investment analysis outfit Lowry's Reports, has been watching declines in the utilities sector as a precursor to what he believes will be broader declines in the stock market as rates continue to rise.

"The utility market usually tops outs anywhere from three to 12 months head of the top in major price indices, and it's already been down for six months now," says Desmond. "We're seeing all kinds of signs that buying enthusiasm is slowing. The whole process of topping is a very slow, gradual process. It's been underway for some time, and we think it's going to continue here, and that we're probably not that far away from the final top. We're advising clients to be ready for the coming storm."

The

iShares Dow Jones U.S. Utilities

index

(IDU) - Get Report

is down 8.3% from its highs in September. Shares of

FPL Group

(FPL) - Get Report

are down over 14% for that span, and shares of

TXU

(TXU)

are down over 20%.

Consumer spending also is widely expected to be hit by rising interest rates, as Americans start making higher debt payments. On Thursday, retailers reported their weakest levels of same-store sales growth since November 2004. Ken Perkins, president of RetailMetrics LLC, said his overall index tracking results from more than 60 national chains showed a gain of 1.9%, missing tempered expectations for a 2% rise.

Wal-Mart

(WMT) - Get Report

reported 1.4% growth in sales at stores open for at least a year, while

Target

(TGT) - Get Report

posted a 2.2% increase.

Nolte expects first-quarter earnings season, which begins next week, to take some attention off the Fed and bond yields.

"The focus won't be on the first-quarter numbers," he says. "People will be listening for commentary from companies on what they see going forward and what their spending plans are going to be."