Key points:

  • Employment growth boosts investor confidence in the economy but lowers hopes for a rate cut.
  • Contrary to forecasts, the dollar is rising, which may prompt investors to reassess their positions.
  • Investors eagerly await Q3 results from major companies, especially in the financial sector.

The rapid growth in U.S. employment poses risks to the stability of deals based on assumptions of interest rate cuts. If economic growth exceeds expectations, investors may adjust their forecasts regarding the Federal Reserve’s actions, speculating that the central bank will be less inclined to ease monetary policy.

Dow hits record highs, focus shifts to financial sector

U.S. stock indexes saw significant growth on Friday, ending the trading session at record highs. This positive momentum was supported by the release of stronger-than-expected U.S. labor market data. Investors reacted positively to the increase in job creation and a decrease in unemployment, indicating the economy’s continued resilience.

The Dow Jones Industrial Average added 341.16 points, or 0.81%, reaching 42,352.75. The S&P 500 rose by 51.13 points, or 0.90%, closing at 5,751.07. The Nasdaq Composite posted the most impressive gain, adding 219.37 points, or 1.22%, and finishing at 18,137.85.

Alongside the rise in stock indexes, oil prices also strengthened, leading to a 1.1% increase in the S&P energy index. The unstable situation in the Middle East acted as a catalyst for rising oil prices, which jumped 7% for the week, marking the most significant weekly gain since October 2022.

U.S. President Joe Biden commented on the escalating situation in the Middle East, stating that if he were in Israel’s position, he would consider alternatives to military action against Iranian oil facilities. However, he emphasized that Israel has not yet made a final decision on its response to recent rocket attacks.

Next week, the Q3 earnings season will kick off for companies in the S&P 500 index. Investors will be closely watching the financial sector, with major companies like JP Morgan Chase, Wells Fargo, and BlackRock scheduled to release their financial reports on October 11.

Dollar strengthens despite the opposite expectations

Bets on the weakening of the U.S. dollar have reached their highest levels in nearly a year, according to data from the Commodity Futures Trading Commission. Investors have been actively entering contracts to short the U.S. dollar, reflecting their expectations of a decline. However, despite negative forecasts, the U.S. dollar saw significant strengthening on Friday, reaching a seven-week high against a basket of currencies.

This sudden turn of events may force investors who bet on a weakening dollar to reassess their positions. The dollar’s strengthening is likely tied to improved U.S. economic prospects and its reputation as a safe-haven asset amid the Middle East conflict. Expectations of higher inflation and faster economic growth could push the Federal Reserve towards tighter monetary policy, which in turn supports the dollar.

The shift in investor sentiment regarding the U.S. dollar could also affect other markets. For example, investors who had been actively purchasing assets that benefit from a weaker dollar (such as shares of export-dependent companies or bonds) may begin to take profits or even sell these assets.

Moreover, a stronger dollar could lead to a reassessment of yield-seeking investment strategies. With declining yields on government bonds, many investors had turned their attention to high-dividend-yielding stocks, such as utility companies. However, if the U.S. economy continues to show robust growth, the appeal of these assets may diminish.