Wall Street Soars on Expectations That Fed Will Not Raise Interest Rates, Dollar Weakens

Last week, indices on Wall Street rose sharply, thanks to the resolution of the political impasse regarding further borrowing by the U.S. government, as well as growing expectations that the Fed will pause further interest rate hikes in June, while the latest labor market data suggests that a soft landing has been achieved for the world’s largest economy.

On Wall Street, the Dow Jones rose 2 percent last week, to 33,762 points, thanks to a jump on Friday of 2.12 percent, marking its largest daily increase since January.

At the same time, S&P 500 rose 1.8 percent, to 4,282 points, and the Nasdaq index increased by 2.5 percent, to 13,240 points. The Nasdaq has strengthened for the sixth consecutive week, the longest growth period for this technology stock index since 2020, reaching its highest level since April 2022.

The positive sentiment on the stock market was largely contributed to by the resolution of the issue of continued borrowing by the U.S. government, after the Fiscal Responsibility Act was passed without major issues in both houses of the U.S. Congress.

This suspended the U.S. government’s borrowing limit of $31.4 trillion just days before the June 5 deadline set by U.S. Treasury Secretary Janet Yellen, preventing a potential bankruptcy of the world’s largest economy.

Additionally, market participants are increasingly convinced that the Fed will pause in June regarding further interest rate hikes, and possibly in July, primarily due to data from the U.S. labor market.

The U.S. Department of Labor announced at the end of the week that 339,000 new jobs were created in May in the world’s largest economy, significantly more than expected, marking the 29th consecutive month of employment growth.

Despite this, the unemployment rate reached its highest level in seven months at 3.7 percent, indicating that more people are seeking jobs, which is a sign of easing conditions in the labor market, the department noted. More labor reduces pressure on companies to raise wages and helps slow inflation.

Fed Is Expected Not to Raise Rates

While until recently, employment growth was pressuring stock markets as it was estimated that the Fed would continue to raise interest rates, the latest data now gives hope that the Fed will pause tightening monetary policy, as inflation is easing and the economy is not sliding into recession.

Market participants’ expectations now indicate that the chances of the Fed not raising interest rates by 0.25 percentage points on June 14 are above 70 percent.

Raising interest rates is considered bad news for the stock market as it increases the cost of financing for companies, slows consumption, and also diverts some capital from stocks to other forms of investment, such as bonds.

– Although it seems that higher employment is heating up the labor market, wages are not rising as quickly. Conditions in the labor market are improving. Is this the mythical soft landing of the economy? It seems so – says Kim Forrest from Bokeh Capital Partners.

The star performance of the technology sector is largely attributed to Nvidia’s stock, which reached a record $1 trillion market valuation mid-week, boosting the entire technology sector.

However, the nearly 170 percent increase in Nvidia’s stock price since the beginning of the year indicates what investors are facing in a market dominated by the strong performance of large-cap companies, while most other companies do not achieve such results.

– A company like Nvidia is growing so much in such a short period that it makes no rational sense. No one has actually explained to me where the profit is – notes Michael Landsberg, Chief Investment Officer at Landsberg Bennett Private Wealth Management.

Meanwhile, on European exchanges last week, the major indices had mixed signals, with the Frankfurt DAX strengthening by 0.45 percent, while the London FTSE index weakened by 0.26 percent, to 7,607 points, and the Paris CAC by 0.66 percent, to 7,270 points.

Decline After Three Weeks of Growth

On global currency markets, the value of the dollar against a basket of currencies slightly fell last week, after three weeks of growth, due to rising expectations that the Fed will not raise interest rates by another 0.25 percentage points in June.

The dollar index, which shows the movement of the value of the U.S. dollar against the other six major world currencies, weakened by 0.12 percent last week, to 104.04 points.

At the same time, the dollar strengthened by 0.2 percent against the European currency, causing the euro price to slide to $1.0705. Meanwhile, the dollar exchange rate against the Japanese currency fell by 0.47 percent, to 129.94 yen.

On Thursday alone, the dollar index weakened by 0.62 percent, marking its largest daily decline in about a month as some Fed officials signaled that the central bank would pause tightening monetary policy this month.

Specifically, the governor of the Philadelphia Fed branch, Patrick Harker, stated on Thursday that ‘it is time to at least pause at one meeting to see where all this is going,’ referring to the Fed’s next meeting from June 13 to 14.

The day before, Fed Governor Philip Jefferson said that pausing the cycle of interest rate increases ‘would allow the committee to see more data before making decisions on the extent of further policy tightening.’

Supporting the pause are the latest data from the U.S. labor market, which indicate a possible soft landing for the world’s largest economy. In May, 339,000 new jobs were created in the U.S., significantly more than the expected 190,000 and more than April’s 253,000.

The month of May, however, saw the dollar index finish with a gain of 2.7 percent, achieving its best monthly performance since last September, when it rose by 3.1 percent.