Asian shares inched higher on Monday as investors awaited an update on the US interest rate outlook from Federal Reserve Chair Jerome Powell, and a jobs report that could have implications for future rate hikes.
The recent run of data out of China has been strong enough to keep investors optimistic, despite Beijing choosing to lowball its growth outlook with a target of 5% rather than the 5.5% or higher favoured by the market.
The MSCI broadest index of Asia-Pacific shares outside Japan was up 0.7%, while Japan’s Nikkei climbed 1.2% to a three-month high. South Korean stocks added 1.0%, helped by a softer reading on inflation.
Futures markets indicated that the EuroSTOXX 50 and S&P 500 would open higher, while Nasdaq futures rallied 0.4%. Last week, bond yields eased back from recent highs, and yields on 10-year US Treasuries stood at 3.94%, after spiking to 4.09% last week. This was enough to attract buyers, who may be hoping the Federal Reserve sticks with quarter-point moves rather than returning to half-point hikes.
San Francisco Federal Reserve President Mary Daly reiterated that rates would have to rise, but set a high bar for moving to half-point increases. Futures markets imply a 72% chance the Federal Reserve will raise rates by 25 basis points at its meeting on March 22.
Fed Chair Jerome Powell’s testimony to Congress on Tuesday and Wednesday is anticipated, where he will likely be asked about the possibility of larger rate hikes. The February payrolls report on Friday is also expected to be closely watched, with forecasts centering on a more modest increase of 200,000 following January’s jump of 517,000. However, risks are on the upside.
The Fed is not alone in warning of further tightening. European Central Bank President Christine Lagarde said in an interview released over the weekend that it was “very likely” the bank would raise interest rates by 50 basis points this month, and that the bank had more work to do on inflation.
Australia’s central bank is expected to raise its rates by 25 basis points on Tuesday, while the Bank of Canada is expected to pause after raising rates at a record pace of 425 basis points in 10 months.
Friday marks the final policy meeting for Bank of Japan Governor Haruhiko Kuroda before Kazuo Ueda takes over in April, and the fate of the bank’s yield curve control stance will be closely watched. Analysts at NAB noted that “no change is expected, but we should not completely rule out the chance of Kuroda going out with a bang via the BoJ announcing another tweak to the 0% YCC tolerance band”. The BOJ jolted markets in December when it unexpectedly widened the allowed trading band for 10-year bond yields.
Oil prices dipped on Monday, with investors perhaps disappointed that China did not set itself more ambitious growth targets. Brent crude eased 62 cents to $85.21 a barrel, while US crude fell 59 cents to $79.09 per barrel. On Friday, the pullback in bond yields helped gold recover some ground, and it was trading at $1,855 an ounce.
The recent strength of economic data out of China has helped to underpin investor confidence in the region, despite concerns over rising interest rates and inflation. Analysts will be closely watching Powell’s testimony to Congress, the February payrolls report, and the Federal Reserve’s meeting on March 22 for any indication of the direction of future rate hikes.
Meanwhile, the European Central Bank and the Bank of Japan are also likely to be closely watched for signs of future monetary policy decisions. Australia’s central bank is expected to raise rates on