Asian shares edged higher on Monday, March 06, 2023, while bond markets stayed cautious ahead of a U.S. rate outlook update and an upcoming jobs report that could determine the size of the next interest rate hike.
Investor sentiment was slightly dampened by Beijing’s decision to set a modest growth target of 5%, below the 5.5%+ market expectation, though recent economic data from China remains encouraging.
The MSCI Asia-Pacific index, excluding Japan, climbed 0.8% following a 1.5% increase last week.
Japan’s Nikkei surged 1% to reach a three-month high, while South Korean shares rose 0.6%, buoyed by a lower-than-expected inflation reading.
U.S. futures showed minor dips, with S&P 500 futures down 0.1% and Nasdaq futures off by 0.2%, despite a rally on Friday fueled by easing bond yields.
The yield on 10-year U.S. Treasuries stood at 3.970%, after last week’s spike to 4.09% attracted bargain buyers.
Market expectations have shifted toward continued rate hikes from the Federal Reserve, with hopes centered on smaller, quarter-point increases rather than larger, half-point jumps.
San Francisco Fed President Mary Daly reaffirmed the need for further rate hikes but suggested that moving to half-point increments would require substantial justification.
Current market pricing indicates a 72% probability of a 25 basis point rate hike at the Fed’s March 22 meeting.
Fed Chair Jerome Powell’s testimony to Congress on Tuesday and Wednesday is eagerly awaited, with markets looking for clues on potential rate hikes.
The U.S. jobs report, due Friday, could heavily influence the Fed’s decision, with forecasts predicting a gain of 200,000 jobs following January’s strong increase of 517,000.
This jobs data will precede the Consumer Price Index (CPI) report on March 14, creating further anticipation around the Fed’s next moves.
Jan Nevruzi, an analyst at NatWest Markets, noted, “Powell’s testimony comes before the payrolls and inflation numbers, therefore, he is likely to avoid committing to a policy path.”
European Central Bank President Christine Lagarde hinted at a likely 50 basis point rate hike this month, signaling further tightening ahead.
Australia’s central bank is expected to increase rates by 25 basis points on Tuesday, while the Bank of Canada is likely to pause after a rapid 425 basis point rise over the last 10 months.
In Japan, Friday will mark the final policy meeting for Bank of Japan Governor Haruhiko Kuroda before Kazuo Ueda takes over in April. All eyes are on whether any changes will be made to its yield curve control policy.
NAB analysts suggest, “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 percent YCC tolerance band.”
The yen remained weak, trading at 135.95 against the dollar after hitting a three-month peak of 137.10 last week.
The euro hovered at $1.0629, just above a recent seven-week low of $1.0533, while the dollar index inched up to 104.610.
Bond yield declines on Friday gave gold a boost, with the metal trading at $1,855 an ounce.
Oil prices softened slightly, likely in response to China’s lower growth target, with Brent crude down 33 cents to $85.50 a barrel and U.S. crude slipping 30 cents to $79.38 per barrel.
Markets are on edge as the U.S. Federal Reserve’s next moves remain uncertain, and a series of economic data releases this week will provide critical clues.
