Stocks and bonds edge up; investors balance China, central banks
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[March 06, 2023] By
Yoruk Bahceli and Wayne Cole
(Reuters) - World shares and bonds edged up on Monday as investors
assessed a lower growth target from China than many had expected, with
testimony from Fed Chairman Jerome Powell and jobs data this week that
could decide the pace of future rate hikes.
There was some disappointment that Beijing chose to lowball its growth
outlook with a target of 5%, rather than the 5.5%-plus favoured by the
market.
Safe-haven government bond prices rallied, with the yield on 10-year
Treasuries down 4 basis points to 3.92%, following last week's spike
above 4%.
Oil prices also dipped, reflecting some gloom over China's growth
target.
Still, the recent run of data, which has significantly reduced
expectations of a recession, has been strong enough to keep investors
optimistic.
While Chinese stocks dropped, MSCI's broadest index of Asia-Pacific
shares outside Japan was still up 0.5% by 0933 GMT, while Japan's Nikkei
touched a three-month high.
European stocks also rose, with the pan-European STOXX 600 index up
0.1%, nearing its highest since February 2022. S&P 500 futures signalled
U.S. markets were also set to open higher.
"Sentiment this morning is dominated by the modest, revised growth
target in China highlighting a diminished likelihood of more stimulus,"
said Kristoffer Kjær Lomholt, head of FX, corporate research and chief
analyst at Danske Bank.
"The announcement may disappoint some investors, but on the other hand,
it could ease some fears of a strong inflationary impact from China,"
Lomholt added.
Focus was firmly on central banks, ahead of a key speech by Fed Chairman
Powell and policy decisions this week from Japan, Australia and Canada.
Markets have become resigned to a higher peak interest rate from the
Fed, but are hoping it will stick with quarter-point increases, rather
than half-point hikes.
San Francisco Fed President Mary Daly on Saturday reiterated rates may
have to go up, but set a high bar for moving back to half-point
increases.
The stage is set for Powell's testimony to Congress on Tuesday and
Wednesday, where he will no doubt be quizzed on whether larger hikes are
needed.
Much, however, might depend on what the February U.S. payrolls report
reveals on Friday. Forecasts are centred on a more modest increase of
200,000 following January's barnstorming 517,000 jump that led markets
to reprice their interest rate expectations, but risks are on the
upside.
And that will be followed by the February inflation report on March 14.
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The German share price index DAX graph
is pictured at the stock exchange in Frankfurt, Germany, March 3,
2023. REUTERS/Staff
"Powell's testimony comes before the payrolls and inflation numbers,
therefore, he is likely to avoid committing to a policy path," said
Jan Nevruzi, an analyst at NatWest Markets.
"Payrolls are due on the final day when Fed officials can publicly
discuss monetary policy, but CPI will be released during the
blackout period," he added. "If we end up in a situation where the
jobs and inflation numbers present a conflicting view, the outcome
of the Fed meeting could become even harder to predict."
The dollar index, which measures the performance of the U.S.
currency against six others, was in wait-and-see mode, down 0.1% at
104.53, while the euro held at $1.0633, just off a recent seven-week
low.
CENTRAL BANK FLURRY
The Fed is hardly alone in warning of further tightening.
In an interview released over the weekend, European Central Bank
President Christine Lagarde said it was "very likely" they would
raise interest rates by 50 basis points this month and the bank had
more work to do on inflation.
However, decisions after March must be based on data, governing
council member and Portuguese central bank Governor Mario Centeno
said, stressing the importance of taking into account the economic
forecasts the bank will release in March.
This week, Australia's central bank is expected to lift its rates by
25 basis points on Tuesday, while the Bank of Canada is seen pausing
having raised rates at a record pace of 425 basis points in 10
months.
Then, Friday marks the final policy meeting for Bank of Japan (BOJ)
Governor Haruhiko Kuroda before Kazuo Ueda takes the reins in April,
and all eyes are on the fate of its yield curve control tool.
The BOJ jolted markets in December when it unexpectedly widened the
allowed trading band for 10-year bond yields to between -50 and +50
basis points.
So far, Ueda has sounded dovish on the outlook for policy which has
kept the yen on a softer trend. The yen started the week down 0.1%
after touching a three-week low of 137.10 last week.
Gold was last down 0.2% at $1,852 an ounce but still traded above
last week's lows, benefiting from a pullback in bond yields. [GOL/]
(Reporting by Yoruk Bahceli and Wayne Cole; Editing by Shri
Navaratnam and Shounak Dasgupta)
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