Stocks and bonds edge up; investors balance China, central banks

Wayne Cole and Yoruk Bahceli

(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.

It was disappointing that Beijing decided to lower its growth forecast with a target for 5% rather than the 5.5% plus preferred by the market.

After last week’s surge above 4%, safe-haven bond prices rose, and the yield on 10-year Treasuries fell 4 basis points, to 3.92%.

Also, oil prices dropped which is a sign of concern over China’s future growth.

Investors are still encouraged by the strength of recent data that has substantially reduced recession fears.

Although Chinese stock dropped, MSCI’s largest index of Asia-Pacific shares was up 0.5% at 0933 GMT. Japan’s Nikkei reached a three-month peak.

European stock prices also rose with the pan-European STOXX 600 Index up 0.1%. This index is close to its highest level since February 2022. S&P 500 futures suggested that U.S. market were 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 also added.

Prior to Powell’s key speech and the policy announcements this week by Canada, Australia, and Japan, Fed Chairman Powell, central banks were in focus.

Although markets have accepted a Fed-imposed higher peak rate, they hope it will keep quarter-point increase rather than half-point.

Mary Daly, San Francisco Fed president on Saturday, reiterated that rates might need to rise but set high standards for returning to half-point increments.

On Tuesday and Wednesday Powell will give his testimony before Congress. He will be quizzed about whether or not larger increases are necessary.

However, much will depend on the U.S. payrolls reports for Friday. After January’s dramatic 517,000 increase, forecasters expect a modest rise of 200,000. But there is still risk.

The February Inflation Report will follow on March 14.

“Powell’s testimony comes before the payrolls and inflation numbers, therefore, he is likely to avoid committing to a policy path,” Jan Nevruzi (an analyst at NatWest Markets) said this.

“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 concluded. “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 is a measure of performance for the U.S. currencies against six other currencies. It was at wait-and-see, 0.1% lower at 104.53. Meanwhile, the euro stood at $1.0633. This just seven weeks after a low.

CENTRAL BANK FLURY

It is not unusual for the Fed to warn of tightening.

Christine Lagarde, President of European Central Bank stated that it is a “very good thing” in a weekend interview. “very likely” They would increase interest rates by 50 basis point this month, and they had to work harder on inflation.

Mario Centeno (Governing Council member) said decisions must be made after March, adding that data is important.

The Australian central bank will likely raise its rates this week by 25 basis points, on Tuesday. Meanwhile, the Bank of Canada appears to be paused after raising rates at an unprecedented 425 basis point pace in 10 months.

Friday will mark the end of the Bank of Japan’s (BOJ), Governor Haruhiko Kojika before Kazuo Umeda assumes the reins in April. The focus of all attention is on the future of the yield curve control instrument.

Markets were shaken by December’s unexpectedly widening of the trading area for 10-year yield bonds to between -50- +50 basis points, which was unexpectedly announced by BOJ.

Ueda’s tone so far is dovish about policy outlook, keeping the yen in a softer trend. Following a low of 137.0 last week, the yen was 0.1% lower to begin this week.

Last week, gold was 0.2% lower at $1,852 per ounce, but it traded higher than last week’s lows thanks to a pullback of bond yields. [GOL/]

(Reporting from Yoruk Bahceli & Wayne Cole; Editing courtesy of Shri Navaratnam, Shounak Dasgupta