Asian stocks rose on Monday as Wall Street futures stabilized, but there will be more tests coming as UK interest rates are set to climb this week, and rising oil prices add to inflation concerns.
Due to the Lunar Winter Holidays, trading volumes were light, and MSCI’s broadest index of Asia-Pacific stocks outside Japan (.MIAPJ0000PUS) gained 0.6 percent in slow activity.
The Nikkei (.N225) in Japan rose 1.3 percent from a 14-month low, despite local data on industrial output and retail sales falling short of expectations.
Markets now expect the Federal Reserve to raise interest rates five times this year, to 1.25 percent, though investors still expect rates to peak at a historically low 1.75-2.0 percent.
According to analysts at Bank of America, that isn’t nearly hawkish enough. Ethan Harris, chief economist at BofA said that the markets have underpriced Fed raises at the start of the last two hiking cycles, and he believes that will be the case again.
BofA expects the Fed to begin hiking rates by 25 basis points at each of the remaining meetings this year, for a total of seven rises this year, with four more hikes next year, and by the end of 2023, the terminal rate would be 2.75-3.00 percent, which would reduce GDP and inflation.
The Fed’s calendar is modest this week, with only three regional presidents slated to speak, but there’s enough data to digest, including the ISM manufacturing and services readings, as well as the January jobs report.
Due to an increase in coronavirus cases and bad weather, the headline payrolls number is projected to be weak. The median projection is for a rise of only 155,000 people, with forecasts ranging from 385,000 to 250,000.
Barclays analysts expect nonfarm payrolls to climb by only 50,000 in January, with the unemployment rate remaining unchanged at 3.9 percent.
Barclays sees downside risk to their prediction because 8.8 million people missed work during the week of January 11 to care for someone who was unwell or because they were sick themselves.
The Fed’s hawkish turn has pushed 10-year Treasury yields up 27 basis points to 1.78 percent this month, producing bonds more appealing than equities, especially growth stocks with stretched pricing.
It has also boosted the US dollar, which has risen 1.7 percent against a basket of its key rivals this month to its highest level since July 2020, at 97.167.
Last week, the euro lost 1.7 percent, falling to its lowest level since June 2020, and was last trading at $1.1157. The dollar even outperformed the safe-haven yen last week, surging 1.3 percent to 115.53 yen.
Higher yields have been a drag on gold, which pays no interest, and the metal was down at $1,787 per ounce, down 2.4 percent from the previous week.
Oil prices have risen for six weeks in a row, approaching seven-year highs as global tensions increased concerns about energy supply shortages.
Brent gained $1.18 to $91.21 per barrel, while U.S. crude gained $1.15 to $87.97 per barrel.