Asian Stocks Rally As The Week Starts, Oil Prices See Decline

Asian stocks edged higher on Monday, while bond markets waited for the world's most powerful central banker to provide an update on the United States' rate outlook, as well as a jobs report that could determine whether the next hike needs to be super-sized.

There was some disappointment that Beijing chose to lower its growth forecast to 5% rather than the 5.5%-plus target preferred by the market, but the recent run of actual data has been strong enough to keep investors optimistic.

Blue chips in China fell 0.9% after rising 1.7% the previous week. MSCI's broadest index of Asia-Pacific shares outside of Japan was up 0.2%.

The Nikkei 225 index in Japan rose 1.2% to a three-month high, while South Korean stocks rose 0.5%, helped by a lower reading on inflation.

The EUROSTOXX 50 futures rose 0.2%, while the FTSE futures fell 0.1%. S&P 500 and Nasdaq futures were flat after rallying on Friday as bond yields eased slightly.

Yields on 10-year Treasuries were 3.957 percent, following a spike to 4.09 percent last week that enticed buyers.

Markets have come to expect more rate hikes from the Fed, but they are hoping it will stick to quarter-point increases rather than switching back to half-point increases.

On Saturday, San Francisco Fed President Mary Daly reiterated that rates would have to rise, but set a high bar for moving to half-point increases.

Futures indicate a 72% chance that the Fed will raise interest rates by 25 basis points at its March 22 meeting.

All of this sets the stage for Fed Chair Jerome Powell's testimony to Congress on Tuesday and Wednesday, during which he will undoubtedly be grilled on whether more rate hikes are required.

Much will, however, depend on what the February payrolls report shows on Friday. Forecasts predict a more modest increase of 200,000 after January's barnstorming 517,000 increase, but risks are on the upside.

The February CPI report will be released on March 14.

"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 Fed is far from alone in predicting further tightening.

In an interview published over the weekend, European Central Bank President Christine Lagarde stated that raising interest rates by 50 basis points this month was "very likely," and that the bank needed to do more work on inflation.

The Reserve Bank of Australia is expected to raise interest 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 is the final policy meeting for Bank of Japan Governor Haruhiko Kuroda before Kazuo Ueda takes over in April, and all eyes will be on the fate of the central bank's yield curve control (YCC) stance.

"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 per cent YCC tolerance band," noted analysts at NAB in a note.

In December, the BOJ surprised markets by unexpectedly expanding the allowed trading band for 10-year bond yields to between -50 and +50 basis points.

So far, Ueda has sounded dovish on the policy outlook, which has kept the yen on a downward trend. The dollar was last trading at 135.85 yen, having reached a three-month high of 137.10 last week.

The euro was unchanged at $1.0629, just off its recent seven-week low of $1.0533, while the dollar index was slightly higher at 104.610.

The drop in bond yields on Friday helped gold regain some ground, and it was trading at $1,855 per ounce.

Oil prices fell, possibly because investors were disappointed that China did not set more ambitious growth targets.

Brent crude fell 53 cents to $85.30 per barrel, while US crude fell 48 cents to $79.20.