By Stella Qiu and Lawrence White
SYDNEY/LONDON (Reuters) – Shares rose and the dollar firmed on Monday as investors bet the Federal Reserve would pause its rate hikes this month after a mostly encouraging U.S. jobs report, while oil prices jumped after Saudi Arabia pledged big output cuts.
The benchmark European STOXX index climbed 0.18% in early trading, led by gains in the oil & gas sector index and echoing a 0.2% gain in MSCI’s broadest index of Asia-Pacific shares outside Japan.
Japan’s Nikkei surged 2.1% to stand above 32,000 for the first time since July 1990.
The dollar also firmed against major peers after data on Friday showed payrolls in the public and private sector far outstripping forecasts, while wage pressures eased and the unemployment rate climbed off a 53-year low.
That in turn stoked hopes the Fed could pause its program of rate hikes at the June 13-14 meeting, albeit likely resuming in July.
On Monday, oil prices, which have recently come under pressure amid heightened concerns about China’s slowing economy, rose after Saudi Arabia announced it would cut its output to 9 million barrels per day in July, from around 10 million bpd in May, the biggest reduction in years. [O/R]
Brent oil rose 2% to $77.81 a barrel by 0815 GMT, giving up some of its earlier gains to as high as $78.73, while U.S. crude climbed 2.36% to $73.4 a barrel, after hitting a session high of $75.06.
“With Saudi Arabia protecting oil prices from sliding too low … we think oil markets are now more prone to a shortfall later this year,” said Vivek Dhar, a mining and energy commodities strategist at the Commonwealth Bank of Australia.
“We think Brent futures will rise to $85 by Q4 2023 even with a tepid demand recovery in China factored in.”
Data on Friday showed the U.S. economy added 339,000 jobs last month, higher than most estimates, but moderating wage growth and a rising jobless rate led markets to continue to bet on no change in Fed rates this month, with a 75% chance priced in for that, according to CME FedWatch tool.
However, there is about a 70% probability that Fed funds rates would reach 5.25-5.5% or beyond at the policy meeting in July if U.S. inflation remains elevated. Conversely, markets now see little chance of a rate cut by the end of this year.
Treasury yields continued to climb on Monday. Yields on U.S. two-year Treasuries rose 3 basis points to 4.5389%, on top of a surge of 16.2 bp on Friday, and 10-year yields also climbed 4 bps to 3.7351%, after a rise of 8 bps on Friday.
Fitch Ratings said the United States’ “AAA” credit rating would remain on negative watch, despite the debt agreement.
The U.S. dollar was at 104.2 against its major peers on Monday, after gaining 0.5% on Friday on the jobs report. The greenback also rose 0.1% on the Japanese yen to 140.03 while the euro eased 0.1% to $0.1070.
Central banks from Australia and Canada will meet this week. Markets see a sizeable chance – about 40% – that the RBA could surprise with a quarter-point hike on Tuesday after a minimum wage hike that economists feared could further stoke inflationary pressures.
The Bank of Canada will meet on Wednesday. A majority of economists polled by Reuters expect the BOC to keep interest rates on hold at 4.5% for the rest of the year although the risk of one more rate rise remains high.