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A recent string of positive economic news has dragged markets back closer to the Fed's overall outlook, allaying recession fears and suggesting the Fed will have more credibility at its meeting next week when it says further rate hikes this year remain firmly on the table

"Financial markets for a while were completely out in the weeds, running around looking at things that turned out not to be real risk," said Torsten Slok, chief international economist at Deutsche Bank.

When the Fed raised its benchmark interest rate in December for the first time in a decade from near zero, its so-called "dot plot" of policymakers' forecasts penciled in four quarter-point hikes this year. Markets at the time priced in three increases.

The S&P 500 .SPX dropped almost 10 percent from January through mid-February on fears over China's rebalancing, a global growth slowdown and low oil prices. The rout risked having a sustained negative impact on the U.S. economy by tightening financial conditions.

Those worries have begun to fade. The United States added 242,000 jobs last month, far more than expected and the unemployment rate stands at 4.9 percent, near full employment. A total of 14.3 million private-sector jobs have been created since 2010.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, has also strengthened, posting for January its largest gain in 10 months.

Since hitting its lowest level in two years on Feb. 11, the S&P 500 has risen 9.5 percent, while the 10-year Treasury yield US10YT=RR has risen about 35 basis points to 1.90 percent early Thursday.

Brent crude oil LC0c1 has jumped to around $40 a barrel, up 45 percent from 12-year lows less than two months ago.

Fed policymakers have been banking in part on the effects of oil price declines to dissipate, helping inflation move back toward the central bank's 2-percent target rate as input costs trend higher.

The Fed said in December that future rate hikes were contingent on actual progress on inflation, which has been below target for the past four years. Core inflation jumped to 1.7 percent in the 12 months to January, the biggest rise since July 2014.

In light of progress on inflation, the statement may also reflect the Fed's desire not to get too far behind the curve.

Eighty percent of analysts see a further cut to the negative rate as the most likely action for Governor Haruhiko Kuroda, and almost 90 percent see more easing coming at one of the four meetings through the end of July. Only five of 40 economists expect additional stimulus at the meeting ending on March15, according to the survey by Bloomberg.

“March easing is unlikely in my opinion since money markets are still trying to find an equilibrium,” Izumi Devalier, an economist at HSBC Holdings Plc, wrote in the survey, conducted March 8-10. “Our base case is for July easing precisely because we thought the BOJ would want a few months to judge the impact of negative rates on markets, especially money markets.”

The bank will expand stimulus, but not next week, Etsuro Honda, an aide to Japanese Prime Minister Shinzo Abe, told Bloomberg on Thursday. "The BOJ is carefully watching the reaction from market participants" to its January announcement, he said.

Oil prices jumped on Friday supported by fresh investment and a strong yuan, which makes fuel cheaper for Chinese importers, but analysts warned that any price rally was pre-mature as a global glut remained in place.

U.S. crude futures CLc1 were trading at $38.66 a barrel at 0409 GMT, up 82 cents and over 2 percent from their last close.

Brent crude futures LCOc1 were at $40.73 a barrel, up 68 cents.

Traders said that the price support came from the Chinese yuan hitting its highest level in 2016 on Friday at 6.4877 per dollar, reflecting a global weakening of the dollar against leading currencies .DXY. The greenback declined following easing measures announced by the European Central Bank on Thursday.

China's demand exerts a strong influence on the oil markets as its government is taking advantage of low prices to build strategic reserves and gasoline consumption is soaring because of rising car sales in the world's second-biggest oil user.

A weaker dollar is supportive for oil prices as it makes dollar-traded oil cheaper for countries using other currencies, potentially spurring fuel demand.

Friday's stronger prices came following losses the previous day after a meeting between major producers to coordinate a freeze in output looked unlikely to even take place since Iran would not commit to attending.

Freed from international sanctions that more than halved its output to little more than 1 million barrels per day (bpd), Iran said it would not participate in a proposed agreement between top producers Saudi Arabia and Russia to freeze production at January levels, when both pumped over 10 million bpd.

A global glut in supply means that over 1 million bpd of crude is produced in excess of demand and that has left storage tanks around the world brimming with unsold oil. Analysts say that a fundamental reduction in supplies, for instance through a production cuts, must happen before prices can move higher.

HSBC economist Fred Neumann said "the problem... lies with all the extra supply (e.g. Iran) that has poured onto markets. That means that even a (demand) pick-up in China, in any event likely to be marginal, may not be enough to sustain the latest rally."

To reduce the supply overhang, Neumann said "more supply destruction is needed. And that, amid record low interest rates, will take some time."

Reference: Reuters, Bloomberg