S&P 500 Futures struggle to cheer China inspired optimism as yields portray rate hike fears

Markets struggle to cheer the upbeat China data during early Wednesday as fears of higher inflation and interest rates join geopolitical concerns about Beijing and Russia to weigh on risk profile.

While portraying the mood, the S&P 500 Futures track Wall Street’s mild losses around 3,960. Further, the US 10-year Treasury bond yields rose two basis points (bps) to 3.93% while the two-year counterpart rises four bps to 4.84% by the press time. With this, both the key bond coupons march towards the three-month high marked in February after printing the biggest monthly gain since September 2022.

Recently, China’s Caixin Manufacturing PMI rose to 51.6 versus 50.2 expected and 49.2 for February. In doing so, the private manufacturing activity gauge traced the official numbers. Earlier in the day, China NBS Manufacturing PMI jumped to 52.6 compared to 50.5 market forecasts and 50.1 prior. More importantly, Non-Manufacturing PMI rallied to 56.3 versus analysts’ expectations of 49.7 and 54.4 previous readings.

Even so, China Finance Minister Liu He said after the data release that the foundation of China's economic recovery is still not stable.

Also a China-linked risk-negative catalyst is a concern that China President Xi Jinping is up for a big overhaul of government agencies, as signaled by Bloomberg, which in turn could increase the tension between the US and China.

Elsewhere, the sustained geopolitical tension between Ukraine and Russia, as well as fears of more supply-chain issues emanating from the UK and China, seems to propel the fears of higher inflation and more rate hikes. As a result, Reuters mentioned that the US central bank is expected to deliver two additional 25-basis-point rate hikes in March and May while adding, “Financial markets are betting on another increase in June.”

It’s worth observing that the recent US data appeared downbeat but failed to move a needle from the hawkish Fed bets. On Tuesday, the US Conference Board’s (CB) Consumer Confidence dropped for the second consecutive month to 102.9 versus 106.0 prior (revised) while US Housing Price Index drops 0.1% in December versus -0.6% market forecasts and -0.1% prior. On the same line, the S&P/Case-Shiller Home Price Indices grew 4.6% YoY during the said month compared to 6.1% market expectations and 6.8% previous readings. Furthermore, Chicago Purchasing Managers’ Index for February eased to 43.6 from 44.3 previous readings and 45.0 market consensus whereas the Richmond Fed Manufacturing Index for the said month eased below 11.0 prior and -5.0 expected to -16.

Looking ahead, US activity data for February can entertain the markets ahead of next week’s monthly jobs report. However, major attention will be given to Federal Reserve (Fed) Chairman Jerome Powell’s testimony and the Federal Open Market Committee (FOMC) monetary policy meeting for clear directions.

Also read: Forex Today: Fears remain the same, USD makes the most out of it