By Lawrence Delevingne and Nell Mackenzie
(Reuters) -Wall Street stocks and Treasury prices declined on Wednesday as China’s manufacturing activity rebounded to push Asian shares higher, but stronger-than-expected inflation numbers in Europe battered government bonds.
China’s official manufacturing purchasing managers’ index (PMI) rose to 52.6 last month from 50.1 in January and was well ahead of an analyst forecast for 50.5, giving investors hope that China’s recovery can offset a global slowdown.
“Global PMI continues to point to a firmer global growth outlook – creating some upside risk to domestic activity and inflation,” Citi U.S. economic strategists said in a note on Wednesday.
As China’s economy rebounds, inflation remains high elsewhere. Data from German regions, a day after February numbers showed price pressures surged more than expected across France and Spain, bolstered expectations that the European Central Bank will push interest rates higher and previously thought.
In the U.S., the average interest rate on the popular 30-year fixed-rate home loan remained last week at its highest level since November.
“The surprises in January inflation releases have challenged hopes for a smooth return to target inflation,” said Bruno Schneller, managing director at INVICO Asset Management.
The Dow Jones Industrial Average fell 0.14%, to 32,610.18, the S&P 500 lost 0.43%, to 3,952.9 and the Nasdaq Composite dropped 0.45%, to 11,404.50.
MSCI’s broadest index of Asia-Pacific shares outside Japan jumped 2.14% to leave behind a two-month low.
The index provider’s broader world stock measure last rose 0.27%, with Europe’s STOXX 600 down 0.2%.
BONDS YIELDS MARCH HIGHER
Germany’s 2-year government bond yield, which is highly sensitive to changes in interest rate expectations, rose to its highest since October 2008 at around 3.2%. Bond yields rise as prices fall.
Two-year Treasury yields, a guide to short-term U.S. rate expectations, were close to four-month highs, but at 4.849%, remained below a November peak around 4.88%. The yield on 10-year Treasury notes rose 4.3 basis points to 3.957%.
The next flush of economic indicators is likely to be crucial as markets assess whether future rate hikes are sufficiently priced in now.
INVICO’s Schneller added that sticky inflation might compel central banks to raise rates further in order to prevent further economic damage.
“Consequently, the risk of policy-driven recessions could rise.”
In currency markets, the dollar’s February gains seem to have run out of steam and European and Asia Pacific currencies advanced on the strength of the Chinese data.
The dollar index fell 0.51%, with the euro up 0.86%, and sterling was down 0.07% on the day.
Oil slipped on Wednesday, giving up an earlier gain, as signs of ample supply and rising U.S. crude inventories countered expectations for higher demand arising from a jump in manufacturing in top crude importer China.
U.S. crude fell 0.61% to $76.58 per barrel and Brent was at $83.14, down 0.37% on the day.
Spot gold added 0.7% to $1,839.10 an ounce.
Geopolitics also kept nerves elevated in the background.
Last week’s visit to Kyiv by U.S. President Joe Biden and Russian President Vladimir Putin’s abandonment of the last remaining nuclear arms control treaty with the U.S. signalled a hardening of positions.
China, which showed support for Russia by sending its top diplomat to Moscow last week, has issued a call for peace, though it has been met with scepticism and Washington has expressed concern in recent days that China could send arms to Russia.
“Should Beijing send Russia arms, it risks a rapid geopolitical breaking of the world economy,” said Rabobank’s research head, Jan Lambregts. “Markets have not even begun to contemplate what this might mean.”
(Reporting by Lawrence Delevingne in Boston and Nell Mackenzie in London; Editing by Dhara Ranasinghe, Sharon Singleton, Tomasz Janowski and Shounak Dasgupta)
