US stocks, Treasuries dip as inflation worries linger

(C) Reuters. FILE PHOTO: TV crews talk in front of a large screen showing stock prices at the Tokyo Stock Exchange in Tokyo, Japan October 2, 2020. REUTERS/Kim Kyung-Hoon

By Lawrence Delevingne and Nell Mackenzie

(Reuters) – Wall Street stocks and Treasury prices declined on Wednesday as manufacturing activity rebounded in China but contracted in the United States, while 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, giving investors hope that China’s recovery can offset a global slowdown.

U.S. manufacturing contracted for a fourth straight month in February, but there were signs that factory activity was starting to stabilize, with a measure of new orders pulling back from more than a 2-1/2-year low.

“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.

At the same time, inflation remains high globally.

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.

“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 0.19%, to 32,593.83, the S&P 500 lost 0.52%, to 3,949.54 and the Nasdaq Composite dropped 0.63%, to 11,383.66.

MSCI’s broadest index of Asia-Pacific shares outside Japan jumped 2% to leave behind a two-month low.

The index provider’s broader world stock measure was flat on the day, with Europe’s STOXX 600 down 0.4%.

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 4.883%, near a November peak around 4.88%. The yield on 10-year Treasury notes rose 8 basis points to 3.994%.

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,” he said.

Atlanta Federal Reserve President Raphael Bostic kept his view that the central bank’s policy rate can stop in the 5.00%-5.25% range.

Meanwhile, Minneapolis Fed President Neel Kashkari said he is “open-minded” on either a 25 basis point or a 50 basis point rate hike, adding that rates may ultimately need to go higher than the 5.4% level he had thought in December would be adequate.

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 0.25%, with the euro up 0.86%, and sterling was down 0.16% on the day.

U.S. crude oil exports rose to a record high of 5.6 million barrels per day (bpd) last week, according to government data. U.S. crude was up 0.6% to $77.53 per barrel and Brent was at $84.07, up 0.7% on the day.

Spot gold added 0.8% to $1,841.19 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.”