Chinese reflation vs U.S. inflation.
That’s the broad market picture painted by manufacturing PMIs for the world’s two largest economies on Wednesday, as Asian stocks excluding Japan surged 2 percent for their best day in two months, and two of Wall Street’s three main indexes slumped into the red.
How Asian markets trade on the second day of the month on Thursday may come down to which of these two forces retains the most momentum. The impact of Chinese and U.S. manufacturing purchasing managers index data on Wednesday was powerful.
China’s reopening from years of COVID-19 lockdown appears to be extraordinary. Manufacturing activity exploded in February, expanding at the fastest pace in more than a decade, and new export orders rose for the first time since April 2021.
On top of that, Chinese consumers are back with a bang, with some of the world’s top consumer and luxury goods companies saying sales in the country are picking up again.
The U.S. manufacturing PMI report, however, prompted heavy selling across risky assets (stocks) and safe assets (bonds) alike – activity contracted for a fourth month in a row, but the prices paid index jumped much more than economists had expected.
More evidence of inflationary pressures was followed by another flurry of hawkish comments from Fed officials, sending the 10-year Treasury yield up to 4 percent, the two-year yield to a 16-year high near 5 percent, and the implied Fed terminal rate through 5.5 percent.
Spiraling bond yields, rates and inflation expectations aren’t confined to the U.S. – euro zone PMIs also highlighted stagflationary pressures, while euro zone inflation expectations are the highest in over a decade and, in a rare occurrence, pushing above U.S. equivalents.
Can Asian markets withstand these pressures on Thursday and take their cue again from China’s economic renaissance?
There are no top-tier Asian economic data releases on tap – South Korean retail sales, Australian building approvals and Japanese consumer confidence – leaving flash February euro zone inflation as perhaps the biggest market-mover of the day.
Here are three key developments that could provide more direction to markets on Thursday:
– South Korea retail sales (February)
– Australia building approvals (February)
– Japan consumer confidence (February)