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MARKETS 

Stocks are down slightly Wednesday as investors navigate hawkish Fed-speak, mixed results from consumer-facing companies, and the relentless push higher in 10-year Treasury yields that touched and continue to probe the psychological 4 % level.

Last week's PCE report is proving to be the ultimate dagger that sees markets kicking off March with a severe case of "rate hike fever" -- more robust growth that may be accompanied by more substantial inflation has the consensus forming around a higher-for-longer rate regime. Hence the S&P 500 obstinate trend in the face of limited disinflation progress could persist longer. 

But there seems to be a growing asymmetry concerning the next move from here. It appears to be much more skewed negatively today than at any point this year as investors ultimately come to terms with the fact that prices are not decelerating as quickly as expected earlier this year.

Given all this, the most significant move across the macro landscape is taking place in the most critical asset of them all - US interest rates, which featured yet another notable break higher in yields. At the same time, thoughts of rate cuts are getting bled out of the futures strip as the US economy is proving remarkably resilient to Fed tightening. 

It does not matter if you think rates went up because the Fed raised their target rate on Fed funds or if you believe it was because of rising inflation or improving growth; you get the same result. Bond yields are at a level that is now competing with stocks for medium-term investors' attention.

In real-time analysis, while getting whipsawed around in this still post-pandemic era (partly due to SPX zero-days-to-expiration options), it is difficult to determine what trends will endure and quickly fade. Investors will remain cautious ahead of next month's Jobs and Inflation data, which could ultimately be the straw that breaks the camel’s back in the absence of a tack lower on the data.

We can not stress how much the following two weeks loom massively critical for market participants. Events are predominantly US-centric: a reaffirmation of a preferred Fed hiking pace of 25bps, some reversion of the February employment data & CPI prints is precisely what the market doctor is ordering.

ASIA 

The surge in the Chinese PMI raised hopes the Chinese economy can bounce back strongly post-Covid containment measures. If the survey data does actualize into a significant rebound in the consumer data, that might help turn US sentiment around, but at the moment, it is an Asia story. Now focus sets sight on the NPC.

The reaction of the RMB will likely depend on which scenario plays out during the NPC. On the more constructive end, if the government were to fire on all policy cylinders, this would likely be very positive for risk assets. It would drive strong RMB appreciation, and strong policy stimuli would likely turn risk sentiment around, particularly for Asian FX. On the other hand, if the government were to maintain the status quo, i.e. a marginal increase in fiscal stimuli, the market would likely remain cautious about China's recovery. As a result, RMB would likely continue to underperform and remain at the mercy of the USD outlook.

The stock market's sell-off from overbought levels is essentially over after the strong PMI print. The market could rally even in a mildly favorable policy scenario. Should any structural reform be announced, that would likely be favorable to a more sustained rally. And traders could add positions, or at least cover dips before the NPC, thinking mainland investors remain cashed up and “long-onlies” are underweight, especially outside the internet space.

OIL 

Oil markets have taken on a relatively bullish inference bucking the recent grind higher and significant gap lower trend post inventory builds.

Traders are bullish ahead of the China NPC, which could be pro-growth and ally property sector fears.

Oil and RMB have similar setups leading into the NPC; however, if China's policy measures do not fire on all cylinders, oil markets could return to being held hostage by the Fed's hawkish narrative. 

For the time being, oil is back riding the bullish China story.

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