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US equities were stronger Thursday, with S&P 500 up 0.5% heading into the close, recovering from earlier losses after a dovish tinge in comments from Fed's Bostic. Still, the bond sell-off extended: US10yr yields are up 8bps to 4.07%, the highest since 9 November.

Price action in equities shows little trepidation from the move in rates, reflecting the shifting narrative of 2023: inflation may have started the year seasonally higher, but it is not suggesting that we are entering a systemically unanchored higher inflation environment like the 1970s.

And while the Fed's moves to combat inflation, the policy impulse will most likely be a measured response in 25bp basis point increments, not the 75bp jumbo rate hikes we saw continuously throughout 2022.

Recent price action has had shades of 2022, raising the concern that we are heading back into the cycle of Fed-driven pressure: US rates being revised higher, and that, in turn, boosting the Dollar, hurting equities, and causing US financial conditions to tighten meaningfully.

However, unlike last year, where policy shocks drove market shifts through most of the year, this year's price action has been driven as much by improving global growth as by tighter global policy. Indeed, that is a more digestible mix for stock market operators. Still, the uptick in January inflation has muddied this picture and caused a fair bit of panic in market circles.

But as long as activity data remain too strong, fanning the inflation fires, the real vulnerability for risk assets is a definitive hawkish policy shift, particularly from Chair Powell, who represents the core members. 

Indeed, that would suggest the Fed may have been premature in downshifting policy hikes. 

For the time being, investors and virtually every cross-asset in Capital Markets remain caught between misaligned macro drivers – a more robust China outlook and an uncertain Fed outlook however, the restart of China data releases this week, where the manufacturing PMI came in firmly above consensus, alongside the likely pro-growth tone to the Two Sessions policy event, should offer a better macro setup beyond just China proxies.

 China's National People's Congress starts this weekend and should provide more evidence of growth-supportive measures. While higher-for-longer-interest rate dynamics will likely prevent a full-on revival of January's bullish Yuan price action, some China proxy trades could be worth adding where AUD could be a prime beneficiary. 

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