*
Bonds squeezed again, sending yields up
*
China PMI surges; U.S. manufacturing contracts
*
Dollar slips
By Lawrence Delevingne and Nell Mackenzie March 1 (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 there.
China's official manufacturing purchasing managers' index (PMI) rose to 52.6 last month, marking the fastest growth in more than a decade, 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 a more than 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, which came 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 than 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 0.13%, to 32,614.17, the S&P 500 lost 0.49%, to 3,950.69, and the Nasdaq Composite dropped 0.64%, to 11,382.14.
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, with Europe's STOXX 600 down 0.74%.
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.
U.S. Treasury yields rose on higher interest rate fears, with benchmark 10-year government bond yields hitting 4% and the two-year yield at its highest level since 2007, at 4.891%.
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, noting that sticky inflation might compel central banks to raise rates further to prevent further economic damage, said: "Consequently, the risk of policy-driven recessions could rise." 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. Minneapolis Fed President Neel Kashkari said he is "open-minded" on either a 25 basis point or a 50 basis point rate hike at the Fed's next meeting, on March 21-22, 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 0.3%, with the euro up 0.7%, and sterling down 0.13% on the day. U.S. crude oil exports rose to a record high of 5.6 million barrels per day last week, according to government data. U.S. crude rose 0.44% to $77.39 per barrel, and Brent was at $84.06, up 0.73% on the day. Spot gold added 0.6% to $1,838 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. signaled 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 skepticism 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." <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ World FX rates YTD ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Lawrence Delevingne in Boston and Nell Mackenzie in London; Editing by Dhara Ranasinghe, Marguerita Choy, Deepa Babington and Leslie Adler)
