U.S. equity futures slumped lower Tuesday, while Treasury bond yields pushed further into year-to-date highs, as investors continued to grapple with the implications of solid domestic growth prospects against increasing concern over China’s post-Covid recovery.

Central bank officials in China, in fact, slashed to key interest rates Tuesday, including a benchmark one-year bank lending levy, following a series of softer-than-expected retail sales and industrial output data for the month of July that underscored the ongoing weakness in the world’s second-largest economy. 

“China’s production, consumption and investment slowed more than expected in July despite efforts to boost domestic demand, data released by the National Bureau of Statistics on Tuesday showed,” said Saxo Bank strategists. “Coming on top of whole host of weaker than expected data recently, the People’s Bank of China responded by unexpectedly cutting two key policy rates for a second time in three months.”

The moves tipped Asia stocks into the red, and flowed through into the European session, as investors worried China’s efforts to both revive growth and cover-up its failings — the government suspended publication of youth unemployment data — would lead to further market disruption.

U.S. stocks are also looking at a softer open, with investors likely to take their cue from July retail sales data prior to the start of trading while tracking another move higher in Treasury bond yields linked in part to the economy’s surprising summer resilience. 

The Atlanta Fed’s GDPNow forecasting tool suggests current quarter growth of around 4.1%, while yesterday’s NewYork Fed Survey of Consumer Expectations showed year-ahead inflaiton expectations fell to a 2021 low of 3.5%, with labor market sentiment and household finance prospects also improving.

Still, with the Treasury planning to raise more than $103 billion in coupon bond sales this quarter, and stuffing $132 billion in T-bill sales into the market yesterday, bond yield are continuing their upward march even in the face of softening inflation prospects. 

Benchmark 10-year note yields were pegged at a 2023 high of 4.217% in overnight trading, while 2-year notes were last seen changing hands at 4.967%.

Heading into the start of the trading day on Wall Street, futures tied to the S&P 500 were priced for a 29 point opening bell decline while those linked to the Dow Jones Industrial Average were indicating a 233point pullback despite stronger-than-expected earnings from component Home Depot  (HD) – Get Free Report.

The tech-focused Nasdaq, which notched its best session in two weeks on Monday, is looking at a 103 point opening bell decline. 

• Get investment guidance from trusted portfolio managers without the management fees. Sign up for Action Alerts PLUS now.