Activity App Data?

Activity on the watch and phone are showing a combination of data collected by the watch, steps counted by the phone's mobility chip, and certain feeds into Health from 3rd party apps (like Strava, Runkeeper, Garmin Connect, etc.)

To answer your question about how steps are counted while carrying both the phone and watch, but the watch may be limited due to the activity, that is Apple dark magic. In theory, Health on the watch should sort it all out. But, the only way to know is to test to see what happens.