The Terminator did not hug him back. That was a human reaction, and thus far, had not been programmed with emotional sub-routines.. but he did understand the gesture.
He looked at John with the same expression, but said in a firm tone, as if it were fact, "NO. You must live."
And as long as he functioned, he would make damn sure that the boy did live to do what he had to. And as any normal observer can attest, nothing short of destruction will stop a Terminator from its mission.