Hong Kong Lawmaker Criticizes 'Excessively Stringent' Crypto Licensing Rules

Cryptocurrency

Summary:

Hong Kong lawmaker Duncan Chiu criticizes strict crypto exchange licensing rules for deterring global exchanges and harming market confidence.

A Hong Kong lawmaker has raised concerns over the “excessively stringent” regulations for crypto exchanges to obtain a license, criticizing that these rules have pushed major global exchanges away from entering Hong Kong and have dampened market confidence.

Duncan Chiu, a member of Hong Kong’s Legislative Council, wrote in an opinion piece published Saturday on the Hong Kong Economic Journal that the recent license withdrawals of multiple global crypto exchanges have “shaken the confidence of market participants in Hong Kong's push to develop Web3.”

The Securities and Futures Commission stipulates that crypto trading platforms that fail to submit their license applications by Feb. 29 must close down their businesses in Hong Kong by May 31. The regulator said that after June 1, all VATPs operating in Hong Kong must be either licensed by the SFC, or “deemed-to-be-licensed” applicants.

“VATP applicants which are not deemed-to-be-licensed should not commence their business activities in Hong Kong, or actively market their services to Hong Kong investors,” the SFC said on its website.

Many global exchanges — including OKX, Gate.io and HTX — have thus withdrawn their license applications in Hong Kong.

Chiu said the license application withdrawals reflected major drawbacks in the current licensing system. “Firstly, several policies related to the development of Hong Kong's virtual asset market (such as VATP, stablecoin issuance, and virtual asset over-the-counter trading) are designed by different departments, lacking a comprehensive strategic consideration for industry development,” he explained.

The lawmaker added that some license applicants had told him that the authorities lack a forward-looking vision for developing next-generation fintech and that promoting Web3 with a traditional finance mindset lacks flexibility.

Lawmaker Chris Chiu, a tech-forward advocate for Web3, argues that Hong Kong's crypto licensing rules are too harsh. These rules, designed for established financial institutions, seem out of place for the new world of Web3 finance according to Chiu.

Chiu also pointed out that some crypto industry insiders had expressed concerns that the authorities require the management of licensed operators to have many years of experience in the crypto industry, while the regulators often lack personnel with practical experience in operating Web3 businesses. “The two sides have vastly different technical backgrounds, market experiences and innovative spirits, making communication difficult,” Chiu wrote.

Source: TheBlock

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Swissquote

Economic

Commodity

OPEC+ announced on Sunday that it will extend supply cuts to the Q3 but will gradually return barrels to the market over the following 12 months. The fact that OPEC has a clear time in mind for waning its supply cut policy is not supportive of oil bulls.

The barrel of US crude fell to $76.50 at the weekly open before rebounding toward the $77pb on the back of a stronger-than-expected Chinese manufacturing PMI, with the Caixin index pointing at the strongest expansion in nearly 2 years. Expected interest rate cuts from major banks could temper a soft OPEC decision this week, but they may not be enough to send oil prices on a sustained bullish journey unless global growth expectations improve alongside a softer monetary policy outlook from major central banks.

In India, the Nifty 50 jumped to a fresh record, and the rupee rallied as exit polls for the Indian election hinted at a clear-cut victory for PM Modi's party. In separate news, S&P upgraded its outlook for India from stable to positive, laying the foundation for a higher credit rating for the rising EM giant. This upgrade could lower borrowing costs for the country and further support its economic rise.

The combination of Friday's soft US inflation data, OPEC's hint on softer supply policy, the Chinese PMI figure and the reaction to the Indian election results paint the market in green this Monday.

The central bank mosaic

The core PCE data showed on Friday that inflation in the US met the expectation of 0.2% monthly advance in April – the smallest advance of the year, and personal spending grew last than expected. The combination of softer-than-expected US growth and spending, combined with a satisfactory inflation read gave some relief to the market on Friday.

As a result, the week ended on a more dovish note compared to when it started. The US 2-year yield slipped below the 4.90% level after having tested the 5% mark earlier in the week, the 10-year yield eased below 4.50%, the S&P500 recovered 0.80% on Friday and closed the week juts 0.5% lower, as Nasdaq managed to close a difficult session near flat and limited losses to around 1.1% for the week.

Hopefully, the surviving chance of a Federal Reserve (Fed) rate cut – or two – could help improve the investor sentiment this week as eyes turn to the Bank of Canada (BoC) and the European Central Banks (ECB) that are preparing to announce their first rate cut this week.

Note that, the ECB has been clear – and probably a bit too clear – on its intention to start cutting the rates in the June meeting. So they can't really back down now; there will probably be a 25bp cut announced this Thursday. But the truth is, Friday's CPI update for the Eurozone wasn't much enchanting for the ECB doves. Consumer prices accelerated from 2.4% to 2.6% in May – higher than 2.5% expected by analysts – and core inflation unexpectedly spiked from 2.7% to 2.9%. The latest CPI update didn't bring much confusion regarding the ECB cut expectations this week, but somehow killed hope regarding a possible, second rate cut in July.

As such, and in the light of the latest developments, the ECB's communication on what it is planning to do next amid signs of quickening inflation will matter more than the cut itself. If the ECB sounds cautious considering the rising upside risks to the price stability – and that's my base case scenario – we could see the euro get some support following a choppy end of May. The pair is trading near the 1.0850 this morning.

To stay updated on all economic events of today, please check out our Economic calendar

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Samantha Luan

Economic

Washington’s sweeping tariff hikes on Chinese imports will have a largely limited impact on domestic manufacturers, experts told Caixin, as many have moved production overseas and because similar moves in the past have already reduced Chinese exports to low levels.

On May 14, the Biden administration announced tariff hikes on $18 billion worth of Chinese imports across 14 categories including electric vehicles (EVs), semiconductors, lithium-ion batteries and solar cells. Nine of those, including a fourfold rise on EVs to 100%, are proposed to be implemented on Aug. 1.

The move is part of a broader strategy said to prevent Chinese manufacturers from undercutting their U.S. competitors and threatening American jobs. U.S. President Joe Biden hopes the move will help him win more votes from blue-collar workers and manufacturers, especially in swing states such as Pennsylvania, as he aims to defeat his rival and predecessor Donald Trump in November’s election, said Liu Tianyi, CEO of North American policy consulting firm Policy Nexus.

Compared with the last round of tariff hikes, the overall impact of the latest round on the world’s two largest economies will be limited due to the smaller number of industries and products affected, several analysts told Caixin. Why Biden’s Tariffs Increases Won’t Cause China Much More Pain_1

Why Biden’s Tariffs Increases Won’t Cause China Much More Pain_1

The targeted products account for only 4.2% of total U.S. imports from China and less than 1% of China’s total exports, Nomura Holdings Inc. analysts said in a May 15 report.

They also predicted that the new tariffs will have a limited short-term impact on Chinese exporters, but warned that the possibility of other regions imposing similar trade restrictions was more of a worry.

After Biden’s move, Canada is examining whether it needs to raise tariffs on Chinese-made EVs, Trade Minister Mary Ng said. Facing pressure from Washington, the Mexican government is also considering tariffs of 5% to 50% on imports from China and other countries lacking trade agreements with Mexico, an international trade expert told Caixin.

The EU is still conducting an anti-subsidy investigation into EV imports from China and could impose new tariffs as early as July.

Compared with the incremental hikes, analysts are calling for more attention to be paid to the cumulative impact of trade barriers. Brian Coulton, chief economist at Fitch Ratings Inc., told Caixin that the U.S. will likely continue to increase tariffs on China in the future, regardless of who wins the November election.

Lithium-ion EV batteries

While the tariff hike on lithium-ion EV batteries and battery parts, which include non-lithium-ion batteries such as lead-acid ones — from 7.5% to 25% — is not the biggest, analysts told Caixin that they expect Chinese manufacturers of these products to be hit the hardest.

China accounted for 71.5% of all U.S. lithium-ion battery imports by value in the first quarter of 2024, data from S&P Global Market Intelligence showed.

Why Biden’s Tariffs Increases Won’t Cause China Much More Pain_2

Analysts expect the hike to have a further impact on Chinese exporters of EV lithium-ion batteries, which already face headwinds from U.S. subsidy policies in place. This could give their Japanese and South Korean rivals a greater edge in the U.S., they said.

But the move could benefit Chinese battery-makers that have built or are building plants in the U.S. — including the battery arm of Envision Group Inc. and Gotion High-tech Co. Ltd. , a person from a leading Chinese battery company told Caixin.

In March, Japan-based battery-maker ASEC Group Ltd., in which Envision holds a roughly 80% stake, announced plans to build a second EV battery manufacturing facility adjacent to the first building that it broke ground on in June 2023 in South Carolina. The first and second plants are scheduled to be up and running by 2026 and 2027, respectively.

In late December, Gotion said its first U.S.-made battery pack had rolled off the assembly line at its plant in Fremont, California.

Medical devices and gear

In the first three months of this year, China made up nearly 20% of U.S. imports of medical devices by value, according to S&P data.

However, the impact on Chinese companies is likely to be limited. Many manufacturers of medical devices, a category that includes gear like face masks, have shifted to other industries after demand plummeted with the end of the Covid-19 pandemic.

“The industry is currently in a major depression and [we] cannot survive,” said one manufacturer who shifted from producing protective clothing to sanitary wipes.

Steel and aluminum

Tariffs of up to 25% on certain steel and aluminum products won’t have much of an impact on their future exports, as previously imposed tariff hikes by Washington that began in 2018 have already pushed down exports to the U.S. to low levels.

China accounted for 13.5% of U.S. iron, steel and aluminum imports by value in the first quarter, S&P data showed.

In particular, the tariff increase will result in stacked rates of more than 100% for some aluminum products, high enough that it will no longer be profitable to export them to the U.S., industry insiders said. Others warned of the impact on private and smaller firms, which supply the U.S. with the most Chinese-made aluminum products.

Given China’s competitive advantage in the production of general-purpose aluminum products, the increased tariffs will also lead to higher associated raw material costs, which would ultimately be borne by U.S. consumers, Yuan Yuan, a senior aluminum analyst at industry consultancy Beijing Antaike Information Co. Ltd. told Caixin.

Chipmakers

Similarly, the U.S.’ decision to double tariffs on semiconductors to 50% won’t have a serious impact on domestic producers, which have already reduced supplies to the U.S. since the Trump administration imposed tariffs on them in July 2018.

Only 3.1% of processors, including semiconductors, imported into the U.S. by value in the first quarter came from China, S&P data showed.

Chinese chipmakers entering the U.S. market won’t be much affected by the new tariffs, as they have adopted a tactic of integrating most chips into finished products like electronics and home appliances and before exporting them, thus circumventing the levies, a chip industry analyst told Caixin.

U.S. and South Korean chipmakers are actually more affected, according to the Semiconductor Industry Association. Because many of them complete their chip production on the Chinese mainland to reduce costs, they have been the biggest payers of U.S. tariffs since 2018, the association said.

Increasing tariffs only reduces the volume of Chinese chips exported directly to the U.S., so the hikes will not free the U.S. from its dependence on Chinese products, the chip industry analyst pointed out.

U.S. imports of semiconductors from the Chinese mainland fell 26% from July 2018 to August 2022, while import volumes from the rest of the world grew only 5% during the period, according to a 2022 report from the Peterson Institute for International Economics.

One reason for this difference was that other chipmakers were not able to step in and replace Chinese chipmakers that produce specific types of semiconductors, the report said. The mainland’s foundries specialize in high-volume “legacy” chips — defined as those made on process nodes of 28 nanometers or larger. However, overseas chipmakers typically produce more advanced, higher-margin semiconductors.

“Given that legacy chips are not particularly profitable to manufacture, and if the United States does not want to import them from China, then who will produce them? That is the question facing America’s industrial consumers — like the auto sector — of large volumes of legacy chips,” the report said.

Xu Daquan, president of German auto parts supplier Bosch China Investment Ltd., told Caixin that with the development of EVs, the lack of investment in legacy chip production by major global suppliers over the past few years could lead to a repeat of the worldwide chip shortage seen during the pandemic. But that in turn could create opportunities for Chinese chipmakers, which have been rapidly expanding capacity for producing these low-margin chips, he said.

Electric vehicles

Even the impending new tariffs of up to 100% on China-made EVs will have little impact on their exports, as trade restrictions already in place have led manufacturers to shift the focus of their expansions away from the U.S. market.

China accounted for only 0.3% of the U.S. imports of EVs and plug-in hybrids by value in the first three months of 2024, S&P data showed. The Center for Strategic and International Studies (CSIS) said China only exported 12,362 EVs to the U.S. in 2023, of which about 10,000 were from a single firm, Polestar, which has Swedish origins and is controlled by Zhejiang Geely Holding Group Co. Ltd.

Instead, American EV-maker Tesla Inc. is expected to take a bigger hit, as data from the Ministry of Commerce shows the company accounted for more than one-third of China’s new-energy vehicle exports last year.

Tesla CEO Elon Musk has spoken out against the U.S. action. “Neither Tesla nor I asked for these tariffs,” he told a tech conference in Paris via video link. “Tesla competes quite well in the market in China with no tariffs and no deferential support. I’m in favor of no tariffs,” he was quoted by foreign media as saying.

Tesla cars made in China are not able to receive subsidies from the U.S. government under the Inflation Reduction Act, so most of its models are exported to other countries, said Sun Xiaohong, secretary-general of the auto branch of the China Chamber of Commerce for Import and Export of Machinery and Electronic Products.

Solar cells and panels

Nomura’s analysts expect the new 50% tariffs to have a limited near-term impact on Chinese-made solar panels, as they estimate that the U.S. accounts for only 0.2% of China’s total exports of these products.

That’s because Chinese solar-panel makers have shifted their supply chains to several Southeast Asian countries, such as Malaysia, Cambodia, Thailand and Vietnam, to circumvent existing U.S. restrictions, the analysts said. The four countries have been granted a two-year tariff exemption that runs out on Thursday.

Tan Youru, a photovoltaic (PV) analyst at BloombergNEF, agreed that direct exports of Chinese-produced PV cells and modules to the U.S. have been almost negligible in recent years.

The Chinese producers’ tariff evasion tactics have raised complaints from their U.S. competitors, with some petitioning the Department of Commerce in April to impose new duties on imports from these Southeast Asian countries.

In response to the petition, the department announced on May 15 that it is investigating whether imports of crystalline silicon PV cells from the four countries have been dumped or subsidized. Based on the findings of the investigation, the department and the International Trade Commission could issue countervailing or antidumping duties by February.

On May 16, the White House said the tariff exemptions for the four countries “will end as scheduled,” and Chinese manufacturers have been found to be circumventing duties by exporting solar modules to the U.S. from the countries.

Tan expects the cost of exporting PV modules to the U.S. to surge if these tariffs are fully implemented. But he also warned that this would push up the price of these products in the U.S. market, harming local PV plant developers and increasing the cost of building solar projects and capacity in the country.

Other lithium-ion batteries

The new 25% tariff on lithium-ion batteries that aren’t used in EVs, such as those primarily used for energy storage, looks like it will be implemented on Jan. 1, 2026, which means there will be no impact on their exports in the short term.

But the person from a leading Chinese battery company told Caixin that 2026 could be a watershed year, when the cost advantage of Chinese battery storage exporters over their U.S. counterparts could be eroded to a concerning degree, as the former are subject to higher tariffs while the latter could benefit from an up to 40% investment tax credit offered by the government under the provisions of the Inflation Reduction Act.

Natural graphite, rare earths

Tariff increases from zero to 25% on natural graphite and permanent magnets, including rare earth magnets, have been proposed to take effect in January 2026. Graphite and rare earths are indispensable to the EV supply chain.

The U.S. is delaying the rollout of the new tariffs because it needs time to reduce its relatively high dependence on Chinese imports of graphite and rare earths, industry sources told Caixin.

A rare earth industry veteran said the current U.S. rare earth industry is unable to compete with China’s in terms of cost, processing experience and supporting capabilities.

Gracelin Baskaran, director of the Project on Critical Minerals Security at the CSIS, also said that “the United States needs a significant amount of graphite for domestic electric vehicle production,” but “there’s simply an insufficient supply of non-Chinese graphite in the world.”

While the short- to medium-term impact remains unclear, Baskaran warned in a May 14 analysis that if EVs ultimately become unaffordable, it will be the U.S. auto industry that suffers.

Source：Caixin

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Warren Takunda

Economic

Forex

Below are the most important global events likely to affect FX and bond markets in the coming week starting June 3.

U.S. jobs data will be keenly awaited as investors remain uncertain whether the U.S. economy is slowing sufficiently to allow the Federal Reserve to cut interest rates in the coming months, while the European Central Bank is widely expected to begin lowering rates. The Bank of Canada could also cut rates.

Australia economic growth figures, a stream of PMI data and a central bank decision from India are the main events in Asia, with the latter coming as an election in the world's largest democracy draws to a close.

Inflation prints will gauge progress in central banks' battle with price pressures, with the likes of South Korea and Thailand reporting data for May. China watchers will look at more PMI gauges and trade figures.

U.S.

Focus will turn to evidence on how the U.S. jobs market has fared during May as uncertainty remains regarding when the Federal Reserve will start cutting interest rates.

Friday's non-farm payrolls report will be scruntinized closely. Some clues on job market developments will be provided ahead of that, in the form of JOLTs job openings figures on Tuesday, ADP private payrolls data on Wednesday and weekly jobless claims on Thursday.

"We expect the employment updates to continue to show a slight cooling in U.S. labor market conditions, but from a tight starting point," said Investec analyst Ellie Henderson in a note.

The latest Federal Reserve meeting minutes concluded that it would need to hold interest rates at their current level for longer than previously anticipated after inflation failed to fall in line with expectations, with some officials even open to raising rates if inflation picked up again.

After that, however, weaker revised U.S. first-quarter gross domestic product data reignited prospects that the Fed could start cutting rates as early as September, though that would require further evidence that the economy is slowing.

Other key data include ISM manufacturing PMI figures for May on Monday and ISM data on services on Wednesday, while U.S. factory orders for April are released on Tuesday and April trade figures on Thursday.

"We expect in any case choppy markets over the summer, as the Fed needs a couple of months of weaker data before softening its stance," analysts at SEB Research said in a note.

CANADA

The Bank of Canada will make a rate decision on Wednesday, where an interest-rate cut to 4.75% from 5% is possible but by no means certain, with some analysts expecting that the central bank will wait until July.

"The case can be made for the first BOC rate cut to come either in June or July," Citi analysts said in a note.

"With inconclusive signals from both activity and inflation data, we think the BOC will continue to err on the more hawkish side, waiting for a few more months of sub-3% core inflation to conclude there has been sustained easing in inflation before cutting rates in July."

Analysts at Bank of America Securities expect the central bank to cut interest rates in June "given that core inflation keeps falling and the labor market is softening," though acknowledge a risk that it could wait until July.

They believe the BOC can cut rates even if the U.S. Fed takes longer to cut. Desjardins Securities, however, has scaled back its outlook for rate cuts in Canada due to a weaker Canadian dollar.

Canadian jobs data for May on Friday will also be closely watched, as well as purchasing managers' indexes during the week.

LATIN AMERICA

Brazil releases first-quarter gross domestic product data on Tuesday, while Mexico releases inflation data for May on Friday.

EUROZONE

The European Central Bank will outline a rate decision on Thursday, and is widely expected to make a first 25 basis-point cut to interest rates as inflation is on a declining trend and following strong hints from policymakers, taking the deposit rate down to 3.75% and the refinancing rate to 4.25%.

"The updated inflation forecasts should validate the decision by showing inflation sustainably at target by mid 2025," Barclays analysts said in a note.

A rate cut has been well flagged and attention is expected to focus on any clues about how far and how quickly interest rates will fall after that, particularly as data recently showed eurozone inflation starting to pick up again in May as the economy recovers and wage inflation remains relatively elevated.

May's inflation reading is a warning that next week might not be the start of a traditional cutting cycle, said ING economist Bert Colijn in a note.

"While many forward-looking indicators remain benign, a hot labor market, continued supply-chain disturbances, and a recovery of purchasing power will make for an interesting debate at the ECB," he said.

Katharine Neiss, chief European economist at PGIM Fixed Income, said "data are still murky as to whether domestically generated inflation has returned to a level that leaves headline inflation sustainably at 2%." Rate cuts look imminent but are likely to be "limited and gradual thereafter."

UBS economists expect June's rate cut to be followed by 25 basis-point rate cuts each quarter this year and next year. Barclays similarly expect rate cuts to come once a quarter.

"We judge that the majority of the Governing Council members think of quarterly rate cuts as the natural path of easing at the current stage given elevated uncertainty," Barclays analysts said.

Other data due include final eurozone purchasing managers' data for manufacturing on Monday and services on Wednesday, as well as figures from individual countries. Eurozone producer prices data for April are released on Wednesday, followed by detailed eurozone first-quarter gross domestic product data on Friday.

German unemployment data for May are due on Tuesday, followed by manufacturing orders data for April on Thursday and April industrial production on Friday. In France, industrial production data are released on Wednesday and trade figures on Friday, both for April.

Austria will sell bonds on Tuesday, while Spain and France will conduct auctions on Thursday. Germany will hold two auctions, tapping June 2026-dated Treasury notes, or Schatz, on Tuesday and November 2030-dated Bunds on Wednesday.

European parliamentary elections begin on Thursday, with results due late on Sunday. These are expected to result in an increase in votes for far-right parties.

U.K.

U.K. final purchasing managers' data for manufacturing are due on Monday and for services on Wednesday.

The British Retail Consortium's retail sales monitor is released overnight on Tuesday and will be watched to see whether particularly weak figures in April have continued into May.

"May's BRC figures will help to drive perceptions as to the relative likelihood that April's report was a one-off or marked the start of a new downturn in consumer activity," said Investec economist Philip Shaw in a note.

Real U.K. household disposable income growth has been strong in recent quarters and the GfK consumer confidence index has been recovering, suggesting that retail sales are "currently on an upward trend," he said.

The U.K. is due to auction an October 2063 gilt on Tuesday and a March 2027 gilt on Wednesday.

SWITZERLAND

Swiss inflation data for May are due on Tuesday, which will be closely watched amid uncertainty over whether or not the Swiss National Bank will cut interest rates again at its next meeting on June 20.

Rate-cut prospects dimmed after SNB President Thomas Jordan recently warned there was a risk of higher inflation, stemming particularly from a weak Swiss franc.

"His headlines on the risk of higher inflation have poured some cold water on views that the Swiss National Bank will cut rates again next month," said ING's global head of markets Chris Turner in a note.

SCANDINAVIA

Sweden first-quarter balance of payments data are due on Wednesday.

Denmark is lining up for a bond auction on Tuesday, followed by Norway on Wednesday.

AUSTRALIA

In Australia, attention will be on first-quarter national accounts data on Wednesday, which are expected to show that the economy remains on life support.

Weak spending and falling construction levels are expected to drag growth toward zero in the quarter, compared with growth in the prior quarter of just 0.2%.

If the economy fails to register much of a pulse, the Reserve Bank of Australia could shelve any thoughts it may have of raising interest rates further.

A contraction in the economy would be additionally concerning and feed fears of a coming recession.

Still, the RBA's board is faced with worrying signals that inflation is again rising, despite an economy that's barely growing.

At the start of the week, the Fair Work Commission will outline a rise in the base wage for workers. If the FWC proves more generous than what most economists are expecting, the case for the RBA to raise interest rates further will be strengthened.

The central bank's deputy governor, Andrew Hauser, will speak on Friday to business economists. Hauser is a member of the RBA board and still a relatively unknown quantity for financial markets, as he came to the job just a few months ago.

Any reflections on stubborn inflation risks, sluggish GDP growth or the base wage decision will be watched by bond traders, who are currently pricing in a strong chance of a further rise in interest rates before the end of the year.

ASIA PMIs & CPIs

Monday is PMI day for Asia, taking the pulse of manufacturing activity in China, Japan, South Korea, Taiwan, Singapore and other economies in the region.

S&P Global's April data showed that Asia's manufacturing recovery remains patchy, with output growth cooling and employment dropping in a sign of fragile confidence among manufacturers.

Source: Morningstar

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Danske Bank

Economic

In focus today

Today in the US, we get the May ISM Manufacturing index at 16.00 CET. Its PMI-counterpart released earlier shifted modestly higher, but the leading new orders indices still pointed towards muted growth.

In Sweden, we get the manufacturing PMI for May at 08.30 CET. It is set to continue higher from last month's 51.4, as suggested by the order/inventory-spread reaching its highest level since mid-2021. Notably, it was primarily export orders that were strong in April, with the sub-index rising from 49.9 to 54.6. Domestic orders are also on a rising trend, but the sub-index remained below the 50-mark coming in at 49.4 in April.

For the rest of the week focus will turn especially to the euro area and the ECB, where we expect the ECB to cut interest rates by 25bp on Thursday, thus lowering the deposit facility rate to 3.75%. In the US focus will be on the job market as we get the JOLTs for April on Tuesday, ADP report on Wednesday, and NFP report on Friday. On Wednesday we also get the ISM non-manufacturing figures. The Bank of Canada as well as the Polish central bank will also both convene Wednesday and announce their rate decisions.

Economic and market news

What happened overnight

In China, the Caixin manufacturing PMI for May was released overnight. The figure printed at 51.7 (prior: 51.4), thus beating the expected 51.5, and remaining in expansionary territory (above the 50.0 mark), as it has been since November last year. In fact, the figure has not printed as high since June 2022.

Interestingly, this is somewhat the opposite of what was seen last week with the NBS manufacturing PMI, which unexpectedly dropped to 49.5 from 50.4, thus falling into contractionary territory. The Caixin figure has generally been stronger than its official NBS counterpart, and the two figures do not always follow one another on a monthly basis.

There was also Manufacturing PMI data from other Asian countries such as South Korea and Japan. Here the data also showed an improved outlook for the Asian manufacturing sector.

The Asian equity markets responded positively to the data with gains across the region. The Indian equity market was up on the back of the widely anticipated victory for PM Modi at the general election which concluded yesterday (see more below).

There were modest gains in the Asian bond markets this morning with a small decline in bond yields.

Oil is flat this morning with Brent trading around USD81/bbl. This comes after OPEC+ announced an extension and phasing-out plan of their voluntary production cuts yesterday. Whereas the extension of the cuts was expected by most market participants, the phasing-out scheme was news. However, commenting on the plan after the meeting, Saudi Arabia's oil minister said that they would maintain their ‘cautious and pre-emptive approach', which could entail ‘pausing or even reversing the phase-out of the cuts' if deemed necessary.

What happened on Friday and over the weekend

In the euro area, HICP headline for May inflation came in slightly higher than expected at 2.6% y/y (prior: 2.4%), whereas consensus expected 2.5%. The higher-than-expected inflation was in line with the signals from the country data released before the aggregate print. Core inflation also printed higher than expected at 2.9% y/y (prior: 2.7%). Consensus expected 2.7% y/y. Service inflation once again came in very strong rising to 4.1% y/y from 3.7% y/y. The monthly increase in seasonally adjusted service inflation was around 0.5% m/m for the second consecutive month.

Overall, the inflation print for May confirmed the picture we have seen over the past months of a strong underlying pressure on inflation from service prices. The sticky services inflation is a key reason for the ECB to await more data before embarking on a series of rate cuts not counting the all-but-promised cut on Thursday 6 June, which we see as a roll-back of the ‘insurance hike' from last September.

Going forward, we expect that euro area inflation will hover around 2.5% over the next couple of months due to rising energy inflation and sticky services inflation. After summer, we then expect headline inflation to hit the 2% target in some months due to energy base effects, but the sticky underlying inflation means that we expect inflation only to sustainably converge to the 2% target during 2025.

In the US, the Fed's favourite price gauge, the PCE price index, showed headline inflation for April standing at 2.7% y/y and 0.3% m/m both unchanged from the month prior and in line with expectations. As for core inflation, it stood at 2.8% y/y and 0.2% m/m. Whereas the annual rate was unchanged from the month prior and in line with expectations, the monthly rate came in lower than the 0.3% m/m consensus had expected according to a poll by Reuters. However, on a double-digit note, the measure stood at 0.25% m/m, hence it came very close to consensus. With the PCE inflation figures we also received April figures for the real personal consumption volume which stood at -0.1% m/m, down from the revised March figure of 0.4% m/m.

In India, prime minister Modi's party looked set to win big in the Indian general election according to exit polls, pointing to Modi securing a third five-year term as prime minister. The National Democratic Alliance led by prime minister Modi's party, the BJP, was projected to improve on their current absolute majority from 2019 of 353 seats by securing between 353 and 401 seats out of the total 543 seats in parliament.

Modi's party alone accounted for 301 in the alliance after the 2019 election, and 3 out of 5 exit polls predicted the prime minister's party would improve on this. Despite somewhat ‘patchy' track records of polling agencies in India, often claimed to be due to the vast size and large diversity of the country, prime minister Modi went on X (previously Twitter) saying that he with “confidence [could say] that the people of India have voted in record numbers to re-elect the NDA government”. Results of the election will be expected on 4 June.

In France, the S&P rating agency downgraded France to an AA- credit rating from AA. The S&P said in their announcement the downgrade was due to higher projected debt-to-GDP ratios than previously expected, as they now forecast a ratio of 112% in 2027 up from 109% in 2023. Likewise, they also foresee a higher budgetary deficit in 2027 of 3%, after a higher-than-expected deficit in 2023 of 5.5%.

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Data Interpretation

On May 31, the US Bureau of Economic Analysis (BEA) released the latest PCE price index report:

April core PCE price index YoY: 2.8% (expected: 2.8%, March: 2.8%)

April core PCE price index MoM: 0.2% (expected: 0.3%, March: 0.3%)

April PCE price index YoY: 2.7% (expected: 2.7%, March: 2.7%)

April PCE price index MoM: 0.3% (expected: 0.3%, March: 0.3%)

The $39.1 billion increase in current-dollar PCE in April reflected an increase of $49.1 billion in spending for services that was partly offset by a $10.0 billion decrease in spending for goods. Within services, the largest contributors to the increase were housing and utilities (led by housing), health care, and financial services and insurance. Within goods, the largest contributors to the decrease were spending on recreational goods and vehicles.

From the preceding month, the PCE price index for April increased 0.3 percent. Prices for goods increased 0.2 percent, and prices for services increased 0.3 percent. Food prices decreased 0.2 percent and energy prices increased 1.2 percent. Excluding food and energy, the PCE price index increased 0.2 percent.

From the same month one year ago, the PCE price index for April increased 2.7 percent. Prices for goods increased 0.1 percent and prices for services increased 3.9 percent. Food prices increased 1.3 percent and energy prices increased 3.0 percent. Excluding food and energy, the PCE price index increased 2.8 percent from one year ago.

When the year-over-year PCE value is precise to several decimal places, the actual value for the April core PCE is 2.7537%, marking the lowest level since April 2021.

While the PCE has cooled, it remains insufficient to boost the Fed's rate cut expectations. The six-month annualized rate for April core PCE stands at 3.18%, the highest since July last year. The three-month annualized rate is 3.46%, which, although lower than the previous two months, is still higher than any time in the second half of 2023.

Following the release of the PCE price index, the probability of the Fed holding rates steady in June is close to 100%, and the likelihood of a rate cut in September is less than 50%, even lower than before the data was released. This underscores the point that the current PCE inflation data has not altered market expectations for Fed rate cuts.

US April PCE Report

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Stocks

London stocks rose in early trade on Monday, taking their cue from a positive session in Asia, as investors eyed the latest UK manufacturing reading.

At 0845 BST, the FTSE 100 was up 0.3% at 8,297.08.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: "Positive vibes are powering the FTSE 100 higher, as fresh hopes swirl that interest rate cuts are not as far off as feared.

"Strong trading in Asia has laid the groundwork for an upbeat session, as investors take took cues from gains on Wall Street on Friday. Signs of weaker consumer spending patterns have lifted expectations that upwards price pressures could ease off and that the Fed may be less inclined to keep interest rates higher for longer.

"With lower borrowing costs spied on the horizon, it may start to give a little lift to oil prices, which are languishing around three-month lows. Brent Crude is trading around $81 dollars a barrel despite an agreement by OPEC+ to extend output cuts into 2025."

On the macro calendar, all eyes will be on the S&P Global CIPS manufacturing PMI for May, which is due out at 0930 BST.

On the corporate front, investors were mulling reports that online fashion giant Shein was edging closer to a London stock market flotation.

It was understood that Shein - which was founded in China and is headquartered in Singapore - is planning to file a confidential prospectus with regulators this month.

Elsewhere, JD Sports jumped to the top of the FTSE 100, having slumped on Friday after full-year results.

St James’s Place rallied after an upgrade to ‘overweight’ from ‘neutral’ at JPMorgan Cazenove, which cited an attractive valuation and reducing uncertainty.

"Whilst we believe that negative news is largely behind us, this has not been reflected in valuation, with St James’s Place trading at 7x FY25e," it said. "We expect that sentiment will improve given the resilience in gross flows, and we see upside to consensus net flow estimates."

Quilter was also in the black as JPM lifted the shares to ‘overweight’ from ‘neutral’, saying it was "looking beyond the redress".

Hipgnosis traded up after it agreed the terms of an improved cash offer from US private equity firm Blackstone, at $1.31 a share, up from $1.30.

Streeter said: "Although there may be a little disappointment that another suitor had not charged in with a much higher offer following the bidding war, the deal still marks a turn up for the books for investors. It follows a volatile run which saw shares sink to a low after the value of the fund’s music portfolio was slashed by more than 25%."

On the downside, GSK tumbled as the pharma giant said it would be appealing against a US court decision allowing jury trials in cases brought by cancer sufferers claiming its heartburn drug caused their condition.

A judge in the Delaware State Court ruled that scientific experts would be able to testify there is a link between the plaintiffs' illnesses and their exposure to probable human carcinogens, through the Zantac drug. GSK and other companies who marketed Zantac, including Boehringer Ingelheim and Sanofi dispute the claims.

Baltic Classifieds lost ground after Antler, which is controlled by funds advised by Apax, sold 40m shares in a placing.

Source: Sharecast

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[US] April PCE: Core PCE Hits Three-Year Low but Fails to Boost Rate Cut Expectations

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