As US Hikes China Tariffs, Imports Soar from China-Reliant Vietnam

Economic

Summary:

US tariffs on China push imports from Vietnam to soar. Vietnam relies on China for parts to assemble US-bound goods, raising concerns of circumventing tariffs and human rights violations in Xinjiang.

As the United States intensifies efforts to reduce trade with China by hiking tariffs, it has greatly boosted imports from Vietnam, which relies on Chinese input for much of its exports, data show.

The surge in the China-Vietnam-U.S. trade has vastly widened trade imbalances, with the Southeast Asian country last year posting a surplus with Washington close to $105 billion - 2.5 times bigger than in 2018 when the Trump administration first put heavy tariffs on Chinese goods.

Vietnam now has the fourth-highest trade surplus with the United States, lower only than China, Mexico and the European Union.

The increasingly symbiotic relationship emerges from trade, customs and investment data reviewed by Reuters from the United Nations, the U.S., Vietnam and China, and is confirmed by preliminary estimates from the World Bank and half a dozen economists and supply chains experts.

It shows that Vietnam's export boom has been fuelled by imports from neighbouring China, with inflows from China almost exactly matching the value and swings of exports to the United States in recent years.

In preliminary estimates shared with Reuters, the World Bank reckons a 96% correlation between the two flows, up from 84% before Donald Trump's presidency.

As US Hikes China Tariffs, Imports Soar from China-Reliant Vietnam _1

"The surge in Chinese imports in Vietnam coinciding with the increase in Vietnamese exports to the U.S. may be seen by the U.S. as Chinese firms using Vietnam to skirt the additional tariffs imposed on their goods," said Darren Tay, lead economist at research firm BMI, noting that could lead to tariffs against Vietnam after U.S. elections.

The hope is that the printer could help with greener manufacturing, while slashing production times.

The growing trade imbalance comes as Vietnam seeks to obtain market economy status in Washington after President Joe Biden pushed to elevate diplomatic ties with its former foe.

At over $114 billion last year, U.S. imports of goods from Vietnam were more than twice as big as in 2018 when the Sino-American trade war began, which boosted the Southeast Asian nation's appeal among manufacturers and traders who sought to reduce risks linked to China-U.S. tensions.

That surge accounted for more than half the $110-billion drop since 2018 in imports from Beijing, U.S. trade data show.

In key industries such as textiles and electric equipment, "Vietnam captured more than 60% of China's loss," said Nguyen Hung, a specialist in supply chains at RMIT University Vietnam.

As US Hikes China Tariffs, Imports Soar from China-Reliant Vietnam _2

But Chinese input remains crucial, as much of what Vietnam exports to Washington is made of parts and components produced in China, data show.

Imported components accounted in 2022 for about 80% of the value of Vietnam's export of electronics - the U.S.'s main import from Hanoi - according to data from the Asian Development Bank.

One-third of Vietnam's imports come from China, mostly electronics and components, according to Vietnam data which did not provide further detail.

Around 90% of intermediate goods imported by Vietnam's electronics and textile industries in 2020 were subsequently "embodied in exports", the Organisation for Economic Co-operation and Development said in a report, noting that was higher than a decade earlier and far above the average in industrialised countries.

The symbiotic relationship is reflected in latest data: In the first quarter of this year, U.S. imports from Vietnam amounted to $29 billion, while Vietnam's imports from China totalled $30.5 billion, mirroring similarly corresponding flows in past quarters and years.

As US Hikes China Tariffs, Imports Soar from China-Reliant Vietnam _3

As inflation remains high, the White House has remained quiet on Vietnam's large trade surplus, but that may change after the November vote, analysts say.

"A possible scenario is that after elections, whoever wins may change the policy towards Vietnam," said Nguyen Ba Hung, principal economist at ADB's Vietnam mission, noting that would however raise U.S. import costs.

The U.S. Embassy in Hanoi declined to comment on trade imbalances.

Vietnam's foreign and trade ministries did not reply to requests for comment.

China's commerce ministry did not immediately respond to a request for comment.

COTTON AND PANELS

The surge in the China-Vietnam-U.S. trade reflects the rise in investments in the Southeast Asian manufacturing hub, as companies relocate some activities from China.

Many of those manufacturers are Chinese firms that add value in their new factories in Northern Vietnam but still rely heavily on supply chains from their homeland.

But in some cases the trade involves finished products labelled as "Made in Vietnam" despite no value being added in the country, as the U.S. Department of Commerce concluded in an investigation over solar panels last year. A separate probe on aluminium cables and second on allegedly unfairly subsidised solar panels are underway.

Another reason Vietnam is drawing U.S. scrutiny is its exposure to Xinjiang, the Chinese region from where the U.S. bans imports over accusations of human rights violations against minority Uyghurs.

Xinjiang is China's main source of cotton and polysilicon used in solar panels. Both are key for Vietnam's industry, whose exports of cotton apparel and solar panels accounted for about 9% of exports to the U.S. last year.

Vietnam is the country with the highest volume of shipments by value denied entry into the U.S. over Uyghur forced labour risks, according to U.S. customs data.

Vietnam's import of raw cotton from China fell by 11% last year to 214,000 tons, but it was roughly twice as big as in 2018.

China also exported to Vietnam at least $1.5 billion-worth of cotton apparel, up from nearly $1.3 billion in 2022. Meanwhile, U.S. imports of cotton clothes from Vietnam fell by 25% to $5.3 billion last year, according to the data, which may not include all cotton items.

The fall in U.S. imports came as Vietnam last year surpassed China as the main exporter of products covered by the Xinjiang ban, said Hung Nguyen of RMIT.

As US Hikes China Tariffs, Imports Soar from China-Reliant Vietnam _4

Source : Reuters

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Alex

Economic

Commodity

Market Overview

Gold (XAU/USD) rose to $2,397 on Thursday amid a weakening US dollar (USD). However, the uptrend seems to get weaker, and a bearish correction seems imminent. The recent Consumer Price Index (CPI) report indicated a slowdown in US inflation for April, increasing market expectations of Federal Reserve (Fed) rate cuts this year. Lower interest rates can benefit gold by reducing the cost of holding the metal.

US Economic Data Influence

Gold traders will focus on US Building Permits, Housing Starts, Initial Jobless Claims, the Philly Fed Manufacturing Index, and Industrial Production on Thursday.

Additionally, speeches from Fed officials Barr, Harker, Mester, and Bostic are anticipated. Despite the potential for hawkish commentary boosting the USD, which could cap gold’s upside, the overall sentiment remains supportive for gold.

Inflation and Retail Sales Data

In April, the US Consumer Price Index (CPI) increased by 3.4% year-over-year (YoY), down from 3.5% in March. Monthly CPI rose by 0.3%, below the expected 0.4%.

Core CPI, excluding food and energy, increased by 3.6% YoY, easing from 3.8% in March. Retail sales were flat in April, following a 0.6% rise in March, underperforming the forecasted 0.4%.

Central Banks Boost Gold Demand

According to the World Gold Council’s Q1 2024 report, global gold demand increased by 3% to 1,238 tonnes, the strongest first quarter since 2016. Central banks, including the People’s Bank of China, are increasing gold holdings while reducing exposure to US Treasury securities.

Julius Baer noted that this shift, driven by political motivations, supports structurally high gold prices without necessarily driving them higher.

Gold Prices Forecast

Gold (XAU) Daily Forecast: Weaker DXY Pushes XAU to $2392; Correction Ahead?_1

Gold (XAU/USD) is trading at $2392.795, up 0.13%. Key price levels to watch include a pivot point at $2383.79. Immediate resistance levels are at $2398.70, $2414.06, and $2431.46. Immediate support levels are at $2372.33, $2354.71, and $2334.83.

Technical indicators show mixed signals. The 50-day Exponential Moving Average (EMA) is at $2348.56, and the 200-day EMA is at $2307.93, both suggesting a bullish trend above these levels. However, a double top pattern around the $2398 level indicates potential bearish pressure.

In conclusion, gold’s outlook is bearish below $2398. A break above this level could boost bullish momentum, while a break below the pivot point at $2383.79 may drive a bearish correction towards $2373.

Source: FX Empire

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Owen Li

Economic

Political

Markets have so far taken a relaxed view on such threats, leaving them exposed to sudden shifts in sentiment in the event of shocks, the central bank said in its bi-annual Financial Stability Review, published Thursday. It also cautioned that European Union and national votes increase uncertainty about the trajectory for public finances.

“The scope for adverse economic and financial surprises is elevated, and the risk outlook for euro-area financial stability remains fragile accordingly,” ECB Vice President Luis de Guindos said in the report. “Sentiment can change rapidly, not least given the geopolitical environment and pricing-for-perfection which creates the potential for large market reactions to disappointing news.”

Global dangers have only increased since Russia invaded Ukraine on the euro zone's border in 2022, with the Middle East representing the latest hot spot. Elections — including Donald Trump's bid to return to the White House in November and European Parliament polls next month — add yet more uncertainty more to the mix.

Despite that backdrop, the chances of a soft landing in Europe have risen, as inflation eases toward 2% without a deep recession or a spike in unemployment. The European Commission on Wednesday forecast that price growth will moderate more quickly than previously anticipated, while prospects for an economic recovery will remain intact.

That means overall threats to financial stability have receded compared with the last report six months ago, the ECB said. It added, though, that question marks over government policies and economic conditions remains high.

That's reflected in views about the path for ECB interest rates. Officials haven't dared to commit to much beyond a highly probable first cut in June, citing the need to remain dependent on incoming data.

“Volatility in financial markets could increase significantly, should inflation deviate substantially from consensus expectations, if economic growth weakens or if geopolitical conflicts escalate further,” the ECB cautioned.

Another concern is public finances. According to the commission's forecast, budget deficits that widened significantly due to pandemic and energy support aren't narrowing as quickly as previously thought.

While currently enjoying relatively benign conditions on financial markets, high debt levels are leaving governments vulnerable to external shocks if they require an increase in spending, according to the ECB. The euro zone's deep-seated economic issues, meanwhile, complicate tackling such burdens.

“Structural headwinds to potential growth, from weak productivity for instance, are raising concerns about longer-term debt sustainability, making sovereign finances more vulnerable to adverse shocks and elevating risks to the financial-stability outlook,” the ECB said.

It also warned that tight financial conditions are testing households and corporates that have so far stayed resilient to rising borrowing costs.

“This shouldn't provide grounds for complacency, as pockets of vulnerability remain,” Guindos said. The ECB is in particular concerned about lower-income households and firms with lower credit ratings.

These challenges are compounded by recent turbulence in the real estate sector, the ECB said, though it expects the downturn to “remain orderly.”

On a more positive note, the ECB said that even if corporate insolvencies have increased to above pre-pandemic levels in several countries, “defaults and non-performing loan rates have remained relatively low.”

Source: Bloomberg

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Thomas

Economic

Forex

Markets

US CPI inflation contrasted with the PPI shocker (+0.5% M/M) from Tuesday. Price pressures eased slightly in April (0.3% M/M for headline and core; down from 0.4% M/M for both in March) but the CPI report was in line with expectations. Flanked by disappointing US retail sales (flat M/M) and a weaker May Empire Manufacturing business survey (-15.6 from -14.3), it triggered an outsized relief rally on markets.

US Treasuries were already well bid in the run up to the data and extended gains afterwards. US yields eventually dropped 8.6 bps (30-yr) to 10.9 bps (5-yr) across the curve. From a technical point of view, they fell back to or even below the levels from before the previous (March) inflation report which triggered the opposite market reaction. We consider these levels as first important support which should be able to hold into this week's close.

For the US 2-yr and 10-yr yield, these levels are respectively 4.7% and 4.35%. The loss of interest rate support put the dollar in the defensive with EUR/USD currently testing a similar reference at 1.0885. US stock markets cheered at the outcome, rallying 0.9% to 1.4% with new all-time highs for the Dow Jones, S&P 500 and Nasdaq. While we don't expect yesterday's data to alter current Fed thinking – on hold for longer -, they did influence US money markets. 25 bps rate cuts are now discounted for the September and December meetings with January (50%) coming into play for a third move.

Today's eco calendar is again well-filled in the US with weekly jobless claims, housing data (starts & permits), the Philly Fed business outlook, industrial production figures and import/export prices. Fed speakers include Goolsbee, Barkin, Harker, Mester and Bostic. We don't expect them to bring a July rate cut back into play, suggesting a slowing in this week's trends.

Yesterday's US Treasury rally had global repercussions with European and UK bond yields facing more or less similar losses. An avalanche of ECB members hits the wires today as well, but they won't alter their common message. A June rate cut is a done deal, but the central bank won't pre-commit to a specific rate path in H2 2024. Next week's Q1 wage data could already be a first complicating factor in embarking on a genuine cutting cycle.

News & Views

Japanese GDP growth contracted by 0.5% Q/Q (-2% Q/Qa) in Q1.The outcome was worse than expected. Making the picture even less compelling, Q4 2023 growth faced a downward revision from 0.4% Q/Qa to 0%. Private consumption declined for a fourth consecutive quarter (-0.7% Q/Q), illustrating the impact of negative real income growth on spending. Private investment fell by 0.8% Q/Q.

Net exports also subtracted a net 0.3 ppts from growth as exports declined more than imports. Some of the factors weighing on growth (earthquake in January, lower production in the automobile sector) might have been temporary in nature, but still the picture looks unconvincing. The price deflator of the series slowed less than expected from 3.9% to 3.6%. Weak data don't make it easier for the BoJ to continue policy normalization. However, in this process the focus will probably be on wage growth with persistent yen weakness also being in play. The Japanese currency this morning extends yesterday's rebound, but this is mainly driven by USD-weakness in the wake of yesterday's data.(USD/JPY 154).

After slightly softer than expected Q1 wage data published yesterday, Australian April jobs data this morning added to evidence that the labour market is cooling. Employment rose a bigger than expected 38.5k, but this didn't suffice to cope with an even more pronounced rise in the labour force. This caused the unemployment rate to rise from 3.9% to 4.1%, matching the ST peak level from January.

The combination of slower wage growth and a higher unemployment rate might give some comfort to the RBA as it still looks for more convincing signs that inflation is heading back to its 2-3% inflation target. Australian yields this morning declined further, reinforcing yesterday's global trend (3-yr: -13 bps). After briefly trading above AUD/USD 0.67 this morning, the Aussie dollar reversed initial gains (currently 0.668). Still the picture turned more constructive after yesterday's break above the 0.667 area.

Graphs

GE 10y yield

ECB President Lagarde clearly hinted at a summer (June) rate cut which has broad backing. EMU disinflation continued in April and brought headline CPI closer to the 2% target. Together with weak growth momentum, this gives backing to deliver a first 25 bps rate cut. A more bumpy inflation path in H2 2024 and the Fed's higher for longer strategy make follow-up moves difficult. Markets have come to terms with that.

Loss of Interest Rate Support Put Dollar in the Defensive_1

US 10y yield

The Fed in May acknowledged the lack of progress towards the 2% inflation objective, but Fed's Powell left the door open for rate cuts later this year. Soft US ISM's and weaker than expected payrolls supported markets' hope on a first cut post summer, triggering a correction off YTD peak levels. Sticky inflation suggests any rate cut will be a tough balancing act. 4.37% (38% retracement Dec/April) already might prove strong support for the US 10-y yield.

Loss of Interest Rate Support Put Dollar in the Defensive_2

EUR/USD

Economic divergence, a likely desynchronized rate cut cycle with the ECB exceptionally taking the lead and higher than expected US CPI data pushed EUR/USD to the 1.06 area. From there, better EMU data gave the euro some breathing space. The dollar lost further momentum on softer than expected early May US data. Some further consolidation in the 1.07/1.09 are might be on the cards short-term.

Loss of Interest Rate Support Put Dollar in the Defensive_3

EUR/GBP

Debate at the Bank of England is focused at the timing of rate cuts. Most BoE members align with the ECB rather than with Fed view, suggesting that the disinflation process provides a window of opportunity to make policy less restrictive (in the near term). Sterling's downside turned more vulnerable with the topside of the sideways EUR/GBP 0.8493 – 0.8768 trading range serving as the first real technical reference.

Loss of Interest Rate Support Put Dollar in the Defensive_4

Source: KBC Bank

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Warren Takunda

Economic

Stocks

Asian stock markets rallied on Thursday, buoyed by Wall Street's surge to all-time peaks overnight after a milder U.S. inflation report raised expectations the Federal Reserve will deliver two interest rate cuts this year.

The dollar remained on the back foot, sagging to fresh multi-week lows against peers including the euro and sterling.

U.S. Treasury yields extended their retreat in Tokyo trading, sinking to six-week troughs. That helped the beaten-down yen to continue its recovery, even as data showed the Japanese economy contracted more than expected in the first quarter.

Gold marched back toward record levels and crude oil added to gains after rebounding strongly overnight from a two-month trough.

U.S. data on Wednesday showed the consumer price index (CPI) rose by 0.3% in April, below an expected 0.4% gain, raising hopes the Fed can cut rates by 50 basis points this year, with the first quarter-point reduction fully priced for September.

The data provided succour to markets after higher-than-expected U.S. consumer prices in the first quarter had led to a sharp paring of rate cut bets and even stoked some worries of an additional hike.

"The expression of relief ripples through risky assets, with markets coming alive the moment we saw U.S. core CPI," Chris Weston, head of research at Pepperstone, wrote in a report.

"All in all, after three months of troubling price pressures, this is a report that will sit well with (Fed Chair) Jay Powell and co."

MSCI's broadest index of Asia-Pacific shares outside Japan climbed 1.5%. Hong Kong's Hang Seng and Australia's stock benchmark each rallied about 1.6%.

Japan's Nikkei advanced more than 1%.

"U.S. CPI inflation provided relief that the Fed's last mile towards its 2% inflation target may become less complicated," DBS Group strategists wrote in a client note.

"Market participants are sufficiently satisfied to keep the soft-landing narrative going, buoying risk sentiment in the process."

Japan's currency was a standout on Thursday, far outpacing gains against the dollar among major peers.

The dollar was last down 0.66% at 153.86 yen , from as high as 156.55 in the previous session.

The 10-year U.S. Treasury yield , which the dollar-yen pair tends to track, slipped as low as 4.705% for the first time since April 5 in Tokyo trading.

The dollar index , which measures the currency against the yen, euro, sterling and three other rivals, touched a five-week low of 104.07.

The euro rose to $1.0895, the highest since March 21, and sterling reached $1.27005 for the first time since April 10.

Also benefitting from broad dollar weakness, leading cryptocurrency bitcoin marked a fresh three-week top at $66,694.89 following Wednesday's more than 7% advance.

"It's hard to go past the move in crypto," said Pepperstone's Weston.

"The 23 April swing high of $67,252 is the near-term target and the level to watch," he added. "A break here and we will likely see traders chasing this move for a push into $70,000."

Gold rose as high as $2,397.32, pushing toward the all-time peak of $2,431.29 from April 12.

Brent futures rose 39 cents, or 0.47%, to $83.14 a barrel, while U.S. West Texas Intermediate crude (WTI) gained 42 cents, or 0.53%, to $79.05, adding to Wednesday's strong gains.

Source: Reuters

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Thomas

Economic

Forex

The British Pound has rallied against the Euro, Dollar and other G10 currencies as the foreign exchange market engages a classic 'risk on' gear to rising expectations that the Federal Reserve will cut interest rates in September.

Just last week, the market was only fully priced for a December rate cut, but Wednesday's softer-than-expected set of U.S. inflation data was the latest underwhelming economic report out of the U.S. that encouraged market participants to raise expectations for earlier rate cuts.

Global stock markets rallied to fresh records as investors cheered the hope of lower interest rates, while the Krona, Australian and New Zealand Dollars were the winners of this renewed optimism.

The Franc and the U.S. Dollar - the two go-to safe havens - were the major losers.

The Pound is a mid-tier player in the risk stakes, meaning while it lost against the high beta names, it gained against the Dollar and Franc. The Euro is also a mid-tier player, but the Pound is widely considered to have a higher beta, meaning the Pound to Euro exchange rate staged a decent recovery of 0.16% to 1.1650.

"The weaker dollar pulled the pound up through 1.26 towards 1.27, while it was slightly firmer versus the euro," says Hann-Ju Ho, an analyst at Lloyds Bank.

Pound-Euro has been highly sensitive to the ebb-and-flow of Bank of England policy expectations, which makes the gains registered on Wednesday and into Thursday interesting.

We note that the odds of a potential June rate cut at the Bank of England also increased midweek, with money markets betting that earlier Fed rate cuts will encourage more members of the Bank's Monetary Policy Committee to cut rates.

Money market pricing shows investors now see more than a 50% chance of a June rate cut. "Financial markets are pricing a high chance of June interest rate cut from the Bank of England," says Carol Kong, a strategist at CBA. "In the UK, a rate cut is fully discounted for August, with a June cut currently seen as a close call," says Lloyds Bank's Ho.

Market Rally Boosts Pound Sterling Against Euro and Dollar_1

The Pound's gains suggest the prospect of a June rate cut is less of an overhang for the Pound than has been the case in recent weeks.

We have quoted numerous analysts warning that as the odds of a June rate cut grow, the odds of a deeper retracement in the Pound grow too.

But, if we are switching to a more notable risk-on / risk-off regime, the broader market sentiment might be of greater importance to Sterling in the coming days. Any retrace in recent market optimism therefore puts it at risk.

Source: Pound Sterling

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Warren Takunda

Economic

Japan's economy fell faster than expected in the first quarter as the weak yen continued to batter consumers, throwing a fresh challenge to the central bank's push to get interest rates further away from near zero.

Preliminary gross domestic product (GDP) data from the Cabinet Office on Thursday showed Japan's economy shrank 2.0% annualised in January-March from the prior quarter, faster than the 1.5% drop seen in a Reuters poll of economists.

Downwardly revised data showed GDP barely grew in the fourth quarter of 2023, due to downgrades to capital expenditure estimates.

While preliminary capital spending data is often subject to heavy revisions in the final release, the across-the-board declines in all GDP components suggest Japan's economy had no major growth engine in the first quarter.

That could create some hesitation for the Bank of Japan, which raised interest rates in March for the first time since 2007 and has since signalled its intention to continue tightening policy.

"It would be possible that the timing of rate hikes could be pushed back depending on how the GDP may rebound in the current quarter," said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.

He said while the economy would certainly rebound in the current quarter due to rising wages, uncertainty remains around consumption in the service sector.

The latest GDP reading translates into a quarterly contraction of 0.5%, versus a 0.4% decline expected by economists. Revised first quarter figures will be released on June 10.

Japan's Economy Skids, Clouding BOJ's Rate Hike Plans _1

The weak yen has created a two-speed economy in Japan, with the export and tourism sectors broadly benefiting from a more competitive exchange rate but households and small businesses squeezed by inflated costs of imported goods.

Toru Suehiro, chief economist at Daiwa Securities, said the yen's weakness complicates the question of whether the BOJ should maintain its monetary stimulus or continue to unwind it.

"The adverse effects of a weaker yen are becoming a cause for concern so one can argue that interest rates should be raised," Suehiro said.

"Although real wages are likely to turn slightly positive in the second half of this year, the level of real wages will not rise sharply as the yen continues to weaken."

REAL WAGE PAIN

Japan's large businesses delivered the biggest wage hikes in three decades this year, which the BOJ says provided the conditions needed to finally end decades of radical monetary stimulus.

However, thrifty households have since tightened their purse strings as price hikes outpaced wage gains, squeezing real incomes and diminishing their purchasing power.

Private consumption, which accounts for more than half of the Japanese economy, fell 0.7%, bigger than the forecast 0.2% drop. It was the fourth straight quarter of decline, the longest streak since 2009.

Economists are hopeful the first quarter weakness will prove temporary and expect the drag to growth from an earthquake in the Noto area this year and the suspension of operations at Toyota's Daihatsu unit to dissipate.

Still, sharp yen declines persist as a threat to the recovery as do spikes in crude oil due to the Middle East crisis.

Capital spending, a key driver of private demand, fell 0.8% in the first quarter, versus an expected decline of 0.7%, despite hefty corporate earnings.

External demand, or exports minus imports, knocked 0.3 of a percentage point off first quarter GDP estimates.

For now, policymakers are counting on the bumper pay hikes and planned income tax cuts to spur flagging consumption and prevent a shift back to deflation.

"Rate hikes or cuts in bond purchases can ease the pain of yen weakening, which could pave the way for income gains to spill over to consumption," said Maruyama. "If that doesn't happen, raising rates would be difficult, particularly when consumption remains weak."