Can Warmer Ties Overcome the Deepening Divide in China-U.S. Relations?

China-U.S. Relations

Political

Summary:

Chinese envoy Xie Feng's strong start in Washington and more senior meetings between the two sides are good signs. But analysts doubt the relationship can return to its former footing, with increasing disputes on a range of issues.

Talks between senior Chinese and U.S. officials in recent weeks have given hope that tension between the world's two great powers could be easing. In the second of a three-part series on China-U.S. relations, Orange Wang looks at how new and deepening challenges are clouding the future of those ties.

China's new envoy to the United States Xie Feng arrived in Washington at a critical moment, with bilateral ties at what many deem to be at their lowest point in five decades.

Since taking up his post – just days after it was announced near the end of May – the veteran diplomat has made it his mission to rebuild China-U.S. exchanges and cooperation.

Within two weeks, Xie met undersecretary of state Victoria Nuland and U.S. Treasury undersecretary Jay Shambaugh. He also headed to Connecticut to celebrate elder statesman Henry Kissinger's 100th birthday.

There are other signs that ties between the two countries are starting to warm, with some meetings of senior officials also taking place.

Even so, analysts say, it will still be difficult to manage China-U.S. ties through more engagement. They say Beijing and Washington remain increasingly in dispute as old challenges – such as Taiwan and the South China Sea – deepen and new ones, including technology competition, emerge.

Lily McElwee, a fellow at the U.S. think tank Centre for Strategic and International Studies, said keeping U.S.-China channels open "is becoming more difficult as it is becoming more important, especially as we near elections in both the U.S. and Taiwan".

"They are bound to create some turbulence in the relationship," she said.

Taiwan was high on Xie's agenda as he took up his new role. In his first encounter with reporters in the U.S. – at the airport after landing – he urged the Americans to work with China to "properly" handle the issue.

Beijing regards Taiwan as a breakaway province to be brought under mainland control by force if necessary. Most countries, including the U.S., do not recognise the island as an independent state, although Washington is opposed to any attempt to take it forcibly.

In recent years, Taiwan has become one of the thorniest issues in the growing discords between Washington and Beijing, escalating after former U.S. House speaker Nancy Pelosi's visit to Taipei in August and again in April this year, when her successor Kevin McCarthy met Taiwanese President Tsai Ing-wen in California.

Both meetings were followed by military drills by the People's Liberation Army in the Taiwan Strait which included encircling the island.

In Beijing's view, the Joe Biden administration has been sending the "wrong signals" by signing a trade deal with Taipei and stepping up its push for the island's presence at the World Health Assembly and other international organisations.

The U.S. has also drawn Beijing's ire over the reported delivery of the first batch of Stinger air defence missiles to the island as part of a US$500 million military aid package.

At the same, Washington has criticised Beijing for being more aggressive over the Taiwan Strait.

David Shullman, senior director of the Washington-based think tank Atlantic Council's Global China Hub, said he was "very pessimistic" about the prospect of a more permanent improvement in relations, given Washington's switch to a more competitive stance and while Beijing was reluctant to accept the new reality.

Shullman said there was now bipartisan consensus in the U.S. on the wisdom of adopting a more competitive approach with China, to better defend its economic and security interests.

This extended to supporting Taiwan's ability to defend itself, and to calling out Beijing's human rights record – and "that approach will not change", he said.

According to Shullman, China is highly suspicious of U.S. intentions and is unwilling to accept the shift in Washington's approach.

Instead, Beijing appeared to regard the maintenance of stable communication channels as conditional on Washington returning to policies of the past. "That's not going to happen," he said.

Zhu Feng, executive dean of the school of international studies at Nanjing University, said the next U.S. presidential election cycle could add more uncertainties to the Taiwan issue, potentially doing further harm to ties.

"It might further ignite tensions in China-U.S. relations [if U.S.] figures across various levels were to fervently hype up the Taiwan issue in pursuit of their own political interests, which warrants high attention," Zhu said.

With high-stakes Taiwanese presidential and legislative elections also a mere seven months away, international relations professor Da Wei said he expected both Washington and Beijing to handle the issue cautiously as they worked to stabilise their relationship.

But both sides had previous successes in managing the aftermath of Taiwanese and U.S. elections, said Da, from Tsinghua University in Beijing.

"There were times when both sides were in a far more dangerous place than they are now, but they were able to manage reasonably well," he said. "What everyone thinks is dangerous might not be very dangerous as everyone would be careful."

Da said the biggest risk to the relationship was likely to be another "significant accident", like the alleged Chinese surveillance balloon – an event that was hard to anticipate, but with potentially devastating consequences.

A recent encounter between a Chinese fighter jet and an American surveillance plane over the South China Sea, as well as a near-collision between warships in the Taiwan Strait, saw Beijing and Washington trading blame for the close calls.

The bilateral rift on the military front appeared to widen at last week's Shangri-La Dialogue in Singapore last week. Both sides pointed fingers at each other over China's rejection of a meeting between Defence Minister Li Shangfu and U.S. Defence Secretary Lloyd Austin.

In his speech to the defence conference, Li accused "some big power" of creating divisive alliances, bullying other nations, spurring an arms race and seeking to contain China with its support for Taiwan.

Li also pledged that the PLA "will not hesitate for a second" to move on Taiwan if necessary.

Another possible flashpoint is the South China Sea, where Beijing has territorial disputes with some of its neighbours and the U.S. has stepped up its "freedom of navigation" exercises, often in concert with its allies.

The U.S. recently gained access to four more military bases in the Philippines, including some facing the South China Sea and Taiwan. And this month coastguards from the U.S., Japan and the Philippines launched their first joint exercises in the contested waterway.

China has long stressed that the U.S. is not a party to the South China Sea dispute, while Washington criticises Beijing for "continued infringement" upon its freedom of navigation crossings.

Nanjing University's Zhu said the South China Sea issue had become quite "fragile", with a significant factor the continuing increase in U.S. intervention and its rallying of allies to push for military precautions against Beijing.

"The South China Sea issue is an important area where China and the U.S. truly need to maintain communication and dialogue," he said.

But the rift over the disputed waterway is just part of a broader contention and competition between the two countries.

China's rise to challenge U.S. technological dominance has made it a serious competitor in some of the most advanced technologies, including artificial intelligence, 5G, quantum information science and semiconductors.

Dennis Wilder, a senior fellow for the Initiative for U.S.-China Dialogue on Global Issues at Georgetown University, said technology was the "battleground" for the 21st century because of the profound effects of emerging technologies on everything from war to jobs.

There had always been many tactical issues in the relationship, Wilder said. "The question is whether the U.S. and China can come to some 30,000-foot overall understanding of the future trajectory of relations."

If that occurred, other issues – such as Taiwan and human rights – would be far more manageable, he said.

"But intense competition is here to stay. The trick is to find mechanisms for managed competition that does not become a cold or even hot war."

Trump-era additional duties on Chinese products worth hundreds of billions of dollars remain in place.

Meanwhile, the Biden administration has pursued an industrial strategy to diversify supply chains in areas such as clean energy, electric vehicles and semiconductors.

This has included limiting exports of advanced chips and chip-making equipment from the U.S. and other industrial giants in the Netherlands and Japan.

Washington has also blacklisted more than 1,000 – and counting – Chinese entities on multiple grounds, from ties to military end users in Russia through human rights concerns in Xinjiang to the fentanyl public health crisis in the U.S..

Beijing deems such restrictions as "all-around containment, encirclement and suppression of China" by U.S.-led Western countries, as Chinese president Xi Jinping put it in March.

The U.S. has recently aligned its rhetoric with its allies, noting it is looking to de-risk and diversify from the Chinese economy, but not to decouple – a term that emerged during the Trump administration's trade war with China.

But to Beijing, the two are essentially the same. "De-risk is decouple in disguise," said one commentary circulated by state news agency Xinhua.

And Beijing's ban on the sale of Micron Technology products in China over security concerns has only added to signs of an enduring hi-tech war between the two countries.

McElwee from the CSIS said the U.S. had several trade and technology actions vis-à-vis China in the pipeline, such as an outbound investment screening mechanism and further export controls.

She said she did not anticipate that the trade and technology actions already on foot to be shelved in the name of advancing bilateral cooperation in other areas.

Still, she said she also expected to see a renewed emphasis from Washington on improving economic ties in less sensitive sectors, as well as cooperation to address critical shared challenges.

"There is clearly some scepticism in Beijing about U.S. outreach however, so it will be interesting to watch how this unfolds," McElwee said.

Under current circumstances, the best people could hope for was a "new normal" in the relationship, where critical channels of communication remained resilient and could be "walled off", said Shullman from the Atlantic Council.

This would help the two countries "manage the inevitable resurfacing of tensions over the issues … such as Taiwan, tech competition, human rights, China's support for Russia, and more – and head off potential crises".

"The risks are too great to do otherwise," Shullman said.

Zhu, from Nanjing University, said recent interactions between Beijing and Washington showed a need for "reconfiguration" in bilateral ties, while China's stance was unequivocal that dialogue should not be conducted for its own sake, but must be reciprocal.

"Chinese feel it's not right that the U.S. only discusses issues that concern them while ignoring the issues that China is concerned with," Zhu said.

Source: SCMP

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Damon

Central Bank

The U.S. Federal Reserve is widely expected to pause its campaign of interest rate increases on Wednesday to give policymakers more time to assess the economic impact of existing hikes and recent banking stresses.

But members of the rate-setting Federal Open Market Committee (FOMC) remain divided going into the meeting on June 13-14, with a minority still pushing for an 11th straight hike to fight inflation, which remains stubbornly above the Fed's long-term target of two percent.

The Fed has raised its benchmark lending rate by five percentage points since March last year, lifting it to between 5.00 to 5.25 percent.

"I think there is enough support within the community for that pause," EY senior economist Lydia Boussour told AFP.

"But at the same time, the compromise will be that the FOMC will be keen on carrying on retaining that optionality, and really keeping the door open to further tightening," she said.

Corralling the cats

Senior officials including Fed chair Jerome Powell have indicated they may vote to hold the benchmark lending rate at the next meeting of the Fed's powerful rate-setting committee, while leaving the door open to an additional rate hike in July if necessary.

"Skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming," Fed governor Philip Jefferson said late last month.

The data points to a mixed economic picture, with slowing growth, a tight labor market, and inflation still well above the Fed's two percent target.

Jefferson, who was recently nominated for the vacant number two spot at the Fed, added that "a decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle."

But those pushing for a further hike, like Fed governor Christopher Waller, have indicated support for a more aggressive stance on inflation.

"I do not support stopping rate hikes unless we get clear evidence that inflation is moving down towards our two percent objective," Waller said last month, adding: "whether we should hike or skip at the June meeting will depend on how the data come in" before the next decision.

The division among members of the FOMC over the best path forward has led some traders on a journey, from predicting a pause to expecting a hike -- and back again.

Futures traders who as recently as late May were predicting another hike, now see a more-than 70 percent chance that the Fed will vote to hold rates on Wednesday.

And many analysts now also see a pause as the most likely scenario on Wednesday.

"Chairman Powell is expected to corral the cats and get the Federal Open Market Committee (FOMC) to skip a rate hike in June, while leaving the door open to hike in July," KPMG Economics chief economist Diane Swonk wrote in a recent note to clients.

While most major banks now predict a pause, there are still some notable outliers who expect the Fed to hike rates by another quarter percentage point.

"We are maintaining our call for a 25bp rate hike next week - though admittedly it is a close call," Citi economists wrote in a recent investor note.

If Powell does succeed in winning over a majority of FOMC members for a June pause, analysts expect the Fed to signal through its interest-rate announcement and updated summary of economic projections (SEP) that it expects another rate hike to complete the cycle.

"Among the key innovations for this meeting, we expect the statement will be hawkishly adjusted to note the potential for further tightening at 'coming meetings,'" Deutsche Bank economists wrote in a note to clients.

The SEP will likely show that "appropriate policy may require an additional hike to achieve a "sufficiently restrictive" stance," they added.

This, analysts say, would help the Fed leave the door open for an additional rate hike if needed, possibly as early as July.

Source: AFP

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Owen Li

Commodity

Speculators in the first days of June covered short positions across Chicago grains and oilseeds for a second consecutive week, motivated by dry weather for U.S. crops and multi-year lows across some contracts.

Most-active CBOT wheat, soybean and soybean oil futures on May 31 hit multi-year lows, and soymeal fell to multi-month lows, but everything recovered in the following days.

Gains across most-active CBOT futures in the week ended June 6 were as follows: corn 2.4%, soybeans 4.4%, wheat 6.2%, soymeal 1% and soyoil 10.2%. December corn rose 3% and November beans added 2.7%.

Money managers in the week ended June 6 staged their largest round of short covering in CBOT soyoil since 2019, slashing their net short to 18,306 futures and options contracts from 37,449 a week earlier.

They also trimmed their net short in CBOT corn futures and options to 44,492 contracts from 51,065 in the prior week. That was mostly on short covering, though funds also reduced gross corn longs. Money managers have been net buyers of corn in nine of the last 12 weeks.

Funds Cover Short Positions in U.S. Soyoil, Corn and Hogs_1

Commodity funds in mid-March established a net short in CBOT corn for the first time since August 2020, but they have not held a net short in soybeans since April 2020.

Through June 6, money managers increased their net long in CBOT soybean futures and options to 13,981 contracts from 529 a week earlier, and short covering was most prominent. However, they have been net sellers of soybeans and soyoil in nine of the last 12 weeks and sellers of meal in eight of the last 12.

Funds Cover Short Positions in U.S. Soyoil, Corn and Hogs_2

Money managers have held a net long in CBOT soybean meal futures and options since November 2021, and they increased that position to 65,816 contracts through June 6 versus 59,676 in the prior week.

Funds continue carrying a heavy net short in CBOT wheat futures and options, though they trimmed it to 119,474 contracts in the week ended June 6 from 126,998 a week earlier. The last 12 weeks have been evenly split between net buying and selling in CBOT wheat.

Open interest in CBOT wheat futures and options remains below average, though last week it hit the highest levels since March 2022, up 6% from early June 2022.

The week ended June 6 featured money managers' largest round of short covering in CME lean hogs since March 2019. Funds slashed their net short to 16,173 futures and options contracts from a record 31,110 a week earlier. CME July hogs rose 11% that week after hitting contract lows in late May.

Money managers' net long in CME live cattle rose to 114,637 futures and options contracts through June 6, their most bullish since April 2019 and up about 6,800 on the week. Most-active August futures rose about 5% in that period, though the front-month contract on Wednesday hit an all-time high.

Futures price action was mixed over the last three sessions. Most-active soybean oil featured the biggest gains at 7.2%, and corn was the biggest loser with December down 1.9% and most-active corn down 0.6%, mostly on weekend rain expectations for the U.S. Corn Belt.

CBOT wheat and soybean meal rose fractionally over the last three sessions, but most-active soybeans added 2.5% and November beans were up 1.6%. On Friday, most-active soybeans reached their highest levels since May 16, and CME July hogs were the highest since May 3.

Rains were scattered across the U.S. Midwest this weekend, and areas that received lighter amounts will be aided by cooler temperatures early this week. However, heat may return to the Corn Belt late next week, upping the need for ample, widespread rains, which are not guaranteed in the forecasts.

Source: Market Screener

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Cohen

Economic

Emerging-market bulls are still upbeat on the asset class, even after China's highly-touted reopening rally fizzled and proved Wall Street's early 2023 optimism to be misplaced.

Developing-nation assets stand to finally take off in the second half, they say, as long as global interest rates peak, Chinese authorities prop up growth and structural reforms in India bolster sentiment. A revival may still make this the decade of emerging markets that Morgan Stanley Investment Management flagged earlier this year.

"India, Brazil, China, they don't have an inflation problem any longer, so they may cut rates faster than the Federal Reserve," said Xavier Baraton, global chief investment officer at HSBC Asset Management in Paris, on Bloomberg Television. "If you're looking for true diversification at this time, you've got to look into true EM. You've got to look into Asia. You've got to look into India, which is under-appreciated."

While the first half of 2023 hasn't been a disaster for EM investors, it has fallen far short of buoyant forecasts.

MSCI Inc's emerging-market stock index has risen 4.8% so far this year, well behind the 11% gain in a gauge of developed-nation peers. An index of EM currencies, meantime, edged up 1.7%. And emerging local-currency bonds have only narrowly outperformed a global debt gauge.

What Bloomberg's strategists say

It's nice to see that there's more to investment life than simply buying ludicrously-valued tech stocks, and that one can derive comparable if not superior returns from alternative strategies with a less odious value proposition. If global inflation and monetary tightening has had one positive impact from an investment perspective, it's been the revival of the good old-fashioned EMFX carry trade. — Cameron Crise, macro strategist

Among the factors crimping gains, China's exit from Covid-Zero restrictions has failed to translate into broad economic strength, instead boosting spending on services such as travel and eating out, leading to weak credit growth, contracting exports and a slowdown in housing sales. The impact has spread to other markets that rely on Chinese demand such as South Africa and Thailand.

That's cast doubt on the bullish view set out by Morgan Stanley Investment Management in January: that emerging-market stocks are set to be this decade's winners amid attractive valuations and a superior growth outlook — especially in countries such as India.

Equity opportunity

On the positive side, the underwhelming numbers so far mean some metrics are now identifying pockets of value across of the emerging-market landscape.

Benchmark share indexes are expected to rise in most emerging markets by year-end, with some of the biggest gains expected in Hong Kong and mainland China, according to aggregate analyst price targets compiled by Bloomberg.

"The pessimism, particularly in China and Hong Kong, has been extreme and is not accurately reflecting the economic fundamentals," said Greg Lesko, a managing director at Deltec Asset Management LLC in New York. He favours consumer names that are likely to be supported by targeted Chinese stimulus.

"Alibaba, JD.com are silly cheap and have tons of cash, but got hit on US-China tensions," he said. "Indonesian banks are money-making machines."

Value in currencies

Many emerging-market currencies may also be set to strengthen as the Fed nears the end of a tightening cycle that has already been underway for more than a year.

"Assuming that we are one or two hikes away from the peak, then that headwind to EM currency performance should dissipate," said Edwin Gutierrez, head of emerging-market sovereign debt at abrdn plc in London. "It also psychologically will pave the way for more EM central banks to consider rate cuts in the coming months."

The lack of a clear driver has led to scattered performance among emerging currencies this year, while uncertainty over Fed tightening has boosted volatility. The Colombian and Mexican pesos have both surged more than 10%, while the Turkish Lira has tumbled about 20%.

The end of global rate hikes will help reduce volatility and support the carry trade, and that will benefit higher-yielding EM currencies and bonds, said Alvin T Tan, head of emerging-market currency strategy at RBC Capital Markets in Singapore.

"A more concerted return of the carry trade would benefit the higher carry Latam and EMEA currencies even more, excepting the ones under the spell of unorthodox policies, such as the Turkish lira," he said.

Developing-nation debt

There are advocates for developing-nation bonds, too, as peaking central-bank interest rates boost the attractiveness of higher-yielding assets.

"We are anticipating the start of the easing cycle out a number of emerging markets in the second half of this year, starting with the Latin American economies, and also then some of the Central and Eastern Europe economies," said Phoenix Kalen, head of emerging-market research at Societe General SA in London.

"There is space for there to be some thinking about pre-positioning for those rate cuts, and space for the rates to come back in — especially given how high real policy rates are at this point in time, especially out of Latam," she said.

Yield-hungry investors have already been piling into Indonesian bonds after the central bank all but ended its tightening cycle earlier this year, while its domestic coffers remain healthy from the rally in commodities. Rupiah-denominated debt has returned about 11% in dollar terms this year.

Indian bonds are also looking attractive due to good growth, a potential rate cut later this year as inflation moderates, and a trade balance that has "never been better," said Eric Lo, Asia fixed income portfolio manager at Manulife Investment Management in Hong Kong.

Source: Bloomberg

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

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Warren Takunda

Traders' Opinions

Cryptocurrency

Polygon (MATIC) has recently been hit with significant fundamental concerns due to legal actions taken by the United States Securities and Exchange Commission (SEC). The SEC has alleged that MATIC and 12 other securities are unregistered securities, as part of their enforcement actions against Binance Holdings Limited, Changpeng Zhao, Coinbase, Inc., and Coinbase Global, Inc.

The SEC accuses the defendants of disregarding federal securities laws and the protections they provide to investors and the market. According to the Exchange Act, entities that meet the definition of an exchange or broker-dealer are required to register with the SEC. Selling unregistered securities is a serious violation of securities laws and carries severe legal consequences. Coinbase Inc., for example, is alleged to have unlawfully evaded the disclosure requirements set by federal law.

The key issue in these legal actions revolves around whether the crypto assets involved are considered securities. If the crypto assets are not deemed securities, much of the enforcement action may fail. However, if any of the assets are considered securities, the enforcement action may succeed in part. The registration requirement for exchanges also depends on whether the entities involved provide a market for buyers and sellers of securities.

The repercussions of these legal actions have caused panic and uncertainty in the market. There have been reports that Robinhood, a popular retail trading platform, has delisted major crypto tokens, although further research is required to confirm these reports. Regardless of their accuracy, such reports contribute to the overall panic and market sentiment resulting from the legal actions.

While these fundamental concerns are significant, it is important to analyze the price action to gain insights into the market sentiment. Technical analysis focused on longer-term trends reveals that MATIC has experienced a sharp decline of over 32% in the past 10 days since June 1, 2023. Since its peak in February 2023, MATIC has plummeted approximately 67.55%.

SEC Strikes Back: Is MATIC the Next Victim of Regulatory Crackdown?"_1

However, zooming out and considering the long-term trend, it becomes apparent that Polygon has been in an overall upward trend. The 4-year uptrend line on the primary chart shows that the price has not touched this line since November 2020. Additionally, the long-term Fibonacci retracement levels indicate that even the shallowest retracement level (.236 proportion) has held as support since the peak in December 2021.

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Thomas

Central Bank

The Bank of Japan (BOJ) is expected to maintain ultra-loose monetary policy this week and its forecast for a moderate economic recovery, as robust corporate and household spending cushion the blow from slowing overseas demand, sources said.

The central bank also may signal that inflation is overshooting its forecasts, which would heighten the chance of an upgrade in its price projections at a quarterly review of its estimates due in July, they said.

But any upgrade in its inflation view is unlikely to automatically trigger an interest rate hike, as BOJ Governor Kazuo Ueda has stressed the need to maintain ultra-loose policy until durable wage growth accompanies the price rises.

Ueda told parliament on Friday that corporate price-setting behaviour was showing changes that could work to push up inflation more than expected.

"Consumption appears to be holding up and underpinning the economy," said one source familiar with the BOJ's thinking.

"But the BOJ must support the economy to ensure recent positive signs are sustained, and help Japan sustainably achieve 2% inflation," the source said, a view echoed by two more sources.

At a two-day policy meeting ending on June 16, the BOJ is likely to maintain its -0.1% short-term interest rate target and a 0% cap on the 10-year bond yield set under its yield curve control (YCC) policy, the sources said.

Reflecting soft U.S. and Chinese demand, the BOJ may offer a slightly bleaker view on exports and output than at the previous meeting in April, the sources said. In April, it said exports and output were moving sideways.

But the BOJ will stick to its view the world's third largest economy is headed for a moderate recovery as a post-pandemic pickup in consumption offsets soft exports, they said.

While the BOJ will not produce fresh inflation forecasts next week, it may signal that inflation is overshooting initial projections - possibly at Ueda's post-meeting briefing, the sources said.

Japan's economy expanded a stronger-than-expected 2.7% in the first quarter on robust capital expenditure and solid domestic demand.

Core consumer inflation hit 3.4% in April as companies continued to hike prices, casting doubt on the BOJ's view that inflation will slowly move back below 2% toward the latter half of the current fiscal year ending in March 2024.

An index stripping away the effects of both fresh food and fuel - closely watched by the BOJ as a barometer of domestic demand-driven price trends - rose 4.1% in April from a year earlier, the fastest pace in four decades.

"It's true inflation is somewhat overshooting the BOJ's initial projections," a second source said. "The BOJ must be vigilant to both the risk of an inflation overshoot, and the risk of a deep overseas slump hitting Japan's economy."

With droves of companies continuing to hike prices, the BOJ is widely expected to upgrade its inflation forecasts at its next quarterly review in July, analysts say.

In forecasts made in April, the BOJ expects core consumer inflation to hit 1.8% in the current fiscal year, much lower than 2.6% projected in a recent Reuters poll.

Source: Yahoo

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Owen Li

Commodity

Spring temperatures across the continental United States were close to the seasonal average - providing no relief to a gas market struggling with too much production and excess inventories accumulated last winter.

Temperatures in March were a little lower than usual for the past 10 years, but April and May were in line with the 2013-2022 average, according to degree day data from the U.S. Climate Prediction Center (CPC).

For the three months as a whole, there were 1,064 population-weighted heating degree days across the Lower 48 states compared with a prior 10-year average of 1,022.

Over the same period, however, working gas inventories increased by 454 billion cubic feet compared with a prior 10-year average increase of 401 billion cubic feet.

Significantly larger-than-normal inventory builds despite slightly colder-than-normal temperatures early in the season confirms over-production in the market.

No progress was made eliminating excess inventories during the spring quarter.

Gas stocks ended the quarter with a surplus of 280 billion cubic feet (+13% or +0.68 standard deviations) above the prior 10-year average, having started in a surplus of 227 billion cubic feet (+12% or +0.58 standard deviations).

U.S. gas production increased to a new monthly record in March, the latest month for which data is available, and was 7% higher than the same month a year earlier.

Production was still rising in a delayed response to the extremely high prices that prevailed for much of 2022 following Russia's invasion of Ukraine.

Freeport LNG's re-opened export terminal did not make a significant difference in depleting the excess inventories accumulated during the winter of 2022/23.

With inventories stubbornly high, prices remained under pressure throughout the spring months, averaging just $2.20 to $2.40 per million British thermal units, in only the 2nd or 3rd percentile for all months since 1990, after adjusting for inflation.

But there are signs that lower prices were starting to force a slowdown in drilling. The number of active rigs targeting primarily gas-rich formations declined to an average of 144 in May down from 153 in February.

Fewer rigs drilling for gas as well as oil (which results in associated gas from oil wells) will eventually rebalance production and consumption.

Unless the summer is unusually hot, boosting gas consumption by electricity generators, excess inventories look set to persist for several more months.

As a result, hedge funds and other money managers have been cautious about turning bullish on gas prices.

Funds' net position ended the quarter in the 35th percentile for all weeks since 2013 after starting it in the 19th percentile, well below the average throughout.

From a pricing perspective, the balance of risks must lie to the upside, but the market is still struggling to work down the surplus built up last winter, and until that starts to happen prices are unlikely to rise.