China’s Industrial Profits Resume Decline in May Amid Deflation and Trade Stress

Economic

Summary:

China’s industrial sector recorded a sharp 9.1% drop in profits in May 2025, reversing two months of growth and reflecting mounting pressures from weak domestic demand, persistent deflation, and uncertain trade conditions with the U.S....

Industrial Profit Growth Reverses Despite Retail Rebound

In May 2025, China's industrial profits contracted by 9.1% year-on-year, according to the National Bureau of Statistics (NBS), following two brief months of modest growth. This decline signals renewed distress in the manufacturing and production sectors despite positive surprises in April retail sales data. On a year-to-date basis, profits declined by 1.1% for the January–May period, reversing the earlier 1.4% gain registered from January to April.

The profit retreat highlights the fragility of China's industrial recovery. According to NBS statistician Yu Weining, the main culprits were declining prices for industrial goods, weak effective demand, and short-term market fluctuations — all consistent with broader deflationary pressures and sectoral overcapacity.

Deflation and the Property Slump Dampen Demand

May’s data illustrates how deflationary conditions continue to plague industrial firms, especially those producing durable goods and capital-intensive products like automobiles and heavy machinery. The lingering property sector crisis remains a central drag on upstream industries such as steel, cement, and construction materials. These sectors typically form the backbone of industrial profit growth during recoveries, but in the current environment, their contribution is muted.

Although China and the U.S. reached a temporary trade truce in June to avoid escalation of reciprocal tariffs, tariffs remain at elevated levels. The uncertainty surrounding July 9 — the deadline for new U.S. trade decisions — has left exporters hesitant, limiting any short-term rebound in export-oriented production.

Highly competitive sectors like automotive manufacturing are also under pressure. Excess production capacity and aggressive pricing strategies have sparked price wars, leading regulators to urge automakers to stop dumping vehicles onto local dealerships. Auto retailers, in turn, have reported severe cash flow issues, operational stress, and even closures — all of which feed back into declining industrial profitability.

Ownership Breakdown: SOEs Lag While Private and Foreign Firms Show Resilience

Disaggregated data shows a continued divergence in performance among ownership categories. Profits at state-owned enterprises (SOEs) fell by 7.4% in the first five months of 2025, suggesting that government-linked firms — often concentrated in resource-heavy or infrastructure sectors — are bearing the brunt of the downturn. Meanwhile, private-sector firms posted a marginal 0.3% gain, while foreign-funded enterprises saw a more encouraging 3.4% increase, possibly reflecting better flexibility in pricing and more diversified demand channels.

The sharp downturn in May underscores the limits of China’s economic recovery amid structural headwinds and external trade uncertainty. While some foreign and private firms have shown resilience, the broader industrial base continues to struggle with weak demand, overcapacity, and profit compression. With deflation still looming and U.S. tariffs unresolved, the outlook for the industrial sector remains clouded, and without aggressive policy support or stabilization in the property market, further profit erosion is likely in the second half of 2025.

Source: Reuters

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Economic

Stocks

Market Rally Gains Momentum Amid Trade Breakthroughs and Policy Reassurance

Markets across Asia reached new milestones on Friday, with MSCI’s Asia-Pacific Index ex-Japan hitting its highest level since November 2021 and Japan’s Nikkei breaching 40,000 for the first time in five months. The rally was underpinned by a confluence of positive developments: a rare earth supply agreement between Washington and Beijing, signals that Section 899 retaliatory tax measures may be scrapped, and waning fears over Middle East tensions.

Sentiment was also buoyed by reassurances from U.S. Treasury Secretary Scott Bessent, who confirmed efforts to ease foreign investor concerns by asking Republicans to drop the contentious tax clause, which would have imposed penalties on foreign entities under a retaliatory framework.

Dollar Decline Reflects Fears Over Fed Independence

The dollar continued its downward slide, approaching a 3.5-year low against the euro and sterling. The US Dollar Index hovered near 97.378, marking a weekly loss of 1.4% and a year-to-date drop of over 10%. If this trend persists, 2025 may become the worst-performing first half for the dollar since the shift to free-floating currencies in the early 1970s.

Driving the greenback’s slump is not just data weakness but growing unease over political interference in the Federal Reserve. Reports from the Wall Street Journal suggest that President Trump may announce Jerome Powell’s successor as early as September or October — well ahead of Powell’s May 2026 term expiration — potentially positioning the replacement as a “shadow Fed chair.” This prospect has rattled traders who fear compromised Fed independence and eroded policy credibility, both of which underpin the dollar’s global reserve status.

Rate Cut Bets Intensify as PCE Data Looms

Investors now anticipate approximately 64 basis points of Fed rate cuts this year, up from 46 bps priced earlier in the week. This dovish repricing is fueled by both soft economic indicators and the political context surrounding Fed leadership. Attention is now shifting to the release of the core PCE price index — the Fed’s preferred inflation gauge — which could either reinforce or temper current expectations.

US Treasury yields were stable in Asia trading, with the 2-year yield at 3.74% and the 10-year at 4.25%, reflecting a pause after recent declines.

Commodities Diverge: Oil Falls, Gold Drifts

Brent crude and WTI futures edged slightly higher on the day — $68.01 and $65.53 respectively — but remain down over 10% for the week, pressured by a sustained Israel-Iran ceasefire and diminishing fears of supply disruptions. Meanwhile, spot gold dipped 0.23% to $3,320.25 per ounce, consolidating near historic highs as inflation expectations and interest rate outlooks remain fluid.

While equity markets globally are reveling in optimism fueled by de-escalating trade and geopolitical risks, currency markets are signaling deeper uncertainty tied to US policy credibility. The weakening dollar and mounting rate cut bets underscore a fragile confidence in institutional autonomy. As inflation data and political developments unfold, markets may face renewed volatility in the second half of the year.

Source: Reuters

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Economic

Refill Timeline Extended: Only 8.8M of 15.8M Barrels Delivered So Far

The U.S. will not complete its planned 15.8 million-barrel crude oil refill into the Strategic Petroleum Reserve (SPR) until the end of 2025, according to an announcement from the Department of Energy (DOE). Originally scheduled for completion by May 2025, the program has delivered just 8.8 million barrels to date. The delay, driven by site maintenance at SPR facilities, pushes the completion timeline up to seven months behind schedule.

The SPR — once the world’s largest emergency crude supply — was heavily drawn down under the Biden administration in 2022 to counter surging oil prices following Russia’s invasion of Ukraine. Biden authorized the release of 180 million barrels, marking the largest SPR sale in history. Since then, refilling the reserve has become a politically and economically charged issue, especially under President Trump’s renewed push to prioritize U.S. energy independence.

Trump’s Refill Agenda Confronts Budget Constraints

On taking office in January 2025, President Trump pledged to refill the SPR “right to the top” to support U.S. oil producers and reinforce national energy security. However, logistical limitations and constrained funding have slowed progress. Energy Secretary Chris Wright acknowledged that fully refilling the SPR to pre-sale levels would cost around $20 billion and take several years. In contrast, Trump’s current budget allocates just $1.5 billion for oil purchases and SPR maintenance combined.

This mismatch between ambition and fiscal resources highlights the challenges of reestablishing the SPR’s previous capacity, particularly as geopolitical volatility continues to influence oil markets.

Political Debate: Biden's Sale vs. Trump’s Critique

The SPR remains a political flashpoint between current and former administrations. Secretary Wright has sharply criticized Biden’s 2022 emergency release, claiming it caused “hundreds of millions” in damages. The DOE detailed those costs as $2 million in emergency repairs, $35 million for oil transport, and $243 million in maintenance delays.

Nevertheless, the Biden administration defends its actions, highlighting a financial upside. According to DOE data, the government repurchased 59 million barrels at an average price of under $76/barrel, compared to the $95/barrel selling price in 2022. This generated an estimated $3.5 billion in net profit, making the sale fiscally advantageous despite the controversy.

In tandem with the SPR news, oil prices rose slightly, with crude futures (CL=F) up 0.61%. The modest move reflects broader market attention on global supply chains, geopolitical risks, and trade dynamics rather than immediate shifts from SPR flows. Still, traders are likely to view the delayed refill as a constraint on near-term government demand, potentially tempering upward price momentum in the second half of 2025.

While the SPR still holds significant volumes of crude, the delays in scheduled deliveries and limited refill budget expose strategic vulnerabilities. The United States faces a prolonged timeline to rebuild its energy buffer, raising questions about emergency readiness in the face of future geopolitical shocks. The outcome of this slow recovery may depend less on oil prices and more on political will, budget priorities, and infrastructure readiness.

Source: Reuters

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Economic

Forex

Dollar Weakens as Fed Policy Expectations Shift

The U.S. dollar extended its recent slide on Friday, remaining near its lowest levels in three and a half years against the euro and sterling. This follows growing conviction among traders that the Federal Reserve will ease monetary policy further, especially amid signs that President Trump may intervene in Fed leadership decisions before Powell’s term ends in May.

The dollar index, which tracks the greenback against six major peers, stood at 97.378—on pace for a 2% drop in June and its sixth consecutive monthly decline. Year-to-date, the index has plunged more than 10%, pressured by persistent speculation over U.S. policy direction and economic vulnerabilities tied to Trump’s tariff regime.

Political Overhang: Fed Leadership Uncertainty and Powell’s Diminished Clout

Investor uncertainty has intensified following reports from The Wall Street Journal that President Trump is considering announcing Powell’s successor as early as September or October. Although no final decision has been made, the idea of installing a "shadow chair" could undermine Powell’s policy authority in the coming months, weakening the market's confidence in Fed independence.

Carol Kong of the Commonwealth Bank of Australia noted that “the sooner a replacement is announced for Powell, the sooner he could be perceived to be a ‘lame duck’.” This perception, she said, would likely reinforce expectations for a dovish policy tilt and apply further downward pressure on the dollar and Fed rate projections.

Powell’s recent congressional testimony, interpreted as slightly dovish, added fuel to these expectations. Markets are now pricing in 64 basis points of rate cuts for 2025, compared to just 46 basis points at the start of the week.

Euro and Sterling Hit Multi-Year Highs

The euro traded at $1.1693 on Friday, just below Thursday’s peak of $1.1745—its highest since September 2021. The pound also remained strong at $1.3733, after reaching $1.3770, a level not seen since October 2021. The strength of these currencies reflects a mix of dollar weakness and confidence in Europe’s relative macroeconomic positioning amid trade negotiations.

The yen slipped slightly to 144.73 per dollar, while the Swiss franc hovered near a decade-high at 0.8013 per dollar, reflecting its safe-haven status in a time of rising U.S. political risk.

Trade Negotiations Add Another Layer of Volatility

Markets are also tracking the fast-approaching July 9 deadline for President Trump’s “reciprocal tariffs,” which have injected considerable uncertainty into global trade flows. Countries are scrambling to reach bilateral trade agreements with the U.S. before the deadline triggers automatic tariff increases.

German Chancellor Friedrich Merz on Thursday urged the EU to finalize a “quick and simple” trade deal with the U.S., signaling that Brussels is willing to forgo broader negotiations in favor of a focused agreement to shield European exports.

On the China front, the White House said a deal was reached to accelerate rare earth shipments to the U.S., a move that could help stabilize U.S. tech supply chains but does little to offset broader trade tensions.

The dollar's prolonged weakening trend reflects not just monetary policy expectations, but also political and structural shifts in the global economy. The threat of Fed leadership changes, upcoming tariff deadlines, and diverging global trade strategies have all combined to erode investor confidence in the dollar’s near-term stability.

Unless the Fed can reassert its independence or U.S. economic indicators turn decisively stronger, the dollar may remain under sustained pressure—potentially setting the stage for deeper realignments in global currency markets in the second half of 2025.

Source: Reuters

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Oliver Scott

There are growing signs that the UK jobs markets is slowing as employers respond to higher national insurance contributions (NICs) by cutting hiring and offering weaker pay rises, the governor of the Bank of England has warned.

Andrew Bailey said the combined effect of lower employment and weaker wages growth would be considered by the Bank’s nine-member monetary policy committee (MPC) when it next meets in August to set interest rates, which now stand at 4.25%.

Bailey, who voted to keep rates on hold at the last meeting earlier this month, appeared to be softening his stance after further signs that the economy is faltering following a surprise acceleration in growth earlier in the year.

Speaking in London at the British Chambers of Commerce trade conference on Thursday, Bailey said he was hearing “a bit more evidence” that companies were adjusting pay and employment levels after the rise in employer NICs announced in the last budget.

“In recent months, the evidence that slack is opening up has strengthened, especially in the labour market.”

He added: “The latest data on pay settlements and pay expectations point to a significant decline in wage growth in the year ahead.”

The UK economy grew by 0.7% in the first three months of the year before contracting by 0.3% in April. Employment dropped by more than 100,000 in May, marking the largest monthly fall in PAYE payrolls since the same period in 2020 during the first Covid lockdown.

Annual earnings in the private sector grew by 5.1% in the three months to April, down from 5.9% in the three months to January.

Bailey said: “The latest intelligence from the Bank’s agents continue to suggest average pay settlements for 2025 of 3.5 to 4.0%, closer to levels consistent with the inflation target.”

Earlier this month six members of the MPC voted to keep rates on hold while three supported a reduction to 4%. The split was widely seen as an indication of the pressure growing for a rate cut in August. Financial markets expect two further cuts in interest rates this year to 3.75%.

Bailey said the underlying growth of the economy was weak and likely to remain subdued for the rest of the year while businesses coped with the uncertainty created by US import tariffs.

The governor cautioned that “there remain uncertainties around the overall balance between supply and demand in the economy as well as the remaining inflation persistence in the system”.

He said strong rises in some categories of food showed that inflationary pressures had not gone away. “The prices of meat, chocolate and non-alcoholic drinks have gone up the most, consistent with higher wholesale prices for beef, cocoa beans and coffee. These price increases are to an extent idiosyncratic, with reports of reductions in cattle herds and climate-related disruptions to coffee and cocoa production.

“But our agency intelligence also highlights labour costs and costs related to new packaging regulation as wider factors at play. And, like energy prices, food prices are salient to consumers. We have to make sure that these increases do not feed through to second-round effects either.”

Bank officials have been concerned that high levels of wages growth and extra costs on employers from higher taxes will feed through into higher prices, maintaining inflation above 3%. The consumer prices index edged down to 3.4% in May from 3.5% in April.

Source: GUARDIAN

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Liam Peterson

U.S. Dollar Index sinks to 97.13, marking its lowest level since mid-2022. Bitcoin holds near $108K, up roughly 250% from its 2022 bear-market low despite policy turmoil.

Only 14% odds of Powell leaving Fed Chair originally appeared on TheStreet.

Jerome Powell's future as Federal Reserve Chair is increasingly under question, especially on Kalshi, a crypto prediction platform.

However, Kalshi bettors see only a 14% chance that Powell will be removed as Fed Chair by the end of the year, down nine points from the previous levels.

This shift comes amid rising speculation that President Donald Trump will soon announce his potential replacement well before the end of Powell's term in 2026.

If President Trump names a replacement who is more aggressive on interest rate cuts, crypto markets could see an accelerated fund inflow as investors seek higher returns on riskier assets.

This week, Trump publicly attacked Powell, saying he is "dumb, moron, and low IQ'" for waiting to cut interest rates, at the NATO summit in the Netherlands.

He also criticized the Federal Reserve's monetary policy as being unwilling to shed what Trump called unnecessary economic drag. Trump is also ratcheting up pressure on Congress to pass his new tax bill before the July 4 holiday.

Trump's coupling of fiscal and monetary policy—his tax plan now gets pressure from the Federal Reserve—has created political tension and market fears about the independence of the Federal Reserve.

Due to high inflation and global economic uncertainties, the Fed maintained its benchmark interest rate at 4.25%-4.50% this month.

Powell has clarified, however, that the Fed's sole goal is to support a robust economy for the American people. He stated that "anything else is a distraction," highlighting the Fed's non-political nature.

Dollar hits 3-year low

The U.S. dollar has also been affected by the current political uncertainty. The U.S. Dollar Index has dropped to a three-year low of 97.13, sparking concerns over capital flight and inflation. Meanwhile, crypto markets are holding ground.

U.S. Dollar Index sinks to 97.13, marking its lowest level since mid-2022.

Bitcoin remains above $107,000 as per Kraken's price page, representing a gain of over 250% in the past three years.

Bitcoin holds near $108K, up roughly 250% from its 2022 bear-market low despite policy turmoil.

The U.S. Dollar Index, in turn, has dropped more than 10% in the past three years, demonstrating a behavioral change from investors with a greater commitment to decentralized assets during periods of fiscal unease.

It is difficult to know whether Trump will fire Fed Chair Powell. On Polymarket, another crypto prediction platform, names such as Chris Waller, Kevin Warsh, and Kevin Hassett are gaining popularity as potential successors.

For now, Powell is safe, but the markets are starting to position themselves differently.

Only 14% odds of Powell leaving Fed Chair first appeared on TheStreet on Jun 26, 2025

Source: Yahoo Finance

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Fiona Harper

Orders for long-lasting U.S. manufactured goods rebounded sharply in May, boosted by a surge in commercial aircraft bookings, though economic uncertainty stemming from import tariffs remains a constraint for business spending on capital.

Orders for durable goods, items ranging from toasters to aircraft meant to last three years or more, jumped 16.4% last month after a revised 6.6% decline in April, the Commerce Department's Census Bureau said on Thursday.

Economists polled by Reuters had forecast orders increasing 8.5% after a previously reported 6.3% decrease in April.

Transportation equipment orders soared 48.3%, driven by a 230.8% surge in commercial aircraft orders, which are extremely volatile. Boeing reported on its website that it had received 303 aircraft orders, including 150 from Qatar Airways placed during President Donald Trump's visit to the Gulf Arab country in May.

That compared to only eight orders in April.

Outside the transportation industry, orders were muted. Economists say Trump's often shifting trade policy has left businesses in limbo while the duties already imposed have increased costs for companies.

The Federal Reserve is also in a wait-and-see mode as policymakers monitor the economic fallout from the sweeping tariffs. Fed Chair Jerome Powell told lawmakers this week the U.S. central bank needed more time to gauge if tariffs pushed up inflation before considering lowering rates.

The Fed last week left its benchmark overnight interest rate in the 4.25%-4.50% range where it has been since December.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending plans, rebounded 1.7% in May after an upwardly revised 1.4% decline in April.

Economists had forecast these so-called core capital goods orders edging up 0.1% after a previously reported 1.5% drop in April.

Shipments of core capital goods rose 0.5% after being unchanged in the prior month. Non-defense capital goods orders accelerated 49.4% after plunging 19.1% in April. Shipments of these goods were unchanged after advancing 3.6% in April.

Business spending on equipment accelerated sharply in the first quarter, helping to blunt some of the drag on gross domestic product from a flood of imports as businesses rushed to bring in merchandise before the tariffs came into effect.

The Atlanta Fed is forecasting economic growth rebounding at a 3.4% annualized rate in the second quarter, largely reflecting a reversal in the import flows.

Data on retail sales, the housing and labor markets have suggested economic activity is softening. The economy contracted at a 0.5% pace in the January-March quarter.