Higher European Open Expected as Chinese PPI Slips to a 7-Year Low

Forex

Summary:

A 261k weekly jobless claims print, the highest since October 2021 appears to have been all it took to push U.S. markets higher on the day and rekindle the idea that the Federal Reserve would signal a pause when it meets next week.

This week's rate hikes by the RBA and Bank of Canada have muddied the waters somewhat as to what the Fed might do next week, with both central banks taking the view that financial conditions are still too loose, posing the question as to whether the Fed might feel the same way based on recent data.

Nonetheless yesterday's claims numbers prompted some U.S. dollar weakness, along with a slide in yields perhaps in the hope that this would mean that there would be enough of a data deterioration between now and July, for the prospect of next week's skip becoming a slightly more permanent state of affairs.

The danger is that we've been here before with a big jump in claims data which has subsequently been revised away, however such is the nature of market sentiment now that the markets are moving on the basis of one data point to the next.

While U.S. markets finished higher on the day, European markets underwent a rather more mixed session, with the FTSE100 and Spanish IBEX closing lower, while the rest of Europe's markets edged higher. The mixed session had little in the way of significant drivers, apart from the latest EU GDP data showing that the eurozone economy had fallen into a technical recession, at the end of last year and the beginning of this year.

The jury continues to be out as to whether we are likely to see the recent sharp falls in headline inflation start to act as a drag on core CPI, but there have been some encouraging signs, in spite of the resilience being seen in the services sector, and with respect to wage growth.

One of the encouraging signs that inflation is starting to turn into deflation has been recent economic data out of China which has shown that inflation has been slowing sharply, and that factory gate prices especially have been negative for the last 7 months.

In April we saw PPI come in at -3.6%, and this morning's May numbers were even worse at -4.6%, the lowest levels since 2016.

Headline CPI was also subdued, rising 0.2%, as the slowdown in the Chinese economy showed little signs of coming to an end, raising the prospect that this period of low and negative prices could act as a broader headwind or leading indicator for the global economy. It also raises the prospect of further easing from the Chinese central bank, although how that would help the wider economy is open to question given the reluctance of Chinese consumers to spend after 3 years of restrictions, which were only recently eased.

Crude oil prices fell back again yesterday on reports that the U.S. and Iran had agreed a deal on oil exports, a claim which was subsequently denied, but also saw oil prices slide to their lowest levels this week, and below last weeks close.

EUR/USD – rallied back through the highs of last week and needs to push up and beyond the 1.0820/30 area to kick on higher. We still have support back at the recent lows at 1.0635.

GBP/USD – pushed up beyond the highs of last week at 1.2540 and looks set to test trend line resistance from the 2021 highs at 1.2630. This, along with the May highs at 1.2680 is a key barrier for a move towards the 1.3000 area. We have support at 1.2450.

EUR/GBP – still feels like it wants to go lower towards support at the 0.8560 level and last week's lows, just above the December 2022 lows at 0.8558. While below resistance at the 0.8660 area the bias remains for a drift lower, through 0.8550 towards 0.8520.

USD/JPY – still feels toppy above the 140.00 area, but needs a break below 138.30 to suggest a return to the 137.00 area. The main resistance remains at 140.95 area.

Source: CMC

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Warren Takunda

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Rising Unemployment Figures and its Impact on Financial Markets

The United States witnessed a concerning surge in initial jobless claims, reaching the highest level since October 2021. This unexpected increase has ignited discussions about the underlying strength of the labor market. In addition to its repercussions on job seekers and the economy, these figures have also stirred the financial markets, with implications for currency exchange rates, stock futures, and investor sentiment.

Unemployment Figures

Initial Jobless Claims Surge to 2021-Highs: Labor Market Strength Under Scrutiny_1

During the week ending June 3rd, 2023, initial jobless claims climbed to 261,000, surpassing market forecasts of 235,000. This rise marks the third consecutive week of increases, suggesting a potential slowdown in labor market momentum. The 4-week moving average, which smooths out weekly volatility, rose to 237,250, indicating a persistent upward trend in unemployment claims.

Regional Analysis

Among the states, Ohio witnessed the largest increase in initial claims with 6,345, followed by California with 5,173, and Minnesota with 2,746. Conversely, Connecticut and New York experienced declines of 2,350 and 1,243 respectively. These localized fluctuations reflect the varying economic conditions and sectors within each region, further underscoring the need for targeted policy measures.

Currency Market Impact

Initial Jobless Claims Surge to 2021-Highs: Labor Market Strength Under Scrutiny_2

The release of higher-than-anticipated weekly jobless claims had a noticeable impact on the value of the US dollar. The dollar index dropped to as low as 103.58, as market participants adjusted their expectations regarding an imminent interest rate hike by the Federal Reserve. While many anticipated a temporary pause in rate increases, recent unexpected rate hikes by the Reserve Bank of Australia and the Bank of Canada have raised the possibility of an early Federal Reserve rate hike as well.

Stock Market Response:

Initial Jobless Claims Surge to 2021-Highs: Labor Market Strength Under Scrutiny_3

In response to the jobless claims report, the stock market exhibited a mixed reaction. Dow Jones futures recorded a loss of nearly 60 points, while contracts for the S&P 500 and Nasdaq 100 futures turned positive. This divergence suggests that investors are weighing the implications of the rising unemployment figures alongside ongoing deliberations on monetary policy. With the Federal Reserve's decision on rates looming, market sentiment remains uncertain, with a growing likelihood that the rates will be left unchanged.

Corporate developments have also influenced the market's trajectory. GameStop shares declined by nearly 18% in premarket trading following disappointing sales and the departure of its CEO. Meta, the parent company of popular social media platforms, saw its stocks dip almost 1% after facing demands from the EU industry chief to address content targeting children. These individual cases highlight the importance of robust financial management and adaptability to changing market dynamics.

The surge in initial jobless claims has raised concerns about the strength of the US labor market, posing challenges for both the economy and financial markets. The impact can be witnessed in currency fluctuations, stock market movements, and the overall sentiment of investors. As the Federal Reserve contemplates its next moves, market participants eagerly await May's consumer inflation data to gain further insight into potential price trends. The coming weeks will undoubtedly be crucial for policymakers, investors, and individuals alike as they navigate these uncertain waters and seek stability in an evolving economic landscape.

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Owen Li

Commodity

The government's starting U.S. corn yield for 2023 has already raised eyebrows for being notably above the prior record, and that number is likely to come under further scrutiny on Friday given near-record dryness across the Corn Belt since planting.

In some areas, crop and soil conditions have deteriorated to degrees matched only by 2012, one of the driest, hottest U.S. summers on record which featured terrible crop yields.

Still, the U.S. Department of Agriculture is unlikely to change corn or soybean yields in its Friday update based on how yields are formulated, though adjustments are possible next month if the dry pattern does not break down.

Yield Lowdown

USDA arrived at its 2023 U.S. corn trend yield of 181.5 bushels per acre using a weather-adjusted trend over 1988-2022, assuming normal planting pace and summer weather. Planting pace was normal this year and should be a non-issue.

Weather-wise, the model primarily relies on July, though it has a dry June variable that applies when June precipitation is in the lowest 10% tail of its statistical distribution. USDA identifies June 1988 and 2012, when Midwest rainfall was 29% and 58% of normal, respectively.

USDA did not change corn yield in June 2012, though that may not be relevant since the current yield model started in 2013. Slow planting in 2013 and 2019 caused corn yield reductions in those Junes, but there have been no other June changes to corn or soy yields since 2013.

Bloomberg's pre-report survey mostly supports the idea of unchanged yields this month. Nineteen of 25 analysts submitted 181.5 bpa for corn, and the lowest among the other six was 180. Twenty submitted 52 bpa on beans, equal to USDA's trend, and the lowest among the rest is 51.

June has started bone-dry in some states, especially in Illinois, Indiana and Ohio, where the first week featured between 5% and 20% of normal rains. But USDA would have to make assumptions about forward weather, which it does not do, for a yield change to be triggered by June's dry start.

If June stays sufficiently dry, a yield change could occur in July. The only July adjustment for corn or soybeans since 2013 was a small cut to soy yield in 2019 on late planting.

Although last year featured the fourth-driest midwestern June since 1988 at 64% of normal precipitation, yields were unchanged in June and July 2022. June 1992 was the third-driest, and USDA cut corn production in July based on unfavorable weather.

Rain is expected over the weekend for many dry areas of the Corn Belt, though whether that trend continues is still up for debate and yield potential hangs in the balance. As of Tuesday, some 45% of U.S. corn areas were in drought, the week's highest since at least 2012 and up from 26% two weeks earlier.

Exports

Analysts may not be anticipating U.S. corn or soy production changes on Friday, but they likely expect to see softer old-crop corn demand. Thursday's export data seems to support a possible easing in both old-crop corn and soy exports.

As of June 1, U.S. exporters had sold 85% of USDA's 2022-23 corn export target, the second-lowest share in at least 15 years. Only 83% was sold by the same date in 2019, and final 2018-19 corn exports ended up 10% below what was predicted in May.

June 1 soybean sales accounted for 93% of USDA's 2022-23 export outlook, the smallest for the date in at least 15 years. Just 94% was sold by the same date in 2020, but cheap, plentiful beans that year sparked abnormally high U.S. sales mid-year, and final 2019-20 exports were fractionally above May's forecast.

On average over the past five years, June 1 sales covered 93% of USDA's May corn export target and 98% of its bean outlook.

Net U.S. corn sales in April and May were smaller than those for soybeans in that period for the first time since 2012. April-May bean sales were better than in the same stretch in 2021, though they were 65% worse than the five-year average.

Net corn sales below 1 million metric tons in April and May were led by Chinese cancellations and were the lowest for the period in over 15 years, some 82% below the recent average.

Source: Market Screener

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Warren Takunda

Traders' Opinions

In a significant development for Egypt's asset-sale plan, Actis LLP and Edra Power Holdings Sdn Bhd are reportedly considering the acquisition of a major power plant in Beni Suef. The power plant, co-built by Siemens AG, could fetch a staggering $2 billion, injecting a substantial boost to Egypt's economy while reducing its debt and attracting foreign investment.

The Beni Suef power plant is part of a trio of power plants that were inaugurated in 2018 by President Abdel-Fattah El-Sisi. Together, these plants possess a remarkable total capacity of 14.4 gigawatts, making them vital components of Egypt's energy infrastructure.

The potential acquisition of the power plant by Actis LLP and Edra Power Holdings signifies a significant stride in Egypt's ongoing efforts to divest state-owned assets. Under the country's broader asset-sale plan, valued at $9 billion this year, Egypt aims to offload shares in various ports and hotels.

The move holds promising implications for Egypt's economy as it seeks to attract foreign investment and stimulate private sector growth. By leveraging the sale of state assets, Egypt can strengthen its financial position, reduce debt burdens, and foster an environment conducive to entrepreneurial initiatives and market competitiveness.

Actis LLP and Edra Power Holdings' interest in the Beni Suef power plant underscores the growing appeal of Egypt's energy sector among global investors. The country's strategic geographical location, coupled with its commitment to sustainable development and energy diversification, makes it an attractive investment destination.

If the deal goes through, Actis LLP and Edra Power Holdings will assume ownership of a significant power generation asset, consolidating their positions in the energy market and fortifying their investment portfolios. At the same time, Egypt will benefit from increased foreign capital inflows and enhanced efficiency in its power infrastructure.

Egypt's asset-sale plan has been met with enthusiasm from investors, highlighting the international confidence in the country's economic trajectory. As Egypt continues to implement reforms, such as enhancing regulatory frameworks and streamlining investment procedures, it positions itself as an emerging market ripe with opportunities.

While the potential acquisition of the Beni Suef power plant still requires further deliberation and regulatory approvals, the mere interest from Actis LLP and Edra Power Holdings sends a positive signal to the global investment community. Egypt's commitment to privatization and attracting foreign investment is set to propel its economic growth and secure a prosperous future.

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Thomas

Economic

While retail trade continued its double-digit growth trend for the first three months of this year, it was in stark contrast to the drop in consumer sentiment recorded in the same period, and the largely disappointing corporate earnings reported by consumer-related companies on Bursa Malaysia.

Indeed, the latest March retail trade data released last month by the Department of Statistics Malaysia marked the 14th straight month of double-digit growth since February 2022, but at a slower pace of 17.7% compared with February's 19.2% and January's 21.7%.

While the double-digit growth is still notable, economists said the latest figure should be considered in the context of the low base in the year-ago quarter when economic activities were still affected by lockdown disruptions and consumer spending had yet to recover.

Meanwhile, consumer sentiment, as measured by the Consumer Sentiments Index (CSI) produced by Malaysian Institute of Economic Research, fell below the 100-point optimism threshold to 99.2 points for the 1Q2023 period, down 9.7 points from 108.9 points in March 2022, and 6.1 points lower than 4Q2022's 105.3 points. The index, compiled by MIER using a quarterly survey conducted to gauge consumer spending trends and sentiments. Malaysia: Consumer Spending Seen Softening in Coming Months as Inflation, Economic Concerns Weigh_1

Malaysia: Consumer Spending Seen Softening in Coming Months as Inflation, Economic Concerns Weigh_1

Malaysia: Consumer Spending Seen Softening in Coming Months as Inflation, Economic Concerns Weigh_2

"MIER's CSI fell because some components of the index did not perform well. Specifically, expected job prospects and income pulled the measure down. Also, households were anxious about inflationary expectations. These factors weighed on the index," Dr Shankaran Nambiar, senior research fellow at the Malaysian Institute of Economic Research or MIER, told The Edge.

The CSI is a gauge of forward-looking expectations that reflect consumers' anticipation or concerns. So, a deterioration in the index means consumers are wary about upcoming risks to the economy, such as recession and rising costs of living. Hence, it indicates consumers may be more mindful of their spending, going forward.

"The MIER CSI has fallen to below 100 points, and notice how DOSM's [retail trade data] dissipating base effects have appeared to take shape. The lack of growth catalyst, unlike Malaysia's post-pandemic economic reopening, is also a factor in why things are moving the way they do now," said Bank Islam chief economist Firdaos Rosli.

Stable job market, tourist arrivals to mitigate slowdown

Economists The Edge spoke to expect growth in consumer spending to moderate in the next six to 12 months amid multiple headwinds ahead that would curb demand, but a stable job market and rising tourist arrivals will mitigate the slowdown.

"Naturally, consumers would be quite guarded in their spending plans as higher cost of living would make them more mindful of their budget. But I do not think consumer spending would decelerate sharply as the labour market condition is still conducive. It's more like a normalisation of the growth trend, since we saw 11.3% growth in private consumption last year — which was way above the [average] growth of 7%. My estimates for private consumption growth this year is around 5.8% and 6%," said Bank Muamalat Malaysia Bhd chief economist and social finance head Dr Mohd Afzanizam Abdul Rashid.

AHAM Capital said the era of "revenge" spending fuelled by measures such as Employees Provident Fund (EPF) withdrawals, loan moratoriums and government handouts are over. That, coupled with the rise in overnight policy rate to 3% this year, could dampen consumer spending.

"Furthermore, the cost of doing business is on the rise, resulting in higher prices for consumers. Factors such as increased utility costs and higher minimum wages have contributed to this upward pressure. The government's decision to lift subsidies on chicken and eggs in July may also lead to higher prices if commodity prices persist at stubbornly high levels.

"A notable trend among major retailers is the phenomenon of down-trading, wherein consumers are opting for lower-priced and smaller-packaged items. This shift reflects a moderation in consumption. The recent weakening of the ringgit against other currencies has further exacerbated the situation, as imported goods become more expensive," the asset management firm said.

Things could turn out differently if the ringgit strengthens, with a pause in OPR hikes, which may alleviate some of the inflationary pressures on household budgets, AHAM Capital noted.

The factors that could affect the consumers' spending outlook are greater-than-expected inflationary pressure that reduces consumers' spending ability, a higher-than-expected interest rate hike, and weaker-than-expected labour and wages prospects, said MIDF Research analyst Genevieve Ng Pei Fen.

Ng is positive about consumer spending on essential items with competitive pricing. "We think that demand for F&B [food and beverage], poultry, and consumer-staple retailers should remain stable in the near term. The increase in tourist movement should also support out-of-home consumption, benefiting F&B players, poultry players, and convenience stores."

Other headwinds that could affect consumer sentiment are possible escalation in the US and China trade war, and the upcoming state elections in Malaysia, said Bank Islam's Firdaos.

The first, together with the ongoing Ukraine-Russia war, could weigh on global economic growth and disrupt supply chains, while the upcoming state elections could pose domestic political risks and weigh on consumer sentiment, particularly in terms of private investments, Firdaos said.

Source: The Edge Malaysia

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

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Kevin Du

Cryptocurrency

Other U.S. crypto exchanges are likely to be in the firing line after the Securities and Exchange Commission (SEC) this week sued Coinbase and Binance, two of the world's largest crypto exchanges, for allegedly breaching its rules.

The SEC on Tuesday alleged Coinbase traded at least 13 crypto assets that are securities and which should have been registered, while on Monday it also accused Binance, the world's largest cryptocurrency exchange, of offering 12 cryptocurrency coins without registering them as securities.

The lawsuits expand the overall number of cryptocurrencies that the SEC has explicitly identified as securities. That raises questions about other exchanges that have also allowed U.S. investors to trade those tokens, such as Kraken, Gemini, Crypto.com and Okcoin, and whether they could be at risk of regulatory action, industry executives said. Some exchanges may look to de-list the tokens in question.

"All U.S. exchanges should now be on notice that they may be subject to enforcement action if they permit, or have permitted, these tokens to be traded," said Jason Allegrante, chief legal and compliance officer at Fireblocks, a digital asset infrastructure provider.

A spokesperson for crypto exchange Bitstamp said the company takes "all new regulatory developments very seriously" and is "currently reviewing the new information that has come out this week to determine what actions to take."

Both Coinbase and Binance deny the SEC's allegations and have pledged to vigorously defend themselves in court. The SEC declined to comment.

While crypto companies started out in a regulatory gray area, the SEC under the leadership of Gary Gensler has steadily asserted the agency's jurisdiction over the industry, arguing most tokens meet the definition of a security and should be subject to the same strict disclosure rules.

The agency has brought more than 130 crypto lawsuits and settlements to date, according to data from consultancy Cornerstone Research and the SEC website, and in several of those cases has named specific tokens as securities.

The Coinbase and Binance suits this week expand that list to include some commonly traded tokens, such as Solana, Cardano and Polygon.

"We would not be surprised to see more lawsuits from the U.S. regulators, and possibly the Department of Justice, in the next few weeks," said Scott Freeman, co-founder of JST Digital, a financial services firm focusing on digital assets.

A spokesperson for the Justice Department declined to comment.

Crypto companies, including Coinbase and Binance, dispute the SEC's authority, saying many tokens are more akin to commodities, and have repeatedly called for regulators to create clear rules rather than assert their jurisdiction via enforcement actions.

"We do not list securities. For every asset we list, our teams conduct thorough risk and security evaluations which includes a comprehensive legal and compliance process. We will continue to closely monitor this case and others for precedential rulings," a spokesperson for Kraken said.

Gemini, Crypto.com and Okcoin did not immediately respond to a request for comment.

'Destroy the crypto economy'

The latest lawsuits will play out in court, which could take years. An SEC suit alleging Ripple's XRP token is a security, for example, has been under litigation for more than two years.

But whether the SEC wins or loses, the suits send a strong signal to the industry that the agency is not going to let up, executives said. While big crypto companies can afford to fight the SEC, smaller companies have filed for bankruptcy following SEC enforcement actions, including crypto exchange Beaxy.

"I don't think that this SEC under this leadership necessarily cares whether they win or lose in the courts. I think what they are engaging in is a coordinated campaign to essentially destroy the crypto economy in the United States," Stuart Alderoty, chief legal officer at Ripple, told the Piper Sandler Global Exchange & Fintech Conference in New York on Wednesday.

Gensler has suggested an industry shake-out would be good for investors.

"I disagree with the notion ... that crypto intermediary compliance isn't possible," Gensler said in a speech on Thursday, adding however that "it takes work."

According to analysts at Bernstein, roughly 90% of crypto trading already takes place outside the U.S. Executives said they expected exchanges to continue to expand into international regions that have more favorable regulations.

Coinbase, for example, has previously said it would consider moving its global headquarters outside of the U.S.

"I would imagine that other firms spooked by the prevalent trend for regulation by enforcement will follow suit," said Katharine Wooller, business unit director at Coincover, a provider of insurance for digital assets.

Source: REUTERS

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Warren Takunda

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Growing disillusionment among members of the Russian elite regarding President Vladimir Putin's ability to secure victory in the ongoing war against Ukraine has prompted calls for a peaceful resolution to end the conflict. Several anonymous sources within Russia's political and business circles have revealed deepening concerns, reflecting a shift in sentiment among influential figures who previously supported Putin's aggressive stance. Former Russian government advisor Alexander Petrov, now residing in Vienna, has also voiced skepticism regarding the war's outcome.

The war between Russia and Ukraine has been raging for over a year, resulting in significant casualties and humanitarian crises on both sides. Recent events, including a massive flood in Ukraine's Kherson region allegedly caused by Russian sabotage of a dam, have further exacerbated the situation. Attacks on Russian soil, such as drone strikes in Moscow and shelling near the Ukrainian border in Belgorod, have added to the mounting challenges faced by Russia.

The international community has unequivocally condemned Russia's invasion of Ukraine and has been providing military and economic support to Ukraine in response. In a significant move, the United States has announced its decision to permit its allies to supply F-16 fighter jets to Ukraine, bolstering their defense capabilities. China has called for a diplomatic resolution and urged nations to cease arms deliveries to the conflict zone. Furthermore, Sweden has expressed its intention to join NATO, garnering support from US President Joe Biden.

Within Russia, the war has ignited internal divisions, particularly among nationalist groups led by Yevgeny Prigozhin, the founder of the Wagner mercenary group. These factions have vehemently criticized the Russian military leadership, citing incompetence, and are demanding a comprehensive mobilization and the implementation of martial law. Prigozhin has also accused defense officials of planting explosives along the retreat route of Wagner forces, deepening the rift within Russia's power structures.

While the conflict continues to exact a heavy toll on both military personnel and civilians, ordinary people on both sides are enduring immense suffering. In Ukraine, mothers have displayed immense bravery, risking their lives to cross the front lines and rescue children abducted by Russian-backed separatists. Some Ukrainian civilians have returned to their homes near the front line despite the inherent dangers, as they have nowhere else to seek refuge. Simultaneously, a number of Russians have chosen to leave their country during the war, seeking asylum or better opportunities abroad.

The war's complex and tragic nature presents a challenging and uncertain path forward. The waning confidence within the Russian elite and their calls for a peaceful resolution illustrate a growing recognition of the war's costly implications. While the international community intensifies its support for Ukraine, pressure mounts on President Putin to reconsider his strategy and explore diplomatic avenues to bring an end to the protracted conflict.

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