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Among digital privacy advocates, the launch of central bank digital currencies is often greeted with suspicion and alarm. On both sides of the Atlantic, there are concerns that CBDCs represent an opportunity for the state to obtain greater oversight over payments systems. In Europe, protesters demonstrated against a digital euro as an invasion of privacy in February, while in the US, Republican Congressman Tom Emmer has sponsored a bill called the CBDC Anti-Surveillance State Act.

In early 2022, a convoy of truckers in Toronto had their assets frozen after objecting to vaccine mandates and gridlocking US-Canada trade. This led some people to suggest that a CBDC would consolidate state control over payments and provide an easier tool to suppress dissidents or discourage certain behaviours.

It is true that certain ways of designing a CBDC might provide new, more efficient means for the state to implement control. Payments are best provided as a public good, and for the state to use access to them as a tool of social engineering is much closer to authoritarianism than most of us are comfortable with.

But as the example of the Toronto truckers indicates, Canadians are already living in a world where the state has the willingness and capacity to restrict access to payments services, despite not having a CBDC.

A CBDC might – if designed in a certain way – concentrate data, leading to new risks and the capacity to make the exercise of state authority over payments more complete. But this kind of development does not require a CBDC. Aggregating data from multiple services is a technical challenge, but one that law enforcement agencies are already eminently capable of solving.

CBDCs are not a serious threat to the privacy of digital payments because we have so little to begin with. The European Data Protection Supervisor points out that, ‘tracking payments of a person can describe the consumers’ life in great detail… The amount of personal information that actors involved in transactions’ management learn about each individual when a payment system operates is significant. This generates a systemic risk of profiling and surveillance by the parties operating the payment system.’

Whether a CBDC is implemented or not, there should be more robust protection of privacy. At present, the main defence is simply that most people use a variety of services, but the sophistication of the tools used to aggregate and process payments data is growing. Regardless of whether this is driven by private actors seeking profit or state actors seeking greater control, the prospect is not appetising, as the EDPS also mentions that ‘payment data is often used for purposes other than those strictly related to the payment execution… payment providers may collaborate with private credit scoring companies that inform landlords, creditors and service providers about the individual trust score of their future clients.’

Central banks have made it clear that they will not launch a fully anonymous CBDC due to the risk that it would facilitate financial crime. There is a notion that privacy and oversight are a trade-off and the best that regulators and privacy advocates can hope for is some kind of mutually unsatisfying compromise.

But innovation in privacy-enhancing technology offers a way to improve privacy without degrading law enforcement agencies’ ability to fight crime. In most countries, payments data is generally only available for use by law enforcement agencies under circumstances set out in a comprehensive legal framework. If a CBDC erodes that framework’s ability to protect individuals’ right to privacy, that is a design choice and not a necessity.If (and this is far from certain) a CBDC is designed with the correct principles, it can form a new benchmark for privacy in digital payments.

A central bank should not become a repository of individuals’ data. Whether the core ledger is distributed or centralised, there is no reason for the central bank to have access to the know-your-customer information of those transacting in CBDCs. That should be sufficient to ensure that a CBDC does not worsen the privacy of digital payments systems. Privacy-enhancing technologies can also be used to make improvements. There are a broad range of such techniques, many of which are discussed in the Bank of England’s digital pound technology working paper. These include: zero-knowledge proofs, which allow a party to verify a statement without revealing additional data; homomorphic encryption, which allows parties to process encrypted data; and distributed data analysis, which allows multiple entities to jointly process datasets without sharing data.

Central banks and law enforcement agencies will still need the capacity to obtain personal data in their crime-fighting activities, but these data should only be visible to them if rigorous criteria are met. The concept of reciprocal negotiated accountability offers a framework that keeps payment data encrypted and keys held in escrow – released only if certain rules are satisfied. It is a cryptographically secured enforcement of the existing framework.

Much of the challenge in this area is cultural, not technical. The encryption standards and systems architectures already exist but revelations from Edward Snowden, the National Security Agency whistleblower, and others have shaken the public’s trust in the state’s willingness to respect individual privacy. Can the state be trusted to implement these privacy-enhancing technologies without leaving additional backdoors? Convincing the general public will be a tremendous challenge.

That is not a reason not to try. We are not starting from a point of sufficient privacy so do not risk losing it. Privacy in digital payments is already poor – the chance is that we improve it.

The digitalisation of the global economy has caused a rapid loss in control over data. The technology exists to regain it but, as the commercial value of such data increases, the likelihood of the private sector willingly deploying that technology shrinks. If, however, the state establishes a benchmark – a free, high-quality payments system that protects privacy without facilitating crime – then the private sector will be forced to raise its standards.

Last week’s ISM manufacturing index dropped to 46.9, the seventh consecutive sub-50 reading with order books, aside from two months of pandemic stress, looking in their worst shape since the 2009. Today’s ISM services report for May, while not quite as grim, only adds to worries about the outlook for the economy.

The headline balance fell to 50.3 from 51.9 (consensus 52.4). As with many of the manufacturing ISM components, the only time the service sector report has been weaker in the past 14 years was in April and May 2020 at the peak of Covid containment and the December 2022 blip caused by the huge winter storm that was so disruptive for the travel, entertainment and service sectors. The details are poor throughout with business activity having similar metrics to the headline. New orders fell 3.2 points to 52.9, but the backlog of orders plummeted to 40.9 from 49.7. The backlog of orders are not seasonally-adjusted so comparisons are tricky, but for what it is worth, this is the worst reading since 2009. This is something that we also saw in the manufacturing report, dropping from 43.1 to 37.5.

Now at least in the manufacturing report we saw the employment component rise to 51.4 from 50.5, yet the payrolls report said manufacturing employment fell 2000. We saw private sector employment rise 257,000 in that same report, yet the ISM has service sector employment in contraction territory at 49.2! The data contradictions underscore the challenge for the Federal Reserve and only support the argument that they leave policy on hold in June to try and get a better gauge of what is happening in the economy. The decline in price pressure is a welcome development though with the manufacturing prices paid below the break-even 50 level at 44.2 and service sector prices falling to 56.2 from 59.6. This leaves the service sector price index at its lowest level since March 2020 and slap bang in the middle of its long run range.

It looks likely that the manufacturing sector is already in recession (seven consecutive sub-50 readings for ISM manufacturing). The service sectors order books are weak and will need to turn around rapidly to prevent the service sector joining it. Given this situation it is difficult to imagine that employment will continue to make such large gains. Then with price measures rapidly weakening it is understandable that markets doubt that if we do get a pause at the June Federal Open Market Committee meeting that the Fed will be able justifying a restart on rate hikes later in the year.

World markets retained a warm afterglow from Friday's shining U.S. employment reading, with only minor gains in crude oil prices on Saudi Arabia's output cut clouding the picture.

A forecast-busting May payrolls gain, coupled with signs of cooling wage growth, provided investors with a "soft landing" economic narrative that complemented relief over last week's government debt ceiling resolution.

With the Federal Reserve moving into a blackout period ahead of a June 14 policy decision, futures markets only see just over a one-in-four chance of another rate hike this month - though one final quarter point rise in July is still largely priced.

The combined picture was enough to lift the S&P500 and Nasdaq to their highest in almost 10 months on Friday - with S&P futures retaining those gains ahead of Monday's open.

Remarkably, Wall St's "fear index", the VIX gauge of implied equity volatility, recorded its lowest close since before the pandemic hit more than three years ago.

While Big Tech stocks have led the way this year with gains of more than 65% - and Apple coming within a whisker of reclaiming record highs last week - stock gains showed some sign of broadening at last.

The Russell 2000 Index of small cap stocks outperformed both the S&P500 and Nasdaq and is now up some 4% for the year so far.

MSCI's all-country index hit its highest in more than a year on Monday.

And the dollar climbed across the board.

While Brent crude oil prices popped up about $1 per barrel on the Saudi output cut plans, the move was limited and year-on-year crude losses continue to clock some 35%.

May U.S. service sector readings dominate the Monday diary, as does the likely start of Treasury rebuilding its depleted coffers with 3- and 6-month bill auctions. U.S. 2-year Treasury yields nudged higher to 3.75% on Monday.

Soundings from China's service sector earlier helped partly to offset fears that dour factory readings questioned its post-COVID recovery. European equivalents were more downbeat.

As midyear investment outlooks stream in, Morgan Stanley's global take sees developed market government bonds, Asia equities and the dollar all outperforming over the remainder of the year - but it spotlighted "front loaded" risk to growth, earnings and policy that make it something of a "crunch time".

Elsewhere, U.S. regulators are preparing to tighten rules for large banks, which could raise their capital requirements by 20% on average after a spate of midsize bank failures this year, the Wall Street Journal reported on Monday.

Turkey's lira slid almost 1% on Monday to weaken past 21 per dollar, in a shaky initial reaction to the appointment of highly-regarded Mehmet Simsek as finance minister.

* U.S. ISM and S&P Global May service sector surveys, April factory goods orders

* European Central Bank President Christine Lagarde speaks to European Parliament; Cleveland Federal Reserve President Loretta Mester speaks at conference opening

* U.S. Treasury auctions 3- and 6-month bills

The private non-oil sectors of the United Arab Emirates (UAE) and Saudi Arabia have showcased robust growth in May 2023, as indicated by the latest Purchasing Managers' Index (PMI) reports. Despite a slight dip in the UAE's PMI, both countries' economies remain on a positive trajectory, with strong demand, increased employment, and optimistic outlooks for the future.

The S&P Global UAE PMI declined marginally from 56.6 to 55.5 in May 2023, still surpassing the critical 50 mark, indicating expansion. The non-oil sector continues to drive growth, with notable improvements in both activity and new orders. The pace of new business intakes moderated slightly but remained high, thanks to a rise in domestic demand. Additionally, employment growth reached its second-fastest rate since July 2016, while backlogs of work continued to accumulate, underscoring the sustained momentum in the sector. One encouraging factor is the subdued cost pressures, primarily attributed to improved supply chains. Moreover, business optimism soared to its highest level since October 2021, with firms anticipating the continuation of strong demand in the foreseeable future.

In Saudi Arabia, the PMI stood at a healthy 58.5 in May 2023, although it experienced a minor drop from the previous month's 59.6. Despite this decline, the index remained above its long-run average, indicating sustained growth in the non-oil private sector. The rising market demand conditions propelled new order inflows to expand at their fastest pace in eight and a half years, while output also increased significantly, albeit at a slower rate compared to the previous months. Consequently, firms stepped up their purchasing activity, albeit at a relatively lower level compared to earlier this year. Employment growth in Saudi Arabia advanced at its fastest rate since 2018, reflecting a positive outlook for the labor market. However, some firms mentioned the challenges of labor shortages and higher living costs, resulting in increased staff expenses. The rise in wages, in turn, contributed to a broad increase in input costs, leading to a sharp rise in output charges, the highest since August 2020. Despite these challenges, overall business sentiment remained positive, although the degree of optimism declined due to rising competition.

The sustained growth and positive sentiment in the non-oil sectors of both the UAE and Saudi Arabia are encouraging signs for their respective economies. While the UAE experienced a slight moderation in its PMI, the overall performance remains strong. The UAE's focus on diversifying its economy away from oil and investing in non-oil sectors continues to yield positive results. In Saudi Arabia, the expansion of the non-oil sector and strong market demand highlight the country's economic resilience. However, challenges such as labor shortages and rising costs need to be addressed to sustain growth and maintain a competitive edge.

The UAE and Saudi Arabian non-oil sectors demonstrated resilience and strong growth in May 2023, supported by robust activity, increased employment, and positive outlooks. Despite a marginal dip in the UAE's PMI, the sector remains on a growth trajectory, benefiting from domestic demand and improved supply chains. Saudi Arabia experienced a slight decline in its PMI as well but continues to exhibit positive expansion, driven by rising market demand and strong output. Both countries should focus on addressing challenges such as labor shortages and cost pressures to sustain growth and capitalize on the optimistic business sentiment. Overall, these developments bode well for the economic diversification efforts and long-term stability of the UAE and Saudi Arabian economies.

On Friday, 2 June, we witnessed a significant flow of rotation among the benchmark U.S. stock indices ahead of the key 16 June "Triple Witching" U.S. options expiration; prior laggards, the Dow Jones Industrial Average and Russell 2000 have recorded one of the best single day outperformance in at least three months against the leading mega-cap tech & AI concentrated Nasdaq 100.

The ongoing medium-term uptrend of the Nasdaq 100 started on 13 October 2022, outperforming the Dow Jones Industrial Average and Russell 2000 in the past seven months. Interestingly, the Dow Jones Industrial Average / Nasdaq 1000 ratio recorded its strongest single-day performance on Friday since 3 Feb 2023 (1.38) while the Russell 2000 / Nasdaq 1000 ratio notched its strongest single-day performance since 26 October 2022 (2.81) supported by strong rallies seen in cyclical, industrial and banking stocks such as 3M (+8.7%), Caterpillar (+8.4%) and U.S. regional banks (KRE ETF +6.2%) on Friday.

On the surface, these positive observations can be considered as an improvement in market breadth as rotation is being spread from the high-flying eight mega-cap tech stocks (FAANG plus MNT; Facebook/Meta, Apple, Amazon, Netflix, Google/Alphabet, Microsoft, Nvidia, and Tesla) that are leading the rally since late October 2022 towards the cyclical laggards.

However, a higher cost of funding environment amid a lingering risk of stagflation may put a damper on earnings growth. The 10-year U.S. Treasury yield has recovered above its 200-day moving ex-post U.S. debt ceiling deal and is looking for a test on a key resistance at 3.90% with positive momentum.

In addition, we cannot rule out an impending global recession as the leading U.S. Treasury yield curve, the difference between the 10-year and 2-year is now at -0.81%; it's the most inverted state in almost 42 years.

However, in a nutshell, the trend is always your friend until its ends so do not be surprised by such positive FOMO irrational behaviour that can persist in the short to medium-term time horizons which in turn may take the U.S. stock market higher due to a relatively low level of positioning, exposure, and sentiment since the start of the year.

China has successfully transformed from a major agricultural country into the world's top manufacturer through reform and opening-up, and has become the world's second-largest economy.

However, the country is in urgent need of a second economic transformation, given its rapidly aging population and bottlenecks in a growth model driven by exports and real estate.

China's transition to high-quality growth will require an economic rebalancing of its previous growth pattern — from heavy reliance on investment, exports and property toward domestic consumption, advanced manufacturing and the digital economy.

Compared to its global peers, the contribution of investment to China's GDP has been about twice the global average from 2008. The contribution rate has remained at around 42 percent while the global average has only been about 21 percent for the same period.

However, as the return on investment declines, greater investment means more debt. Investments are mainly channeled to sectors such as manufacturing, real estate and infrastructure.

Investment into China's real estate development, for example, shrunk by nearly 10 percent year-on-year in 2022, and is expected to post negative growth this year. Even though the fall in the property sector could narrow, the upward trend of the long real estate cycle of more than 20 years has come to an end.

Further, the overall return on infrastructure investment, which acts as a countercyclical policy tool to stabilize investment, is dropping on a sustained basis, as evidenced by the fact that the median return on invested capital of local government financing vehicles has dropped from 3.1 percent in 2011 to 1.3 percent in 2020.

As the prospect of exports and real estate has a direct bearing on the growth of manufacturing investment, it is no surprise that manufacturing investment will experience a long-term downward trend.

Exports have also faced mounting pressure due to stagnant external demand, rising trade frictions and increasing domestic labor costs.

Since 1990, China's exports have continued to grow, and the country has long been the world's top exporter. China's exports accounted for more than 15 percent of the global total in 2021, but a falling trend emerged since the second half of 2022 and continues to unfold.

Japan's share of global exports, after reaching 9.55 percent in 1993, began to go downhill, accounting for less than 3 percent in 2022. The decline of Japanese exports was not caused by the significant appreciation of the yen after the Plaza Accord in 1985 but by the dramatic rise in Japanese labor costs starting in the late 1980s.

Lessons from Japan show that it is almost impossible for a country to sustain a booming export share permanently. A rise of economies is accompanied by increasing labor costs, which will undermine exports' cost advantage.

As China's manufacturing labor costs are now over four times that of Vietnam and over three times that of Thailand, it is difficult to stop enterprises from moving low-end production lines out of China.

Besides the two aforementioned factors, the fast-growing aging population in China has fueled an urgency to push forward its second economic transformation. China entered a period of negative population growth in 2022, and its population is aging faster than that of developed countries.

China has encountered a challenge similar to that of Japan and the Republic of Korea with their population aging at a rapid pace, and is estimated to become a super-aged country by 2030. This means that the potential growth rate of China's economy may decline as a result. Researches show that Japan's average annual GDP growth rate was only 1.26 percent during its rapidly aging population period.

From 2012 till now, the workforce in China has decreased by more than 30 million. The number of retirees will surge significantly from 2022 to 2035 as people born during the second baby boom will be past retirement age. Such changes are partly attributable to China's downward economic trend.

The second transformation of China's economy, with less dependence on real estate and export and more efforts toward expanding consumption, has taken on a new urgency.

In the case of Japan and South Korea, their global industrial output ratios had declined sharply or flattened since mid-1990s, due to rising wage levels. China's wage levels are also rising rapidly, which explains for the transfer of some of its low-end manufacturing capacities to Southeast Asia and other regions.

To achieve a real economic transformation, China must improve both scale and strength of its manufacturing. It needs to increase research and development inputs and better leverage the roles of both the market and the government in accelerating industrial mergers and acquisitions.

China's manufacturing industry, with a low industrial concentration, generally relies on market-based ways to carry out mergers and acquisitions, which is less efficient and takes longer. The synergy of an effective and facilitating State can be brought to integrate industry resources in a more efficient way.

An array of measures, therefore, should be employed to optimize the institutions and mechanisms for China to become a manufacturing powerhouse to guard against falling into the trap of economic stagnation.

It must be very patient in encouraging growth and upgrading its manufacturing enterprises.

China should also uphold the principle that "housing is for living in, not for speculation".

China's society-wide net worth, according to a McKinsey study, has soared to $120 trillion in 2020 from $7 trillion in 2000, while the United States has only doubled its net worth to $90 trillion over the same period. Such rapid asset growth in China is closely related to the rapid expansion of real estate.

By the end of April, China's M2, a broad measure of money supply, which covers cash in circulation and all deposits, reached 281 trillion yuan ($39.71 trillion), twice that of the United States. This is also related to the huge scale of real estate.

The long-term upward channel of the real estate cycle has come to an end in China. It means that the transformation of China's economy from an investment-led model to a consumption-driven one is imminent. However, it takes a long time for consumption to take the place, and economic transformation is also a long-range process.

Greater efforts, therefore, will be needed to advance reform, with a key focus on shoring up residential incomes and especially expanding the proportion of middle-income groups. Only by expanding consumption can the country maintain a well-functioning domestic economy and create a new development dynamic.

It is also worth mentioning that China's overall leverage ratio is around 100 percent, which is not high compared to 144.5 percent in the United States and 260 percent in Japan. But the proportion of local government debt is relatively high and poses greater credit risk.

With revenues from the sale of land-use rights on the wane, the local governments are facing debt-repaying risks.

Therefore, it is imperative to promote the reform of State-owned enterprises, with the view of better mobilizing State-owned assets through mergers, acquisitions and restructuring and increasing local fiscal revenues through dividends and sales of listed State-owned company shares.

The scale of central government debt should be raised to ensure economic transformation while achieving stable overall economic growth.

Sustained efforts must also be pursued for wider opening-up to combat "de-Sinicization" and bringing in foreign technology and equipment in a proactive manner.