• Asian equity markets began the week subdued with risk appetite sapped amid holiday closures for key global markets
• Headline Chinese Manufacturing PMI slightly missed expectations whilst Non-Manufacturing topped forecasts
• DXY heads into the EU session around 90.00, EUR/USD trades circa 1.22 and GBP/USD eyes 1.42
• Key GOP Senators in infrastructure discussions with the White House suggested over the weekend that they were still looking for a deal
• Looking ahead, highlights include German regional & national CPIs. UK & US markets are closed
• Today, the service will run to 18:00BST, upon which the desk will close. The service will then re-open on May 31st at 22:00BST for the beginning of the Asia-Pacific session

CORONAVIRUS UPDATE

US COVID-19 cases on Saturday were at 11,976 which was the lowest reported infections since March 23rd 2020. (Newswires)

Pfizer (PFE) and BioNTech (BNTX) received the first authorization in the EU for COVID vaccine use in adolescents. (Newswires)

UK Vaccines Minister Zahawi suggested the lifting of lockdown will be driven by data with a cautious approach needed. (Newswires)

UK vaccine passport plans are reportedly to be scrapped. In relevant news, the UK could maintain face masks and work from home guidance beyond June 21st under government plans to “prioritise” the end of social distancing if cases of the Indian COVID-19 variant continue to surge. Furthermore, it was also reported that scientists were calling for a delay to the June 21st phase of the unlocking after new daily cases increased above 4,000 recently and the R value rose above one for the first time since January, while a SAGE scientist warned that the UK is on a knife edge and that everyone needs to be cautious with the next two weeks critical for exiting the pandemic. (The Telegraph/The Times/Sky News)

Plans to make Covid-19 passports a legal requirement for large events are set to be dropped, according to the Telegraph. (Telegraph)

French Labour Minister Borne said the country is ready to begin cutting back on its financial support to businesses and workers impacted by COVID-19 restrictions as the vaccination program offers a route out of the crisis. (Newswires)

Vietnamese authorities detected a new variant of COVID-19 which has characteristics of both the Indian and UK variants, while the country is said to be bracing for disruptions in its tech manufacturing sector which is it’s economic engine and a key component of global supply chains. Furthermore, it was reported that the country’s business hub of Ho Chi Minh imposed social distancing measures for two weeks. (Newswires)

Malaysia announced all manufacturing sectors will be closed aside from selected sectors during a total lockdown, while only 12 manufacturing sectors will be permitted to run at 60% capacity. (Newswires)

South Africa extended its nightly curfew with non-essential establishments required to shut at 22:00 local time and limited gatherings amid surging COVID-19 cases. (Newswires)

ASIA

Asian equity markets began the week subdued with risk appetite sapped amid holiday closures for key global markets, month-end factors and as the region also digested mixed Chinese PMI data. ASX 200 (-0.2%) traded marginally lower with the index pressured by underperformance in energy, tech and financials although downside was cushioned by strength in metal-related stocks, especially gold miners after the precious metal reclaimed the USD 1,900/oz status and domestic producers came close to topping China in terms of the world’s largest gold output during Q1. Furthermore, Australia's tensions with its largest trading partner continued to linger with the government readying to launch a second WTO action in its trade dispute with China after finalising consultation with wine exporters in recent weeks. Nikkei 225 (-1.1%) underperformed after the extension of the state of emergency for Tokyo and several other prefectures on Friday in an effort to slow COVID-19 infections and as the Olympic games remain on the line, with mild currency inflows and weaker than expected Industrial Production and Retail Sales figures adding to the headwinds for the Japanese benchmark. Hang Seng (-0.5%) and Shanghai Comp. (-0.2%) conformed to the uninspired mood after mixed Chinese PMI data in which the headline Manufacturing PMI slightly missed expectations but Non-Manufacturing PMI topped forecasts. The factory activity data was seen as a stabilization which was said to support analysts’ views that China’s economic activity could be peaking in Q2, while reports late last week added to the China crackdown narrative with the securities regulator paying greater attention to fluctuations in commodity prices recently and vowed to take action on future market violations. Finally, 10yr JGBs were flat despite the risk averse tone in Japan as price action was constrained amid the similar lacklustre trade in T-notes and following weaker demand at the 2-year JGB auction.

PBoC injected CNY 10bln via 7-day reverse repos with the rate at 2.20% for a net neutral daily position. (Newswires) PBoC set USD/CNY mid-point at 6.3682 vs exp. 6.3690 (prev. 6.3858)

• Chinese NBS Manufacturing PMI (May) 51.0 vs. Exp. 51.1 (Prev. 51.1)
• Chinese Non-Manufacturing PMI (May) 55.2 vs. Exp. 55.1 (Prev. 54.9)
• Chinese Composite PMI (May) 54.2 (Prev. 53.8)
• Japanese Industrial Production (Apr P) Y/Y 15.4% vs. Exp. 16.9% (Prev. 3.4%)
• Japanese Retail Sales (Apr) Y/Y 12.0% vs. Exp. 15.3% (Prev. 5.2%)

China CBIRC official warned that recent rate hikes by emerging economies could result in a bursting of global financial asset bubbles. (Newswires)

Chinese think-tank China Finance 40 Forum stated that US President Biden’s administration is unlikely to remove tariffs on Chinese goods in the short-term but added that sides could find a middle ground by increasing tariff exclusions as a method of lowering tensions. (Newswires)

Former PBoC official Sheng warned that the rapid appreciation of the CNY against the USD may have overshot which signals short-term speculation and will not be sustainable, while Sheng added that the rapid appreciation of the currency will squeeze margins at export firms, especially SMEs and will also damage the broader economy as companies would be distracted from their main business and turn to speculation. (Newswires)

New Zealand said it supports Australia in its ongoing trade dispute with China regarding Barley tariffs, while Australia’s Trade Minister said that they welcomed New Zealand’s support for a rules-based trading system. (Newswires/abc.net)

UK/EU

UK Chancellor Sunak said there is a deal to be made regarding global corporate tax and urged the US to get it done next week at the G7, while he noted that negotiations regarding a G7 agreement on tax are going well. (Newswires)

British Retail Consortium warned of a tsunami of closures for Britain’s retail sector if the government does not extend a moratorium on aggressive debt enforcement. (Newswires)

EU Commission approved EUR 10bln German state aid for companies which suffered because of the COVID pandemic. (Newswires)

France’s budget deficit is expected to reach EUR 220bln this year due to the pandemic-related response measures, according to budget minister Dussopt. (Newswires)

Italy’s government approved a reform decree on Friday to unlock EU recovery funds and which sets out how it will oversee investments funding by the EU. (Newswires)

Insa poll showed support for the Greens fell by 1ppt to 22% while Chancellor German Merkel’s Christian Democratic-led bloc rose 1ppt to 25%. (Bild am Sonntag)

FX

In FX markets, the DXY was uninspired and briefly retreated below the 90.00 level amid the extended weekend in US for Memorial Day and after last Friday’s slew of data releases failed to spur the currency. Last week also saw the announcement of President Biden’s budget proposal which was opposed by congressional GOP leaders including House Minority Leader McCarthy who said every member of Congress should reject it and Senate Minority Leader McConnell suggested it would drown American families in debt, deficits, and inflation even after the massive tax hikes. Conversely, the infrastructure front seemed more constructive as GOP Senators suggested they were still looking for a deal and the Biden administration extended the talks into June although Transport Secretary Buttigieg noted that discussion cannot continue forever and called for clear direction by next week. EUR/USD mildly benefitted from the soft greenback and attempted to reclaim the 1.2200 handle after composing itself from last Friday’s volatility, while GBP/USD tested 1.4200 to the upside but with gains capped amid the UK bank holiday closure and increasing concerns regarding domestic cases of the Indian COVID-19 variant. USD/JPY was lacklustre and continued to retreat from its brief foray into 110.00 territory and antipodeans were kept afloat on the back of a subdued USD, recent upside in metal prices and another firmer CNY reference rate setting by the PBoC.

RBNZ Assistant Governor Hawkesby said OCR projections of a rate hike at the end of next year are conditional on underlying economic assumptions and stated that he is aware markets are trying to get ahead of the bias but reiterated that they must remember projections are conditional. Furthermore, he stated that recent COVID-19 outbreaks are a reminder that uncertainties remain and that inflation is not expected to hit sustainable levels until the tail end of forecasts. (Newswires)

• New Zealand NBNZ Business Outlook (May) 1.8% (Prev. -2.0%)
• New Zealand NBNZ Own Activity* (May) 27.1% (Prev. 22.2%)

Israel’s opposition parties are planning a coalition in an attempt to form a minority government and unseat PM Netanyahu, while PM Netanyahu commented that a government of the opposition leaders will weaken the nation. (Newswires/FT)

COMMODITIES

Commodities were mixed with mild gains in WTI crude futures after finding some support beneath the USD 66.50/bbl level but with upside capped by the subdued risk tone and ahead of tomorrow's OPEC+ meeting where producers are expected to adhere to previously agreed plan to ease oil output cuts until July. Elsewhere, gold prices were kept afloat above the USD 1900/oz level as the greenback languished overnight with the precious metal set for its biggest monthly gain since July last year, while copper traded sideways due to the lacklustre risk tone.

Baker Hughes US rig count (w/e 28th May): Oil +3 at 359, NatGas -1 at 98, Total +2 to 457. (Newswires)

OPEC JTC will commence today at 12:00BST/07:00EDT whilst the JMMC/OPEC+ back-to-back meetings will start tomorrow at 13:30BST/08:30EDT, according to EnergyIntel. (Twitter)

US Colonial Pipeline reportedly experienced network issues on Friday which impacted customers' ability to enter and update nominations, while communication from Colonial systems to Transport 4 may have also been affected. (Newswires)

GEOPOLITICAL

US President Biden said he will press Russian President Putin to respect human rights when the two leaders meet next month and will make it clear that the US will not stand by and let him abuse those rights. (Newswires)

US

Treasuries rallied into the US session amid month-end rebalancing flows while mixed data slate was overlooked. By settlement, 2s -0.4bps at 0.143%, 3s -1.1bps at 0.295%, 5s -1.9bps at 0.795%, 7s -2.2bps at 1.257%, 10s -2.4bps at 1.586%, 20s -1.8bps at 2.183%, 30s -2.3bps at 2.268%. 5yr TIPS +1.2bps at -1.802%, 10yr TIPS -1.4bps at -0.849%, 30yr TIPS -1.9bps at -0.045%. SOFR and EFFR unchanged at 1bp and 6bps, respectively. Bonds were on the back foot out of APAC trade in quiet Friday trade. The downside accelerated as Europe arrived, particularly EGBs, finding additional pressure as comments from ECB’s Schnabel crossed. In sum, the more hawkish-leaning GC member contends that the Eurozone economy has troughed and recent yield rises are a consequence of the improved outlook, adding that this is what one would expect and ‘want’ to see, a very contradictory view to that offered by Panetta earlier this week. There was little reaction to firmer than forecast German import prices. Some desks also draw attention to the hot weather in London into the holiday weekend sapping on liquidity conditions. But, govvies soon recovered into the European/US handover as (present) participants casted their attention to month-end duration extension (exp. +0.12yr for USTs). Today's US data slate appeared a non-event for markets: Personal Income -13% (exp. -14.1%), Consumption +0.5% (exp. +0.5%), Core PCE M/M +0.7% (exp. +0.6%). But, the folks over at IFR noted that "Hedge funds sold 5k USU and 40k TYU just after the data. Cash 10s hit the 1.62% support and held, similarly bond hit 2.30% (support) and also held –both scooped by real money. But small algo buy programs also ran on the dip." Essentially, some heavy activity under the static hood. Otherwise, prices continued to advance into the afternoon, with some brief wobbles in wake of the solid Chicago PMI print, but once Uni of Michigan was in the rear view, bidding continued with flows linked to index extension. T-note (U1) futures settled 5 ticks higher at 131-30.

US President Biden's 2022 budget proposal calls for USD 6.01trln on spending (up 36.6% from 2019), calls for raising USD 4.17trln in revenue (+16.5% over 2021) and projects a USD 1.84trln deficit in 2022. Furthermore, the 10-year budget window projects US nominal GDP to grow by 42% from 2022 to 2031 and President Biden's 10-year budget plan adds USD 14.53trln to the nation’s debt between 2022 to 2031 and narrows annual deficits to USD 1.45trln by 2031, while the White House said it would pay for the infrastructure and families plans in 15 years. The White House also released economic forecasts in which it sees US Real GDP Growth at 5.2% in 2021, 4.3% in 2022 and 2.2% in 2023. (Newswires)

US Treasury said proposed clean energy tax deductions and credits would reduce revenues by USD 303bln over a decade, while tax credit proposals for children and families would reduce revenues by USD 821.8bln over a decade and proposed tax increases for high-income Americans would raise USD 691bln in revenues over a decade. Furthermore, the net revenue increase from Biden’s tax proposals is estimated at USD 94.3bln in FY22, USD 160.1bln in FY23 and USD 2.393trln over a decade, while corporate tax increase proposals would increase revenues by USD 98bln in FY22, USD 195.7bln in FY23 and USD 2.035trln over a decade. (Newswires)

US Senate Minority Leader McConnell spoke against the budget which he stated would drown American families in debt, deficits, and inflation even after the massive tax hikes, while House Minority Leader McCarthy said every member of congress should reject it. (Newswires)

Key GOP Senators in infrastructure discussions with the White House suggested over the weekend that they were still looking for a deal, according to reports in Axios. In relevant news, there were also comments from US Transport Secretary Buttigieg that infrastructure talks cannot continue forever and called for clear direction by next week. (Newswires/Axios)

US Treasury Secretary Yellen in G7 finance meeting, emphasized importance of further fiscal support to promote robust, lasting recovery from the pandemic. Yellen also expressed support for work on digital payment issues including exploring Central Bank Digital Currencies and expressed US commitment to multilateralism and support for G7 climate change efforts. (Newswires)

US regulators are preparing to take a more active role in regulating the crypto market, however this could take time to bear fruit, according to the US Treasury acting Comptroller of the Currency Michael Hsu. (FT)