• Asian indices are subdued with sentiment weighed on by US President Trump’s plans to place tariffs on Mexican goods at an initial level of 5%
• Chinese Manufacturing PMI moved into contractionary territory and printed below the estimate at 49.4
• China reportedly has plans to limit rare earth sales to the US if necessary, while US VP Pence says Trump and Xi will likely meet at the G20 summit
• Looking ahead, highlights include German Retail Sales & CPI (Prelim), Italian GDP (Final) & CPI (Prelim), US Core PCE Price Index, Personal Income, Chicago PMI & University of Michigan Sentiment, ECB's Visco, Fed's Williams & Bostic

ASIA-PAC

Asian equity markets traded mixed heading into month-end with early pressure seen after US President Trump announced to place 5% tariffs on all goods from Mexico from June 10th, which will increase to as much as 25% by October 1st and remain there until Mexico addresses the illegal immigration inflows to the US through its territory. The announcement pressured US equity futures to give back the prior session’s gains in which the Emini S&P breached its 200DMA to the downside and the DJIA briefly slipped below the 25K level, with Wall St on track for its worst monthly performance YTD. ASX 200 (Unch.) was lower for most the session with tech and energy the underperformers although strength in gold and other mining names stemmed the downside in the index, while Nikkei 225 (-1.0%) suffered from currency flows and with automakers spooked by fears of a trigger-happy ‘Tariff Man’. Hang Seng (-0.3%) and Shanghai Comp. (Unch.)were mixed as participants digested varied Chinese PMI data in which Manufacturing PMI fell short of estimates and slipped into contractionary territory but Non-Manufacturing PMI printed inline, and although the PBoC refrained from open market operations, its efforts this week resulted to a total net injection of CNY 430bln. Finally, 10yr JGBs followed suit to the upside in T-notes as Trump’s announcement spurred safe-haven demand, while the BoJ were also present in the market for JPY 680bln of JGBs in the belly to super long-end.

PBoC skipped open market operations for a net weekly injection of CNY 430bln vs. CNY 100bln net injection W/W. (Newswires) PBoC set CNY mid-point at 6.8992 (Prev. 6.8990)

Chinese Manufacturing PMI (May) 49.4 vs. Exp. 49.9 (Prev. 50.1). (Newswires) Chinese Non-Manufacturing PMI (May) 54.3 vs. Exp. 54.3 (Prev. 54.3) Chinese Composite (May) 53.3 (Prev. 53.4)

US Vice President Pence said the US can more than double tariffs on China if necessary and hopes progress can be made at the G20 but added that China must agree to make reforms. Pence also commented that President Trump will probably meet with Xi at the G20 and will urge him to release the Canadian detainees, while he stated the US sees Huawei as incompatible with its security needs and is working to promote alternatives. (Newswires)

China reportedly has a plan ready to limit rare earth sales to the US if needed, while there were separate reports that Huawei ordered employees to cancel meetings with US contacts and repatriated American workers at its Shenzhen HQ. (Newswires/FT)

China reportedly quietly adjusted tools for handling capital flows in which it increased the number of indicators and conditions for banks to consider to manage their risks. (Newswires)

Bank of Korea kept its benchmark rate unchanged at 1.75% as expected, while the decision was not unanimous as board member Cho dissented and called for a cut. Furthermore, the BoK said exports are to gradually recover and consumption will continue to grow but added that trade risks have increased which contributes to uncertainties for Korea. (Newswires)

UK/EU

UK GfK Consumer Confidence (May) -10 vs. Exp. -12.0 (Prev. -13.0) UK Lloyds Business Barometer (May) 10 (Prev. 14)

Italy’s 5 Star Movement members voted in favour of Deputy PM Di Maio to continue as leader who won 80% of the votes in the internal ballot. (Newswires)

FX

DXY was steady above the 98.00 level as its major counterparts EUR/USD and GBP/USD languished near this week’s lows at the weaker end of the 1.1100 and 1.2600 handles respectively, while Citi's month-end FX hedge rebalancing model also suggested moderate buying of USD. Elsewhere, Trump’s tariff announcement on Mexico spurred flows in into safe-haven JPY and saw USD/JPY test the 109.00 level, while MXN dropped nearly 2% and was the biggest fallout from the tariff threat which Deputy Foreign Minister Seade described as very extreme and suggested that the normal route would be to mirror the tariffs although that would lead to a trade war. CAD also weakened due to the potential ramifications on the USMCA, while antipodeans were flat as support at 0.6900 for AUD/USD and 0.6500 for NZD/USD helped prices rebound from the early tariff-related pressure.

COMMODITIES

Commodities were mixed in which WTI crude futures extended on recent losses to test the USD 56.00/bbl level to the downside after having slipped around 6% from Thursday’s peak amid a bearish EIA inventory report. Gold continued on its ascent towards the USD 1300/oz level after the downward revisions to US GDP and Core PCE data, while copper was rangebound as it mirrored the indecisive tone in China.

OPEC oil output in May declined 60K bpd from April to 30.17mln bpd which was the lowest since 2015, while compliance to supply cut deal was at 96% vs. Prev. 132% M/M, according to a Reuters survey.  (Newswires)

US Secretary of State Pompeo said attacks on oil tankers in the Gulf was an effort by Iranians to raise global crude prices, while the US Special Envoy for Iran Hook said any countries purchasing Iranian crude oil after expiration of waivers will be subject to sanctions. (Newswires)

US

Treasuries began Thursday on the backfoot, trading lower in the Asian and European session, before reversing course to settle approximately unchanged. A risk off US session helped spur bids in the T-plex, with the usual US-China trade talk deterioration dampening sentiment. The curve saw bull flattening on the day, with 30-year yields hitting 21-month lows, in addition to the 5-year yield testing the 2% handle. US T-note futures (M9) settled 2 ticks higher at 125-22.

US President Trump announced a 5% tariff on all goods coming from Mexico beginning June 10th until illegal immigrants coming through Mexico to the US stop. Trump added the US will begin raising tariffs on Mexico beyond 5% on July 1st and will continue until it reaches 25% on October 1st, where they will remain unless and until Mexico significantly stops illegal inflow of aliens through its territory. (Newswires/Twitter)

Mexico Deputy Foreign Minister Seade said the tariffs would be disastrous and that Mexico would respond strongly if tariffs are carried out. Seade also commented that this was an unexpected move by Trump and is very extreme, while he added that the normal route would be to mirror the tariffs although that would lead to a trade war. (Newswires)

USTR Lightizer told congress they are submitting a draft statement of administrative action to implement USMCA deal, while US House Speaker Pelosi commented that the decision to expedite USMCA process is not a positive step. (Newswires)

Fed's Clarida (Voter, Neutral) said the US economy is in a good place and the Fed are close to achieving the dual mandate. Clarida added that if inflation shortfall becomes persistent, the Fed would take that into account and is prepared to adjust balance sheet normalisation if conditions warrant, while he also commented that the Fed would be open to cutting rates if data suggests risks of a sharper than anticipated slowdown. (Newswires)

Fed's Quarles (Voter, Hawk) said financial stability risks must be incorporated into monetary policy decision making, while he added that current financial stability risks are not elevated and that accommodative policy can increase financial stability risks. (Newswires)