China manufacturing PMI unexpectedly signals contraction in May

China’s manufacturing PMI slipped into contraction territory in May, falling to 49.5 from 50.4 in April and below the median forecast for a slight improvement. The non-manufacturing PMI also declined slightly to 51.1 in May from 51.2 in April but pointed to an improvement in business conditions. The composite PMI fell to 51.0 from 51.7 in April. Weak domestic demand has weighed on China’s post-pandemic economic recovery. The government has announced measures to buy unsold residential real estate which may improve confidence going forward.

China and the UAE are looking to improve cooperation in the energy and infrastructure sectors as well as look for ways to boost bilateral trade, as the UAE President’s official visit to China got underway yesterday. One area in focus for improved co-operation is the high-tech industry including the digital economy and artificial intelligence as well as clean energy. The UAE state visit coincides with the China-Arab States Co-operation Forum which is running this week in Beijing, and will be attended by some other Arab heads of state as well. Separately, Bloomberg reports that the US has slowed the issuing of licenses to semiconductor manufacturers such as Nvidia and AMD for AI related shipments to the Middle East.

US GDP growth was revised lower to 1.3% q/q annualized from the initial estimate of 1.6%. Personal consumption growth was revised down to 2.0% from 2.5% previously, slightly lower than the median forecast. The weaker consumption data reflected lower spending on goods, particularly cars. Net exports were a drag on US growth for the first time in two years. Core PCE was also revised a touch lower to 3.6% from 3.7% in the first estimate. PCE data for April are due this evening.

The US pending home sales index fell to a four-year low of 72.3, down -7.7% m/m, against a forecast of -1.0% m/m. High mortgage rates and low inventory weighed on the number of transactions, but real estate prices in the US have continued to rise.

With over 50% of the votes counted in South Africa so far, the African National Congress looks set to lose its majority after 30 years in power. Current projections put the ANC on track to win just over 42% of the vote, down from 57.5% in 2019, followed by the Democratic Alliance at 23%. The big question for markets is who the ANC might choose to form a coalition: an alliance with the DA would be seen as market friendly, but a partnership with the Economic Freedom Front (EFF) or former president Jacob Zuma’s MK party could see a shift to the left in economic policies that would be negative for investors. UAE imports from South Africa reached USD 5.8bn in 2023, and the UAE is South Africa’s sixth largest export market.

Today’s Economic Data and Events

10:00 UK Nationwide house price index (May) forecast 0.2% m/m and 0.9% y/y prev. -0.4% m/m; 0.6% y/y

13:00 Eurozone CPI (May, P) forecast 0.2% m/m and 2.5% y/y, prev. 0.6% m/m and 2.4% y/y

16:30 US personal income (Apr) forecast 0.3% m/m, prev. 0.5% m/m

16:30 US personal spending (Apr) forecast 0.3% m/m, prev. 0.8% m/m

16:30 US PCE deflator (Apr) forecast 0.3% m/m and 2.7% y/y, prev. 0.3% m/m and 2.7% y/y

Fixed Income

• Treasuries rallied after US GDP data for the first quarter were revised lower yesterday. The 2y yield fell -5bp to 4.92% while the 10y yield declined -6bp to 4.55%. Treasury yields are steady in Asian trade this morning.
• Benchmark 10y bond yields also declined across most of EMEA yesterday with only Sweden and Switzerland seeing 10y yields rise. Gilt yields fell -5bp to 4.35% while Bund yields declined -4bp to 2.65%.
• Bank of Bahrain and Kuwait is in the market for a benchmark USD 5yr issue with pricing around the low “7%” level according to press reports. Elsewhere National Bank of Kuwait is pricing a USD green bond at +130 over benchmarks.

FX

• The USD spot index lost -0.4% yesterday, with CHF and JPY gaining 0.2% and 0.7% respectively against the greenback. EUR and GBP depreciated -0.3% respectively. The commodity currencies were also weaker against the dollar but have recovered somewhat this morning in Asia.
• ZAR weakened almost 2% yesterday as the extent of the ruling ANC’s losses in this week’s elections became apparent, raising the prospect of a coalition with less-market friendly parties.

Equities

• Saudi Arabia has offered 1.55bn shares in Aramco in a secondary offering which will begin on 2 June. The price range is expected to be between SAR 26.70 and SAR 29.00 per share. The Tadawul ASI declined -1.7% on Thursday while ADXGI and DFMGI rose 0.5% and 0.3% respectively.
• US equities closed in the red on Thursday despite a modest decline in Treasury yields. The Nasdaq100 fell -1.1% while the DJIA and S&P500 declined -0.9% and -0.6% respectively. European stocks fared better with the EuroStoxx50 index gaining 0.4% and the FTSE100 up 0.6% yesterday.

Commodities

• Oil prices fell again on Thursday with Brent closing down -2.1% at USD 81.86/b and WTI down -1.7% at USD 77.91/b. Both contracts are lower in Asian trade this morning, after weaker than expected China PMI data and ahead of the OPEC+ meeting this weekend. We expect the existing OPEC+ production cuts to be extended.