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Asian shares tick up ahead of US payrolls test; Trump's tax bill in focus
Wall Street climbed overnight to close at new record highs after President Donald Trump announced that the US has struck a trade deal with Vietnam, including a 20 per cent tariff on exports to the US That fuelled hopes that more deals will be forthcoming, with negotiations underway for a trade agreement with India.
The MSCI's broadest index of Asia-Pacific shares outside Japan advanced 0.2 per cent to hover just below a near four-year top. Japan's Nikkei was flat.
China's blue chips edged up 0.2 per cent, while Hong Kong's Hang Seng index fell 0.6 per cent after data showed China's services activity expanded at the slowest pace in nine months in June.
Both Nasdaq futures and S&P 500 futures were little changed in Asia [.N]
Investors were waiting for Trump's massive tax and spending bill to pass the House of Representatives for possible final approval. The bill is expected to add $3.3 trillion to the national debt, slash taxes and reduce social safety net programs.
The main risk event for markets will be the US payrolls figures due later in the day. Analysts are forecasting a rise of 110,000 in June with the jobless rate ticking up to 4.3 per cent but the stakes are high after a private sector payrolls report surprised with the first fall in over two years.
The resilience of the labour market is a major reason the majority of Federal Reserve members say they can afford to hold off on cutting rates until they can gauge the real impact of tariffs on inflation.
"These labour market indicators warn of the risk that the unemployment rate could spike to 4.4 per cent, the highest since October 2021," said Tony Sycamore, analyst at IG.
"This would quickly increase the probability of a July Fed rate cut to around 70 per cent."
Futures imply just a 25 per cent probability for a rate cut this month from the Fed, which has not eased policy at all this year, drawing the ire of Trump who reiterated his call on Wednesday for Chair Jerome Powell to resign.
The Treasuries market was tense before the data as a weak jobs report would send yields sharply lower. Ten-year Treasury bond yield slipped 2 basis points to 4.265 per cent on Thursday, while two-year yields eased 2 bps to 3.77 per cent.
The dollar is again under pressure, having caught some relief overnight. Concerns about the Fed's independence in the wake of Trump's criticism have driven the dollar to its lowest against its peers in over three years.
Trump, who said rates should be cut to 1 per cent from the current Fed benchmark rate of 4.25 per cent to 4.50 per cent, has repeatedly railed against Powell for not lowering borrowing costs since his return to the White House in January.
The euro inched up 0.1 per cent to $1.1807, just a whisker away from a nearly four-year top of $1.1829 hit on Tuesday, while sterling added 0.1 per cent, recovering a steep 0.8 per cent fall overnight, as fears about the future of its finance minister Rachel Reeves eased.
Investor anxiety over UK finances after the British government's reversal on welfare reforms caused gilt yields to jump overnight, up nearly 23 basis points at one point, the most since October 2022.
In commodities markets, oil prices were slightly lower after jumping 3 per cent overnight as Iran suspended cooperation with the UN nuclear watchdog. US crude futures slipped 0.4 per cent to $67.20 a barrel while Brent was at $68.84 per barrel, also 0.4 per cent lower on the day.
Gold prices eased 0.4 per cent to $3,342 an ounce.
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The lion's share of Vietnam's exports to the US are goods like Airpods, phones or other products assembled with Chinese components in a factory in Vietnam and then shipped to America. That's not illegal. 'A lot will depend on how the 40 per cent tariffs are applied. If the Trump administration keeps it targeted, it should be manageable,' said Roland Rajah, lead economist at the Lowy Institute in Sydney. 'If the approach is too broad and blunt, then it could be quite damaging' for China, Vietnam and for the US, which will have to pay higher import prices, he said. The think tank estimates that 28 per cent of Vietnamese exports to the US were made up of Chinese content in 2022, up from 9 per cent in 2018. Pham Luu Hung, chief economist at SSI Securities Corp. in Hanoi, said a 40 per cent levy on transshipped goods would have limited impact on Vietnam's economy because they aren't of Vietnamese origin in the first place. Re-routed exports accounted for just 16.5 per cent of Vietnam's shipments to the US in 2021, a share that's likely declined over the past couple of years amid stronger enforcement actions by both governments, Hung said. 'An important caveat is that the rules of origin remain under negotiation,' Hung said. 'In practice, these rules may have a greater impact than the tariff rates themselves.' Devil in Details Duncan Wrigley, chief China economist at Pantheon Macroeconomics, said he's skeptical the latest deal will be effective in stamping out Chinese exports via Vietnam to the US. 'The devil is in the details, but I think China's exports will either go via other markets to the US, or some value-added will be done in Vietnam so the product counts as made in Vietnam, rather than a transshipment,' he said. As officials across Asia rushed to negotiate lower US tariff levels with their US counterparts this year, Chinese businesses have been just as quick to ramp up their exports through alternative channels in order to skirt punitive US levies. Shipments from China to Southeast Asia have reached record highs in Indonesia, Malaysia, Thailand and Vietnam this year. And there's been a 'significant increase in correlation' to the region's increase in exports to the US during the same period, Citigroup Inc. economists said in a recent report. Much of that is likely due to the shifting of legitimate production across the region. Goods destined for the US market may be sent from their factories in Southeast Asia, and what they make in their factories in China will be sent to the rest of the world, said Derrick Kam, Asia economist at Morgan Stanley. 'If you try to represent that in the trade data, it will look exactly like rerouting, but it's not,' Kam said. 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When the goods are then exported to the US, they'd be subject to the 10 per cent universal levy that Trump has imposed on nearly all countries, instead of the tariff for China that still equates to an effective level of over 50 per cent, even after a recent 'deal' that lowered levies from a peak of 145 per cent. With the huge scope for arbitrage, coupled with little policing, that process will prove tough to stamp out. 'Chinese exporters and their affiliates and partners in Southeast Asia are highly skilled at adapting to changing rules, identifying loopholes, and sometimes overstating the extent of value-add by non-China countries,' said Gabriel Wildau, managing director at advisory firm Teneo Holdings LLC in New York. Some final assembly or transshipment may shift to rival Southeast Asian transshipment hubs like Cambodia, Thailand and Singapore, or farther afield to Turkey, Hungary or Poland, Wildau said. 'Another possibility is that the definitions and enforcement mechanisms are fuzzy, rendering the latest deal cosmetic and toothless,' he said. 'Rigorous enforcement would also require a significant boost of resources to enable US customs to verify compliance with the tougher rules of origin.' There have been efforts across the region to at least be seen to be making an effort to curb the practice. Indeed, Vietnam has made a big deal about cracking down on trade fraud and illegal activity in recent months. In April, South Korea said it seized more than $20 million worth of goods with falsified origin labels — the majority of which were destined for the US. The Airfreight Forwarders Association of Malaysia issued a warning in May as Chinese brokers promoted illegal rerouting services on social media. Malaysia has centralized the issuance of certificates of origin with its Ministry of Investment, Trade and Industry, while tapping its customs agency to help curb transshipment. Thailand has expanded its watch list for high-risk products, including solar panels, cars and parts, and is mulling stricter penalties for violators. Red Tape Casey Barnett, the president of the American Chamber of Commerce in Cambodia, is already seeing the changes in action. One factory that exports to major US retailers, including Walmart, Home Depot and Lowe's, said that customs officials were very carefully reviewing their products before being sent to the US, he said. 'It's creating some additional paperwork and a little bit of red tape here,' Barnett said. A senior manager at a logistics company in Cambodia, who asked not to be identified because the matter is sensitive, said export processing time has now stretched to as much as 14 working days — double what it was before. But in Indonesia, getting a certificate of origin is fairly quick and painless when goods are marked for export, often just requiring a product list and a letter to the provincial trade office, according to Wirawasta. Authorities prioritize checking products that enter the country to ensure they pay the right duties and comply with regulations, he explained. It's rare for them to inspect factories where an export good was supposedly made. So much so that sometimes, Chinese companies don't even need to muster up some local processing. 'The T-shirt could be finished in China, with a 'Made in Indonesia' label already sewn on,' Wirawasta said. 'Some traders won't even bother to unload the goods from the shipping container,' he added. 'Unloading costs money.'
