The US administration issued tariff letters this week to a range of countries, including those in Asia. Most Asian trading partners received lower tariffs than initially announced on “US Liberation Day” in early April. The effective date is set for August 1st, implying a three-week window for further negotiations. These discussions will likely focus on increased purchases of US goods and transhipment issues. Asian rates remain largely calm, with 10-year government bond yields across the region continuing to trend lower this week. Currencies also remain broadly stable. Looking ahead, slowing domestic economies and a gloomy trade outlook suggest further easing from Asian central banks. For instance, the BNM has cut the interest rate for the first time this week after two years pause. The weak USD, with the DXY index hovering around 96-98, provides scope for broader Asian rate cuts. Note that US President Trump's trade policies, fiscal concerns, and worries about the Fed's independence are weighing on the DXY over the medium to long term.
While the US and China have already engaged in multiple rounds of negotiations, investors are focused on the potential for US transhipment tariffs being applied to other trading partners. Year-to-date through May, China's exports to ASEAN rose by 12.2% YoY, while those to the US fell by 9.7%. ASEAN has already become China's top export destination in 2024, accounting for 16.4% of total exports. While the surge in shipments to ASEAN cannot be solely attributed to re-exports, the potential third-party tariffs may cloud China's trade outlook for 2H25.
Manufacturers may continue to curb export prices to maintain market share, further contributing to weaker domestic prices. In fact, the Producer Price Index (PPI) released earlier this week extended its contraction from -3.3% in May to -3.6% in June. The Consumer Price Index (CPI) also fell by 0.1% MoM. This disinflationary environment translates into higher real interest rates, which are restraining credit demand. Consequently, the PBOC is expected to maintain its course of monetary easing and potentially cut the 1-year Loan Prime Rate (LPR) by another 20 basis points this year. Short-end 2-year CGB yield is likely to see further downward pressure, leading to a steeper yield curve.
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