By Anthony Boadle

BRASILIA (Reuters) -European Commission President Ursula von der Leyen on Monday said the EU hopes to finalize its long-delayed trade deal with the Mercosur bloc of South American countries by the end of the year at the latest.

Brazilian President Luiz Inacio Lula da Silva, after meeting with von der Leyen, criticized an addendum the EU has added to the agreement, which has been on hold since 2019 largely due to European concerns over Amazon (NASDAQ:AMZN) deforestation.

Lula said he told her that the so-called additional tool or side letter to the accord included obligations that could lead to sanctions if they were not complied with.

"The premise between partners should be mutual trust, not distrust," he said in a joint news conference.

The European Union is waiting for a Mercosur response to its proposal to attach sustainability and climate change commitments to the deal struck in 2019 with the Mercosur bloc of Argentina, Brazil, Paraguay and Uruguay.

"We have been discussing the trade deal for two decades now ... Now finally, we are close to the finishing line. It is time that we cross that line," von der Leyen said later in a speech to industrial executives and diplomats.

She said she and Lula both committed themselves to concluding the accord "as soon as possible, the latest by the end of this year."

Lula said earlier this month his country would not sign the trade pact without adjustments, specifically pointing to the procurement clause and his government's opposition to allowing European companies to sell to Brazil's public sector.

Von der Leyen praised Lula's leadership on climate politics and his plan to end deforestation in the Amazon by 2030, and she offered 2 billion euros ($2.2 billion) in European funding to develop green hydrogen production in Brazil.

She announced that the EU was almost doubling to 10 billion euros the funds available to Latin America and the Caribbean in the 300 billion-euro Global Gateway plan for funding sustainable development.

Von der Leyen met Lula at the start of a four-nation trip to Latin America to bolster political and trade ties.

Since Russia's invasion of Ukraine, the European Union has cast around for "like-minded" partners to provide other sources of trade and critical minerals required for its green transition and help reduce its reliance on China.

Her talks with the presidents of Brazil, Argentina, Chile and Mexico will prepare the ground for the EU meeting with 30 leaders from Latin America and the Caribbean at a summit in Brussels on July 17-18.

EU and Mercosur negotiators are scheduled to meet again in Buenos Aires on June 29-30 and the South American countries will present a counterproposal. Brazil hopes to remove any possibility of sanctions, arguing that the Paris Agreement on climate set voluntary goals.

A spokesman for Brazil's foreign ministry said a counterproposal will be presented. He gave no date, but added that Mercosur negotiators will meet to agree on a joint stance before the next round of talks with the EU in Buenos Aires.

"Before the meeting with the Europeans, there will be an intra-Mercosur meeting to coordinate positions," he said.

($1 = 0.9295 euros)

By Julie Zhu

HONG KONG (Reuters) - Asian shares edged up in early trade on Tuesday, following an upbeat session on Wall Street while investors turned their attention to key U.S. inflation data and the Federal Reserve's interest rate decision this week.

Investors will be closely monitoring U.S. Consumer Price Index (CPI) data, due to be released on Tuesday, and Producer Price Index (PPI) data, due out Wednesday, for a reading of how well the Fed's tightening cycle has managed to curb inflation.

The equity index's gains partly reflected expectations for a Fed tightening pause for the first time since January 2022 and for CPI and PPI to come in lower than the prior month, investors and strategists said.

"Overall equity markets reacted positively to expectations the monetary policy cycle may be nearing its peak," ANZ analysts said in a note. "U.S. markets are now pricing a 72% probability that the Federal Reserve Monetary Policy Committee (FOMC) will hold rates at this week's meeting."

In China, to prop up the economy, the central bank cut its seven-day reverse repo rate by 10 basis points to 1.90% from 2.00% on Tuesday, when it injected 2 billion yuan ($279.97 million) through the short-term bond instrument.

Early in the Asian trading day, MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.3% while U.S. stock futures - the S&P 500 e-minis - rose 0.1%

Japan's Nikkei advanced 1.59% and Australian shares were down 0.03%.

China's blue-chip CSI300 index was 0.05% higher in early trade. Hong Kong's Hang Seng index opened down 0.2%.

On Monday, the S&P 500 and the Nasdaq rallied to their highest closing levels since April 2022.

Lifted by gains in market heavyweights Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA), the S&P 500 has recovered 21% from its October 2022 lows, heralding the start of a new bull market, as defined by some market participants.

The S&P 500 climbed 0.93% to end the session at 4,338.93 points. The Nasdaq gained 1.53% while Dow Jones Industrial Average rose 0.56%.

While the Fed is expected to keep rates steady, surprise rate hikes by the Reserve Bank of Australia and the Bank of Canada last week have still kept investors alert to the idea of prolonged tightening cycles.

The European Central Bank will deliver its rate decision on Thursday with analysts expecting it to raise rates by 25 basis points (bps) and to signal that there is more ground to cover. But the Bank of Japan, which will announce its plan on Friday, is expected to maintain its ultra-loose policy.

In U.S. Treasuries, the yield on benchmark 10-year Treasury notes reached 3.7375% compared with the U.S. close of 3.765% on Monday. The two-year yield, which rises with traders' expectations of higher Fed fund rates, touched 4.5749% compared with a U.S. close of 4.592%.

In currencies, the U.S. dollar index, which measures the greenback against a basket of major currencies, rose 0.019% to 103.600, while the European single currency was up 0.1% on the day at $1.0762.

The dollar dropped 0.05% against the yen to 139.52.

U.S. crude ticked up 0.15% to $67.22 a barrel. Brent crude rose to $72.01 per barrel.

Gold was slightly higher. Spot gold was traded at $1959.29 per ounce. [GOL/]

SYDNEY (Reuters) - Australia's business conditions eased sharply in May, dented by slower gains in sales and employment, suggesting demand growth is moderating in the wake of the central bank's most aggressive tightening campaign in its modern history.

The survey from National Australia Bank (OTC:NABZY) Ltd (NAB) released on Tuesday showed its index of business conditions fell by a sizeable seven points to +8 in May, but they remained just above the long-run average.

The volatile measure of confidence dipped back to negative territory, falling to -4 from April's 0, showing that the number of firms that are pessimistic outnumbered those that are optimistic.

The survey's measure of sales declined 8 points to +14 in May, the employment index fell 7 points to +4, and forward orders, a leading indictor of demand, fell to -5 in May.

"With the easing in business conditions accelerating and forward orders falling sharply, there is a growing risk that the RBA’s attempts to maintain an even keel 'run aground'," said NAB chief economist Alan Oster.

"The trend over coming months will be important as the RBA tries to assess whether it has done enough and if underlying inflation pressures are easing in a timely way."

In a worrying sign for the Reserve Bank of Australia, the survey pointed to persisting price pressures, with the measure of labour costs picking up to a quarterly rate of 2.2%, from 1.9% the previous month, and purchase costs accelerating to 2.5% from 2.2%.

The RBA surprised markets last week by raising the cash rate another quarter-point, bringing the total hikes to a whopping 400 basis points since May last year, and warned more rate hikes may be required to bring inflation to heel.

Markets have moved to price in the risk of two more hikes to 4.6%, while seeing rates staying there for the remainder of the year.

(Bloomberg) -- US consumers’ near-term inflation expectations fell last month to the lowest level in two years as their outlook for personal finances and credit conditions worsened, according to a Federal Reserve Bank of New York survey.

Median one-year-ahead inflation expectations declined by 0.3 percentage point to 4.1%, the lowest reading since May 2021. Expectations for inflation three years ahead and five years ahead each increased slightly, by 0.1 percentage point, to 3.0% and 2.7%, respectively, according to the New York Fed’s monthly Survey of Consumer Expectations.

Consumers also expressed more nervousness about their finances. Expectations for what earnings growth will be one year from now fell for the first time in five months, sliding to 2.8% from 3.0%. The drop was larger among respondents who had only a high school education.

A larger share of households said their finances were worse now than a year ago. The outlook for the future also deteriorated, with fewer respondents saying they expect to be better off a year from now.

More consumers said it was harder to access credit now compared to a year ago. At the same time, more households said they expect to see tighter credit conditions in one year. 

But it wasn’t all bad news. The perceived probability of job loss in the next year fell to 10.9%, the lowest since April 2022 and close the lowest level on record in data stretching back to 2013. Households also said they expected it would be easier to find a new job if they lost their current position.

The findings come just ahead of a two-day Fed policy meeting, where officials are expected to pause their aggressive tightening campaign to allow more time to learn about how prior interest-rate increases are affecting the economy. Uncertainty over how much credit conditions will tighten has bolstered the case for a pause.

Read More: Fed Backs Away From Wages Focus, Bolstering Case for Rate Pause

An update on the consumer price index due Tuesday is expected to show that core inflation, excluding food and energy, moderated to 5.2% in the 12 months through May. Reports on the labor market have been mixed, with employers adding more jobs than expected last month and the unemployment rate rising to 3.7%. 

Policymakers will release fresh forecasts this week for where they see interest rates, inflation and the unemployment rate heading over the next few years when their meeting concludes on June 14.

©2023 Bloomberg L.P.

LONDON (Reuters) - JPMorgan (NYSE:JPM) said on Monday it expects Turkey's central bank to hike interest rates to 25% from the current 8.5% at its June meeting, adding this could come with forward guidance suggesting smaller hikes ahead if needed.

June 22 is the first scheduled policy meeting after Hafize Gaye Erkan was appointed as central bank governor on Friday.

"We maintain our year-end policy rate forecast at 30%, with risks on the upside," Nicolaie Alexandru-Chidesciuc wrote in a note to clients.

"We forecast a recession in 2H23 on the back of a tightening in credit conditions."

The Wall Street bank confirmed it expected the country to tip into recession in the second half of the year due to tightening credit conditions.

By Paritosh Bansal

(Reuters) - 'De-risk, not decouple' are the new buzzwords for Western policy toward China, drawing skepticism from Beijing about whether there is any difference between the two. For businesses caught in the middle, the semantics are beside the point.

As tensions between Western allies and Beijing ratchet up over a litany of disputes, from sensitive technology to positions on Russia and Taiwan, companies with China exposure are worrying about contingency planning and conducting business amid proliferating regulatory landmines, according to interviews with nearly a dozen Western business executives in recent days.

Whether that involves a complete separation or something short of that depends on the business and its direct and indirect exposure to China, the executives said.

"There's enormous suspicion on the Chinese side and on the American side,” said Henrietta Fore, the former head of UNICEF who has served on boards of major companies, on the sidelines of a Women Corporate Directors’ conference. “I'd say 90% of CEOs are consumed with how to plan properly for this."

A former U.S. diplomat who is familiar with China added: "Everything is being questioned. Everything is in flux. And everyone is trying to minimize their dependencies."

The former diplomat and other executives, including CEOs and directors, requested anonymity to be able to speak freely about China-U.S. relations without having to worry about any repercussions.

The latest sign conversations are getting more urgent came last week when venture capital firm Sequoia said it would separate its Chinese and Indian businesses into two independent firms after concluding it had “become increasingly complex to run a decentralized global investment business.” Sources said geopolitics was one of those complicating factors.

For others, that's much harder to do. Some want to be in the Chinese market for the opportunities it presents. For some, alternatives such as moving supply chains entirely out of China are costly and not practical.

So while Sequoia took the route of separation, many other major business executives have traveled to China in recent weeks to meet staff, clients and officials. Executives including JPMorgan (NYSE:JPM)'s Jamie Dimon, Citigroup (NYSE:C)'s Jane Fraser and Tesla (NASDAQ:TSLA)'s Elon Musk made the trip.

One financial services CEO who also visited China earlier this year said he went to support his colleagues who have to deal with the uncertainties created by the current environment and to demonstrate to officials his firm's intention to remain there. At the same time, he's tried to keep a low profile, part of the reason he didn't want to be named in this column.

When asked about how he was planning for a scenario where there is a severe escalation in tensions, such as over Taiwan, he said he didn't know if there was a way to answer. The economic damage from war would be incalculable, he said. "It makes you always think that it's not possible."

SMALL YARD, TALL FENCE

Washington is putting export controls on sensitive technologies and encouraging Western companies to reassess supply chains.

At the same time, Beijing is trying to reduce its dependence on foreign know-how and increasing pressure on companies, with moves such as raids on consultancies and a new anti-espionage law. Last month, it barred operators of key infrastructure from buying from U.S. chipmaker Micron Technology (NASDAQ:MU).

In recent months, Western allies have tempered their tone, rejecting the idea of severing all economic ties with China in favor of a more nuanced approach that would not cut off trade but protect sensitive areas, such as military technology – the doctrine of "small yard and high fence."

But China has already been suspicious of the new approach, with Xinhua state news agency saying de-risking is "decoupling in disguise" and a senior diplomat telling the New Statement they'd be opposed if "de-risking means ridding China of the global industrial and supply chains, especially in key areas."

LIMITS TO DE-RISKING

One concern for businesses is how they can continue to make money while following all the rules, everywhere, especially the tricky ones around national security that are sometimes not fully spelled out.

With the new Chinese espionage law, for example, U.S. companies will have to contract out work such as competitor analysis and geospatial information because it might be too dangerous to do it in-house, the former diplomat said.

Companies are also reworking their IT systems, in some cases separating China from global operations, to prevent sensitive data from leaving the country, the former diplomat said.

But there are limits to how much they can de-risk. Companies are reworking supply chains to build redundancies and avoid single points of failure, but their dependence is so deep that they are unable to move entirely out of China, executives said.

Sometimes they work with their Chinese suppliers on the new facilities in other countries. And even when they do move some production, it's often more expensive and the quality is not as good, executives said.

The financial firm's CEO said there had not been enough focus on the costs of the new policy. He also worried rhetoric from Washington and Beijing was unleashing forces that could prove to be hard to control, even if the intent was to be balanced.

"The world doesn't do nuance very well," he said.

By Ankur Banerjee

SINGAPORE (Reuters) - Asian shares started tentatively on Monday as investors braced for central bank meetings from Europe, Japan and the United States this week, along with U.S. inflation data that will likely influence the Federal Reserve's monetary policy path.

MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.17% to 519.96, having touched a more than one-month peak of 521.94 earlier in the session. The index is up 4% for the month. Japan's Nikkei rose 0.7%, while E-mini futures for the S&P 500 rose 0.15%.

China stocks eased 0.01%, while Hong Kong's Hang Seng Index opened up 0.3%. China's sputtering post-COVID-19 economic recovery has weighed on stocks, with investors pinning their hopes on more policy stimulus as weak manufacturing and exports hurt the broader outlook this year.

Last week, the Reserve Bank of Australia and Bank of Canada stunned markets by increasing interest rates to tame stubborn and sticky inflation, stoking worries that the Fed might follow suit and take a hawkish stance in its June meeting.

Citi strategists said the Fed could be faced with the lesson that other central banks like the Bank of Canada have learned – further tightening is still needed to bring inflation to 2%.

Markets are pricing for a 71% probability the U.S. central bank will stand pat when it meets on June 13-14, according to CME FedWatch tool.

"It's a close call between a 25 basis point hike or a 'skip' ... and will come down to CPI on Tuesday," Citi said in a note.

Citi expects a 25 basis point hike from the Fed. "The most straightforward action to take when acknowledging rates should be higher is to raise rates."

While doubts persist among investors which path the Fed will take this week, they are more certain the European Central Bank, which meets on Thursday, will raise rates and remain hawkish.

"We expect (ECB President) Lagarde to retain a hawkish stance on inflation arguing that more needs to be done on the inflation front," said Mohit Kumar, economist for Europe at Jefferies.

"It is unlikely that Lagarde will give any hint that they are ready to pause after July, which is what the market is currently pricing," said Kumar, who expects the ECB to hike interest rates by 25 basis points.

In the currency market, the dollar index, which measures the U.S. currency versus six major rivals, rose 0.048%, with the euro down 0.04% at $1.0743. Sterling was fetching $1.2575, up 0.05% on the day.

The yen eased 0.01% to 139.39 per dollar ahead of the Bank of Japan's (BOJ) policy meeting on Friday.

The BOJ is expected to maintain ultra-loose monetary policy this week and its forecast for a moderate economic recovery, as robust corporate and household spending cushion the blow from slowing overseas demand, sources told Reuters.

Elsewhere, the Turkish lira slid to another all-time low of 23.77 per dollar.

U.S. crude eased 0.34% to $69.93 per barrel and Brent was at $74.49, down 0.4% on the day. Both benchmarks notched their second straight weekly decline last week as disappointing China economic data raised concerns about demand growth in the world's largest crude importer. [O/R]

Spot gold dropped 0.1% to $1,958.69 an ounce. U.S. gold futures fell 0.15% to $1,959.30 an ounce. [GOL/]

Investing.com -- It’s set to be a major week in markets - on Wednesday the Federal Reserve may pause a rate hike campaign that started 15 months ago, but it’s likely to be a close call and Tuesday’s U.S. inflation reading will be key. The European Central Bank and the Bank of Japan will also hold policy meetings while data out of China could bolster stimulus expectations.

Fed decision day

The Fed is tipped to keep interest rates on hold at the conclusion of its two-day policy meeting on Wednesday, with investors focusing their attention on the ‘dot plot’, which outlines policymakers' expectations for future tightening.

Several Fed officials have indicated that a pause shouldn’t be taken as a sign interest rates have already peaked, but markets are pricing in another 25 basis point hike in July before a similar-sized cut by December.

Recent economic data has painted a mixed picture of the U.S. economy - inflation is moderating but remains well above the central bank’s 2% target, while the economy added a far larger than forecast 339,000 jobs in May even as wage growth cooled.

The Fed is also watching the impact on the economy from the banking turmoil and has suggested that tighter lending standards could help rein inflation, lessening the need for aggressive monetary tightening.

May inflation data

The Fed will have the latest U.S. inflation report to hand when they kick off their meeting on Tuesday.

Headline consumer prices are expected to rise by 0.3% on a monthly basis after a 0.4% increase in April. Core inflation, which strips out volatile food and fuel costs, is expected to rise by 0.4% month over month.

Market participants will be closely watching the inflation report for signs that the Fed's rate hikes are continuing to cool inflation without badly hurting growth.

The economic calendar also includes May data on producer price inflation on Wednesday, followed by retail sales figures for May along with the weekly report on initial jobless claims on Thursday.

Stock market

U.S. stocks have defied fears of a recession, a banking crisis and soaring Treasury yields to rise 20% from their October lows - one definition of a bull market.

A 20% gain from bear market lows has in the past heralded further upside for stocks.

A megacap stocks rally, better-than-expected earnings season, and expectations that the Fed is nearing the end of its rate-hiking cycle have supported U.S. equities so far this year, despite concerns over the prospect of a recession and persistent inflation.

"We're seeing indications that the economy is going to be more resilient to headwinds," said Tim Murray, a capital market strategist in T. Rowe Price's multi-asset division told Reuters. "There's reason to believe that the pessimism we saw at the start of the year is giving way to a stronger-than-expected market."

Central bank meetings

Meeting a day after the Fed decision, the European Central Bank is likely to diverge from its U.S. peer with markets primed for another quarter point rate hike, with a similar size increase expected to follow in July.

The ECB slowed the pace of its rate hikes to 25 basis points at its May meeting after a series of 75 and 50 basis point moves.

ECB President Christine Lagarde said last Monday it was too early to call a peak in core inflation and reaffirmed rates would need to be increased again.

Eurozone inflation is currently running at 6.1%, still over three times the ECB's 2% target but is down from a peak of 10.6% in October last year.

Meanwhile, the Bank of Japan is widely expected to make no changes to monetary policy at its meeting on Friday after recently appointed Governor Kazuo Ueda indicated that ultra-easy policy will remain in place until wage gains and inflation are stable and sustainable.

China data

China is to release May data on new home prices, unemployment, industrial production and retail sales on Thursday after recent data indicated that the post-COVID economic recovery is losing momentum.

Property developer shares have rallied in recent sessions on speculation of a new property support package.

Data last week showing a huge miss in China's May exports barely caused a dent in the market, as investors bet the weak reading bolsters the case for stimulus.

--Reuters contributed to this report

By Aziz El Yaakoubi and Maha El Dahan

RIYADH (Reuters) -Saudi Arabia wants to collaborate, not compete, with China, the kingdom's energy minister declared on Sunday, saying he "ignored" Western suspicions over their growing ties.

As the world's top oil exporter, Saudi Arabia's bilateral relationship with the world's biggest energy consumer is anchored by hydrocarbon ties. But cooperation between Riyadh and Beijing has also deepened in security and sensitive tech amid a warming of political ties - to the concern of the U.S.

Asked about criticism of the bilateral relationship during an Arab-China business conference, Prince Abdulaziz bin Salman said: "I actually ignore it because ... as a business person .. now you will go where opportunity comes your way."

"We don't have to be facing any choice which has to do with (saying) either with us or with the others."

Chinese entrepreneurs and investors have flocked to Riyadh for the conference, which came days after a visit by U.S. Secretary of State Antony Blinken.

OIL DEALS

In March, state oil giant Saudi Aramco (TADAWUL:2222) announced two major deals to raise its multi-billion dollar investment in China and bolster its rank as China's top provider of crude.

They were the biggest announced since Chinese President Xi Jinping's visit to Saudi Arabia in December where he called for oil trade in yuan, a move that would weaken the dollar's dominance.

"Oil demand in China is still growing so of course we have to capture some of that demand," Prince Abdulaziz said.

"Instead of competing with China, collaborate with China."

The two nations' momentum has also raised prospects for a successful conclusion to negotiations for a free trade deal between China and the Saudi Arabia-dominated Gulf Cooperation Council (GCC), ongoing since 2004.

Saudi Investment Minister Khalid Al Falih said any agreement would have to protect emerging Gulf industries as the region starts to diversify towards non-oil economic sectors.

"We need to enable and empower our industries to export, so we hope all countries that negotiate with us for free trade deals know we need to protect our new, emerging industries," Falih said, adding he hoped a deal would soon be struck.

By Joe Cash

BEIJING (Reuters) - China's factory gate prices fell at the fastest pace in seven years in May and quicker than forecasts, as faltering demand weighed on a slowing manufacturing sector and cast a cloud over the fragile economic recovery.

As rising interests rates and inflation squeeze demand in the United States and Europe, China is in contrast battling a sharp decline in prices with factories receiving less for their products from key overseas markets.

The producer price index (PPI) for May fell for an eighth consecutive month, down 4.6%, the National Bureau of Statistics (NBS) said on Friday. That was the fastest decline since February 2016 and bigger than the 4.3% fall in a Reuters poll.

"The risk of deflation is still weighing on the economy," said Zhiwei Zhang, chief economist at Pinpoint Asset Management, in a note. "Recent economic indicators send consistent signals that the economy is cooling," he added.

China's economy grew faster than expected in the first quarter, but recent indicators show demand is rapidly weakening with exports, imports and factory activity falling in May.

The consumer price index (CPI) rose 0.2% year-on-year, speeding up from a 0.1% rise in April but, missing a forecast for a 0.3% increase.

Food price inflation, a key driver of CPI, slowed to 1.0% year-on-year from 2.4% in the previous month. On a month-on-month basis, food prices fell 0.7%.

The Australia dollar eased 0.2% to $0.6704, tracking a fall in the Chinese currency yuan after the inflation data.

The government has set a target for average consumer prices in 2023 to be about 3%. Prices rose 2% year-on-year in 2022.

"We still think a tightening labour market will put some upward pressure on inflation later this year, but it will remain well within policymakers' comfort zone," said Julian Evans-Pritchard, head of China economics at Capital Economics in a note.

"The government's ceiling of 'around 3.0%' for the headline rate is unlikely to be tested and we doubt inflation will become a barrier to increased policy support," he added.

UNDER PRESSURE

Policymakers have repeatedly signalled their intention to lean on China's 1.4 billion consumers, after the economy last year reported one of its slowest paces of growth in nearly half a century.

"So far, monetary policy and fiscal policy have remained tight, along with lower income growth, so domestic demand is depressed," said Dan Wang, chief economist at Hang Seng Bank China.

Some economists expect the People's Bank of China (PBOC) to cut rates or release more liquidity into the financial system. The bank cut lenders' reserve requirements ratio in March.

China's biggest banks on Thursday said they had lowered interest rates on deposits, providing some relief for the financial sector and wider economy by easing pressure on profit margins and reducing lending costs.

Analysts have been downgrading their forecasts for economic growth for the year amid continued signs of slowing. The government has set a modest GDP growth target of around 5% for this year, after badly missing the 2022 goal.