By Gaurav Dogra and Patturaja Murugaboopathy

(Reuters) - Asian bonds attracted their highest monthly foreign inflows in about two years in May, boosted by hopes of less aggressive monetary tightening measures from the U.S. Federal Reserve.

Foreigners purchased a net $10.1 billion worth of bonds in India, Indonesia, Malaysia, South Korea and Thailand, marking their biggest monthly purchases since June 2021, data from regulatory authorities and bond market association showed.

"Asia ex-China (bonds) could benefit as the Fed approaches the end of its tightening cycle, notwithstanding residual uncertainty on the terminal rate," said Fiona Lim, senior fx strategist at Maybank.

"This is especially in light of an arguably resilient macro backdrop where services sectors continue to hold up in most countries."

While the Federal Reserve maintained interest rates without change, deviating from 10 consecutive rate hikes, it indicated the likelihood of two small rate hikes by year-end to address inflation concerns.

Analysts also noted that investors were encouraged by signs that regional economies had reached their peak inflation levels, leading to anticipated interest rate cuts by central banks to stimulate economic growth.

South Korean bonds attracted net purchases of $8.2 billion, the highest since June 2021.

Khoon Goh, head of Asia Research at ANZ, said the Bank of Korea is perceived to be mulling potential rate cuts towards the end of the year, boosting the appeal for their bonds.

Malaysia and Indonesian bonds drew foreign inflow worth $652 million and $500 million, respectively, while India and Thai bonds got about $400 million each in the last month.

Maybank's Lim said the disappointment over China's weaker-than-expected data in May, alongside U.S.-China tensions, could also have spurred a re-allocation of bond flows out of China into other Asian countries.

Although foreign demand for Chinese bonds slightly rebounded in May, the percentage of foreign holdings as part of total outstanding Chinese government bonds remained at 8.3%, the lowest since July 2019, according to a Barclays (LON:BARC) report.

SYDNEY (Reuters) - Australia's unemployment rate needs to rise to help contain inflation and avoid higher interest rates and a deep recession, a top central banker warned on Tuesday, after data showed little loosening in a still drum-tight labour market.

Reserve Bank of Australia (RBA) Deputy Governor Michelle Bullock said the jobless rate would need to rise to about 4.5% from the current rate of 3.6% to bring the economy back into balance, a rate still well below pre-pandemic levels.

"Our goal is to return the labour market back to a level more consistent with full employment ... We think this can be achieved if employment and the economy more generally grow at a below trend pace for a while," said Bullock at the Ai Group in Newcastle.

The RBA has already raised interest rates by 400 basis points to an 11-year high of 4.1%, including a surprise hike earlier this month out of fear that inflation was becoming entrenched.

Indeed, Bullock also warned that if inflation were to become entrenched in people's expectations, that would mean higher rates and a larger rise in unemployment.

"A deep and long-lasting recession would be likely, which would mean a substantial rise in the unemployment rate."

The RBA has projected inflation - which was running at about 7% - would return to the top of the bank's target range of 2-3% by mid-2025, but warned risks are on the upside amid concerns about low productivity, fast rising labour costs, and stickiness in services inflation.

SHANGHAI/SINGAPORE (Reuters) -China cut its lending benchmarks on Tuesday in the first such easing in 10 months, as authorities seek to shore up a slowing recovery in the world's second-largest economy, with more stimulus expected.

The latest monetary easing comes as China's post-pandemic recovery shows signs of losing steam after some initial momentum in the first quarter of this year.

The one-year loan prime rate (LPR) was lowered by 10 basis points to 3.55%, while the five-year LPR was cut by the same margin to 4.20% from 4.30%.

A Reuters poll of 32 market participants showed all respondents expected reductions to both rates.

The People's Bank of China (PBOC) lowered short- and medium-term policy rates last week, signalling it is about to embark on another round of loosening in monetary settings in a push to rev up the recovery.

The medium-term lending facility (MLF) rate serves as a guide to the LPR and markets mostly see the medium-term rate as a precursor to any changes to the lending benchmarks.

"These cuts will lower the cost of new loans, as well as interest payments on existing loans," said Julian Evans-Pritchard, head of China economics at Capital Economics.

"That should offer some modest support to economic activity. But we think it is unlikely to drive a sharp acceleration in credit growth, given weak credit demand."

China's cabinet met on Friday to discuss measures to spur growth in the economy and pledged more policy support.

"More policy measures may be rolled out separately, including but not limited to a 25 basis point cumulative cut to the LPR by the year-end, and property-easing measures to cut payment ratios or mortgage rates, as well as some form of consumption support," analysts at BofA global research said in a note.

"Such marginal easing will probably help prevent growth from slowing sharply, but will unlikely offer a strong boost to reverse the growth slippage in the near future," they said, downgrading their forecasts for China's economic growth outlook for this year to 5.7% from 6.3% previously.

Several global investment banks cut their 2023 gross domestic product growth forecasts for China after May data showed the recovery was faltering.

The LPR, which banks normally charge their best clients, is set by 18 designated commercial banks who submit proposed rates to the central bank every month.

Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages. China last cut both LPRs in August 2022 to boost the economy.

MEXICO CITY (Reuters) - Mexico's headline inflation likely reached its lowest level in more than two years during the first half of June, but remained above the central bank's target, a Reuters poll showed on Monday, reinforcing bets the bank will keep the key rate steady longer.

The median forecast of 11 analysts sees annual headline inflation at 5.30%, its lowest level since the second half of March 2021, although it would still be significantly higher than the official target of 3%, plus or minus a percentage point.

In its most recent monetary policy announcement, the Bank of Mexico kept its benchmark interest rate unchanged at 11.25%, ending a nearly two-year rate-hike cycle, and vowed to keep it at that level for an extended period of time for inflation to converge to the target.

The core index, which strips out volatile food and energy prices, is forecast to have slid to 7.02% year-on-year, its lowest level since March 2022.

In the first half of June, consumer prices were forecast to have risen 0.15% compared to the previous two-week period, while the core measure likely grew 0.22%.

Mexico's statistics institute will release inflation data for the first half of June on Thursday.

By Walter Bianchi and Rodrigo Campos

BUENOS AIRES/NEW YORK (Reuters) - Argentina and the International Monetary Fund (IMF) have a $44 billion dilemma, with the two sides set to meet for crunch talks to revamp the country's huge, wobbling debt deal, key to avoiding default on billions in looming debt payments.

The South American country, a serial defaulter that has struggled for years with inflation and currency crises, struck a $57 billion loan deal with the IMF in 2018, which failed and was replaced last year with a new $44 billion program.

But with net foreign currency reserves estimated to be in negative territory, hit by a major drought that sunk the key soy and corn harvests, Argentina is at risk again of missing debt repayments, with $2.7 billion due to the fund this month alone.

Economy Minister Sergio Massa is expected in Washington as early as this week to try to unlock talks to accelerate IMF disbursements and ease economic targets attached to the deal, with investors and traders watching closely.

"The fund knows that Argentina is a problem, it is its main debtor, but it seems to me that the negotiation has stagnated. One does not see significant progress," said Ricardo Delgado of Argentine financial services firm Analytica.

In a sign of potential holds-ups, an economy ministry source said on Friday that Massa's trip, previously briefed to happen in the next few days, could be delayed depending on how virtual talks progressed.

"Until everything is sealed, no one travels. When everything is ready, they'll travel to put things on paper. And when everything is written, Massa will travel," the source said.

On the streets of Buenos Aires pressure is rising. Inflation has hit 114%, hurting salaries and spending power, reserves have tumbled and one-in-four people is in poverty, with many blaming - not for the first time - austerity linked to the IMF.

"We must change these economic policies, we must break with the dependence on the IMF," said Hugo Godoy, a union leader marching on Friday in Buenos Aires as part of protests against the government's handling of the economy and austerity.

"Some 43% of Argentines live below the poverty line and 4.5 million, 10% of the population, suffer from hunger," he said.

'DAMAGE CONTROL'

The government is hoping to bring forward over $10 billion in IMF disbursements scheduled for this year, though is reluctant to agree to tough austerity measures with an eye on October general elections where it faces likely defeat.

"Investors are paying real attention to signs from the IMF negotiations," said economist Gustavo Ber.

"Receiving fresh funds - or at least rescheduling disbursements and payments - would be crucial to reduce exchange and financial tensions at this stage."

Meanwhile Argentina has been rolling over local debt to push back peso-denominated repayments, has extended a currency swap line with China, and faces a wall of obligations with private foreign creditors next year.

The local debt exchanges and hopes of progress with the IMF have nudged up Argentina's dollar-denominated bonds from high-20 cents on the dollar in May to mid-30 cents now, though they remain mired in distressed territory.

And many worry that even sped-up IMF payouts won't solve Argentina's problems for long.

"Frontloading disbursements could be a 'damage control' solution until the end of the current government's term in December," the Institute of International Finance, a Washington-based banking trade group, said in a report.

Argentina got a hint of good news this week with monthly inflation cooling in May for the first time in half a year and coming in below analyst expectations, though it was still an eye-watering 7.8% for the month.

"Inflation continues to be very high and affects the entire economic scenario, but the fact that it has eased somewhat with respect to April helps to remove some pressure," an Argentine banker said, asking not to be named.

"It is like the sick patient with a fever that has gone down slightly. But the patient is still sick and still has a fever."

SEOUL (Reuters) - South Korea's central bank said on Monday that upward risks to core inflation were "a little high" amid strong consumption and employment trends, raising the prospect of higher inflation lasting longer than expected.

"While there is high uncertainty regarding global energy prices, domestic and global economic growth and public price hikes over the future inflation path, upward risks are assessed to be a little high when it comes to the outlook on core inflation," the Bank of Korea (BOK) said in its biannual review of inflation conditions.

"If consumption and employment continue their robust trends, spill-over effects from accumulated cost increase pressures on core inflation may last longer than expected," it added.

The BOK said in the report that core inflation, which remained higher than headline inflation in recent months, was also easing at a much slower pace than in past comparable periods because of sticky service prices.

South Korea's consumer inflation slowed to a 19-month low of 3.3% in May, but core inflation remained elevated at 3.9%, staying above the headline figure for the second consecutive month.

Consumer inflation is expected to ease toward its 2% medium-term target level by mid-2023, mostly due to high base effects, before rebounding to about 3% near the end of the year, the BOK said in the report. The trend of a slower easing of core inflation is forecast to continue through the middle of this year, it added.

Compared with Canada and Australia, whose central banks recently resumed tightening interest rates after some pauses, South Korea's housing and labour markets showed less upward price pressures, the BOK report also noted.

The BOK expects core prices will rise 3.3% this year, it said last month when it raised a February estimate of 3.0%. Overall consumer prices are expected to rise 3.5%.

The central bank held interest rates steady last month for a third straight meeting, but it also flagged it might not be done tightening.

Investing.com-- Goldman Sachs (NYSE:GS) slashed its economic growth forecasts for China on Sunday, stating that current levels of stimulus from the government will provide less support for the economy than previously thought.

The investment bank cut its forecast for 2023 gross domestic product (GDP) to 5.4% from 6%, joining a growing list of major banks that have cut their bets on a Chinese economic recovery this year.

The bank said  in a note released on Sunday that the country’s ongoing stimulus was incapable of generating a strong “growth impulse," and would result in a slower recovery despite the lifting of anti-COVID measures earlier this year.

Goldman Sachs also slashed its outlook for second quarter GDP to quarter-on-quarter growth of 1% from 4.9%, but forecast an improvement in the second half of the year on potentially more stimulus measures.

The move follows similar annual GDP target cuts from several major banks including UBS Group AG (NYSE:UBS), Nomura Holdings Inc (TYO:8604), Bank of America (NYSE:BAC) and JPMorgan (NYSE:JPM) last week, who also cited a slower-than-expected recovery from the COVID-19 pandemic and an insufficient degree of stimulus measures from Beijing.

But Goldman Sachs and other brokerages still hold a 2023 GDP target that is higher than the 5% forecast by the Chinese government, which was viewed as modest. 

The Chinese economy grew 3% in 2022, one of its worst GDP prints on record. Growth had then rebounded in the first quarter of 2023, surging to 4.5% as the country scaled back three years of strict COVID-related restrictions. 

But this rebound now appears to be running out of steam, as shown by a string of weaker-than-expected economic readings over the past two months. 

China’s manufacturing sector- a major economic driver- is grappling with worsening local and international demand, while the property market has failed to rebound from a three-year downturn. 

This spurred a series of interest rate cuts by the People’s Bank of China over the past week, with a cut in its benchmark loan prime rate now expected on Tuesday.

By Stella Qiu

SYDNEY (Reuters) - Asian shares started cautiously on Monday after their best weekly run in five months, as investors looked ahead to China's rate decision and U.S. Federal Reserve Chair Jerome Powell's testimonies for clues on the rate path ahead.

S&P 500 futures rose 0.1% early in Asia while Nasdaq futures firmed 0.3%. Cash U.S. Treasuries were untraded owing to the Juneteenth holiday, while futures were up a fraction with little liquidity.

In Asia, Japan's Nikkei fell 0.5%, having clinched a fresh three-decade top on Friday, buoyed by the Bank of Japan's (BOJ) decision to leave its ultra-easy policy setting unchanged, which has sent the yen to a 7-month low against the U.S. dollar.

MSCI's broadest index of Asia-Pacific shares outside Japan was 0.1% lower, after hitting a four-month high on Friday and finishing up 3% for the week, the best since January.

In China, market hope for more forceful stimulus is growing after the cabinet met on Friday to discuss measures to spur economic growth. Also, the People's Bank of China is widely expected to cut its benchmark loan prime interest rates on Tuesday, following a similar reduction in medium-term policy loans last week.

Morgan Stanley (NYSE:MS)'s chief China economist Robin Xing expects an imminent stimulus package given second-quarter gross domestic product (GDP) growth is tracking at 0%, lagging the government's target of around 5% for the year.

"This requires more policy easing to stabilise investment – the key drag to 2Q GDP growth - and prevent weakness from spreading to household sentiment and services," said Xing.

After a busy central bank week as the stock market cheered the Fed's decision to skip a rate hike in June, investors are looking to a number of Fed speakers this week, with Powell set to deliver congressional testimonies on Wednesday and Thursday.

"Fed Chair Powell gives House and Senate testimony with focus on whether the July FOMC (Federal Open Market Committee) meeting is truly 'live', and if the Fed dot plot of two more hikes is a true base case depending on the data or more 'aspirational'," said Ray Attrill, head of foreign exchange strategy at National Australia Bank (OTC:NABZY).

Markets are pricing in a 70% probability of the Fed hiking by a quarter point in July before holding steady for the remainder of the year, though officials have sounded hawkish and the dot plot indicates two more hikes..

The dollar index was little changed against major peers early on Monday, after falling 1.2% the previous week, the most in five months.

The yen was undermined by a dovish BOJ, touching a seven-month low of 141.90 per dollar, while the hawkish the European Central Bank, which hiked by a quarter point last week, aided the euro to hover close to a five-week top at $1.094.

Oil prices declined early on Monday. U.S. crude futures fell 0.7% to 71.24 per barrel, while Brent crude was down 0.8% at $76.98 per barrel.

Gold prices were flat at $1,956.84 per ounce.

JERUSALEM (Reuters) -U.S. chipmaker Intel Corp (NASDAQ:INTC) will spend $25 billion on a new factory in Israel, Prime Minister Benjamin Netanyahu said on Sunday, calling it the largest-ever international investment in the country.

The factory in Kiryat Gat is due to open in 2027, to operate through 2035 at least and to employ thousands of people, Israel's Finance Ministry said. Under the deal Intel will pay a 7.5% tax rate, up from the current 5%, the ministry added.

During its almost five decades of operations in Israel, Intel has grown to become the country's largest privately held employer and exporter and a leader of the local electronics and information industry, according to the company's website.

In 2017, Intel bought Israel-based Mobileye Global Inc, which develops and deploys advanced driver-assistance systems, for $15 billion. Intel took Mobileye public last year.

Announcing the deal in televised remarks to his cabinet, Netanyahu called it "a tremendous achievement for the Israeli economy - 90 billion shekels ($25 billion) - the largest investment ever by an international company in Israel".

In a statement, Intel said its Israel operations had "played a crucial role" in the company's global success.

"Our intention to expand manufacturing capacity in Israel is driven by our commitment to meeting future manufacturing needs ... and we appreciate the continued support of the Israeli government," it said.

By Essi Lehto

HELSINKI (Reuters) - Finland's conservative National Coalition (NCP), winner of April's parliamentary election, has reached agreement to form a majority government with the eurosceptic, anti-immigration Finns Party and two smaller groups, its leader said on Thursday.

"All issues have been resolved and the papers are ready," said NCP leader Petteri Orpo, a fiscal conservative set to become Finland's next prime minister, referring to the government program.

By getting the NCP, the nationalist Finns, minority-language Swedish People's Party and the Christian Democrats to agree on a common platform, Orpo shifts Finnish politics to the right and sends left-wing Prime Minister Sanna Marin into opposition.

During 11-week talks over how to govern Finland during the coming four years the Finns and the Swedish People's Party had struggled to agree on immigration, climate policy and public finances, but reached a compromise in the end.

Orpo's government is expected to curb the fiscal deficit by cutting unemployment and welfare benefits, and to tighten immigration and loosen environmental commitments.

Each policy area was subject to tough negotiations, however it was not immediately clear how strong each measure would be.

Orpo has wanted to cut taxes and sell off stakes in some government-controlled companies, and said his government's policy programme would be presented on Friday. He declined to elaborate on any details.

The NCP won 48 seats in the April 2 election, ahead of the Finns with 46, while outgoing Prime Minister Marin's Social Democrats came third with 43 elected members of the 200-seat parliament.

To secure a majority, Orpo included the Swedish People's Party, which holds nine seats, and the Christian Democrats with five, bringing the total support to 108.