Washington and Beijing Resume Trade Talks; Markets React to US Jobs Data
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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. So U.S.-China trade talks are set to resume Monday morning in London. Today, we heard from the director of the National Economic Council, Kevin Hassett. He told CBS News Face the Nation, the goal here is to restore the flow of critical minerals. So

Those exports of critical minerals have been getting released at a rate that is higher than it was, but not as high as we believe we agreed to in Geneva. And President Trump, being a dealmaker, talked with President Xi and he said, let's take our senior guys and the people who are the same level as you, let's have them meet somewhere and let's get these things cleared up.

That is Kevin Hassett. He is the director of the National Economic Council. Now, on Saturday, Beijing said it approved some applications for those rare earth exports, but it didn't elaborate on the products, applications or destinations.

So for a closer look at how trade is affecting financial markets, I'm joined by Chris Bregotti. He is the chief investment officer at SWBC. He joins from just outside of New York City. Chris, thank you so much for making time to chat with me on this. I know we've seen a lot more volatility when it comes to the equity market, certainly, but the same is true for the bond market. I mean, yields up one moment down the next. And there's also this debate as to whether or not

Tariffs are going to accelerate inflation and maybe at the same time slow growth. Then there is the dollar story, which is all a part of this. So give me your sense kind of in the big picture when you look at markets. What are they telling you in a nutshell as it relates to tariffs?

Yeah, thanks for having me, Doug. My big picture view is basically that the challenges to the markets, the economy are all around the uncertainty of the tariff situation. It seems like we might have some clarity at various points of time, but then things change. The dynamic changes. Trump says something different. He adjusts his metric in terms of whether there will be a pause or not. We hear more news coming out of China that there might be some resolution than there might not

be. Then there's positive news about rare metals, for example. So the uncertainty is really what's driving the bus here, in my opinion. And markets do not like uncertainty. So that's being priced in, as you see. Interest rates have risen remarkably since the initial tariff discussion started. And I think that's going to persist until we do have a little bit more clarity. So what's your sense of how tariffs are going to impact the inflation story?

I think that the tariff situation will be somewhat inflationary at some point in time. We have not seen that bleed into the data as of yet. The data seems relatively static, and part of the problem has been the fact that the tariffs brought forward some customer buying, some purchasing by the U.S. Therefore, we saw a surge in imports when the tariffs were initially announced.

And therefore, we didn't see the same effect that we might have seen. It seemed like the markets might be okay. Prices weren't really driven higher as of yet due to the big problem with imports coming into the U.S. and surplus or deficit of goods. Therefore, I'm seeing some supply chain issues that I expect to transpose down the road. That will affect the markets a little more, and I expect that tariffs will ultimately add a little bit more inflation to the picture.

higher for longer inflation as opposed to maybe drifting lower that we had seen as of late. I think we can agree that that's the big concern for the Fed, right? Which is why officials time and again have been saying we're not ready to cut rates because there is still so much that is unknown in terms of the impact that these tariffs will have on prices.

Now, the Fed is in a blackout period. We've got the meeting June 17th and 18th. We also have this week a couple of data points that will give the Fed its last look at inflation before that meeting. We have Wednesday, the CPI. Thursday, it's the PPI report. What do you think these numbers are going to kind of reveal here, particularly CPI data? Is that going to begin to creep higher, do you think, in a worrisome way?

I think that there's a potential for it to start to creep higher a little bit. Maybe this month might be flat to slightly higher. But the bigger challenge and the issue is we just got through a big employment report on Friday, which did not say that unemployment was rising. And so to me, it's

Again, back to what you pointed out earlier, the Fed focus, which is on inflation. They've said it time and again. They seem to be putting all of their attention on that. So for me going forward, that will be what we need to have measured more appropriately and more specifically and more

As I see CPI and PPI coming out this week, a flat to slightly higher reading could be on the offing, and that could start to edge interest rates a little bit higher. I certainly don't expect interest rates to start plummeting from here by any means. So when you look at the corporate response to this, to what extent are companies going to be willing to take a hit to margin or, on the other hand, feel the need to really pass along these higher import duties?

That's a really great question and a solid point. And to me, about two or three weeks ago, we saw the biggest retailer in the United States, being Walmart, come out and say they might have some problems down the road passing on these higher prices and they might have to pass them on to customers. They've been absorbing them of late, as most retailers have been. But once that happens,

kind of has to change. I expect the dynamic to be a little bit different. And I do expect them to have to start to pass on to customers. They can only absorb for so long. And they've been doing it thus far. Once those tire prices have to be passed along to customers one way or another, that's not a great thing for the consumer. And I do expect that impact to happen in short order. So we had some pretty sizable moves yesterday.

in the bond market here in the U.S. on Friday after that employment data. I think the two-year and the 10-year were each up about 10 basis points. What do you feel about the bond market right now? So if you look at the 10-year around 450, could

Could that break through and test maybe 475 or even higher? I certainly expect higher rates. I definitively expect that because of the inflation picture, which we just discussed. So if inflation should be higher, we should have some challenges going forward that will put pressure on the long end of the market.

not to mention the fact that we've got supply issues coming out. We got deficit hurdles that have really started to make headlines of late. So I do expect us to retest that 4.806, I think is the exact level, 10-year high that we reached earlier this year. And I expect that to happen before the end of the summer.

I do expect also a steeper yield curve. We could get some pressure on the long end of the market, even if the short end of the market kind of stabilizes or feels a little bit better. But I don't expect that necessarily happen. I do expect a steeper yield curve than we have at the moment. So the S&P in the Friday session was up about 1%. I'm curious about how you view the equity market right now and where you're finding opportunity.

The opportunity in the equity market is kind of a little bit of a challenge to identify at various points in time. On a macro basis, we're just over 6,000 was the close on Friday. I do expect us to possibly retest that high again that we did see earlier in the year. And that's something that kind of puts a top on the market, though. I think we're closer to the top.

than we are to a sell-off potential that could happen. Therefore, the opportunity for me is things that will perform well in a recessionary environment. Think of your basics, your utilities, your consumer staples. I do see opportunity in Europe as well. So if there's a matter of moving money around the globe, it could be a benefit for at least U.S. investors and repositioning themselves in different ways. But go back to the basics of what performs well in a recessionary environment. And I think those domestic type of

entities will perform decently. I also expect financials to start to perform a little bit better and have some upside potential. It's a little bit longer runway, but a steeper yield curve, as we all know, does benefit financial services and banks. So in the long run, I do expect them to start to feel a little bit better with regard to their ability to monetize interest rates.

We were talking a moment ago about meta platforms being in talks to make a multibillion dollar investment into an AI startup known as Scale AI. We know the story on artificial intelligence and how it has helped to power so many companies. And I'm thinking of NVIDIA primarily, but even a company like Broadcom,

How do you feel about the AI trade right now in the current environment? Is it a little long in the tooth, at least for this part of the cycle?

I think the AI trade does have some more opportunity for it, but there's ebbs and flows in it. I think we're closer to the part where it might have to ebb a little bit. It might have to back up a little bit, settle down, retrace. We've seen various points in time the AI trade has gone gangbusters and then has resettled because news comes out that there might be some competition for NVIDIA, for example. We saw that earlier this year. So it's

As those things come about, I do expect there to be some challenges in the market to be able to reprice and absorb them. But the long-term AI trade still has a lot of upside potential, and I do expect there to be some gains to be had. All right, Chris, we'll leave it there. Thank you so much. Chris Bergotti, he is the chief investment officer at SWBC on the line from just outside New York City here on the Daybreak Asia podcast.

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. As we've been discussing, all eyes will be on the meeting in London on Monday between trade delegations from the U.S. and China. For more, we heard from Alicia Garcia-Horreiro. She is the chief APAC economist at Natixis. Alicia spoke with Bloomberg Sherry on and Heidi Stroud-Watts. Alicia, always great to have you with us, particularly to kind of

sort through everything that's going on and of course the big sort of risk factor or impossible opportunity for some relief is how these latest round of US-China talks go. And as you mentioned, as we've been kind of talking about, this potentially becomes more complex if we're moving on from just straight tariffs to the issue of export controls which is sensitive for both sides. Are you optimistic that an agreement, a meaningful agreement could be reached?

I'm optimistic that an agreement will be reached, but it won't be meaningful. Even the previous one wasn't very meaningful. I mean, of course, hives were cut, but everybody knew that they had to be cut. They were too high. They were at blockade level. That was easy. This time around, I think we'll only have a temporary relief in export controls.

We have export control from both sides. So the U.S. went from what we already had from Biden, export controls on GPUs, any semis of advanced, I mean, advanced enough to be harmful for China. But we moved even further because of retaliation from China's own export controls on critical raw materials. We have airplane engines. We have components of nuclear plants, you name it. So

So, because we've actually expanded, there is room to temporarily lift these export controls, both sides. But that won't be a full deal. So, more time is needed. There's too many things happening, like from student visas, you name it. So, all of that will just be temporary. That is the second truce out of the very many we will see until hopefully things get settled.

In the meantime, do sort of the economic fundamentals to the downside continue to become entrenched? In China, you obviously still have a broadly deflationary environment and demand is still pretty subdued. Exports obviously getting a temporary benefit. On the US side, do you expect costs to continue rising going into the end of the year? Yeah.

At NETEXAS, we have, of course, slightly higher inflation, but not to the point of really unraveling, stopping cuts from the Fed. So we think the Fed is going to cut three times this year. And the reason is that although employment data was decent, but we already see the cracks. The companies are not laying off, but they are thinking about it. You can see from the data that

You know, there's less confidence in the economy, rightly so. Yeah, we have so bad news overall from tariffs to many other things happening in the U.S. So I think, just to make a long story short, those inflationary pressures will be creeping up.

And in China, I don't think the deflationary pressures will be fully off the table with the data we're awaiting. Maybe slightly better, but that will be it. So that divergence between China and the U.S. in terms of price movements is there to stay.

In the U.S., how much do you think a tax bill from President Trump could help the broader economy? And how forgiving do you expect bond investors to be? Because just all over the world right now, we're seeing borrowing costs surging on really concerns about those government budget deficits. I wouldn't bet for investors to be forgiven because they have not been forgiven for a while already. So I think this bill, this tax

this BBB, big for sure, I'm not sure it's beautiful. We could find another adjective for that one.

that bill is a problem for the U.S., and I hope, I mean, that there is enough attention for that. Investors won't take it easily. And you're right, it's not only the U.S. So anybody who is a little bit off the mark, and we saw the JGBs for that matter, will suffer from very high cost of funding. I think that's where we are, and this bill will be a problem for sure. I don't think that's going to support growth because –

there will be a lot of investment leaving and that will increase the cost of funding for the US. So I'm not sure that's going to help. Yeah, we have seen weak demand for JGB auctions here in Japan. We're expecting first quarter revised data for GDP here in the country. What are you expecting?

Well, yeah, I mean, it might be a little bit better, but let's be clear that the first quarter was very negative. So we do have a better year for Japan, 2.3 percent, which is quite high. But because, again, last year was weak. Now we revise, now we have to revise down for 2025. In other words, growth isn't really there in Japan. We have to realize that.

We even heard that there might be a new emergency package, I think 900 billion yen, additional fiscal package. All of this is going to be an additional supply of JGBs, going back to the cost of funding for Japan creeping up as well.

And the reason why they need all of these first quarter exports were so underwhelming. And therefore, I mean, what to expect from the Japanese economy other than, again, additional stimulus on the fiscal side. But that's not going to solve the problem. We need more productivity. We need more investment. The Japanese government is very keen to receive additional FDI. That's true. But it isn't really yet happening in big scale. Yeah.

And of course, we'll be watching the trade negotiations at the G7 between Prime Minister Ishiba and President Trump as well. Alicia Garcia-Reno, always good to have you with us. Chief AIPAC economist Anna Tixis with a look ahead on all of the economic news expected this week.

Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the stories shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Krisner, and this is Bloomberg.

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