China's Commerce Ministry Says It's Evaluating US Trade Talks
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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. So we're less than 12 hours away from the U.S. employment report. Bloomberg Economics is expecting to see a solid net gain in nonfarm payrolls of around 165,000, also a stable unemployment rate at around 4.2%. And in a moment, we'll get some insight from Bill Adams. He is the chief economist at Comerica Bank.

But we begin in the Asia-Pacific, where this morning the Chinese government said it's currently evaluating possible trade talks with the U.S. The Commerce Ministry said senior U.S. officials have repeatedly expressed their willingness to talk with Beijing online.

about tariffs. Joining me now is David Finnerty. He is Bloomberg FX and rate strategist. David, joining from our studios in Singapore. I know it's a market holiday in China, David, so we're not going to get any reaction to this, but it's a positive sign still, right?

Yeah, I think that's the key thing. Any sign that there's some negotiations to be had, even though it's very early days and you certainly don't expect any deal to be hashed out quickly. But I think any idea, any sign that there will be negotiations to even start will be taken positively by the market. Obviously, you know, the tariffs between China and US are well over 100%.

And that's not good really for anyone in terms of trade. So I think any resolution will be the market will quite happily welcome that. I thought it was very interesting that Japan's finance minister said today that Japan's holdings of U.S. treasuries could be a card in Japan's trade negotiations with the U.S. I think Japan currently has around one point one trillion dollars in U.S. treasuries. Is that a friendly way of making a threat?

Well, it's certainly a shot across the bow, I think they'd say. Of course, and he did at the same time say, hey, whether we use or not is a different thing. So, again, the fact that it's even alluded to does sort of say, hey, look, we do have this card and if need be, we will pay it. Of course, the catch to some degree is, OK, if you want to get rid of the treasury, of course you can. But it's like, well, where do you put that money?

you know, you have to put it somewhere and certainly Europe would be the obvious place to put it into. But again, it's not quite as deep and liquid market. It's certainly a big market, but certainly not quite the treasury market.

So, you know, the question I think the market would go, if you are going to say that you are going to change holdings, and if you did, to how much could you? But again, any reduction of holdings is not going to be perceived as well by the market if it was to happen. I mean, it really feeds into the big question of moving forward. How does the West or other countries react?

keep funding US deficits really at the end of the day. And if they show an unwillingness to fund it to the same extent, it does create a problem for the US. At the moment, historically, the US has been fine because it has these twin deficits. But the market goes, we don't mind. We're happy to fund them. But the question I think really does become in the long term question is given how this trade's played out and we don't know how the remainder of Trump's presidency will play out, but

Are we seeing a fundamental shift?

in terms of how people view US assets, for whatever reason that that may be. And if there was a change in dynamics saying, OK, we're not quite as willing to fund it as possible, then for the US economy, that would not be a positive. So when I'm listening to you, I'm thinking of the dollar's role in all of this. And so far in the trade war, the dollar has suffered just a bit. I mean, on a relative basis, I understand that we're still very strong and one of the benefits of being the world's reserve currency.

but the flows have clearly benefited the yen and the euro, right? Yes, definitely. I think, you know, since if you look at, say, the Bloomberg Dollar Index, since basically in February, the trend's been down. Yes, the dollar's rebounded a bit over this week from the lows. But I do think the key thing is, and I was able to discuss this with contacts last night, is you've seen a lot of, say, if you break it down, say, you've got the macro fund, the hedge fund community, you have corporates and you have real money funds, to make it very simple.

So we know the macro fund community has been like, OK, let's sell the dollar. Obviously, it's been a good trade overall. I say overall because obviously the short dollar yen got crushed yesterday. But overall, short dollar has been a good trade. But the question is, OK, what are – corporates move slower and real money funds move even slower than that.

And so these two are beginning to come into play. They haven't really come into play as much, talking to all my contacts. So I think the question is, because it's like an oil tanker, particularly real money funds. It takes a long time to make a decision. But once that decision is made, it's made.

So there are discussions going on now talking to real money funds of what they want to do, how they want to allocate holdings, do they want to change or not change. And so if, and I said this is an if because we don't know what plays, but if they start to say, you know, we are going to minimise or cut back on our dollar holdings and this is a long-term play,

then I think you've got another big wave coming in on the dollar, which will add pressure to it. So I think you've seen the macro funds at play. That's sort of played out for the moment. And now we're looking to see what the corporates do and what does real money funds do as well. And I think we'll need a few more months before we see

what those decisions are. So help me understand what that may mean for the Bank of Japan. We had the meeting yesterday, BOJ holding that policy rate at 50 basis points, not a big surprise. And then policymakers saying afterwards that it's going to take essentially longer than previously thought.

for the Bank of Japan to hit its inflation target. Where do we go from here in terms of BOJ tightening? Well, I think certainly it was interesting that one thing Governor Uyghur did say, he goes, OK, even though we've moved our target for inflation, it doesn't mean rate hikes are off the table.

So the market obviously took how it interpreted it initially was, OK, well, right, hike's off the table. Certainly for dollar-yen, what happened, talking to my trader contacts yesterday, was basically it wasn't people buying. It was just the shorts. It was quite a well-positioned short position on dollar-yen. So those got squeezed out.

Liquidity didn't help because in Asia, a lot of markets were closed yesterday for public holiday. So there was relatively thin liquidity. So that exacerbated these moves. So it's been a bit of a painful trade for those shorts, shall we say. Having said that, I do think the question, you've got two parts of the equation. There's a Japan side of the equation and there's a US side of the equation.

And at the moment, Japan's side of the equation to the BOJ, will they, won't they? The market's gone, OK, we'll kick that can down the road. Yes, it may materialise. You did see the CPI coming strong for Japan. I think if the earnings come in strong, there is a case to say, look, there will be, there is inflationary pressure still there. So maybe they will hike at some point this year.

But I think initially we go to the US side of the equation with obviously the payroll report today and in that I'd heavily focus on the unemployment rate. It's supposed to stay the same at 4.2. If it does that then I think the Fed can say look we said we're in no hurry to hike whereas we don't need to. If it does uptick the

the market will obviously be very happy to price in rate cuts, as we know. Then I think if it does uptake, the market will go, look, there's pressure on it. We're going to run with the growth side of the equation, not the inflation side of the equation, and price in more rate cuts, which obviously will be dollar negative. So I think where it goes from now, really today's payroll report

So we were mentioning the positive developments when it comes to U.S.-China trade and the possibility that we're going to have some level of negotiation happening maybe in the near term. We just don't know. What does that mean for the Chinese currency?

Yeah, it's interesting because certainly if you look at dollar yuan, it's been, or offshore yuan, it's basically been in a pretty much very tight range, really. 726 to 731, chopping around in that range. The yuan against the basket of currencies, the CFETs basket, so has weakened. So China's obviously played out. It's like, look, we're not going to go weaker much at the moment or gradually against China.

But we'll have the weekend against the other markets to help support our economy. Now, what is interesting, though, is we're starting to see some interest. And I say starting, so I wouldn't go heavily on it. We're starting to see some interest in the macro fund community looking at downside dollar yuan. So, you know, we're like options or downside digital options or stuff like that.

So the market sentiment, which initially was, hey, we're going for dollar one higher. That was certainly the case after Trump's election and even at the start of this year. Now it's sort of to neutral or now we're starting to see actually they think that actually this could end up being better.

dollar yuan everything could be dollar yuan positive i do say these are initial signs though but it is interesting that you are seeing a change of sentiment in terms of where the yuan may be headed this idea of the yuan's going to tank to 740 against the dollar not that it won't but those they're not quite you're not hearing those that sort of noise as much nowadays as you were to say a month ago david thank you so much david finnerty there bloomberg fx and rate strategist joining from singapore here on the daybreak asia podcast

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. The U.S. equity market was higher today for an eighth straight session, helped by gains in both Meta and Microsoft. However, after the bell, Apple and Amazon delivered some disappointment. Apple said that sales in China were worse than expected. The company is also warning that tariffs will increase cost in the current quarter by $900 million.

Then there's Amazon forecasting operating profit in the current quarter. That was a little disappointing. And the company is saying the tariffs and trade policy may cause consumers to pull back on their spending. So it's clear the tariffs are beginning to bite. The question is whether this is going to be reflected in tomorrow's report on April employment. Joining me now for a look at the data is Bill Adams. He is senior VP, also chief economist at Comerica Bank.

on the line from Dallas, Texas. Bill, thank you for making time to chat with me. Is it too soon for the impact of the tariffs to manifest in tomorrow's employment data? Hi, Doug. I think we'll start to see some of the effect of the tariffs in the April jobs numbers. I think

In the month of April, businesses were trying to figure out what the changes in tariffs actually were, of course, and then starting to think through how that would affect their profit expectations, their revenue expectations, and so their hiring needs for the next three, six, and 12 months.

So I'm expecting the data to show that while businesses didn't make big layoffs during the month of April, they probably slow rolled the pace of hiring. And so I'm expecting nonfarm payroll jobs to rise a relatively lackluster 115,000 in the month.

So we also had today activity from manufacturers. This is the ISM's manufacturing PMI. It eased by about three-tenths of a point. We've got a reading of 48.7. Obviously, that indicates contraction. What's going on with the manufacturing economy from your point of view?

So I think you have to draw a distinction here between surveys, which look pretty scary right now, versus hard data where, as you just pointed out with the jobs report, we don't have very much in hand yet. Surveys are pointing to a lot of anxiety and a lot of increased caution due to expectations for the impact of tariffs, but also who really knows where tariff rates are going to settle out in another week or another month.

And so the ISM saying that businesses are reducing production, businesses are slowing hiring, businesses are seeing higher input costs. But we'll just have to wait until we get hard data on producer prices to see how much of that increase in input cost is just expectations and emotions rather than hard numbers and big shares of input costs rising.

I think I do expect to see a slower pace of manufacturing growth, if not a decline in the next couple of months. And I think we're likely to see a pullback in demand, especially for capital equipment in the next three to six months because of that same more cautious approach causing businesses to stretch out their CapEx plans and to just

be a little more cautious in their usage of cash in the next couple of months while they figure out what's going on. So the other day, as you know, we got the first print on first quarter GDP, a little bit of a contraction here. Some of that may have been skewed by heavy imports, sales of a lot of merchandise coming into the U.S. to avoid tariffs. But do you think there's a risk now that we're going to see another or a downward revision to that first quarter GDP print?

It wouldn't surprise me, to be honest. My forecast going into the release of the first estimate was for a 1.4% annualized contraction. So I'm kind of-- my bias is to be anchored to what I thought I was going to get, but

But we'll see in the revisions. I think in the second quarter, we're likely to see a strong rebound in GDP and maybe see that sustained into the third quarter because that huge rush to get goods onshore ahead of the higher tariffs is going to drop off and imports are going to be much, much, much lower come May and June and July and August. And so that will translate into a swing of the trade deficit.

in a more favorable kind of, that the numbers will look better for GDP. At the same time, final demand for business spending and consumer spending was pretty good in the first quarter. I think those components of GDP

are likely to slow in the second quarter and third quarter. So we had yields down across the Treasury curve today. I think the two-year was off about nine basis points. That's a pretty sizable move. If you look at what the swaps market is telling us right now, the first quarter point rate cut from the Fed is fully priced in for July. Not June, but fully priced in for July. And interestingly, today, we heard from the Treasury Secretary, Scott Besant, who was saying that...

that what the bond market right now is telegraphing is that the Fed ought to be lowering interest rates. Would you agree with that?

The Fed isn't a pickle. On the one hand, it does look like the job market is likely to weaken near term. On the other hand, inflation's headed higher. And so they're being pulled in opposite directions by the two parts of their mandate. I think it is somewhat reasonable to think that between a rock and a hard place, the Fed will choose to support the job market since there's a

A good case to be made that the inflation from higher tariffs will be a one off, especially if the labor market is weaker a year from now than it is today. And that means less negotiating power for workers to ask for raises and to cause that inflation increase to persist. But the Fed

doesn't like to be cutting with inflation rising. The Fed will be very unhappy to cut given that consumer and business inflation expectations have picked up in the last couple of months. And the bar for the Fed to ease is considerably higher right now than it would be in a more normal economic shock

which brings down prices as well as brings down hiring. So I think, yes, my call is for the Fed to ease in the next couple of months. But I think if my forecast misses, it's more likely that the Fed cuts rates by less than I'm forecasting. And I'm looking for three quarters of a percent in cuts by the end of the year, to be clear. I think it's more likely that I miss by seeing less rate cuts than that, than by seeing more. Without getting into too much politics, how do you feel about the Treasury Secretary weighing in on what the Fed should do?

The independence of the Fed is really an anchor of the U.S. financial system and by extent the U.S. economy. And so I think it's important that the Fed be independent and that actors both within the United States and outside of the United States understand the Fed's independence. Now, I will say I still am very confident that the Fed does have independence in setting monetary policy. And I think the institutional

supports of the Fed's independence in the U.S. system are very strong. They're still in place, despite the noise that you hear in the headlines. And I think Chair Powell in particular has a lot of credibility across Washington that allows him to

tune out the noise and focus on the Fed's dual mandate for stable prices and for maximum employment and to set interest rates according to that. Bill, do you have a view on how effective this tariff policy may be in reshoring American manufacturing? If that's the ultimate goal, do you think it's likely to succeed? I think for tariffs to cause American businesses to make a big shift towards reshoring,

businesses have to be confident that tariff rates are going to stay high over the longer run. And so I would, I think if we see the legislation that bakes tariff revenue into the 10-year projection for fiscal revenues and the fiscal balance depends on tariffs,

then businesses are more likely to say, aha, I guess this is a permanent shift and to make decisions accordingly than if tariffs continue to be exclusively something that comes out of the executive branch and which could change under a change in administration. Bill, thank you so much. Bill Adams there. He is senior VP, also chief economist at Comerica Bank on the line from Dallas, Texas, here on the Daybreak Asia podcast.

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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