Daybreak Weekend: Fed Decision, Germany Chancellor, China Eco
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Bloomberg Audio Studios. Podcasts. Radio. News. This is Bloomberg Daybreak Weekend, our global look at the top stories in the coming week from our Daybreak anchors all around the world. And straight ahead on the program, a look ahead to this week's Federal Reserve Policy Meeting, how it may impact monetary policy moving forward. Plus, a look at earnings from the media and entertainment giant Walt Disney. I'm Tom Busby in New York.

I'm Stephen Carroll in London, where we're looking at the many challenges facing Germany's new chancellor as Friedrich Merz prepares to take up the job. I'm Doug Krisner, exploring what's at stake in the U.S.-China trade standoff ahead of some key eco data in the week ahead.

That's all straight ahead on Bloomberg Daybreak Weekend. On Bloomberg 1130 New York, Bloomberg 99.1 Washington, D.C., Bloomberg 92.9 Boston, DAB Digital Radio London, Sirius XM 121, and around the world on BloombergRadio.com and the Bloomberg Business App.

Good day to you. I'm Tom Busby and we begin today's program just ahead of the Federal Reserve's third policy meeting of the year, which kicks off Tuesday and ends with a decision on interest rates on Wednesday. A

Amid a lot of economic uncertainty and the impact of President Trump's ever-changing tariffs, the Fed has a lot to consider for some perspective on what it all means. Stuart Paul, U.S. economist with Bloomberg Economics. What do you expect the FOMC to do on Wednesday? We're expecting a rate hold. We're expecting the Federal Reserve to keep the target federal funds rate in the range of 4.25% to 4.5%.

We're expecting very little news to come out of the FOMC. We're expecting very little news to come in the way of the Fed's balance sheet. All in all, it should be one of the more boring FOMC decisions and press conferences that we've had in a while.

So a boring press conference, however, a lot of turmoil leading up to this, and there's a lot for the Fed to consider. Let's start with some of the good news. And there is good news about jobs, right? We just led this past week. That's right. In April, there were 177,000 jobs added, a 4.2% unemployment rate. From the Fed's perspective, it's not just thinking about employment chugging along. It's thinking about inflation pressures.

We saw relatively modest 0.2% wage growth and earnings growth during the month. So as employment is becoming a little bit broader, as the workforce is expanding, inflation pressures stemming from the workforce are rather dull. And as we're heading into this FOMC decision, the latest information

inflation data that the Fed has in hand are basically showing muted inflation pressures so far. But the question is going to be on the Fed's mind, just how much can we expect inflation pressures to ripple through from tariffs?

And some of the internal models that we know the Fed operates with are likely showing that risk is skewed to the upside, that we could see, let's say, 3.5%, 4% core PCE inflation at year end. That would be up from about 2.6% right now. The Fed is seeing a relatively hot jobs number. It sees inflation low right now, but risk skewed to the upside. So all the more reason to stay on hold when the FOMC meets next week.

Those risks, I mean, we're hearing because it's the first quarter earnings season. We're hearing from a lot of companies, big companies, no more so than GM that said these tariffs could be a $5 billion hit to profits. Just this past week, Apple finally comes out and says $900 million hit. So company after company, Amazon, you know, a lot of uncertainty, a lot of people, fears of a recession happening.

I mean, this is building and building. That's right. As much as I like to stay focused on the macro, as much as I like to stay zoomed out at 30,000 feet, thinking about capital investment and the workforce, I think that the bigger thing next week is really going to be earnings.

because we're going to get to hear from all these companies. We get to hear from Ford. We're going to get to hear from AMD and some of the tech companies that are thinking about exporting chips and are thinking about regulation of AI and development and other domestic investment. We're going to get to hear from some of the more consumer-oriented companies like DoorDash, for example, that are really leveraged to consumers' discretionary spending power.

And so I do think that more than the Fed's decision, more than the economic data, let's say on the trade balance that we're going to get next week, data from March, what's really going to matter is the guidance that we are getting from companies. And what we hear when we look at high-frequency surveys, for example, is that companies are experiencing input cost pressures. They are planning to pass those along to consumers. But what we ultimately think is that with the saving rate so low,

with consumers stretched and relying on credit as much as they are, when firms try to pass along those higher prices, they're ultimately going to face retrenching demand from consumers. We know sentiment from the University of Michigan polls at a five-year low. I mean, people are really worried.

That's right. Sentiment is poor. Business investment plans are being put on hold. A big part of it just gets synthesized in one measure, economic policy uncertainty. Our policy uncertainty index is spiking through the roof.

No reason why. It's because policymakers are coming off as rather mercurial in changing trade policy week to week. We just heard from Stephen Moran from the Council of Economic Advisors, one of the president's chief economic advisors, that we could expect to see a trade deal with China perhaps in the coming weeks. Now, he's not one of the trade advisors, but everybody is chirping up on it.

what we can expect from trade policy. Just when we thought we had an escalation with China, we're now seeing perhaps there's going to be a de-escalation. There's no wonder uncertainty is through the roof and sentiment is down.

Well, a lot to watch out for. The Federal Open Market Committee's two-day policy meeting wrapping up this Wednesday, a decision on rates and a press conference from Chairman Jerome Powell. Our thanks to Stuart Paul, U.S. economist with Bloomberg Economics. We turn now to the current earnings season. A number of companies so far surprising to the upside. This week, we hear from the media and entertainment giant, the Walt Disney Company. That's out on Wednesday in the House of Mouse.

Facing a lot of challenges right now, including a pullback in consumer spending, a slowing economy, fewer tourists coming into the U.S. and to its parks, and a lot of competition for its streaming TV offerings. For more, we turn to Geetha Raghunathan, Bloomberg Intelligence Analyst on U.S. media. Well, Geetha, the last time we heard from Disney was before President Trump announced his tariffs, the trade wars with China, Europe, and other countries started.

How has all that impacted the company and what do you expect to see from Disney in its second quarter results? Yeah, absolutely. Thank you so much, Tom. So Disney is really, I think, one of the most complex stories in the media world. There are so many parts. There's so many moving parts, really, as you think of the parks business, the theme parks business, streaming. You know, you have a presence in linear TV, sports with ESPN, and then, of course, the theatrical business and box office.

There's always something to be concerned about here. So you're absolutely right. In terms of parks, there's obviously, it is very, very sensitive to the overall health of the economy. And why we are concerned about parks when it comes to Disney is because this makes up about 50 to 55% of their profit. So this is really, you know, the largest contributor of operating income. And while they had initially guided to healthy summer bookings,

You know, we've kind of seen this deteriorating macro sentiment. So I think investors are definitely going to be focused on that. Apart from the general health of the economy, you know, as far as, you know, theme parks are concerned. The one thing that Disney investors are going to be super focused on is any commentary that management can provide in terms of competition from Epic Universe, which is a whole brand new theme park.

that is coming out of Universal and will be in Florida and is expected to be a very, very big competitor because some of the initial reviews have been absolutely amazing. And just opened this week, right? Or this month in May? Yes, it is going to open on May 22nd, yes.

So, you know, near term, I think there's going to be a lot of wait and watch with the theme park business. But I think medium to longer term, the business is definitely stabilizing, especially on the streaming front. So we're definitely seeing a big improvement in terms of streaming profits with the company expecting a billion dollars in operating income this year. Compare that to about $4 billion.

billion in losses just a few years ago. Wow. Wow. Well, let's go back to parks because another part of that is its cruise division. And as I understand, it's just unbelievable the demand for these Disney cruises.

Yes, they have really made a huge push into the cruise ship business. And this quarter is going to be our fiscal second quarter when they report is going to be particularly interesting because you're going to have a full quarter contribution from a new cruise ship.

which is called Disney Treasure and which is expected to have been profitable in its first full quarter. So it's going to be interesting. We think that, you know, the cruise ship business is going to go from, you know, about two to three billion dollars in revenue to as much as four to five billion dollars in just a few years time. So this is going to become a

major part of their parks business. And the one thing that we've seen with cruises as opposed to parks is, you know, the demand is, as you just pointed out, is very, very strong and will be a stabilizing force for the entire experiences segment for Disney. Now, I want to talk about its streaming TV unit. We have Disney Plus and Hulu and ESPN. Has there been any let up, any signs of a let up in advertising revenue where they really, you know, make a lot of money from all these networks and their linear networks?

I think the general commentary Tom on advertising is obviously a very cautious kind of wait and see approach because when you head into an economic environment where you have so much of volatility, the first sector that kind of sees that pullback is of course advertising. Now there's both good and bad with respect to Disney. So if you just look at it from an overall company perspective,

only about 14 to 15% of Disney's revenue actually comes from advertising. So exposure itself is not very, very heavy. You compare that to some of the other companies like a Fox or a Warner Brothers Discovery where almost 35 to 40% of revenues are coming from advertising. So I think overall the exposure is fairly limited,

That said, if things go bad, they can go really, really bad. So if you're looking at a linear TV business, and Disney has considerable exposure here, whether it's ESPN, whether it's the ABC network, we can see ads drop almost 10 to 15%. And that is really not good for the business. They do have a little bit of a hedge because streaming ads or digital ads in general have held up better.

up better than the linear TV side of the business. But overall, it is definitely going to be a very, very cautious tone on the advertising business. And let's turn to its film studio, because we've seen some wild success. There's Captain America, Mufasa movie, some not so great, Snow White, Moana 2. But still, I suspect they're all going to make money.

They absolutely are. And we've seen, you know, just if you just think a few quarters ago, Tom, I mean, this business was really, really struggling. The content business as a whole was in desperate need of a rejigger. And we really had that with, you know, inside out kind of really, you know, a

starting this whole resurgence in the box office unit last year. And ever since then, it's been great. You pointed out Mufasa, that's done really well. Moana did really well. And then, of course, you had Captain America. And then we have the summer season for Disney kicking off, the summer box office season kicking off with Thunderbolts, which is tracking to a very, very strong

opening and should have a fantastic run just like Captain America. You know, this is the next phase of the Marvel Cinematic Universe should do really, really, really well for Disney. And they have a fantastic content pipeline coming out over the next eight to 10 months. Disney second quarter earnings coming out after Wall Street's closing bell this Wednesday. Our thanks to Geetha Raghunathan, Bloomberg Intelligence Analyst on U.S. Media.

Coming up on Bloomberg Daybreak Weekend, looking at the many challenges facing Germany's new chancellor as he prepares to take up the job. I'm Tom Busby and this is Bloomberg.

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This is Bloomberg Daybreak Weekend, our global look ahead at the top stories for investors in the coming week. I'm Tom Busby in New York.

Up later in our program, a look at what the Trump tariffs could mean for China's economy. But first, Germany's next chancellor, Friedrich Merz, will be officially confirmed in his role leading Europe's largest economy this week. It's been a rocky road to the top for the conservative, who will preside over uncertain times. What does this path ahead look like for the country's new leader? For more, let's go to London and bring in Bloomberg Daybreak Europe anchor Stephen Carroll.

Tom, it's been more than two months since Germany's federal election and now, finally, the country will have a new Chancellor. The Social Democrats, who led the outgoing government, have voted in favour of a coalition deal with Friedrich Merz's Conservative Alliance, clearing the way for the Christian Democratic leader to be confirmed as the country's next Chancellor.

The agreement, backed by around 85% of SPD members in an online ballot, brings to a close a complex set of negotiations. The deal also keeps the far-right AFD out of power after they won a historic 20.8% of the vote in February. As Chancellor, Friedrich Merz will have to deal with a delicate economic outlook. Germany saw just meagre growth in the first quarter and its key industries face the impact of US tariffs.

He's already passed a plan to ramp up defence and infrastructure spending in Germany, and that's something the CFO of Deutsche Bank, James von Moltke, says is already having an impact. Well, there are two things going on. The German economy is obviously an export-driven economy, so there's a significant impact of tariffs, whatever the outcome will be.

And so there are scenarios around that as to what the impact. But at the same time, you have this offsetting impact of the fiscal reform in Germany and now several years on infrastructure, defense spending, obviously the sustainable and digital transitions that are underway. So a significant investment volume. And so corporates in Germany are sort of gearing themselves up to manage that.

And in terms of sort of payouts and dividends and sort of buybacks and these sorts of things, is this a moment to sort of preserve cash? How are you thinking about that going into this year? We're executing on the distribution strategy and policies that we've laid out. So we've announced so far this year $2.1 billion of distributions through dividends and buybacks. We're executing on that.

And to your question, Oliver, we'll reassess. As time goes by, we see the performance in the first and second quarters in the environment

And, you know, let's say 90 days from now, we'll have an opportunity to reassess distributions later in the year. And then I'd like to also just take a step back and look at the sort of market architecture and what we've seen over the last couple of weeks. And I'll begin by sort of quoting some of your own research back to you, that the preconditions are now in place for the beginning of a major dollar downtrend, expecting €130 versus the dollar by 2027. How much of this damage do you think is permanent?

Well, look, our analysts are calling for a relatively significant structural change. I do think that will take time. There's been what I'll call a break, if you like, in sentiment. But that sentiment, I think, will make itself felt gradually over time.

It's had a pretty dramatic impact on the euro-dollar exchange rate already, and a further drift up from here would be impactful overall. I think the difference you're seeing is that the policy changes are making the rest of the world interesting to investors and changing the relative position a little bit of the United States and Europe, but other destinations as well. In a sense, that's good. I think it's been a wake-up call for Europe to

whether that's the policy side of Europe or, as we talked about, the corporate side. And so there's an opportunity to rebalance a little bit. It'll have impact on a number of markets, including currency. And when you think about sort of the remaking of that sort of global market architecture, does that mean that European markets, that German bonds, that the euro plays a larger role going forward, if not completely eclipsing the United States, but certainly changes? I don't think, again, there's... I don't necessarily think this is a zero-sum competition. I really don't.

But the Bund is an anchor sort of investment, an anchor source of stability in the world. And that's really good. In fairness, and one other thing our analysts said, and this is true, for the German government to have announced as big a fiscal expansion as has taken place

And for the long bond in Germany, the bond not to have moved substantially in that time is a real sign of confidence in Germany. We actually think that the economic health of the country and also its fiscal strength in many respects can be improved through this spending. And if you like a rebalancing of the economy, more consumption, more investment,

And I want to get into that, but I also want to talk quickly also just about the foreign exchange market, not just within the markets, but also your clients as obviously companies that look at the outside world. You've seen some wild moves on the exchange rate. How are your clients dealing with that? How are you sort of also an intermediary in helping them sort of hedge some of that risk? Well, we had tremendous volumes in those days of early April. So obviously we were managing our risk, but we were also helping clients to manage theirs. And there is a theme, by the way, of risk.

more business coming to us because of clients seeking to work with a European bank. And that's also encouraging for the business model. Again, rebalance is a little bit the imbalance that has been strategically the case in the industry.

The clients were in those days reacting strongly to this idea that the dollar and the US long bond was no longer the risk off trade. And that resulted in a lot of movement and uncertainty with clients, but all around the world is the honest truth.

And so trying to figure out the sort of German fiscal expansion kind of conversation here, there's so much bad news priced in, whether it's what's coming out of the United States, the sort of years of contraction within Germany. Do you think that there is actually quite a bit of good news that is not yet priced in, that actually we can really see things take off materially in Germany? I think so. It'll take time. I mean, in the nature of a fiscal expansion, the government needs to be put in place and the spending plans not just enacted but actually hitting.

And so we see this as a real support to the German economy and the European, more broadly, economies

in the years really starting in 26, but it's a sustained improvement. Now, one thing that's important is what it does to confidence today. And so we do expect some help in 25 in terms of overall confidence in households and corporates. Obviously, that confidence requires a resolution of the tariff war and some of the other things that are live at the moment, potentially peace in Ukraine. So there's a lot sort of hanging in terms of confidence on the outcome of these events.

That was the Deutsche Bank CFO James von Moltke speaking there to Bloomberg's Oliver Crook.

So what are the major challenges awaiting Germany's next Chancellor? I've been discussing this with our Germany Bureau Chief Christoph Rawald. Pushing through economic reforms will definitely be on top of his list and also will be particularly in focus in coming days will be his efforts to liaise with other European leaders like French President Emmanuel Macron or the Polish President Tusk. Germany has been notably passive under outgoing Chancellor Olaf Scholz

And Merz really has pledged and made it one of his top priorities to change that and play also a more active role on the European stage again. How quickly will the new government be able to draw up a budget? I imagine another key concern.

That is actually definitely one of the most pressing issues, actually, since when the outgoing government decided on a provisional budget for this year, for 2025, there was a gap of roughly 12 billion euros. That's about or close to 14 billion dollars. And since that provisional budget was announced, like some additional funding needs,

have actually come up. So the latest number that has been floating around in Berlin was about 18 billion euros. And the new government under Friedrich Merz will definitely need to address this sooner rather than later to basically plug these funding gaps. Of course, Germany in the crosshairs, as so many other countries are, two of Donald Trump's trade tariffs too. Are we likely to hear anything about trade policy from Merz in the coming days?

that does seem pretty likely uh math has been quite outspoken actually that the disruption from the from from the us tariffs um mark really like a significant shift for for germany because the us is one of its key trading partners so we can definitely expect them not just to meet with with emmanuel macron in france and with other european leaders in the individual like european union member states

but also to show up in Brussels to get involved in the European Union's trade policy, because that is actually like this, the sort of like entity that discusses trades with the US. How solid does this coalition look? The SPD have voted for it. It has, you know, gone through the period of negotiations. But where should we be looking for potential doubts in this new alliance?

This will definitely be in focus since the last government's sort of constant bickering over months and years, actually, was really like one of its major problems. And that actually disgruntled

Many, many voters in Germany. Overall, the SPD, the Social Democrats and the conservative bloc that's led by Friedrich Merz, they do seem very determined and so to reassure voters that they will make this cooperation work. But there are definitely some potentially contentious issues there that will have to be addressed, particularly when it comes to immigration, for example, or social welfare spending, where Friedrich Merz has sort of floated the idea of pretty painful solutions

cutbacks, that will be something that will for the Social Democrats will probably be difficult to accept. So yeah, it's going to be really interesting to see if they are or if they will be able to find really like a common ground or a common line. The biggest opposition this new government is going to be facing comes from the far right AFD party. They came in second in the elections in February. They're leading the opposition now. How much are the AFD's policies and politicians going to put pressure on this new government?

Well, they are definitely the biggest opposition party in the new German parliament after they secured just over 20 percent of the votes at the last federal election in late February. But they don't have direct influence on policymaking on a federal level. What we're seeing at the moment is that some of the regional governments, like some of the German states where the AFD has a stronger presence,

that there we can definitely see that they are trying to disrupt and influence decision making by blocking certain decisions. On federal level, we're not seeing that. I'm a bit reluctant to make a forecast there of how long that will remain in place or if they actually will have some sort of influence. But for now, their sort of potential to disrupt decision making on a federal level is close to zero, actually.

Talk us through some of the international challenges that Friedrich Merz will also need to be addressing. We know before this new Bundestag came into force, he did manage to pass that bill, which will ramp up defence and infrastructure spending. That's going to be an interesting one to watch for the domestic economy. But in terms of Germany's place in the EU, how will Friedrich Merz be playing that, given the, you know, obviously trade tariffs being a big question there too?

Yeah, defense spending will definitely be one of the key areas that's linked to some of the trade deals that have been sort of discussed over the past weeks and months, both on national level and on European level or on NATO level, I should say.

So the German army urgently needs to be modernized to fulfill its obligations within NATO and actually also be able to defend the country. And like modernizing the Bundeswehr for Friedrich Merz will be hugely complicated. Defense purchasing is, as we all know, that's a pretty convoluted.

sort of process a lot of like capacity restraints in the industry. And that is something that will have to be addressed with both within the NATO member states with the US administration, obviously, because the US is also like when it comes to defense, like a big

producer of weapon systems and ammunition. So that's definitely probably will be one of the most difficult and complex challenges that Merz will have to address. Thanks to our Germany Bureau Chief Christoph Rawald. We'll have full coverage of Friedrich Merz's first days as German Chancellor for you here on Bloomberg.

I'm Stephen Carroll in London. You can catch us every weekday morning for Bloomberg Daybreak Europe, beginning at 6 a.m. in London and 1 a.m. on Wall Street. Tom? Thank you, Stephen. And coming up on Bloomberg Daybreak Weekend, we'll look at more economic data in Asia that could offer fresh clues about the health of the world's second largest economy. I'm Tom Busby, and this is Bloomberg.

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This is Bloomberg Daybreak Weekend, our global look ahead at the top stories for investors in the coming week. I'm Tom Busby in New York. As U.S.-China tensions flare under President Trump's tariff push, fresh data out this week could offer clues about the health of China's economy. For some analysis, let's get to the host of the Daybreak Asia podcast, Doug Krisner.

Tom, a trio of key Chinese economic indicators will land in the coming week. We'll have the Caixin Manufacturing PMI. We'll be getting the April inflation reports and new trade activity data. Together, they will provide a crucial read on China's economic momentum, or lack thereof, at a time when global markets are watching nervously.

For a closer look, I'm joined now by John Liu. He is Bloomberg's executive editor for Greater China. John joins us from our studios in Beijing. John, we can talk about the inflation story in a moment, but I want to begin by trying to understand current conditions. Some of the recent data, as you well know, has indicated a fair amount of weakness. And I'm thinking of the PMI data in particular, which we had at the end of last week. Give me your sense of the macro right now.

I think there's a lot of concern at the moment. The PMI data that you mentioned there, Doug, that came in a week. There was a contraction. It was the longest or the biggest contraction in manufacturing that I think we've seen in about two years' time. And so that speaks to the weakness as a result of the Liberation Day tariffs that President Trump announced yesterday.

because that PMI data was for the month of April. So it was the first reading that we've had of what kind of impact there has been on China's economy. And I think there's a broad expectation that there will be more weakness because of trade. What about more stimulus? And how might the government go about it? I mean, some of this weakness is showing up on the export side, which

in the past hasn't really correlated very strongly with trying to get domestic demand put into a higher gear. Is this a particularly tricky situation for Beijing right now? I think there's a general recognition in Beijing that the way to

offset the pain from the trade war is to provide stimulus that will create domestic demand. So create a market for these products that would have gone to the US without these tariffs, but that potentially gives companies here in China a chance to sell domestically to a domestic

consumer or a domestic company. And I think what you will see is more and more stimulus in terms of offering rebates for people who buy a car or buy a refrigerator or buy some air conditioning, offering rebates for companies that want to get new equipment, that want to upgrade their production processes,

things of that nature. But as of now, we had this Politburo meeting in April that really showed the government right now is sort of in a wait and see attitude. The government said, we are ready with an emergency plan when that is needed. But they seem to be conveying an idea that so far in the first quarter, the economy was doing okay, and they're waiting for more data and information before they launch themselves into some dramatic stimulus.

In the last week here in the U.S., President Trump held a rally in Warren, Michigan, and it was there that he said countries from around the world have contracted his administration about trade deals. India may end up being the first. We just don't know at this point.

But I'm curious what President Xi Jinping is trying to do in the Asia Pacific and deals that he may be looking to create with trading partners that China already has in the region. So I think the starting point of this discussion, I think, is the fact that China does not seem to be in a rush to get to the negotiating table with President Trump.

I think the trade war has done something very pronounced here in China in that it's really created this sense of patriotism. It's really rallied support around Xi Jinping. And so whatever economic troubles there might be, whatever the employment situation might be going to the future, by and large, people here in China are going to blame the United States. They're going to blame President Trump.

That is going to take a lot of pressure off of President Xi Jinping, and it's going to make it easier for him to hold out for a better deal. In the meantime, there is also a lot of angst in countries around Asia, in Southeast Asia, in Japan, in Korea, about the tariffs that

The Trump administration has announced and Beijing is trying to take advantage of that by doing a charm offensive. Xi Jinping has already visited Southeast Asia. Beijing has just allowed the first K-pop concert that's taken place in China in about a decade. And so there is an effort to take advantage of that situation by

I was reading a piece on the Bloomberg Terminal in the last week. This is Wang Yi, China's foreign minister, was saying that if nations choose to remain silent, countries will be able to continue to trade with China.

compromise and retreat, it will only lead to the bullies making further advances. This seems to be very much an anti-US message. I get that, but I'm wondering whether or not there's a big audience for that right now in the region. I think there is that message that Foreign Minister Wang Yi delivered was at the meeting of BRICS nations, their foreign ministers, that was held at the end of April.

And so I think in that setting, there is a built-in audience for that message. Many of those countries, Iran is in that group, South Africa, Russia, Brazil, these are countries that have always had a suspicion about American intentions, if not outright hostility towards American intentions.

And so in that setting, I think he was speaking to the right audience with that message. More broadly, I think it's trickier to say when it comes to Australia or Japan or South Korea, traditional American allies, how well that message, what kind of message

mood that message will strike because yes, these countries depend on China for their economic growth, but they also depend on the United States a lot for their security. And at the same time, those countries also are suspicious of Chinese intentions. Japan, many Southeast Asian countries, the Philippines, India have all had border disputes with China, territorial disputes. And so that makes them less than enthusiastic about embracing Beijing.

So we've established the fact that the overall economy is weak vis-a-vis the PMI data, and we know that the government has to do more to stimulate domestic demand a lot more. Let's talk a little bit about the inflation story now. Is China still very much in a deflationary trap right now, or are there green shoots emerging that maybe prices are beginning to move higher?

I think we are still in a position where deflation is the major concern. There may be some green shoots in terms of services and in terms of retail spending because the government has started to –

roll out more and more stimulus. They've tried to roll out subsidies for people who buy various products. They've started to invest in new projects. China just approved a number of new nuclear power stations. And so that investment will start making its way through the economy. So some green shoots, but still, I think there's a major problem when you have

Such a big trade relationship between the United States and China being essentially cut off by the level of tariffs that have been imposed. Really shutting off end demand for many, many Chinese factories and where those products are going to end up is a big question. And I think there's a high likelihood that you will see companies and manufacturers and suppliers try to

Find a place to sell those products into by cutting prices. So does that necessarily mean I hate to use the term dumping But that's what I hear when you kind of make that point and whether or not that's going to leave China open to a lot of criticism so a lot of countries are worried about Where these Chinese products will go if they don't go to the United States That is a real concern and that is a real concern because of just what we're talking about manufacturers being

being incentivized to cut prices to get their product moving out of the warehouse. Whether or not that will result in dumping, I think we have to wait and see because what we have seen is the Chinese government telling various countries in Southeast Asia, for example, that China will not engage in dumping. And so there is a mechanism by which the Chinese government could stop that sort of thing.

And so they may choose to do that in order to take advantage of that opportunity we talked about. So we know during the first Trump administration that supply chains in China were being reconfigured to kind of remove the threat of tariffs. A lot of that was accelerated during the pandemic.

But I'm wondering now whether or not that's really gathered even more steam during the trade war. Are we seeing more and more companies kind of taking their processes out of China and to countries like India, for example, just to maybe find a way of getting into the good graces of the United States?

Well, I think what we see is American companies like Apple. Apple has announced that they are going to move all of the production of their iPhones that they sell in the U.S. from China to India. So for an American company, doing that makes sense. For a Chinese company, it makes less sense because the Trump administration has made it a point in their discussions with other countries, with Mexico, with India,

other partners that they want to make sure that Chinese companies are not rerouting their products through a third country. And so I think that has made it more difficult for Chinese companies to make decisions about investing, building big factories in Brazil or Mexico or some other country. What instead I think you are seeing a lot of Chinese companies think about is, can I sell product in Brazil? Can I sell product in Vietnam? Can I sell product in

Eastern Europe. And if I can, then I will build a factory there to do that. We were talking a moment ago about how the trade war has kind of incited a feeling of nationalism in China coming together to kind of coalesce around supporting the government's effort to fight this trade war. And I'm wondering whether or not there is

this feeling that we're in it for the long haul and that China can really manage to endure a great deal of economic pain for the foreseeable future, or whether or not there is a level of vulnerability right now that's being masked. And there's a breaking point that could happen in the next few months if there is no resolution to this tariff story.

Unfortunately, I think we are in the early stages, the early innings of this trade war. And right now, both sides are feeling in a relatively strong position. And I think that is mostly because the actual pain that will be caused by this conflict is not being felt. It's not going through the economy yet. In this current situation in China, people are feeling

more patriotic. They're feeling like they want to support their government. They want to support their president. They want to fight this thing. As time goes on and the economic reality sets in, the pain sets in, I think that attitude will start to change and evolve. I think there will be a more openness to negotiation.

And indeed, I think we probably will not get negotiations until both sides feel enough pain. John, it's always a pleasure. Thank you so very much. John Liu, Bloomberg Executive Editor for Greater China, and I'm Doug Krisner. You can catch us weekdays for the Daybreak Asia podcast.

It's available wherever you get your podcast. Tom? Thank you, Doug. And that does it for this edition of Bloomberg Daybreak Weekend. Join us again Monday morning at 5 a.m. Wall Street time for the latest on markets overseas and the news you need to start your day. I'm Tom Busby. Stay with us. Top stories and global business headlines are coming up right now.

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