Fed Board Shakeup, Trump-Xi Call Set for Friday

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Welcome to the Daybreak Asia podcast. I'm Deuk Krisner. So officials from the US and China have reached a framework on keeping TikTok running in the US. This will set the stage for a phone call on Friday between President Trump and Chinese President Chi Jinping. The framework was reached in Madrid Treasury Secretary Besson confirming a plan for US ownership of TikTok. Tom Orlick is chief economist for Bloomberg Economics.

If we think about this from Beijing's perspective, they've got conflicting objectives. On the one hand, they would dearly love to have unlimited access to leading edge chips from Nvidia to accelerate their artificial intelligence progress. On the other hand, they recognize that the US is using access to chips as an instrument control and negotiating leverage. They don't like that.

That is Bloomberg's tom Orlick. Now, we'll get some perspective from the Asia Pacific momentarily, but we begin here in the States, where the fed's two day meeting gets underway in a matter of hours. Joining me now is Katie Kaminski, Chief for Search strategist, also portfolio manager at Alpha Simplex. Katie, good to see you. Thank you so much for spending time with me. So a rate cut, I think we can agree, seems like it's a sure thing. The question is whether the FED begins to signal a series of

I definitely agree.

I feel like the market has already priced in and has really sort of foregone the conclusion that we'll have rate cuts this week. But what I'm really interested in is how many and what till do they make so that we kind of understand the trajectory of the FED as opposed to just this week.

What is your sense the probability of a fifty basis point rate cut this week? Is that too too aggressive? Do you think?

Well? I think based on most indications, there's a low probability of that, but there still is a small probability. There are a few officials that also probably will dissent in favor of a fifty point cut, and I think that sort of indicates the amount of descents that we've had, and we haven't had a lot of descents in the FED until recently, so I think that is something to watch and think about.

One of the things that we know is that President Trump has been pressuring the FED to cut interest rates. David Kelly over at JP Morgan Asset Management was saying a rate cut will increase risk for stock spawns and the dollar if it's perceived to be driven by political pressure, if it's perceived to be driven by political pressure and doesn't align with the Fed's forecast for the economy. Fair statement.

I definitely so.

And the reason for this is if you look at the dual mandate, I mean, inflation numbers have actually been going up some so you know, you're really sitting in a situation where if it's perceived that this is not given by a sort of economic analysism based on the fed's view, then real view, that could definitely cause people to wonder if it could go too far. And I think there's definitely people out there thinking about that.

So we had records today for the S and P and the NASDAK. What does it say to you that the market is trading at record highs at a time when the FED is going to be easy. Does that make you constructive on equities or are maybe a little cautious.

Right now, I'd say it's still constructive in terms of the signals because it's all about the magnitude. So how severe is the job situation versus the benefits of lower rates potentially stimulating the economy, And so I.

Think that's where the market is right now.

It's leaning towards having lower rates could be positive, and it's not more positive than a worsening job situation. So I think we have to wait and see the next trajectory because the severity of multiple cuts could actually have a much more stimulative or a larger effect.

So it's just the beginning now, I would say.

So a moment ago, I mentioned the US in China reaching the framework on keeping TikTok running in the US maybe step one in trade negotiations between Washington and Beijing. Tariffs, as we know, are still in effect. How are you reading the tariff story right now as it relates to inflation.

Well, the challenge with this particular situation, if you look at this conversation with China is it just shows how complex it is that this could really take a long time to actually come to fruition that there is a deal which means that these tariffs stay in place, and there.

Will be ramifications of those tariffs.

So I think what we've noticed, though, is that headlines are not moving the markets as much as they were before. So you're really not seeing as much reaction to such information. And I think it's going to take a long time and it's going to be quite complex to understand the US China situation.

So we had yields down just a bit today. There's been a lot of movement in the bond market recently as players in that space have been discounting an aggressive FED. How much more room to run is there in the bond market right now? How far can yields decline further?

Well, this is a very good question because a lot of times the market gets ahead.

Of the FED. So I think a surprising.

Thing would be that we might actually be underwhelmed and the market correct. This is because a lot of traders and investors have been getting in sort of ahead of the FED, and if the FED sort of slows down or pumps the brakes, you might actually see a tick up and yields, which is kind of counterintuitive for some investors. So my view is that it's going to be touch and go, and we're going to have to watch and

So worst case scenario, though we're just above four percent now in the tenure in yield terms, could we get back up to a round four and a half?

I mean it's possible, but I think that would require us to have signaling that the FED is still being very steady, and that has not really been the direction momentum that you've seen with the FED. There's been just sort of a slow pivot towards easing, and that, in some sense, I would.

Suggest, is a little bit less likely.

You could see yields tick up a little bit if people where markets are underwhelmed by cuts not coming as fast as they think, or people pricing in aggressive cuts that don't.

Come to fruition.

I'm just wondering about a negative prints on inflation.

Right.

We talk a little bit about the risk of stagflation in the current environment, and I'm wondering whether that could precipitate a move up and yield at the long end.

Oh, definitely, And we started to see some indications in the technical signals this summer.

We saw steepening trades.

Going on for sure, and that could definitely be back in focus again. If we start to see an acceleration in inflation and we're cutting rates at the same time, that always gets everyone concerned about low growth, lots more inflation aka stagflation. I think that's the corner case that many investors are concerned about with cutting rates too fast.

So we had some dollar weakness today that shouldn't surprise you. It seems like the dollar has been in this process right now of giving back a lot of the gains that we saw a short while ago. Are we firmly now in a new paradigm where the dollar is concerned against the majors?

Well this that's a good question because we have seen a persistent, persistent weakness in the US dollar most of the year, and there's several factors that are against the dollar right now. So cutting rates tends to in general be negative for the dollar. Positive sentiment cash flows regarding positive sentiment can also be negative for the dollar.

So there's just a few.

Factors at play right now that don't make the dollar look as desirable. So I think that could continue to be the case, especially if we continue to see ray cuts over the next couple of months. So I think people are positioning in anticipation of that.

One of the things the market is prepared for is a Dubvish tilt as the fed's Board of Governors kind of gets reconfigured here, and I know there's been some question at the margin about FED independence. We spoke a moment ago about the influence that the president may be having on policy right now. Is that something that you're concerned about a great extent.

I mean, I think the market is definitely concerned about that and has moved some on those type of reactions, especially earlier on.

I think the fact that you have several.

More descents and disagreement in the FED is something that we're not used to seeing for quite some time. So I think as things start to shift even further, this question will continue to be at the top of minds, and if it becomes more apparent, you could see a market reaction where investors get nervous thinking sort of is this really the right decision given the current inflation scenario and unemployment or the current economic situation in the US.

Katie, before I let you go I have to ask you about the story in China. We had the monthly activity data in the prior session, both retail sales industrial production coming in on the weak side. How do you see the global economy right now outside the US, how do you see it performing well?

The interesting thing is in certain areas like Japan merging markets, they have been very strong. China, on the other hand, has lagged, for example em in general. But you're also seeing positive and mixed signals in other portions of the Europe and also even in the US across different sectors.

So I'd say.

That China is definitely one of the laggards when many of the markets have been up substantially this month, and that may be due to that fundamental data that's just suggesting there's not as much growth.

There right now.

Katie, we'll leave it there, Thank you so very much. Kati Kaminski is chief for Search Strategist, also portfolio manager at Alpha Simplex. Joining us here on the Daybreak Asia podcast. Welcome back to the Daybreak Asia podcast Time Doug Krisner. So, as I mentioned a moment ago, officials from the US and China reached a framework on keeping TikTok running in the US. President Trump spoke earlier to reporters in the Oval Office.

It's important and it can maybe even bring us closer to Jenna.

We had a very good meeting with John.

I was surprised.

I didn't expect it to that extent.

And I'm going to speak again with President she on.

Friday, and you know, I think that'll confirm.

Things up now. China's Commerce ministry called the deal a consensus. Although some technical hurdles do remain. This breakthrough, nonetheless could unlock a long awaited Trump She's summit at APEC next month. For a closer look, we heard from Wendy Cutler, vice president at the Asia Society Policy Institute. She formerly served as acting Deputy US Trade Representative. Cutler spoke with Bloomberg TV host Sherry On and Annabelle Droolers on the Asia.

Trade Wendy, always great to have you with us. What do you make of the Madrid talks because we saw some progress on TikTok, but at the same time, China in the backdrop continues to apply pressure to the US chip settor.

Look, the TikTok framework deal is a welcome development. This has been a long term irritant in our relations with China. So it's good that it's on the path to solution. But there's so many other issues that are challenging this relationship. And if it took two days of talks to basically deal with TikTok, it's hard to see these other issues being resolved over the coming months. I think it's just going to take longer.

Could something of a breakthrough be achieved in the President cGMP and Trump and Leader summit.

Well, first, they're going to have a call on Friday. I think that call is important in that they can confirm the TikTok deal and hopefully they can set a direction forward for their staffs to work together in tech leading up to the APEC meeting. But again there's you know, between fetanyl and export controls and soybeans, there's just so many issues that these two countries need to work on intensively.

How big of a priority was TikTok in the grand scheme of things when it comes to those low hanging fruits that the two countries can target at the moment and what could be next?

So I do TikTok is as of medium importance? What made it rise to the top was the Wednesday deadline to reach a decision or else to kick TikTok out of the United States, And so that deadline I think served to reach a resolution, you know, in this area. But again there are issues including semiconductors and soybean purchases and excess capacity. All of these issues need to be looked at between the two countries to help stabilize the relationship.

Yeah, you mentioned semiconductors. I mean, how much do we really need to read into the TikTok deal when you had as well China targeting and video for instance, over and I going back to a twenty twenty deal exactly.

And I have to say, as a trade negotiator, I have never seen a trading partner overnight in the middle of trade negotiations to hit the other country with such a strong measure like finding one of its key tech companies in violation of its anti monopoly law. So you know, I don't think that helped contribute to a good atmosphere in the talks, but I give kudos to both sides for finding a way forward at least on one issue of concern TikTok.

Do you think then enough has been done right now to sort of set the stage for any travel of President Trump to Beijing later this year or does that sort of look unlikely still for now?

I think we're there's a good start, and Secretary Besson mentioned that the two sides will get together at his level within a month, so you could see other issues being worked at at the working level and then you know, being put forward to Vice Premier Hoa and Secretary Besson. So I think there still is a good chance of at least a meeting in Korea. I'm not sure if circumstances are right for a President Trump visit to China.

Yet, Wendy, I find it really funny that you mentioned imagining being a trade negotiator now and how Nvidia became targeted while the China used conversations went ongoing. But that seems to be the case these days, isn't it. Even in the US. I mean, could you have imagined an immigration rate in that Georgia plant by South Korea after

Well, I couldn't agree more. And I've just returned from Korea, and believe me, I've heard a lot of concerns and a lot of caution about of investing more in the United States. And at the same time that we're detaining we were detaining Korean workers in Georgia, we're pressing the Korean government to set up an investment fund of three hundred and fifty billion dollars in the US, where basically Donald Trump would decide which investments made sense and which

Yeah, it certainly was a mere culpa of sorts yesterday. I mean, it's really hard to not sort of reinforce just that maybe the level of damage that's been done from this, and not just the signal that it sends to Korea, but also the signal it sends to other places like Taiwan where you're asking businesses to shift investment to the US. But how much of this is a setback?

Well, again, I think the Koreans are concerned about going forward with this huge investment fund, and after they read the MoU between the US and Japan, which made it clear that while there's a committee where the Japanese can input into recommended projects, at the end of the day, it's a US decision. Japan focused on just getting those

Talk about allies getting blindsided by the Trump administration. India US officials now they're trying to negotiate a trade agreement. What are your expectations when we have, of course seen the threats of fifty percent tariffs on all Indian goods.

Yeah, actually, I'm kind of optimistic on the India front. I think we got very close to a trade deal with them, and the signals coming out of both Washington and Delhi suggest that both sides do want to finalize an agreement. That's positive, but again, we need to keep in mind that trust has been broken and that it's going to be hard to get back to where we were.

Wendy, thanks so much for joining us this morning. That's Wendy Kutla, their vice president at the Asia Society Policy Institute.

Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the story 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 Chrisner and this is Bloomberg.

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