Not-so-bad news is the new good news

Rob Armstrong (0:00)

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Pushkin. The strange sensation you are experiencing right now that you haven't felt in a long time is the belief that things might be okay. We got news over the weekend that US tariffs on Chinese imports would fall dramatically from 145-ish percent to 30-ish percent and that Chinese tariffs on American goods would drop from 125-percent to 10-percent. And there was a general feeling of human companionship among the negotiators of tariffs over there in Geneva between the two countries. Today on the show, lower tariffs and what it means for the dollar, inflation and China. This is Unhedged, the Markets and Finance Podcast from the Financial Times and Pushkin. I am Rob Armstrong, coming to you from Unhedged Global Headquarters in beautiful New York City, joined by my trusty colleague, Aiden Reiter. So Aiden, do you feel good?

Aiden Reiter (1:38)

I feel better. I don't feel good.

Rob Armstrong (1:41)

You never feel good. That's why I ask you. So if you feel better, I think that is a real sign of progress.

Aiden Reiter (1:47)

To quote our producer, Bryant, it is, market rejoices that boot on neck shifts position.

Rob Armstrong (1:54)

Man, for a young man, Aiden, you are cynical.

Aiden Reiter (1:57)

Only about markets.

Rob Armstrong (1:58)

Okay. So let's start with a basic factual question. We've had a major shift in the tariff posture between the two largest economies in the world. Why do we think this happened?

Aiden Reiter (2:11)

Well, there's a couple of possibilities. The first, as we've written on the newsletter many times, is taco. Trump always chickens out. The market had really wholly rejected anything that looked like heavy China tariffs over the past couple weeks. You'd remember that right after he called off the big tariffs and at the same time ratcheted up tariffs on China, the market took another dive. At the same time, the economy has been sending really concerning signals. So we got the complicated GDP print the other week, but also some concerns from monetary policy makers, from fiscal policy makers, that the economy was not looking great.

Rob Armstrong (2:47)

To say nothing of Trump's approval ratings, especially on the economy, which have been quite poor.

Aiden Reiter (2:52)

Absolutely.

Rob Armstrong (2:52)

So the pressure was on him and maybe he just simply wilted and the Chinese agreed to do the same.

Aiden Reiter (2:59)

Willing to acquiesce.

Rob Armstrong (3:00)

Willing to acquiesce. Is there anything we need to note from the Chinese side?

Aiden Reiter (3:04)

Yeah, so what we had said in the past that China had a stronger political position going into this, that's certainly true. They don't really have to deal with approval ratings the same way that Trump did, but their economy also-

Rob Armstrong (3:13)

That's such a nice way of describing an authoritarian state. They don't have to deal with the approval ratings.

Aiden Reiter (3:20)

Well, it's true. Their economy was not an amazing position, and it was starting to look even a little bit worse. On some measures, not all. I mean, their GDP growth rate came in way higher than people predicted in the first quarter. But with China, we always have to take all those numbers with a grain of salt.

Rob Armstrong (3:37)

Correct.

Aiden Reiter (3:37)

Some of the other contraindicators like the Li Keqiang Index, which also has its own problems, showed a lot more softness. And other activity proxies showed a lot of softness.

Rob Armstrong (3:45)

So those are unofficial GDP.

Aiden Reiter (3:46)

Unofficial GDP measures that look at things that are not GDP. They look at banking transactions. They look at rail lines. And just to see how activity is actually happening in the Chinese economy, they have their own issues, but they showed a lot more softness. At the same time, China was also getting terrible ISM surveys.

Rob Armstrong (4:03)

Just for our listeners who haven't been with us for a thousand years, ISM survey is a business survey where you ask a bunch of businesses, is business getting better or worse in various respects?

Aiden Reiter (4:14)

In China, it's called Caixin, but it's the same idea, right? They ask businesses how they're feeling, and it was really resoundingly bad. Services were down, manufacturing was down, export orders were down, especially after a huge surge in exports in the first quarter. And then at the same time, you know, China, we've been talking about a potential stimulus that would save the Chinese economy for, what, eight months now?