paul: u.s. stocks rally is trade tensions appeared to ease. china held off from the selloff in washington. ramy: the s&p 500 closed at its highest since february as beijing takes a conciliatory tone. both sides are open to talks. paul: president trump ups the ante on brexit. he said a soft divorce would kill trade deal. ramy: earning season gets into

high gear with citigroup and jpmorgan among the biggest due to publish results. paul: hello from sydney just past 8:00 a.m. i'm all allen. -- i'm paul allen. this is daybreak asia. ramy: good friday to you. i'm ramy inocencio. over the next hour, we will be looking at the action on wall street and how it will play into the asia-pacific trading day. the fact that china decided not to release quantitative measures in terms of retaliation meant that lulled investors and push them into the market. let's take a look at how markets closed on the trade. they ended surprisingly in the green. the dow was up .9%. the s&p 500, as i mentioned earlier, was at its highest since february 1 with that increase but the nasdaq, 1.4% rebound.

that's a record high, also the biggest jump since june 1. let's open up the boards and take a look at commodities. just a fraction of a percent down. we did see a spike of .7% yesterday off the release of the new round of tariffs. the commodity index fell, rebound of .7%. new york crude along the flatline. 2.85%. year unchanged at vibesa lot of good spreading into the asia-pacific. we have been here before. a low and the trade war. -- a lull in the trade war. we are off to a strong start, up just over .05%. the kiwi dollar looking a little weak, but sydney futures higher and the aussie dollar popping

hammering74, taking a when the trade war looked to be all on. let's get to our top story, china accusing the u.s. of gangster logic in the worsening trade dispute, which -- we will get to that story a little bit later. let's get to the first word news now. we'll be joined by jenna deccan heart. reaffirmedt trump america's commitment to nato, but only after dragging germany and other allies through insults, accusations, and demands for higher defense spending. he held a news conference saying he threatened to quit the alliance, saying he could do so without the approval of congress. but he says leaving will not be necessary. president trump is tweeting about north korea. he posted a letter from kim

jong-un that raises his efforts. it's dated july 6, one mike pompeo was in pyongyang. with theing concluded state media calling the u.s. approach cancer and gangster like. despite the setback, trumps tweet hails great progress in relations. britain's financial industry has slammed theresa may's latest brexit proposal, some calling it the worst outcome possible. a plan for a luther partnership the eu would drive up costs and hurt the wider economy. sresident trump said may' plan would kill trade deals with the u.s., saying she ignored his advice on brexit negotiations. netflix is home of "the crown" and king of the emmys for a first time. it overtook rating champion hbo in award nominations.

candidates were announced in l.a. and netflix scored 112 nominations, more than any other network. two decades after launching, netflix has become a hollywood powerhouse. global news 24 hours a day on air and at tic-toc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. heart.nis deccan this is bloomberg. paul: thanks very much. let's get back to our top story, china accusing the u.s. of gangster logic in the worsening trade dispute and said it's not afraid of escalation. stephen mnuchin denying the two sides are in a trade war. this is despite the white house proposing to ramp up tariffs on chinese goods. >> don't think we're in a trade war. we're in a situation of trade disputes.

these are not trade war's. and we are very focused on the nafta issue, which is renegotiating an old agreement. we are very focused on the china issue, which is very collocated. paul: all very nuanced. let's bring in greg sullivan. could this be a step toward more tariffs? greg: a step potentially. we were watching to see if there were signs the two sides might hint of resuming talks after the latest round of tariffs. as we seem today and yesterday, the administration signals they are ready for talks. addressingchin lawmakers on capitol hill, said that u.s. administration was available for talks. that echoes what the white house spokeswoman lindsay walters said. the u.s. was open to sitting

down and talking with china. both the white house and steve mnuchin said it depends on china's willingness to address u.s. concerns, mnuchin even saying they had to make structural changes, a steep demand. keep in mind that mnuchin said the trade war was on hold and days later, trump moved forward with initiating the promise of tariffs. hard to know if this is the beginning of a setback or signaling eight -- a disappointing time. ramy: we heard interesting language. take a listen to this. >> that's a gangster's logic and it's the thief crying stopped thief. it's the united states who violated the wto rules and imposed tariffs unilaterally. that's typical behavior of trade protectionism, which is not based on any international law or justify grounds. ramy: some rhetoric there.

any other reaction from beijing? greg: that's correct. beijing blamed u.s. in this trade war. they said the u.s.'s responsibility at this point because they acted in good faith. they are willing to sit down and talk with the u.s. and that's how this should be solved. that also echoes u.s. lawmakers, who have urged president trump to sit down with his chinese counterparts and negotiate rather than escalate the tariff war. ramy: open to talks. mnuchiny of treasury also facing grilling in congress today. lawmakers have been working on legislation that would limit mr. trump's authority to impose tariffs. where are those efforts now? do they have a chance of passing? greg: just a week ago, a look like going nowhere fast. but lawmakers have renewed energy.

the legislation being worked on would limit trumps ability on national security tariffs, like steel and aluminum, not the chinese tariffs. it doesn't look like they are going anywhere. paul ryan tamped down expectations, saying trump should sit down and negotiate with president xi and the house should not be legislating on this issue. ramy: a lot to take in their. greg sullivan, thank you very much. let's head to the markets now for a closer look. the after the bell news on a new challenge to the at&t time warner merger not over yet. we bring in su keenan. let's start with a bounceback, taking a climb after taking hits. su: let's call it a day to day tug-of-war as this cauldron of news headlines. we've got a war, a lull, let's go to a snapshot. we saw a dollar down on weaker

than expected inflation data. crude falling below 70 at one point after being near 75. and gold bouncing up. let's go right to the bloomberg. gtv 's where you find our charts. this is a political insurance chart. the 10 year coming down in the blue and the gold turning upward as the yields turned lower. let's take a look at the big movers. tac was in the mix, leading some of the gains. facebook is the best company after a turbulent year, twitter bouncing up despite the crackdown on fake crackdowns. then you've got fiber optics company right there up 6% on incredible surge in call volume. there was negative speculation and broadcom knocked down in a big way at one point down 19%.

yesterday, we talked about broadcom announcing a $19 billion takeover this decline. it knocked up the value of the takeover and many analysts are questioning the financial and strategic logic behind the move. let's go back to the bloomberg because the big news on friday, the banks are reporting earnings. this is called flying high. u.s. banks posted the highest since the financial crisis. earnings are expected to be robust. that will be the big question. will they be robust? it may determine the market direction. paul: looks like we are heading around to over the battle of at&t's takeover of time warner, the u.s. justice department appealing the decision, allowing the merger to go forward. su: this is a highly unusual move.

washington rejected their attempt to block the merger. we did see at&t take ahead, but friday trading will reveal how this is being pursued -- perceived by investors. could this happen? could the appeal overturned the decision? many analysts say unlikely. they are reviewing mistakes made by the lower court. but what they couldn't do is be a rebuke. it would vindicate the decision by the head of the antitrust division, who is one of president trump's people, and it's being closely watched because it can impact the ability to enforce mergers going forward. paul: thanks for that. still to come, earnings season. citibank, and wells fargo kicking off friday morning. we'll have a look at what shareholders can expect later on. risk a trade, the

war could pose to growth as well as inflation. hsbc's chief economist joins us in a moment. this is bloomberg. ♪

ramy: welcome back. i'm ramy inocencio in new york. paul: i'm paul allen in sydney and you are watching daybreak australia. inflation leads front and center as fed officials weigh in on the economy and monetary policy. economists expressing mixed views on the latest u.s. inflation report. let's get over to global reporter kathleen hays for more. what is the message from jay powell and patrick harker and is it backed by the inflation data? kathleen: let's start with jerome powell. he did in interview on npr public radio, asked about

growth, inflation, trade. he does see the economy in "a good place" and is concerned with trade policy. he said this is a new process and its "difficult to predict how it turns out." michael mckee sat down with patrick harker today and he told bloomberg he's comfortable with inflation as high as 2.5%. that would be considerably above the 2% target. nonetheless, he's in no hurry to hike faster. let's hear what he told michael mckee. >> at the beginning of the year, i put in three for this year, three for next year. i have not moved off of that. let's look at the consumer price index. month on month, 0.1%, weaker than forecasts, something to do

with energy prices. the core of 0.2%. year-over-year rate we watch closely. let's jump into the bloomberg library. what you can see is that the cpi actually hit 2.9% on the headline and that was the fastest since 2012. energy prices have come back. you've got gas price dynamics, rent, etc. i want to show one more chart because you have to look at the fed target. it's not cpi. you have to look at the pce core. the headline is around 2%. not sending off a red flag yet. this concern about tariffs and trade is something people are worried about. i think tariffs may the deflationary rather than inflationary, but it's a concern. ramy: we'll leave it there.

thank you very much. let's welcome hsbc's chief kevin logan. i know you are looking at this economic growth through the inflationary lens. what are your thoughts on this? kevin: i think it's a good point that kathleen made. of course, price increases on some items immediately. the tax has to be paid. rises,ifts relative makes something's more expensive, others less expensive. we don't know how that plays out. a bit more important on a retalix -- are the retaliatory tariffs. canada, mexico, european union. the demand for u.s. products could fall. u.s. exports could decline. that's a depressive effect on the economy. two things going on at once. retaliatory tariffs reduced demand. how does that play out?

it would be appropriate for j. powell to say we haven't been through this but we don't know how it will play out ramy: you describing that is describing what happens every day on the markets. today, it was up .7% but yesterday we saw the tariffs hit u.s. markets. where are we headed over the second half of the summer? predictifficult to because different industries will be affected differently. i just mentioned the retaliatory tariffs. they are mostly aimed at agricultural products. the u.s. is a huge exporter of agricultural products. china imports massive amounts of agricultural products. they are targeting us specifically. canada and mexico target steel. mixed.l a bit because it's different for different industries, the market

is going to have to work this out. even though there are tariffs, there are substitutes for goods. it may turn out u.s. exporters export somewhere else, particularly agriculture. it's a global market. it can be exported somewhere else. we're not really sure how badly profits will be affected. other sectors, there aren't quite substitutes. let's say tech companies exporting to china. perhaps they can source from korea or taiwan. you can't really know until we see how it plays out. it's going to be a mix, somewhere i would say, one we have to play -- pay close attention to different industries. paul: i just want to circle back to the topic of inflation. both you and kathleen mentioned tariffs could be deflationary. but inflation has been a very low for a very long time and j.

powell also said he can imagine situations where inflation is rising while the economy is weakening. can you entertain some hypotheticals on us? kevin: let's think first about u.s. tariffs. retaliatory tariffs may be inflationary. the u.s. tariffs in the first instance, raise the cost of imported goods. that's a one-time affect. it shouldn't continue, which is what inflation is. but it could affect inflation expectations. the u.s. economy is close to full employment. we've seen rates -- wage gains accelerate modestly. if there was a jump in prices of imported cars or imported computers, imported electronic products, steal prices coming through on other products, and that people began to think inflation is picking up. it's hard to disentangle the tariffs from the state of the economy and labor market.

then inflation expectations shift, start to move up, them he could get a higher state of inflation. that's quite possible. that's what the fed has a dilemma. how do they disentangle the one-time tariff affects from what might be a shift in expectations that is pushing us up a higher level for the inflation rate. it was interesting to hear patrick harker's comment that 2.5% inflation rate would be comfortable as far as he was concerned. the fed has been missing its target on the low side are years. -- four years. so accepting and overshoot, even for a few years, might not be a bad thing. it would let them get through this period of adjustment for tariffs. you can let it ride for a few years and see what happens. paul: we've only got a little time remaining, but want to go to another j. powell comment. he says the u.s. economy is in a

good place and he's sleeping well. would you agree with that? kevin: the u.s. is at full employment and the economy is good. there's a lot of stimulus in terms of expanding demand, lower taxes for household and businesses. we're likely to see continues growth for 18 months given the circumstances. from that point of view, the fed has been easy task. they told everyone they will gradually raise rates. it's built into market prices. everything seems to be going along smoothly. the flight in the ointment is the tariffs and the uncertainty and dilemma over what it will do to inflation. hsbc chief logan, u.s. economist. thank you for joining us on bloomberg tv. remember, bloomberg users can interact with the charts we showed you using gtv .

you can browse recent charts featured and catch up on key analysis and save some charts for future reference. this is bloomberg. ♪

ramy: i'm ramy inocencio in new york. paul: i'm paul allen in sydney and you are watching daybreak australia. let's get a quick check of the latest business flash headlines. mining giant welcomed a deal with indonesia for its flagship gold and copper mine while acknowledging the deal is not perfect. the two sides says freeport will receive control to state owned for $3.85 billion. that takes indonesia's stake to 51% and rio tinto, the other partner, will cash out its interest for $3.5 billion. ramy: steady overseas growth lifted third-quarter earnings,

hitting $6.9 million through may, comparing to estimates of $524 million. they've invested heavily abroad for signing of brand ambassador and opening new stores in europe. it acknowledge is threat of a trade war but says it faces limited damage. paul: reliance industries is back in the billion dollar club. michel barnier's company jumped, pushing market value over the mark. reliance is the second giant to suppress $100 billion. barty reaches the richest man. still to come, trade tensions are easing slightly but our next guest says we are seeing the effects of tariffs. a former member of the trade team is joining us next. this is bloomberg. ♪

sydney,'s a: 30 a.m. in markets opening up in 90 minutes time. futures looking bright in the low and trade disputes as steve mnuchin is calling it, up on this front morning. ramy: i'm ramy inocencio in new york. you are watching daybreak australia. let's get first word news with jenna dagmar. jenna: at&t says a u.s. appeal against the merger doesn't change anything because the deal is closed. the justice department is challenging the decision allowing and $85 billion

takeover, which created a telecommunications giant. at&t closed the transaction on june 14, two days after the earlier decision. it was the first time in decades the court decided a merger of companies operating in different parts of a supply chain. china is accusing the u.s. of logic" in "gangers the way it handles trade dispute. no current contact in washington, and although it doesn't want to fight it's not afraid of escalation. they have vowed to take forceful measures, blaming america for breaking the rules. >> that's a gangster's logic and it's the thief crying, stop thief. it's the united states who violated the wto rules and imposes tariffs unilaterally. that's typical behavioral of trade protectionism, which is not based on international law or justified grounds.

jenna: standard chartered lowered its forecast for the yuan due to its forecast of a trade war. they are worried there's no signs of negotiation. recent movement suggests china will allow market forces to drive the exchange rate until there's a risk of overshooting. biggestompared with forecast of 618. in the u.k., protesters greeted president trump and milani a during the first official event. they lined oxford shire where he dined with theresa may. it's unlikely they saw the protests, flying in by helicopter from london. he'll meet queen elizabeth on friday before spending the weekend at trumps golf resort in scotland. global news 24 hours a day on air and at tic-toc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries.

i'm jenna degen heart. this is bloomberg. paul: let's get a quick update on the markets trading in new zealand, going for over 30 minutes now. there's a pause in the trade war. not a very big change to the kiwi dollar the futures in australia pointing higher, .4%. and the aussie dollar climbed above $.74 u.s.. let's take a look at other currencies, japanese u.n. slipping against the u.s. dollar, unchanged at the moment. not a lot of change for the british pound or the 10-year. the markets are welcoming news on trade, higher by .9% and closing the highest is february. -- since february. let's get more on what we should be watching.

adam is joining us and the weakness in japan's currency baffled some. why is it so strange? you think with all that has happened in the trade tension and the huge escalation and the past few days, the tension between the two biggest economies in the world, you would see this flight to quality and people would want to buy traditional safe haven assets like treasuries and the yen. what you're seeing is stability in the treasuries market and actual weakness in the japanese currency. that's a big change from what we saw in the earlier part of the year, where we started to see shocks to geopolitical tensions and money flow into the yen. you can see it clearly on this chart on your bloomberg terminal, gtv library. look at how the yen is trading relative to bond yields. you see that correlation there? then there is the huge

divergence. i think this weakness in the yen surprised many in the market. we heard from securities yesterday. they put this share on yen dollar. they had to absorb the loss and say it hasn't gone our way. part of the reason is because if you think about the japanese economy and the confines of how it operates the trade tensions, it may indeed be a place that could suffer from this. this is a tricky situation. you could have a further weakness in the yen. people talking about 113 versus the dollar, maybe from further than that. week,een an interesting one that has baffled people in the market. a lot of people are watching how the options market will trade, see if they can get a read on for the direction. ramy: we've seen a decent rally and chinese stocks after the recent he down. -- beats down.

you someone that was more ready to go. -- you saw one that was more ready to go. adam: it's been a decent week for chinese stocks. it to them from a bear market a few weeks ago. this is the bloomberg's fear and greed indicator. it's a gauge of momentum of lying and selling. this chart here shows you that there is an a level of panic or fear in the chinese stock market at the moment. some of that may speak to the valuation argument that chinese stocks have they come discounted enough to buy back into the market. that was a point made by blackrock's, speaking on bloomberg tv yesterday, and he made the point that the doom and gloom around the economy slowing down in china may already be reflected in the price. that's perhaps one positive

takeaway that the ball side of the chinese equities argument might have a little bit further to run. it's been a decent week so far. you got to remember how far we fell to get these levels. it will be interesting to watch the start again of chinese assets trading. we had better stability in the currency, but a little bit of a fault and the offshore yuan yesterday. it relies on china back again today. ramy: adam haigh. don't forget to check out our gtv every for the charts you sell their. that's on the bloomberg terminal. some breaking news crossing the bloomberg terminal. johnson and johnson in the spotlight, a jury has awarded $4.14 billion in punitive damages. this is linked to a case regarding talk him powder and asbestos. this is the biggest jury award

of 2018. if you're not familiar with j&j had to pay $560 million in damages, before any punitive claims were prescribed. this is linked to women who claimed asbestos in the caused's talcum products ovarian cancer. johnson and johnson down 1.3%. we will get more on this as news develops. but johnson and johnson seeing the biggest jury award of 2018, $4.4 billion. after days of threats, things appear to be coming down between the u.s. and china. both washington and beijing signaling and openness to get back to the table as china held back on hitting back, at least for now. stephen engle asked founder and ceo benzema north whether he

sees more escalation ahead. upclearly the war is ratchet past where few of us forecast. there is concern with logo beyond today's level. the real concern for me is the implication of the global trading system. a lot of the system is in place. even if we ratchet up a little bit more and step back, we are still in a good place. china in particular has a real need for the global trading system to remain robust because the country has benefited from it clearly. stephen: how can cooler heads prevail if the heads are not talking face-to-face? >> there's a perception while china has met the rule of double trade, it hasn't met the spirit. until we see some compromise on the chinese side, but also the u.s. side, there's a concern it will get worse from here. small,k, and it's not

the u.s. would exit from the global trading system would be disastrous. that's the worst case scenario. stephen: where does china go from here? they cannot match dollar for dollar on the tariffs, but they can do other market access restrictions. >> they cannot match dollar for dollar and they would need to see some compromise over the coming months, particularly around get access restrictions. even so far you can offer quite a lot, but not deliver on everything over a 6-12 month period. so compromise needs on the table at some point. stephen: does this make health and wrote initiative more of a risk? >> the belt and road initiative will become more critical in the trade war. africa, asia, middle east already account for china's total exports. will the exports benefit from

the robust trading system, they have to remain committed to the trade system for belt and road to succeed. china has growing concerns of market access in the u.s., whether bte or broadway. so far they find it more difficult to sell products in the yet it. they will look at markets closer to home, asia, africa, the middle east. paul: that was silk road associate founder speaking to bloomberg's stephen engle. let's bring in asia's society vice president wendy cutler. she's a former acting deputy trade representative and says to negotiating association -- says negotiating a solution is possible. and there's a suggestion u.s. and china might resume talks again. forgive me, this sounds like deja vu all over again. we were here just earlier this year. what are the chances we see the

rhetoric ratcheted up again? seen such strong words and actions from both sides. and secretary mnuchin indicated talks may proceed. [no audio]

it's inevitable. what comes at a surprise is the attempt of a back-and-forth, and the volley on tariff increases. kind of order for some solution to happen, i understand you think more economic fallout actually has to happen. how bad does it have to be? wendy: i don't think it has to be terrible. ramy: we don't want it to be terrible. wendy: exactly. [laughter] i also think at this point, the $34 billion of tariffs increases went into effect less than a week ago. people are not feeling the impact yet. the $200 billion of tariff increases that the president indicated he wants to proceed with can't go into effect into -- until early september at the earliest. i think we will see increasing fallout with respect to u.s. consumers, u.s. businesses, u.s.

theses, and as stakeholders talk to congress and pressure is put on the administration, i would hope that both sides could take a deep breath, get back to the negotiating table. these issues do lend themselves to a negotiated solution, but let's all be clear. they're all going to be very difficult and long negotiations. they don't lend themselves to easy solutions. ramy: one thing, we don't really know what the end solution might be to this in terms of articulation from either side. wendy: correct, but i think it's incumbent upon the u.s. side to indicate its priorities and it's and games. is it looking for a significant reduction in the trade war? or is it more important to seek structural, long-term, lasting changes to the chinese market? or is it all about just lifting market access restrictions with

respect to trade and investment? if it's all three, which is the most important? and how do you sequence all of this? but to put all of this on the table and say china knows what it needs to do, i don't think that's the way forward. paul: in terms of a useful way forward, i like to ask you a question about your experiences because you are a former trade representative. have you seen negotiations conducted in this way? is this approach high risk and counterproductive? wendy: i haven't experienced anything like this. i worked with japan in the 1980's and 1990's. we would have one team working on developing entities and sanctions, but the other team -- penalties and sanctions, but the other team would sit down, trying to find a negotiating solution. both were moving in tandem.

here it seems all the emphasis is on penalties and not finding a solution. hopefully that will change as more hurt his experienced throughout the committee -- is experienced throughout the community. paul: steve mnuchin says he's looking for china to commit to deeper reform. what is he looking for? wendy: i don't know exactly, but i would suspect that the nine states is looking for china to step up its intellectual property enforcement and protections, but also to ensure that our companies can compete with chinese companies, both in china and around the world on a level playing field. and frankly, the pattern of technology practices and innovation issues are moving to the forefront of the agenda. and they should be addressed.

but the way to address them is not to say to china you need to dismantle your made in china 2025 program. the better way around it is, you keep the program but these are the limits and these are the parameters we should place on the program to ensure its conducted in a nondiscriminatory, transparent, and nontrade distorting matter. ramy: one last question. your latest op-ed talked about diversification. i want to expand this regionally. you are saying diversification is basically saying, we can't work with you. we'll have to go elsewhere. is that genie out of the bottle or can we come back from that? wendy: i think the genie is out of the bottle, but how far out of the bottle is it? there's always room for the united states to get back in the straight game and i hope they will. we'll find a way back. but i got to say, when you look

around the world and see these negotiating's in -- negotiations in latin america and europe, we will have a lot of catching up to do if we don't start getting into that game. ramy: thanks very much. great analysis there. wendy cutler, former acting deputy, u.s. trade rep. up next, wall street keeping watch on lending as u.s. banks report their quarterly results. christopher whalen, global advisory chair weighs in on the big financials next. this is bloomberg. ♪

paul: i'm paul allen in sydney. ramy: i'm ramy inocencio in new york and you are watching daybreak australia. several key u.s. banks reported quarterly results, including j.p. morgan, wells fargo, and citibank.

the next guest was probably the peak for bank operating income for the cycle. let's bring in with an global advisors chair, christopher whalen. top line earnings tomorrow, what are you looking at? chris: we should be looking on whether or not they can revenue where they can expect. street is looking for 9% revenue growth, lower for the other banks. first quarter was extraordinary. we had a bunch of things going on we didn't expect. it added a couple of billion dollars out of the blue. a lot of funny things we are not going to repeat this quarter. to me, when you look at the fact the operating income number, $71 billion for the industry, was pretty much above $10 billion for last year. a lot of that was special items. i don't expect to see that gangbusters numbers. we don't know about trading. the bank site is growing nicely,

but the problem is the cost of funds is rapidly catching up. the gift the fed gave them for five years. that's really driven earnings. 8%, but the went up problem is the cost of money went up 50%. it's going to catch up fast. to see ae're going flat net interest margin shrinking. ramy: i have a bloomberg terminal on net interest margins. you can see the highest here, wells fargo, 2.92%. .he lowest, jpmorgan, 2.82% chris: they don't reprice as fast. the big banks price every day. the other half is your checking accounts. 80-90%ttle banks, its checking accounts. ramy: for the foreseeable future here? chris: they will keep going up

for the balance of the year. is not going to be as fast. ramy: moving along to loan growth. got another chart. hop back into the library. you can see the yellow line. that would be citibank, 8.11% is the number there. the blue line, wells fargo. that's negative here. bloomberg economics says we are expecting a slight expansion there. i see that in your notes, you don't think loan growth will go beyond second-quarter. chris: i don't. 2016 was the peak for lending and a lot of asset classes for u.s. banks. since then, the deposit market has tightened up. i spent a lot of time in the mortgage world. you couldn't get the time of day from jamie dimon if you are a big nonbank servicer and you had cash balances. today, they are getting plus.

jamie dimon is calling those guys on the phone to tell them how happy he is to be taking care of them. so the market for institutional deposits has tightened a lot. that's what drives loan growth. if you don't have deposits growing, you are not going to grow loans. what is the fed doing? shrinking reserves. every time they pay off the loan held by the fed, you are destroying the deposit. the money disappears. so the whole reserve base of the banking system is disappearing. you can see the numbers. loan growth has been ratcheting down since 2016. with all due respect to the economists, i think this is a case where we had our boom, it was driven by quantitative easing that created liquidity. now we are taking liquidity away. paul: so we've got some challenges around loans growth. how do banks grow earnings going ahead in this environment? chris: to some degree, the way

they have been, by watching their pennies. you are seeing that interest market growing for the balance of this year, but that growth relative to cost of money, is going to slow. the other thing we haven't seen since the fed started raising short-term rates, is spreads. credit spreads have not widened at all. we saw the 10 year treasury retrace 35 basis points since the last increase. banks don't have pricing power. citi doesn't even get 2% on their loans. same with the other big banks. they have a problem with price because they are so big. the smaller banks, not so much. bbt, their net interest margins is in the 4.5% range. i think the fed has cap returns for a lot of leverage investors

and when it catches up, we are going to get squeezed. is like the movie star wars when they are caught in the trash compactor. that's what is happening with banks. they see a flattening yield curve and they know what that means for leveraged investors. ramy: we will have to leave it there. looking ahead to financials tomorrow. we've got an alert for you on the yen. it's just weakened to its lowest since january. u.s. dollar is what he just did in the past minute or so. the lowest since january. we will continue to talk about this if it continues to weaken. paul: that's almost it for daybreak australia. you and yvonne man are going to have plenty to talk about going into daybreak asia. what have we got coming up? yvonne: looks to be a pretty

risk on day. still waiting sentiment around u.s. companies in china. given trade tensions, there is several weeks before the u.s. and china can strike a deal before this tariffs goes into effect. we have an interesting report saying despite the trade tensions, u.s. companies in china to increase investment in china. we talk about why. kenneth gerrit joining us in the 7:00 hour. ramy: before that, we will talk about what is happening in markets right now and the rest of the summer in the northern hemisphere. us in abouts joins 12 minutes time. paul: you mentioned the yen weakening to the lowest since june. later, we will have do you give a sean talking about foreign exchange and the trade war.

10:00 coming up 10 past sydney time. that's it for daybreak asia. this is bloomberg. ♪

>> it is 7:00 a.m. in hong kong. i am yvonne man. this is daybreak asia and welcome to our asia headquarters. markets are set to track gains on wall street. investors see trade war tensions beginning to ease. the s&p 500 closed the highest since february. both sides say they are open to talks. bloomberg's global headquarters, i am ramy inocencio in new york. president trump ups the ante on brexit. told told -- he has theresa may a soft divorce would kill a u.s. trade deal. plus