At least in the early days, the trade war seems to have no winners.

While the US economy contracted in the first quarter, new economic data this week showed that China — its primary trade war foe — isn’t exactly gaining the upper hand. Which may be why its leaders seem to be, ever so quietly, starting to extend an olive branch.

Look in the Mirror

Through the end of March, China’s economy has looked a bit like a mirror image of the US economy. In the US: A wave of macro uncertainty fueled by the tariff blitz caused the economy to unexpectedly contract 0.3%, according to Bureau of Economic Analysis data reported Wednesday. Conversely, the spike in demand for Chinese-made goods was pretty good for the Middle Kingdom — GDP increased 5.4% in the first quarter, surpassing most expectations. The arrival of 145% import duties on Chinese goods has by now all but emptied out US ports, however, indicating an economic slowdown in China.

The closely watched purchasing managers’ index (PMI), a gauge of factory activity in which any level below 50 signals a contraction, fell to 49 in April, according to China’s National Bureau of Statistics data published Wednesday. That marks the lowest level since December 2023. Meanwhile, a similar gauge measuring export orders fell to its lowest level since December 2022, when the country was slammed by a COVID-19 wave.

Leaders in Beijing have thus far publicly vowed to “fight to the end” in the trade war, and have largely denied any contact so far between the two nations. On Tuesday, the nation’s Foreign Ministry even posted a video on social media titled “Never Kneel Down” that likened the US tariffs to bullying. But recent reporting suggests the country may already be engaging in some quiet trade diplomacy:

• On Thursday, two influential state-affiliated media outlets began reporting that US officials have reached out to Beijing, with one outlet even saying that “there is no harm at this stage for China to engage.”
• The softening of public messaging is mirrored in China’s own trade policies. The country imposed 125% retaliatory tariffs on US goods earlier this month, but, on Wednesday, sources told Reuters that leaders in Beijing have crafted a list exempting some US merchandise — which could signal a willingness to grant some concessions in negotiations.

Mutually Assured Contraction: First-quarter bounce aside, there’s reason for urgency in China. Citing rapidly rising government debt and trade war risks, Fitch earlier this month downgraded China’s sovereign credit rating (as well as the ratings of 38 Chinese central government-owned corporate entities and subsidiaries). Meanwhile, both Goldman Sachs and the International Monetary Fund have reduced GDP forecasts for the country to 4% this year, below China’s own 5% target. Still, that’s better than the outlook for the US, where the IMF cut its 2025 GDP forecast from 2.7% to 1.8% last week— the biggest downgrade of any advanced economy.

Big Tech is on deck this week. Shares of Meta and Microsoft spiked after the duo’s earnings reports topped expectations. So far, it not only seems like tech giants are withstanding tariff turmoil and general macroeconomic drama, but that their multi-billion-dollar investments into AI could be starting to show returns.

Pressure’s been mounting on tech companies to show the AI juice was worth the very expensive squeeze, especially after Chinese startup DeepSeek shoved the industry toward a more cost-efficient future.

The DeepSeek Effect

Investors were shaken by DeepSeek’s debut of its advanced AI model in January — which the Chinese startup said it built with just $6 million, a fraction of other tech companies’ budgets. Within days, $1 trillion worth of AI companies’ value went poof as the world second-guessed how much AI should cost.

But American companies haven’t backed down, and some recent earnings showed signs their continued investments may pay off:

• Microsoft’s cloud revenue grew 33% annually in the most recent quarter, and the tech company attributed about half of that jump to AI. Last week, Alphabet said its search segment’s first-quarter revenue popped 12% as 1.5 billion people used the AI Overviews that Google generates at the top of search results, up from 1 billion in October.
• Meta said its AI assistant now has 1 billion active monthly users, and while ads make up almost all of Meta’s revenue, AI could boost app engagement (and in turn attract advertisers). It also launched a standalone AI app last week and plans to boost spending on infrastructure including AI to as much as $72 billion this year.

On the other hand, Apple may be late to the party: It has had to delay the rollout of some of its Apple Intelligence features.

Powerful Motivator. While Big Tech has made AI gains, regulators have cracked down on DeepSeek. It’s now banned on government devices in a handful of US states over national security concerns, and officials are investigating whether DeepSeek built its model with smuggled chips that are more advanced than the ones it claimed to use. But while DeepSeek may not be a ChatGPT killer, it seems to have lit a fire under tech giants to prove their AI investments are showing progress.

Since 2003, “I’m lovin’ it” has endured as McDonald’s flagship marketing tagline. On Tuesday, the company’s executives could be forgiven for thinking instead about its 1970s catchphrase: “You deserve a break today,” the ‘you’ being McDonald’s.

The fast food giant had its worst earnings report since 2020 as customers spent less for the second quarter in a row, especially on McDonald’s US home turf.

Middling Middle-Class Showing

Wall Street analysts look to McDonald’s not just because the McMuffin makes for an efficient calorie pitstop on the way to the office, but because its mammoth global presence can signal trends in the economy at home and abroad. With plummeting consumer sentiment in the US and overall uncertainty due to pending tariffs, its latest earnings were as closely watched as ever.

While the Golden Arches rolled out a new value menu in the US in January, which was expected to drive spending, revenue still fell 3% to $6 billion in the first three months of 2025. Net income likewise tumbled 3%, ending up at $1.9 billion. McDonald’s global same-store sales fell 1% year-over-year, with a 3.6% drop in the US effectively reversing the situation last year when same-store sales in the country jumped 2.5%. The deeper data behind its slide showed differing movement across geographies and income groups, including growth in some spots:

• McDonald’s international operated markets segment, which includes the countries where it runs and franchises restaurants like Canada, France, Germany, and Australia, posted a 1% same-store sales decline, which executives said was mostly due to falling sales in the UK. At its international developmental licensed markets segment — which consists of countries where it almost exclusively licenses and franchises restaurants, including China, Japan and Brazil — same-store sales rose 3.5%, with the Middle East and Japan fueling the growth.
• CEO Chris Kempczinski offered a more detailed assessment of US consumer spending, telling participants in an earnings call that traffic from low-income customers softened by “nearly double digits versus the prior quarter,” which CFO Ian Borden said was “spilling over into middle-income consumers.” High-income customers, for now, “remained solid” according to Kempczinski.

Recent earnings reports from other major US food franchises Chipotle, Domino’s Pizza, Taco Bell owner Yum Brands, and Starbucks all showed similar sales dips, while Kempczinski called the drop in middle-income spending “a clear indication that the economic pressure on traffic has broadened.”

Non-Food for Thought: Payments giant Mastercard, another bellwether of consumer spending, reported great earnings Thursday, with its $3.4 billion in income besting expectations. Global purchases made with Mastercard-branded cards rose 10% to roughly $2 trillion in the first quarter of 2025, though apparently not for Big Macs.