Transcripts For BLOOMBERG Bloomberg Daybreak Americas 20180208

Sterling at 139. Having the best performing currency against the dollar. David i want to turn to guy johnson who is on the spot in london. We just got these headlines. Surprises here . Guy that is not a surprise. That was anticipated. Surroundingnguage the next rate hike that is pushing the markets to do what it is doing. You can see what is happening with the cable rate. The pound is pushing higher at this point. The market has been pricing in the possibility of an earlier rate hike in anticipated from a. From may. We are starting to see that may be returning and talking about the fact that maybe that rate hike will come through. It is not a surprise we got a 9nil vote. It tilts on the hawkish and. Hawkish end. David the time in question. Help me through this. As i read this, its his three hikes over three years. When those hikes calm is that the deal . The rocket needs to price in a little more. The market needs a little withdrawal. That is what is priced in but it is shifting it a little further forward. That is what the market is pushing sterling higher. Alix take a look at what the market is expecting. December 2018, come inside the bloomberg. The yellow line, would be looking at two rate hikes this year. We really have seen the twoyear hike forecast really move up. It feels like it is a hike more now, maybe a pause later scenario. Guy part of that is down to the fact that sterling has been appreciating. Thought that would take you thought that would take the impetus out of the shortterm. They are raising the gdp forecast. The forecast of 2018 rising to 1. 8 versus 1. 6 in 2019. Got act that weve stronger sterling has been counteracted by the fact that we got a more positive outlook when it comes to the growth story. Hose two are balancing out it is interesting the short sterling script strip in the red, what you are seeing is the short sterling strip pushing low. That implies some that hundred minus. That is pretty much the straw across the strip. The current month and the future month long forward. Maybe a little higher in terms of the rate hike story. David looking forward to five minutes from right now when we hear from mark carney. How do they know . They are making a threeyear projection. Two of those years are going to be a set of the European Union. How can he make these projections on gdp growth . Making anare assumption that brexit will be smooth. The governor has made it clear that the bank can only work on an assumption that has been given by the British Government and that is we are going to see is with brexit. That idea is frayed around the edges a little bit. Nevertheless, the sister Case Scenario is we are going to see the central Case Scenario is we are going to see a smooth brexit. Alix guy, thank you very much. To recap, the boe says rates may need to rise earlier and faster. They are upgrading their growth forecast. They are also seeing inflation above target. They lowered the neutral rate for unemployment to 4. 25 . The economy will need some ongoing withdrawal of stimulus. That is moving the market. For thoughts, we welcome art hogan. He comes from boston. What do you do if you are a currency or trader in the market over in u. K. . Bankwhen you look at the of england, and you want to look at global Central Banks on a spectrum. The fed is at the leading edge of that. The bank of england has been in the middle. They telegraphed a lot better than they need to start removing accommodation. The statement came out hawkish, putting a bit and there a bid in their currency. Probably it puts may back on the table. Timeframe wes the are going to see rate rise. It is probably long overdue. The ecb talking about removing some of the Quantitative Easing Program in september. It is the right thing to do. How do we know how smoothly brexit is going to go . To forecast three years out is aggressive. What they need to do is remove enough accommodation so if brexit is not a smooth process, they have something to get back. David the basis on an assumption, brexit is going to go really smoothly given the news, that seems a little fictional to me. What are the dangers . Also for banks just all Central Banks are 20 get back to a level more normal. If things dont go well. If brexit is not smooth. If the u. S. Were to slip into recession, you need to have some dry powder. Mark carney has been a good job of communicating and being a gradualist. That he is fact signaling lets get the first one under our belt. That means that may timeframe. Does it mean he is going to go it doesnt mean he is going to go three or four times this year. Alix aggressively sell the short end of the curve in the u. K. And so the backend and by sterling . Art that is what the playbook will tell you to do right now. It is interesting that the currency markets dont get as much as the conversation as the markets have. Thats as the equity markets have. As the equity markets have. We will see how that plays out. The bank of england is in the spotlight right now in terms of moving currency markets. Part, art, stay with us. We got twitter earnings out. Maybe on revenue. ,ou can see, they have shot up 732 million. We are going to bring in dan ives. He has a neutral rating on twitter. Youre very brief chance to take a look at these numbers. How do you react to them . Dan definitely a step in the right direction. It is advertising growth for twitter. They had some steps back, this is in full recovery mode in terms of at growth, platform changes, organic and programmatic things they have done. You look at daily average uses, that is something that is positive. If you look at overall user growth, little disappointing but they haveels like strong talents going into the 2018. David really average users have gone up because more engagement. How much of that is because of the video content . Dan a lot of it is about content. Content video has been a big focus of twitter. It is all about engagement. You have to look at since trumps inauguration, stock is up 50 . Part of it is the twitter platform starting to have resurging. Much better targeting an ad was the key. The big issue has been the lack of monetization. They are taking major steps in the right direction. Theres questions, does the Facebook Newsfeed benefit twitter . Nearterm, that twitter gets from that. Alix monthly active Users Falling short, that is flat sequentially. Is that enough . They are using more daily to attract advertisers. Dan they still have to prove more. You call that a small victory that they have to get that user growth up. Everynt to see that quarter growth, three to 4 million is what you would like to see. Given the issues you they have had, it is all about new growth. , strong andsnap eyepopping. Twitter, the same thing. Facebook continues to be the bms. To be the team if. Alix what about a buyout . Dan maybe you look. We think m a is going to step up in 2018. If you look at m a targets, have to look at twitter. Theyre been rumors they are out there in terms of potentially looking for sell. Organically, can they do it themselves . If they can, i dont think m a could be on the table. Given the platform, it does look like potential m a candidate. It is baked into the name. Alix dan ives, really appreciate it. The bloomberg lt operates the global breaking news called ticktock. I want to take a broader look at tech. Come inside the bloomberg and you can look at tech earnings forecast rising slower than the broader market. It is to form of benefits will help tech less. What will prevent tech from keeping up this momentum that we have seen . They held up well in the selloff. Art they surely did. When you look at technology at large, in 2017, the bestperforming sector in the s p 500 by a large margin. When you look at effective tax rate and how they are not being benefited by texan form, that is something you can look through benefited by tax reform, that is something you can look through. To the extent theyve got a lot more cash to work with, they are going to put that to use. Acquisition, i just think the runway for technology is as solid. I am not concerned that they are not getting that tax benefit that we have seen in some the midcycle industry companies. David art hogan, think he so much. He will stay with us. Twitter be on both revenue and revenue share. Nicely inis up premarket. Alix recapping what is happening with the boe, here is where everything first rolled out. A more hawkish rhetoric. Targeton staying above and due to that they see the rate may need to rise earlier and faster than they thought in november. They think they are going to return to targeting inflation at a twoyear horizon. The markets seem to be rising that end sooner. A reaction is that follows is as follows, yields popping. We are on the front end and backend. We will be assessing that. Mark carney will give his press conference. Coming up, what is the trade after the market shakeout . We will break it down next. This is bloomberg. This is bloomberg daybreak. 2. 5 hours until the cash open in the u. S. Relative calm coming to the markets after a lot of volatility. Eurosterling, fascinating. Dropping 1 , the bigss drop we have seen so far since 2017, september all because of the it hawkish boe because of the hawkish boe. Take a look at yields here in the u. S. , up slightly. We end up looking at potentially more supply coming on if we get a larger budget deficit from a budget deal. Nymex seeing its biggest daily loss in more than two months. Japans softbank made by as much as one third of the Worlds Largest reshore. Swiss re. The deal could be valued at more than 10 billion. Softbanks ceo has been looking to diversify his empire. Blackrock wants to raise more than 10 billion to buy stakes in companies. The Worlds Largest money manager was would make investments on things like the growing middle class. Blackrock is seeking capital from other big investors. Congress votes on a twoyear spending plan that would avert a Government Shutdown at midnight. The Senate Proposal would provide over 300 billion in additional funding. That gives members of both parties something they wanted. That is your Bloomberg Business flash. Alix markets fluctuating following that budget news. Treasury yields slightly higher today. The dollar fluctuating got a nice boost yesterday after that potential budget deal. Still with us, art hogan. The worry, lots of supply,. The treasury markets, the yields are going to pop. Do you agree . Art we think we are in the right environment. I dont think the pace we have seen is going to keep up. Global yields are rising. We are seeing that on the screen. It helps the u. S. Yield. We have been anchored to global sovereign. As a country, we are going to need to issue one trillion this year. That is going to be true for the next two years. Our need to issue more is when to put upward pressure on yields. The argument around what happens when the yield on the 10 year gets a 2. 5, what happens to equity markets has been blown out of proportion. That hasnt been the magic level that has drawn investors out of equity markets. It has changed what people are willing to pay. David is the bond market try to send a message to congress that it matters . They said they are going to borrow a lot for the tax cut. The difference now is of they are going to buy borrow some for domestic. Art that is a good point. The message is the market is saying what else are you going to borrow for . That is more spending for the federal government. Yes indeed, the market has been telling us, your issuance has gone up significantly on a year on year basis. Where does it stop . T is why you get somewhat it so much pushback. In general, this is something the market is probably going to celebrate, not having to watch this budget process for two years and getting beyond this so we can focus on things that were supposed to be doing. This highlights the backdrop of the markets shifting to more inflationary world. We caught up with mike wilson of Morgan Stanley on what he thinks happen the last few days. He was what he had to say. Mike there is a regime shift going on right now, we call it reflation to inflation. That is not the end of the world but it is a different environment. The markets are trying to adjust. Get some retest on some of these levels we traded at a monday night. We will get a opportunity to add to that acquisition. That is not rushing back in. Alix little bit of time. What is on sale . Art he brings up a good point. Especially the point about the lows. When people look at the damage we did in a short the oh of time short period of time. To the extent you talk about it reflation to intervention to inflation trade, that was well for commodities that bodes well for commodities. That is an area of great opportunity. The demand picture has picked up with a sick a ninth Global Economics growth. I dont think that is being reflected in the equities. David coming up, bank of England Governor Mark carney is due to speak about eight minutes from now. We will bring you his comments live. This is bloomberg. Alix we are moments away from mark carneys press conference. Here is what markets are looking at. S p futures pretty much flat. It is a modestly stronger dollar story. Unless it comes to sterling. We had billions of dollars worth of 30 year treasurys coming online in option. What will the demand be . Crude continues to roll over. The boe sees seems much more hawkish than we thought. Eurosterling dropping like a stone seeing its worst slide since 2017. 10year gilt yield above since april 2016. Little biting a ahead of our skis if you look at brexit. David it is all going to be fine. There is a lot of news this morning. It is about european banks. Big european banks announced earnings this morning. They all beat expectations and all three are trading up on the news. Societe generale told the burke that is bank look forward to brighter prospects this year. Convictionty, more and more flows. Yes, i am positive overall. [indiscernible] prospects,d growth in particular in europe. Yes, we see signs of monetary the bankingell to activity. That could us now is jonathan tice. Just welcome instructors that we have three banks all beating but theyll have different stories. The reason they seem to be different, is there any overall story we can take away . Jonathan from these three banks, if you look at socgen, it was one of the big underperformers last year. Revenue is the problem. In delivered on equity. It delivered on equity. It is a question about capital. Commerzbank, capital is the good news. For those banks, there is a really a theme. There isnt really a theme the go what happened with unicredit . David what happened with [indiscernible] the first thing she commented on. We are waiting for the call. Well have a better idea. That is a bright spot. An externally strong bright spot. David is this a rough day for deutsche bank, because it seems like it is getting left behind after it had a disappointing earnings reports and these other banks are going out of it. Wasthan for them, trading the biggest appointment. The biggest disappointment was cost. Banks that have been disappointing, ing, abm where we are expected more good news about the capital rules now. What payouts are you going to give us. They are still shirking on that. Commerzbank is making noises again that they will restart their dividend in 2019. I suspect is part of the reason for the positivity. David jonathan, thank you so much. Alix talking about positivity, that is with the boe is feeling about brexit. Here is how markets are looking. You are seeing selling all across the curve. Sterling popping. The boe coming in much hawkish than the markets were anticipating. Upgrading their growth forecast to seize inflation. They might need to raise rates faster than they thought in november. We are moments away from the boe conference where the where mark carney will be getting more of an assessment. Nejra, what is going to be the question we are going to be looking for . Nejra i think there is going to be a lot of questions put to mark carney today. You outlined it perfectly there. It is not that the decision was hawkish. It was a unanimous vote to keep rates on hold. Some people were expecting the vote to be split. It was more the language that came out of the decision. The boe morning markets that it might have to hike rates faster and earlier. It also raised its growth projections and inflation is to stay above target. A couple of key things they came out as the reasoning. They talked about limiting slack in the economy so they lowered the equilibrium Unemployment Rate to 4. 25 . Also, in terms of the rates at which the economy could grow without fueling inflation, that was also lowered to 1. 5 . They said demand is going to start come through at that point. They got a low tolerance for that inflation as well. They said they want to bring it back target in two years. You got 30 seconds. If you are in the room, what is the question youre asking mark carney . Is if ratesus thing keep going up, and brexit negotiations fail, they need to a conclusion which involves crashing out of the eu, then the higher rates go, the bigger the error looks. This is the risks. , promise of a real slowdown in u. K. Growth, and the banks will have to backtrack. Alix definitely dont want to backtrack, we are waiting for mark carney, he will be walking in the room now. Questions about their base case for brexit, how can they have confidence of a 2. 8 inflation 42020. No doubt the press will be asking those questions as a more hawkish boe comes forth and sterling continues to get a pop. Lets listen in to mark carney. Good afternoon and welcome to the february 2018 forecast conference. To my far right is the deputy for Monetary Policy. To my immediate right is the governor mark carney. Thank you, gareth barry good afternoon, everyone. Its been a notable week for anniversaries. Monday we celebrated the centenary of women getting the right to vote. Today marks a quarter century since the first Inflation Report. The style of the report has changed over the years but our commitment to explaining Monetary Policy independently and transparency has not. I wanted to spend a minute or two to go to the future that is painted through this report. I will start with the World Economy. One university to acknowledge the strength of the World Economy, Global Growth is stronger, broader, and healthier than its been for some time. Global growth is at its fastest in seven years, 90 of the World Economy is now growing above trend and the Global Expansion is increasingly being driven by investment. You gain the trade is benefiting from this request Global Demand appreciation of sterling. Where usually drags on growth, the trade is currently contributing substantially and is likely to support activity over the forecast period. British exporters are in a sweet spot with sterling down 16 overall and around 20 against the euro in anticipation of a brexit that has not yet happened. High rates of profitability, lower cost of capital and diminishing their cavity, strong global capacity is supporting Business Investment. Nevertheless, investment is being restrained by brexit related uncertainties. This relate the shallowest Investment Recovery in the u. K. In more than half a century. Consumption growth has also been sluggish as household suggest to the real income squeeze. Growth in Household Spending has had since the referendum and is expected to remain relatively subdued over the next three years reflecting week real income growth. , and despite the projections being conditioned on the support of monetary conditions prevailing in Financial Markets, gdp growth is 1. 75ted to average around percent over the forecast window, stronger than projected in november. While modest by historic standards, this demand growth is still expected to exceed the diminished rates of supply growth over the forecast period. Following its annual assessment of the supply side of the economy, the mpc judges very little Spare Capacity remains an supply capacity will grow only modestly over the forecast period averaging around 1. 5 a year. This reflects lower growth and labor supply and productivity around half of its precrisis average. With growth and demand outpacing growth of supply, with growth and demand pacing that of supply, the small excess demand areas by 2020 and builds thereafter. Turning to inflation, cpi inflation fell from 3. 1 in to 3 in december. Inflation is expected term includes two recent rates in the shortterm, slightly higher than a projection made three months ago, largely as a consequence of recent higher oil prices. It is possible inflation could rise back above 3 temporarily in the shortterm. , sustainablerally target inflation remains almost entirely due to the effects of higher import prices following sterlings past appreciation. This impact of import prices on cpi inflation is still expected to diminish slowly with import prices pushing marginally up on inflation at the end of the threeyear forecast period. While the contribution from external factors slowly dissipates, domestic inflationary pressures are likely to firm as the economy moved from excess supply into excess demand. Unemployment has continued to fall, recently reaching its. Owest level since 1975 the firming of shortterm measures of weight growth in recent quarters as well as the range of survey indicators that suggest a growth will rise further in response to the tightening of the labor market give increasing confidence that growth in wages and unit labor cost will pick up to target consistent rates. The balance of these affects me cpi inflation is projected to fall back gradually over the forecast horizon although it remains above the 2 target in the second and third years of the mpc central projections. As has been the case for some time, developments regarding the u. K. s withdrawal from the eu are the most significant influence on and sources of uncertain tea about the Economic Outlook. But the fact that brexit negotiations entail significant uncertainty does not mean that forecasting is impossible. It is useful to step back to assess how the economy has performed relative to the mpcs expectations in order to understand the broader forces at work. Over the past year, the mpc has been a the upper end of forecast for the global u. K. Economy. We have been right above those directions on the Global Economy has been Even Stronger than we the u. K. Ted while economy has been broadly in line with our forecast a year ago. The mpc has expected a rotation of the man in the u. K. Away from Household Consumption and toward net exports and investment. This appears to be happening, that tradey with contributing importantly to u. K. Growth this past year. And Household Spending growth has been restrained by the real income squeeze, which is expected to ease but not end over the next two years. The mpc has also been expecting a firming of wages as labor markets tighten and that the rate of productivity growth would recover somewhat. Both now appear to be underway. Inflationaryrted pressures arising from the referendum related fall in sterling have been in line with our expectations and are still expected to be the predominant cause of the overshoot of inflation to run our forecast. In the exceptional circumstances prevailing since the referendum, the mpc has set policy to balance the tradeoff between the speed at which inflation returns to target and the support that Monetary Policy provides to jobs in activity. Our understanding of the contours of economic developments as the referendum has met the strategy has worked with employment rising and slack suddenly being absorbed despite the sharp it too real parcel incomes. As outlined in my letter to the chancellor today, the study absorption of slack has reduce the degree to which it is appropriate for the mpc to accommodate and extended period of inflation above target. Consequently in november, the mpc began to remove some stimulus, raising bank rates by a quarter percentage point to have a percent. , the prospect of a greater degree of excess demand and the expectation that inflation would remain above target over the forecast period have further diminish the tradeoffs that the mpc is required to balance. The Committee Judges that were the economy to evolve in line with its february Inflation Report projections, monetary projection would need to be tightened someone earlier and by somewhat greater extent over the forecast period than it had anticipated at the time of the november report, in order to return inflation sustainably to target. All members of the committee agree any future increases in bank rate are expected to be at a gradual pace and to eliminate extent. The Economic Outlook will continue to evolve. There will be ups and downs in Financial Markets and the Brexit Process will twist and turn before it is concluded. , the committees will monitor developments closely and respond appropriately to ensure inflation return sustainably to the 2 target. This principle to consistent and transparent approach to Monetary Policy is the best contribution the mpc can make to monetary stability, and therefore, to the good of all the people of the United Kingdom in these exceptional circumstances. With that, i would be pleased to take your questions. As always, state the name of the organization you are representing, and stick to one question in the first round. Bbc. This is a warning on Interest Rates, isnt it, that they are likely to come earlier and will rise more rapidly than you originally expected. Could i also asked for your response to the governments Impact Assessment on the economy that in the future under any trading scenario once we have left the European Union, the economy will grow more slowly than it would have done if we had stayed in the European Union . I wonder if you agree to that. In terms of the first question, i would clarify. What the committee has said is that, in order to return inflation sustainably to weget, recognizing that expect the economy to move into a situation of excess demand and inflation still to be above target at 3year horizons that in order to bring them back to target over a more conventional horizon, moving in from that 3year horizon, that it will be necessary, likely, to raise Interest Rates to a limited a gradual process, but someone earlier and to some a greater extent than we had thought in november. That reflects the evolution of the forecast, stronger world, slightly less supply, greater access demand, change in the tradeoff. The message is not more rapidly, i would caveat that. It is somewhat sooner and someone greater extent. Jump from the policy horizon to the longterm outlook under various brexit scenarios. What i can say about those impacts assessments is the following. First, we have not seen them, we did not participate in their development, we dont have a pass to the parliamentary library. We have not seen them, so it is hard to comment on reports of reports about the underlying assessments. Of those, based on reports, is that they are what i would call comparative statics. Looking at the longterm impact of various treating relationships not just with eu, but other countries, and they are best out of as comparisons between each other as opposed to not truly forecast of where the economy would be, but they are best used, as i say, in terms of comparison. If you think about their horizon over which those forces come , and if you think about where we are today, which is an agreement that has been struck amongst the eu and u. K. For a transition arrangement that will run, is expected until the end of 2020, or effectively until the end of our forecast horizon, before the is interested potential transition to those longterm scenarios. Those dynamics are of interest to the mpc to the extent to which they affect the expectations of businesses and households. What we are picking up in terms of households, households are reacting to the current levels of real income, which as we all know have been squeezed, but not making an assessment of longerterm path of income and wealth that could be affected by whatever brexit scenario there is. In fairlydetailed extensive detail in the report. Businesses are reacting to the uncertainty about the various scenarios. It affects different businesses to varying degrees but it is notable the affect on investment in the economy. In fact, based on our survey of more than 2000 businesses across the country, socalled decisionmaking panel, we are seeing 3 to 4 off the rate of growth in investment over the course of the last year, so investment has picked up but not to the extent that one would have expected given how strong the Global Economy is, how accommodated run and shoot conditions are. Financial conditions are. We are left trying to interpret what someone earlier and somewhat greater means. Three months ago you indicated perhaps there would be two quarterpoint base rises over the year. The market is pricing in three. It thinks the bank rate will be at 2. 5 by the beginning of 2020. Is that appropriate, couldnt be higher . We have given some relative guidance, relative to where things were in november, a marker in november and an outlook for inflation that, relative to that which we used in november which was supplied by the market, we think things have moved along, not least because of the strength of the Global Economy. But we are not going to tie our hands to a specific path for rate Going Forward. We are reiterating, and importantly for your viewers, that these are Interest Rate cycles unlike those that they would have experienced in the past. If you think about pastorate , on average, since independence, you would have about a little less than two increases per quarter of Interest Rates. Just less than 1. 5 of increases overall. The average rate of bank rate since independence of the mpc prior to the financial crisis was 5 . You can stretch it back to the average rate for bank rate and it is equivalent back to the founding of the bank of england, 1694, also around 5 . We are not talking about going back to those levels. Means. With limited we are not talking about going at that historic pace. That is what gradual means. But beyond the general direction, i dont think it is sensible, nor do my colleagues on the committee, think it is sensible to paint out a specific path of rates. Its important people understand where the economy is, we have unemployment at its lowest since the mid1970s, very little ,lack so to speak in companies the speed limit of our economy has gone down since the half l crisis, around a little more than half of what it was prior to the financial crisis. What is relatively modest growth by historic standards means we have put ourselves in a situation where inflationary pressures build and there may need to the adjustments, there needs to be adjustments to Interest Rates, but all within the context of what i said at the start. Financial times. Governor, no one is trying to tie you down but we want to understand actually what your words mean. You gave the commitment at the start of the press conference, are you committed to explaining Monetary Policy transparently . Markets and people in the markets have taken the words in a statement saying it puts in place a rate rise as soon as may. This is what is in the markets since the decision. Your words are the same as the. Ord used in september are they correct to interpret your words like that today . Things. Ree first, you are trying to tie me down, even though you said you were not at the start. With a way that you link it back at the end. It is a fair challenge. Words are not the same as they were in september. Reason,dly, part of the similar but not the same but that is important. You are an aficionado of this. And my third part is part of the explanation of that. Which is, one of the things that has changed, one of the things that was present to the run up to september is that the markets are not really responding that , certainly, not responding consistent to historic experience to the underlying data. In fact, i think there is a Bank Underground piece on this that came out a few weeks ago, for what its worth. You can do your own analysis. Effectively, u. K. Data was surprising on the upside but market probabilities were not moving. It was understandable to the extent that if people had formed an opinion, that it was impossible that rates would ust during the negotiation this printer of negotiation during brexit. What we had been stressing was that we are in exceptional circumstances, that means we manage the tradeoff. We detailed that in the letter to the chancellor. But that is not taking your hand off the steering wheel, stepping back. We are still ultimately down by inflation targets. That is our primary objective. We can stretch out the horizon over which we returned to target, but not infinitely. And as the tradeoff diminished, as slack is used up, it became appropriate to adjust policy. Fallhas happened since the is that the market has responded much more to the underlying data and formed its own opinion about the relative probabilities. Those opinions are based more on an expectation of how the economy will involve evolve. What we do not want to do is then take away that natural formation of expectations because the market understands, i think, better the tradeoff we are trying to manage, and that given the limited Spare Capacity in the prospects for the economy , that some modest and limited adjustment, gradual adjustment of Interest Rates is possible. The degree, the exact timing will be determined by how the economy unfolds. Let me state something that is very obvious to everyone, lest people think we dont recognize it. Of course this is a crucial year for brexit negotiations, and of course we will all be better informed we hope by this Time Next Year about the future trading relationship with the eu. That will have an effect, could be positive, could be negative, could be neutral on businesses, households, the outlook for the economy and for inflation, and therefore, for the policy of the mpc. The independence. The bankers reduced the estimate of the longterm equilibrium on the Unemployment Rate again to 4. 25. A year ago in february, it was 5 . A cynic may say that you are effectively reducing that estimate in line with the actual falling Unemployment Rate. If in a years time the jobless rate is down to 4 , wage pressure is still not building, that you will reduce it again. What would you say to people of that cynical cast of mind . Given the fundamental importance of these estimates, wouldnt it bandsortant to put large of probability around it rather than giving a point estimate, which you have done . Course there are uncertainties about it, there is a range of views, there will be a range of views on the committee. There is an uncertainty around the equilibrium level of unemployment, equilibrium participation rate, equilibrium average hours, the output gap. Every aspect given the quality of the data in the country, there is uncertainty around the net trade figures, investment figures. The way lies madness in end, if you decide that everything is so uncertain. Our responsibility is to make an assessment, as informed as possible, be transparent about those assessments, so whether cynics or skeptics or objective people can adjust the forecast relative to their own opinion of ,he key, underlying variables and think about what will happen , andowth and inflation therefore, the appropriate stance of policy. Two things, and i will turn to ben on the specifics on the specifics. We have turned to this approach of doing all the aspects of the supply in the economy so all of those aspects of the labor market and the underlying rate of structural productivity growth. It is aon we do it is, discipline. These things are uncertain, but in the end, we find it helpful to gather as much information as possible and to make a call on the underlying variables. Have made for we the equilibrium rate of unemployment is quite a modest adjustment, but one that is informed by what has happened over the course of the last year. You look at builders, job destruction, wage residuals, a variety of things to refine that. En if you look at page 22 of the report, there is a twopage box on how we came to the calculation. It would have been easier if we had been tracking the rate of unemployment. We did quite a bit of work over several years thinking about what this rate is. I will just say a couple of things. Year,hen we did it last if you had days that estimate purely on what would explain the pattern of wage growth, you actually came up with a number slightly below 4. 5. We flag that in the report this time last year. That is what weight growth was telling you at the time. Second, there were some other structural factors in the labor market, including a higher number of graduates who tend to search more intensively for explain whywould the rate is falling. Twoously, over time, the will tend to move together. That is because demand and supply tend to move together but that is not how we statistically arrived at the estimates. Governor, to pick up on your opening comments, if i could pick up on some other universal , Household Consumption is halved since the referendum, productivity is lousy, investment low, brexit has created nervousness, and as the mpc met around you, Global Markets were going into meltdown. Is this really the right time to be waiting the u. K. s consumers and businesses away from the era of cheap money . Mark ok. First off, some of these things are related, and you have to look at them in the round. Investment has been weak, one of the reasons why productivity growth has not recovered to the same extent. The fact that productivity growth is relatively modest, even though we think it will pick up and we see signs of that , it is picking up to modest levels, less than half, as you said, i said, then historic averages. That means the economy cannot grow as fast as it used to be able to without experiencing inflationary pressures. Until that puzzle is solved and unwound. We have to deal with the consequences of that. Its important to understand, i know it sounds colloquial, we emphasized the speed limit of the economy. The speed limit has changed. Expect the, we economy will grow a bit faster than that and start to generate some of those domestic pressures on inflation. , iterms of u. K. Households think you should be very clear what is driving Household Spending. It is income, not debt. Conjugation of debt less than 2 , the change in Household Spending. They are spending on a real income. Yes, of course there is a path through changes of Interest Rate to the price of mortgages, the cost of mortgages. Mortgages have moved quite substantially to fixed rate. 50 of the stock is now fixed rate. That davids it a bit. We are very calm just and we have line of sight to those dynamics, in part because of the nature of the bank of england now, both the regulator and the monetary authority, than we would have had in previous rate cycles. We have been providing a significant amount of support to this economy during very difficult periods. That is one of the reason why the economy is in a position where unemployment is at a 40plusyear low, why more people are working than ever before. One of the reasons why we are in a position where some adjustment of policy is becoming necessary. It started in november. We see the prospect of some further limited and gradual increases in Interest Rates. That is about continuing the economy on this path. By most important decisions orders of magnitude that will be taken that will affect u. K. Households and businesses, collective prospects for the years to come will not be taken in threadneedle, but will be a part of the negotiations this year. Channel four news. Governor, in the report, you talk about wage growth. Sense of theny impact of the gender pay gap in the u. K. . The bank of england has a 24 gender pay gap. How important is it that Big Companies tackle this issue . With reporting in april, do you expect to see a real chance for women to see their salaries go up and possibly that to have a water impact on the economy . Mark pardon me, i missed the last bit of your last sentence. The reporting. Do you expect that to have an impact . Nonresearched opinion on that last bit of your question is, yes, i think this will have an effect over time. See, in general, transparency has an impact in forcing organizations and individuals to stop and think about what is appropriate and put in place plans to adjust over time. I do think it is supplemented by a much broader trend, and welcome trend toward recognizing the value of greater diversity, notsiveness in workplaces for fairness reasons but for business reasons. If i could personalize it to the bank of england, for policy reasons. You get better judgments having diversity in all its senses, which is what we are learning. Not representative, but the institution has come a long way, has a long way to go, but has come a long way in the last few years. Over the threeyear horizon of Monetary Policy, do we have an movements inr closing the gender pay gap . No, is the short answer. I am not sure, in that the scale of these issues, which are partly structural and i will finish on this. There are two issues. One is equal pay for equal work. Equal work in its broadest sense. That can have a more immediate effect. The other is the gender pay gap which results from seniority and hierarchy issues. If you have more men in the upper echelons of an organization, as the bank of havend has had, and you Legacy Benefits that come with it, pension and other benefits, then that pushes up the gender pay gap and it takes longer to close that because you are changing the structure, the actual diversity. From,nstitution has gone the top managers have gone from 20 five years ago to 30 women. That is a big move, not enough, does not close the gender pay gap, but moves it significantly. But if i could bring it back to the topic of today, which is Monetary Policy, and therefore where is the economy, wages over the next three years, inflationary pressures, im afraid it will not be a big mover in the horizon. The guardian. Recently, you said the bank had been providing significant support to the economy through a difficult period. Thoroughly true, nine years since rates were cut. They have been there or lower since. Effectively,aying, that the economy is growing at 1. 75 a year, supply side constraint is expected to grow at 1. 5 a year. Effectively is what you are saying is that the bank is done, that we are entering a different era, where you have done all you can on the demand side providing stimulus and you are looking more toward the old, keeping inflation low, rather than supporting the economy . Clear, we arebe providing support in order to get inflation to target sustainably. Have, in exceptional circumstances, brought in that horizon. Now we think that horizon has come in as we have started to use the slack. Forecast, even with some modest adjustment of policy, we are still looking to be providing important support. I will simplify this down to fiscal policy has been loosened relative, but that is just loosening of a titan had. The nextcourse of several years, fiscal policy is still a drag on the economy. Monetary policy is leaning against to provide a balance, to support growth in the economy, obviously, the point is to bring inflation back down to target as much as possible, while ensuring the economy stays at full employment and capacity. I dont think it is right to paint such a discrete difference between what you call the old remit and what we have now. It is true the words were , more in the13 direction of making this explicit, ande, there was always a phrase about avoiding undue volatility and output. If you look at what the mpc was doing in 2011, 2012, it was targeting up of target inflation, much higher than we have currently, precisely because it was also large amounts of Spare Capacity, a percent unemployment, and was making that same judgment that we have been making over the last year. There is no real big difference in that sense. No Inflation Targeting Central Bank is solely focused on the time on inflation. If we could just have a seminar for a second. One of the things that has is that we have to be much more explicit about the tradeoff. If you look at todays letter, if you will, that is the way that we think about the tradeoff, the way that we have tried to strike. It would have been easy to have a forecast which says, dont worry, we can have our cake and eat it, too, inflation at 2 , and have policy where it is. But our best judgment has been, actually, inflation will be a little higher than the target. We thought we which are that with you, the people of the United Kingdom. Therefore, make explicit that we are making these judgments. Whiche consequence we think is healthy as you get to the position where we are now, the tradeoff is diminishing. In other words, we are getting toward full employment, using up the capacity. Therefore, the horizon moves in and the adjustment in policy becomes more obvious. Is there a chance you are being too pessimistic on and by extension, the need for tighter Monetary Policy with recent figures, having shown productivity has picked up more than expected . In other words, is there a case for testing the supply side of the economy a bit more . Yes, there are two cited. Isks without question you can make the case both for an accelerated pickup in fact, we have been making the case sometime for accelerated pickup. The economy just did not cooperate with that. Given the track of investment, given the conversations we are having with businesses, the ,lobal nature of the slowdown this still marked pickup we have with productivity, you can never put too much weight on the most recent figures that are likely to get revised. Seems to strike the right balance. That said, if there is more supply in the economy, particularly because of productivity, it will have implications for the path of policy. One particular point about that last quarter, it was the drop in the Third Quarter in both participation in the labor market and employment which we thought looked a bit spurious, noisy. The productivity numbers for the Third Quarter. You must avoid looking quarter to quarter. My guess is output to capital would not have grown much in the Fourth Quarter because we have seen participation in unemployment bounce back. So over the longerterm trend, we have had very little productivity growth, just as we had in previous years. We remain hopeful and there is reason to expected to celebrate. Rightt think it would be for your central forecast to look at the numbers we had before the crisis. Governor, i just wonder, if there is no transition policy in place by the end of march, the current ambition, with that have Material Impact on policy outlook when we next see an Inflation Report . Mark it is a fair question. The way that we look at it depends on the impact if that , whato have transpired impact does that have on consumer confidence, what impact does that have on business activity. Of course, what exactly is no transition agreement in march . Not in march, but it will happen in april . I guess there is no point in speculating right now. This gives me a chance to remind, our forecast is predicated on two assumptions around brexit. One that there is a smooth transition to sort of average of potential outcomes. Over the course of the year, we will learn a lot about both of those assumptions. An agreement amongst the u. K. And eu on a transition arrangement that now has to be turned into an actual agreement is a pretty strong thing. The first leg of that assumption there is no reason to walk away from the first light of that, lets put it that way. In other words, there will be a smooth transition. But we will learn. ,n terms of the second aspect we have no further information than anyone else in terms of what is the potential outcome of the negotiations. Pretty confident that we will all be better informed by the end of this year. And that is very likely to have concert once is consequences for business activity, potentially for household confidence, therefore for the outlook. But recall, Monetary Policy is the most nimble of the Macro Economic policy levers. So we will be able to adjust as appropriate, if greater certainty comes into play. Wall street journal. If i could ask about whats been happening in Financial Market thisfew days, if you see as a possibly welcome return to volatility, the attack anything that should worry Central Banks or water economy . Obviously, dont want to give a running commentary on Financial Markets. We, as many others, i think i had made comments the week observed that volatility in markets was extremely low, actual and implied, that it did not seem consistent with even just the normal range of artillery volatility around fundamentals , and atrlying outcomes some point, there would be an adjustment. Hard to pinpoint when it would come. Certainly healthier when markets have two weigh risks around prices. You can have a trend. That holds for any market including volatilities. , one hesitates to it is not anbut entirely surprising development, certainly what is happening in volatility markets is not a surprising development. I think what is incredibly important, though, in this circumstance, we feel strongly that the core of the system is in an entirely different place than it was certainly prior to the crisis but stretching back really a quarter century. There is not the amplification by the core of the system of the volatility of the markets. Will helpg, the core to dampen it. If markets need time to find the right levels, and those include an appropriate level of volatility, that is a good thing because it is not being transmitted through the core and real economy. I think all i would add to what the governor said, yes, we have seen some of those risks we had previously flagged. Particularly volatility in equity markets playing out. Some investors would have taken significant losses from that. Overall we have seen resilience in markets, that we remain here at the bank will be very focused on further developments and whether there are further increases in volatility. The vix has come in somewhat but 30, away fromm those incredibly low levels of the governor flagged. I am just trying to get a better picture about the trigger mechanisms for the bank. There does not seem to be a great deal that has changed since december and this Inflation Report, if you dig deep. How trying to understand much data will it take to confirm, for example, a may hi ke . Does the bank look at the recent ,ata, survey data we have seen really just trying to find out what has changed to become this much more hawkish than the market expected and we saw previously than we saw previously. Mark a couple things, i will not endorse all the elegance of your question, if you dont mind. You say not much has changed. The forecast is slightly stronger but it is a forecast conditions on tighter monetary conditions. As you know, and i will remind everyone, we take the 15day average of the implied path of bank rates and the 15day average of the trade weighted sterling, and we use that as an assumption. It happens to be we take a 15day average of about a week ago, in terms of mechanically to the forecast. Some of those have been stronger. Think. G was 3 higher, i the implied amount of Interest Rate increases were higher or the one we used to condition the forecast, versus the one we used in november. Even if the forecast were the same, that tells you something, that there is a change, we see stronger momentum in the economy, much stronger. We were on the upper end of global forecasts, but the World Economy is that much stronger than even we had been expecting. Througheeing that flow other trade side, the sweet spot that then talked about in the ben talked about in the past, is particularly so at the moment. , and now i amaid repeating myself, repeating the , were the is that economy to evolve in line with , you can expect rates to increase someone earlier and to someone a greater extent than had been anticipated in november, which is the extent to which i will go, in terms of the path to policy. We want to see the policy involved in line with the forecast. Of course, things will happen, things will happen around the world. We will get progress or not on the brexit negotiations, other factors will come into play, we will take those into account. Chrisve to my response to , what we are seeing in markets is that markets, too, are responding to those underlying fundamentals in terms of their thinking about what the bank may do. That is a healthy development. Yes, it leads to a bit more volatility, but that is good. No one can predict with certainty what will happen in the future. But you want to update your views of what is likely to happen given the information that comes to pass. The daily mail. When the bank raised rates in november, you said you expected this rate rise to be passed on to savers. A lot have seen no change at all in deposit rates. A, are you surprised by this . B, do you believe the industry should have passed the rate rise faster, to a greater extent than they have . Mark why dont i start and then i will have ben expand, because we do talk about this in the report, provide information in terms of where the transmission has been. Is,headline i will give you one, in broad terms, there has been a similar degree of passthrough of the bank rate change to savers and borrowers in the economy, relative to historic experience. He second point is important as rates got very low, the relationship between what the bank rate was and what banks, buildings, societies paid to depositors changed. Normally, they paid at a discount to bank rate. Think back to the days when it was 5 . There is a chart that shows this. They paid at a slight premium when it was very low. Someone has to take that into account when it comes to the adjustment. Backs on box on page eight of this, and if you look at the graph that the governor referred to, one thing ist comes across as well that the gap between the overall rate of Interest Rates on mortgages and what banks are paying on deposits, that margin is actually quite low relative to history. These are not the only bits of balance sheets, but the same is true for that interest margins in aggregate. So it is not the case that banks customers,g their certainly not more than they have in the past. Deposit rates have gone up. Mortgage rates in total have gone barely at all. Something else that we flagged because a lot of the mortgages are fixed. Nothing unusual that we did not expect, as a result of this 25 basis point rise in Interest Rates, which is, after all, relatively small. Daily telegraph. Governor, the Term Funding Scheme comes about a lot. Is that a significant moment for the Emergency Response support rolling off . Is that a default of what the banks are using today . Mark thanks for the question. The short answer is no. When we announced Term Funding Scheme, lets recall the purpose. If purpose was to make sure a bank rate cut in august 2016 was passed through, in particular to borrowers, and it anped ensure what was historic low for bank rates was passed on to borrowers, got maximum traction and has helped support the economy over the last several years. The design of the funding scheme borrow withks could certainty for four years and the cost would move with the bank rate. So the stock of that borrowing is in place, and they will continue to benefit from that in time. Once the drug that is closed itself at the end of the month, the amount of drawings, banks will continue to benefit from that for up to four years, depending on the term they took out. It is not a discrete thing in that sense, there is a continued benefit. So there is not a stealth element to it, they have the stock. It does mean at the margins, once i have used up that stock, the cost is what they paid depositors. Depositors will be shopping around. I had a question about whether you are concerned about the impact of brexit on the overall perception of Economic Forecasting . It requires making assumptions. At this point in time, unfortunately, any assumption you make tend to look somehow politically leaning. One, part of the answer is in your question, which is half to be clear about the assumptions you are making. Of the mpc, is that smooth transition to an average of end state. Obviously, it is unlikely that we will end up with an average of end state. We will negotiate and we will end up somewhere on that continuum and will have to adjust the forecast at that point, as the economy adjusts, as households and businesses adjust. If you are going to go back to the question early on, seeing these comparative static works, if somebody is looking at comparing the impact of different trading arrangements on the economy as a whole, different sectors, regions, it is much better to have that there with the underlying assumption and the models so that people can interrogate them. Think about it if you change the fundamental assumptions, how do the results change, what are the sensitivities around those, so that an informed debate as possible around it. One last point. I think this forecasting, i think some of it has been overplayed. Big picture, part two the referendum, the mpcs view was Exchange Rates will go down likely sharply, inflation will grow up, inflation will slow. In terms of magnitude, not on the exchange rate, slightly off on growth. Not entirely uninfluenced by the mpcs response. I go back to the point that, unlike weather forecasters, we help to make the weather. Responding to the forecast is what we do. As i mentioned as well at the start, as we move forward turned , we andiod, broadbrush others in the forecasting profession have the contours of how the economy would respond to the brexit uncertainty. Squeeze on real income, Household Spending, that is what happened. Business investment quite week by historic standards, weak relative to whats happening elsewhere in the world. Also true. Supplied not recovering to the same extent. You see that on the labor and productivity side. In that context, we have been trying to manage this tradeoff, use as much slack in the economy, to put it more positively, get more people to work, and bring up the targets. Big picture, i think there is something in these forecast that tell people something about how the economy will respond. The challenge is going to be, at some point over the course of the next year, we will all be a lot better informed and will have to update those forecasts on the new relationship, potential new relationship. To do that, in the spirit of the way the nbc aboutes, we will be clear what assumptions we are making, what we see the drivers are. People may disagree with us and shade the forecast this way or that, but will provide at least a Reference Point for the outlook and will certainly provide a Reference Point for the conduct of Monetary Policy, which is hugely important. You talk about the strength and youlobal economy, just mentioned Global Investment picking up. Could you talk about how you are thinking about underlying rates of interest in terms of that . Is there any says the global Monetary Policy is now gaining too much traction . Certainly, one of the things that is possible over the course of the next few years is that the underlying global rate of equilibrium interest could be. Ncreasing the institution has done a lot of work on this, and we think about it. That pickup in investment, if sustained, and there is a lot to make up in investment, but if it is sustained, and the relative , if youavings diminish just look at the fiscal side, globally, fiscal policy has quitesubstantially from tied to around neutral to slightly accommodative. Aware a. S. , we are large move is part of that. Not surprisingly, investment curves moving up. You can see why, for those limited aspects of what determines people global equilibrium rate, the direction is likely to be up, which really isyour point, i think, which if you stay still in that environment, then all things being equal, you provide more stimulus now. From the global rate to the local equilibrium rate, you have to take into account the local headwinds you could have domestically, which include in this economy the stance of fiscal policy not making a comment, just observing the stance of fiscal policy uncertainty associated with Business Investment which one layers on top because of brexit. Other factors which would necessitate an adjustment. As a central bank, in an open Global Economy, have to be conscious about what these broader trends maybe. That was the conclusion of an hourlong press conference from mark carney, bank of england governor after a more hawkish than expected statement and press conference as well. The big takeaway is that rates will rise somewhat sooner into some a greater extent than the bank of england on what happened in november. That reverberating across the currency and bond markets. Sterling around the highs of the session. 1. 40. Steepestd, seeing the decline since september 2017. However, we are just bouncing off the lows of the session. Action in the gilt market, particularly in the belly of the curve. Seven and five selling off as yields move higher. 10year higher by five basis points as you look at the jump. Holding steady throughout the press conference. If you look at the 210 curve in the u k, modestly steeper but pretty calm after that initial reaction to the conference. During that conference, the governor waited on the pressures of domestic inflation. This was one of the hawkish bids. The contribution from external factors slowing dissipates domestic inflationary pressures are likely to firm as the economy moves from excess supply into excess demand. Alix joining us outside the boe is nejra cehic. Paint the picture of the broad takeaway over the last hour. Outlined itave saying there is was a hawkish tone coming out of the statement and the press conference. We see that reflected in the markets. Fully pressing in the next rate hike in august and the probability of a rate hike in may has gone up to 75 from just over 50 earlier this morning before we got the decision. What we got was an updated growth forecast and a forecast that inflation would remain above target. The reason that mark carney pointed to this in his statement, which also came out of the quarterly inflation the equilibrium Unemployment Rate has been also the speed limit of the economy, how fast it can grow without generating inflation, has been lowered. We have seen the markets respond. A couple of good questions from the conference, one asking whether this was a warning for the markets. Mark carney said it would be a gradual and limited degree these rate rises. Not going back to the speed and end goal of what happened precrisis. He also did not want to talk himself to a specific path of rate hikes. There is a lot of uncertainty still with brexit. , what wouldsked happen in britain did not get this tradition of agreement between the u. K. And the eu . Ubs says it is predicated specifically on getting that transitional deal. Mark carney says that could cause a reassessment if we dont get that. A lot of uncertainty still around brexit and the bank of england will have to stay fluid and responsive. That was the message. Alix thank you. David for initial reaction to the press conference, we welcome our international and policy correspondent michael mckee. Also with us is jurrien timmer. Talk about inflation, accommodation of the speed limit and demand. Michael the bank of england seems to be taking the position that it will be a smooth brexit, that they will be able to withdraw without of upset to the economy. Sterling has fallen after the affectinge, which is inflation. At the same time, global synchronized growth is raising the rates in britain. With on of limit low even with brexit, they will run out of workers. That will raise inflation. So they will have to react more. Carney was at pains to say, it does not mean that we will raise rates sooner, or even more. David he kept saying gradually. Souter and gradually, there is some tension between those. At times, he says gdp will grow 1. 75 , but on the other hand, the supply will grow at 1. 5 . Productivity is not growing that fast. Is he right that they have an inflation problem around the corner . Bigien that is the question here, especially in the u. S. With all of this fiscal stimulus. That is not just the tax cuts. We saw this with the bill coming through congress now, another 500 billion in spending over the next couple of years. When you have that kind of fiscal stimulus nine years into an expansion at full capacity, it is going to become inflationary. When your speed limit is relatively low, meaning potential growth is low because of demographics, productivity, you will go beyond the speed limit fairly quickly. Then the fed has to come in and basically offset what the administration is doing. That is the thing that the markets are coming to terms with. The u. S. Will get to whats happening in the curve in a second, but staying on the u. K. , do you want to be buying sterling here . Is that your take away from the boe . Jurrien i dont know. Rates in general are on the rise. The good news is they are pricing in a lot more tightening than certainly in the past. In that sense, this bond market selloff that has been underway for the last six months or so, i think, is getting more mature. The u. S. 10year for instance we. 5 rateiced in another 4 hikes. Last august, it was only one more. In that sense, bonds are making more sense than they did six months ago. Mark one of the things talked about was the growth in productivity, growing at half the rate it was then before the crisis. As you talk about the with ainty from brexit, rough brexit, that will not increase productivity, is it . Michael no, it will go down, Business Investment will fall back. We have seen that in the surveys, companies having trouble attracting people spending money until they know what the rules will be. That is why carney was at pains to say we are making forecasts the best weekend but the whole brexit thing raises uncertainty about the final path of policy. Alix that brings me to wirp. You are looking at what the Investment Community is looking at for rate hikes in 2018. The white line signifies one rate hike, purple signifies two. Blue signifies three. The purple line really starting to price in two rate hikes. If i did notmiss say that we are looking at potentially three. What is your base case for the boe and the u. K. For this year in terms of rate hikes, jurrien . That is a very specific question. I look at the global picture much more. The base case is at the global easing era is over and we are transitioning into a global tightening era. Way,. S. Is already on its the boe, the ecb is coming. They are trying to find the exit as well. Ultimately it was mentioned in the press conference about the natural rates. That is what it comes down to pay her for instance, if you look at the u. S. , the typical 223 basisgoes from points from the natural rate and ends at 200 to 300 above the natural rate. During this current cycle, that is what has happened about to the halfway point. I think england is in a similar situation as the u. S. The real policy rate by the fed is around zero. Notcally, the cycle does end with an inverted curve until you get to 200 or 300 above. We are nowhere close to that. But in another year or two if the fed hikes the more times this year, three more times next year, a total of six, you will be maybe 200 above are star, depending on where that we goes. In terms of the boe, that is essentially the same path. Whether they go this court or next quarter i dont think really matters. Inis where they will end up two years, how far above the natural rate that will be. A lot of that comes down to inflation and to what degree the Central Banks are forced into a tightening path that they otherwise would not be following. David which of these to where you were a minute ago and that is that the proposed budget deal on the senate side yesterday, increasing spending by more than 300 billion a year. The house has not agreed to in yet. But if we have that kind of deficit spending which includes the fence and domestic spending, what kind of pressure does that put on inflation and therefore on the fed . Jurrien this is the irony. Normally when you get fiscal stimulus, it happened at the bottom of the cycle and happens at the same time you get monetary stimulus. In 2008,hat happened 2009. This time we are getting fiscal stimulus through spending, tax cuts at a time when we are well into the cycle at all capacity than the fed is actually tightening. That is why the multiplier is going to be less than it otherwise would be. You have one form of policy offsetting the other form. It should create more inflation and potentially overheating in the cycle, and then it comes down to the productivity side. If that speed limit stays low and we know it will stay low because of demographics but we dont know the productivity side. This tax cuts boost productivity growth, that increases the speed limit, but that remains to be seen. In the meantime, it just brings the fed more and more into play. The market has been at 4. 5 hikes, the fed says six through the dots. The market and the fed are a lot closer but that depends on whether the fed moves its dots further north. We will not know until march. With michael, we spoke the white house yesterday, he says dont worry, the speed limit will be coming up, we have so much Capital Investment, productivity is going up. We will not have inflation despite those tax cuts. Know whywe dont productivity fell. It may be because Capital Investment was pared back since the great financial crisis. But we also saw productivity fall in the 1970s. Nobody knew why that was happening. So we have to hope the tax cuts will spur investments. Theother problem is, investments they make are going to take time to hit the economy. So will productivity rise fast enough to absorb the inflation that will come sooner, or will the fed be leaning against that because they are forced to . At this point, when you look at the spending bill that is passing, they are talking about spending an enormous amount of money in the short run, over the next two fiscal years, where productivity growth is at a fiveyear period to get absorbed into the economy. Look at theou 10year, 2. 85 , the highest since way 14. What do you do today when it comes to the treasury market . Jurrien the good news is that the rerouting is well underway. A year and a half ago, the 10year was at 1. 3. Last august, 2. 01 right after the hurricanes. Right before tax cuts were priced back into the market. Since then, about 85 basis points. There is a very close, linear correlation between the 10year and how many rate hikes are being priced into the fed funds curve. Every rate hike is worth about 20 basis points. Given the market and the fed are far closer than they were six months ago remember, six months ago the market was pricing in one more hike, the fed was projecting six. That tells me the 10year is much closer to finding its equilibrium value, whether it is three, 3. 1, 2. 9, who knows . Im a lot more comfortable getting interested in the bond side of things, than i was six months or year ago. Timmer, thank you, as well, michael mckee. Lets get you a market check, 45 minutes until the open. Down, adow futures little bit softer today as we look at the actually, a little stronger. The dow jones up by 92 points. Futures, a little bit of weakness in europe as a bond selloff picks up, in part because of the boe. Off five point 7 despite sterling jumping. Lets take a look at what is happening in the gilt market. Selling underway. Yields moving higher on the 10year in the u. K. By about five basis points. Sterling higher, around the highs of the session, up 1 the vix a little bit calmer here as well. Get billions of dollars worth of supply coming on the 30year. Will the market be able to absorb that . A question that we would try to tackle. Lets get an update on whats making headlines outside the business world. Congress votes to day on a twoyear spending plan that would avert a Government Shutdown at night. The Senate Proposal would provide almost 300 billion in additional funding for both defense and domestic matters. That gives members of both parties something they wanted. Vice president mike pence says we will see when it comes to a possible meeting with north korea. He is in south korea for tomorrows Opening Ceremony of the winter olympics. He says there may be a chance for an encounter with north korean officials. In china, exports held up despite a stronger yuan and tensions with the u. S. Overseas shipment rose 11 in dollar terms from year ago. Meanwhile, chinese imports soared 37 . Some of that may have to do with a later start of the Lunar New Year holiday compared to last year. Global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries. Im kailey leinz. This is bloomberg. Alix thank you. U. S. Economy cultivates right conditions for deals. Investment bankers looking to seize the moment. One of the banks trying to build his presence in Investment Banking and the u. S. Is ubs. Joining us now is joe reece, ubs head of Investment Banking americas. Relatively new to the seat. Also with us is jason kelly. Gentlemen, great to get your perspective, joe, thank you for your patience. Talk about the opportunities that the that ubs sees in the u. S. Joe when you think about Investment Banking globally, the u. S. And the americas real large are the largest. Substantially larger of by india and aipac. Deal are robust, rule of law is good. When we think about a Growth Opportunity to match our global footprint, there is nothing better. Jason when you look at the regulatory environment, whats happening in the markets, even in the last week, how does that look Going Forward in terms of what sectors may be interesting, where are you looking right now joe regulation is a fact that we have to deal with. All investment banks have to deal with it. I like to think of regulation as being a writer, not an anchor to our business. It gives us direction. In terms of sectors, that will be robust this year. In the intermediate term, tnt, infrastructure, biosciences, health care, internet of things, if you can think about it, it will likely be robust given whats happening with tax reform in washington. Fiscal Monetary Policy being favorable, etc. The dealsyou see coming from the strategic side, Companies Buying companies, how much does private equity, to the landscape . Little bit of a loaded question. Jason and i are friends many years and we often talk about it. Alix is it because of the hair . For him on a foil that. That you have a few in journalism, but i was reading another news outlet, indicating 1. 6 trillion of capital remediate to private equity in this market. When you think about that as three,power and you put 4, 5 times leveraged buying on that, that is a substantial amount of capital looking for a home. Private equity is in the business of doing transactions. There are some great stewards of capital. When i think about were the deals will come from, yes there will be strategic, but private equity will be a large component. Add onto that that blackrock will be seeking to raise 10 billion to hold stakes in companies. How do you look at those kinds of headlines . The way we think of private equity, we think of it as a partner. As a partner, they are as much a strategic investor as corporate are. The amount of buying power they bring to bear, you have to think of them as a key component. Just like ge back in the day, one ofcurrently, the headlines i read this morning, blackrock hoping to the next chair. Everyone is hoping to be. Softbank now talking about vision 2, 3, 4. The markets are moving that way. The importance and scale of that capital cannot be ignored. When you talk to your ceos, directors, do they feel like, excited to do deals . A lot of cash sitting on the sidelines but we are in an era, at least this week, of more volatility. How aggressive are those conversations in the boardrooms . Joe i actually think we will be in april to of slightly more vol that we have had. We have been through several years of no volatility. People got complacent. I was with a ceo of a tech company a couple weeks ago in silicon valley. Toy expect 50 billionplus be returned post the Tax Reform Act. When inquiring when they would do, the answer was ostensibly emma not certain, but i know we will invest it. Think the Tax Reform Act is a great thing for stimulating deal demand but people are going to be markedly they are not going to rush into it. We talking about a large amount of capital. David tell us about your mission here in new york. Youre coming was strategic on the part of ubs. We think of ubs in terms of Wealth Management terms. You have some competitors in Investment Banking. What is your comparative advantage . When you go in and they are already banking with somebody else, what is your pitch . Joe first, i would say that i was on bloomberg tv. David that will do it. [laughter] generally, when the Management Team thinks about what we bring to bear, the fact that we have 2. 4 trillion in assets in our wealth business, that gives us distribution muscle. From a strategic standpoint, our access to Family Offices is unparalleled. The reality is most of these Family Offices are ins tuitions , both because of the size of the capital they have under management, as well as the talent they have hired to oversee these businesses. Investment banking is a very challenging and competitive environment. But i feel very confident that we will do extremely well. We have great partners, tools. You mention talent, and that is something we are hearing a lot about in Investment Banking now. I would imagine that like everyone else you are jockeying for the best up and comers but also the best veterans in the business. What is your pitch for people to come to work for you . Been in the industry for over 30 years. Over that window i think i have seen 800 crises. During every period of dislocation i hear the same refrain, terrible time to be an investment banker. That may be true, but still seems to be a career that provides a great opportunity set. My pitch to Young Professionals, it is one of the only places where you can come, and in your first week, you can be sitting in front of the ceo, or a man or woman running a hedge fund with 40 billion, someone and blackstone, blackrock, large multinational, you dont get the kind of exposure we can provide. I think it is the industry at large, an opportunity for Young Professionals to grow quickly, twosed no offense sitting in a cubicle and pounding away at keyboards. When you look at the landscape, do you have to compete on salary and fees . What will that do for your margins and Investment Banking as you compete with Morgan Stanley and jpmorgan . Joe competition comes in many forms, not just quantitative, not just salary, fees on the client side. You need to provide a real opportunity to grow. We have that. We haveative basis, real upside in terms of capturing market share. Alix great to catch up with you, joe reece. Jason kelly, our new york bureau chief, thank you. Hawkish boe leading to a selloff all across the treasury markets. Bloomberg markets is next. Jonathan 30 minutes until the start of trading. This is the countdown to the open. Jonathan coming up, market stability are many elusive. A 24 trillion index behaving like a penny stock. Wild swings. Treasury traders buckling up for the biggest selloff since 2016. The auction comes after a weak tonight in your offering. Relative stupidity stability. C. Be may be in d,. C up on 15 of the s p. The euro and dollar advancing. Yields up three basis points to 2. 86 . The matter who you speak to, the consensus is the pullback in the recent hike in volatility are necessary. The stock market had a remarkable rise