Transcripts For BLOOMBERG Bloomberg Surveillance 20240714

Everyone. Good afternoon if you are watching from asia. This is bloomberg surveillance. These are your markets. We need to watch out for the u. S. 10 year yield and eurodollar. Augustgetting some services pmi rising to 53. 4, little better than expected. ,ut if you have a breakdown also manufacturing is better than expected, but what you need to are member is germany is not doing so great. France is a little bit better remember is germany is not doing so great about frances olympic better. Great, france is doing a little bit better. You can see our interview with Esther George 12 30 london time. Tomorrow, a stellar lineup. We speak to James Bullard all here on bloomberg tv. That may move the markets overall, but now, lets get straight first word news in new york city. The chosen one. That is how President Donald Trump described himself to reporters. He said it is his job to wage a trade war with beijing. Somebody had to do it. I am taking on china. I am taking on china on trade and we are winning. The president criticized former leaders for failing to take on what he says are chinas unfair trade practices. Trump plans for an additional 10 tariffs on an billion but300 beijing says it is a violation of their trade truce. Hong kong stocks are poised for their worst quarter since 2015. Corporate results are unlikely to save them. Analysts are slashing profit forecasts with an average estimates of a 19 slump in operating income. 2020,llion by fiscal thats what the Congressional Budget Office says. The outlook is quoted challenging and federal debt is unsustainable. It would be the first time the deficit has exceeded the 1 trillion mark. Thats when the u. S. Was recovering from the financial crisis. The Deutsche Bank division now must ask for approval from the chief executive to fill any open position. The memos seen by bloomberg says only critical roles should be submitted. It comes as the lender is undergoing its biggest reconstruction in living memory. Global news, 24 hours a day on air, on tictoc, and on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. This is bloomberg. Francine . Francine thank you so much. The jackson hole economic symposium is about to get underway with jay powells speech. The most closely scrutinized. Art the theme this year is challenges for Monetary Policy. Papers will be presented on how to manage the economy. Real topic on everyones mind is how to manage an economy under assault from within. A u. S. Economy growing at 2 with unemployment at 3. 7 , inflation around 1. 7 , does not seem to need additional accommodation. But the president s trade wars have fueled concerns in the business community. On wall street, which has priced in a series of rate cuts. Constant criticism is also putting pressure on the fed and chairman jay powell. Powell will kickoff the conference with a keynote address on friday morning. Benng the financial crisis, bernanke uses speeches to preannounce qe2 and qe3. Many on global wall street think jay powell will use the same opportunity. This weeks minutes suggest many of the justifications for supplies rate cuts are still in place, but does powell really want to ratify traders views or leave himself some options . Particularly in the if he does not want to appear to be giving in to president ial pressure. Bloomberg,ee, jackson hole, wyoming. Francine so how important is this for the markets . Joining us is Patrick Armstrong from flurry me. He will have to soften his stance to say we are doing well domestically but we are not a closed economy and have to take into account exactness factors, so the global backdrop and the escalation of trade tensions. The market may want him to be more dovish. Patrick i dont think he can get it as dovish as they are implying. That will be too much of a capitulation and it is unwarranted. The u. S. Economy is where you would want it to be. But it is not to be viewed in isolation. Francine why doesnt the market want him to be more dovish . Patrick there are a lot of cheerleaders. If you own bonds, you want them to be dovish. Are not thinking andt the economy as a whole the more dovish you are, that raises all the bets. So the market has got an unsightly view, which is risk assets. Basically, safe havens do well with a dovish fed as well. I think you are getting too much noise out of their. Of there. I dont think what the market is pricing in is warranted unless we do have something falling off a cliff somewhere due to a trade war or a higher brexit. Risk of jay the powell cuts or is it that we have another halfhearted message . Patrick if he comes out not dovish enough, he will probably get an inversion. Futures are pricing in all of those cuts that may not materialize. I think you are well aware of that and they want to create a dovish tone in the message. But they cant be seen as youtulating, totally saying are right. They are really reacting to markets. Justifiably so, they have got the president and they have got markets. Francine this is what we are asking all of our guests. On the mliv blog, which assets will outperform after jackson hole . Sounds like a loaded question. Patrick shortterm, i think you will start to see some strengthen the dollar. I think that is where i would be putting my money right now. Longterm, youre not going to see significant dollar strength. Apart from that, the u. S. Dollar is looking very strong. If not getting a completely dovish statement out of powell, youll probably get some strength from the dollar. Coming up, our interview with the Kansas City Fed president at the annual jackson hole symposium. See that interview at 12 30 london time. This is bloomberg. Francine economics, finance, politicsfrancine , this is bloomberg surveillance. Lets get straight to your Bloomberg Business flash. Osram licht is supporting a takeover bid, ramping up pressure on carlisle to raise their joint offer. Financial regulators must now sign off on the decision. If approved, shareholders will have to choose between the two competing offers. This is a very sincere and professional agreement. We had very productive discussions with them. Rest assured, we look at all stakeholders. We support it, we think it is a very credible offer. Kilroy will be profitable in canada in the next quarter or two, europe, not long afterwards. Is according to the chief executive reported a wider than expected loss, say the industry is still in a growth phase. When we look at europe in a place like germany and portugal, they could be profitable in the next two or three quarters. They will continue to invest in new regions and new countries. , we seen existing basis profitability within the next half year. That is the Bloomberg Business flash. Francine thanks so much. We have had pmi for the euro area for august, services coming in at 53. 4, but manufacturing remains in contraction. Next up is the account of the latest ecb meeting, which could give us clues. Is the global mac os x just at a been tech startup and Patrick Armstrong from lurimi. Me p looking at the minutes, how difficult is it to read . There are a lot of strategies already priced into the markets. Where they may be experimental is potentially with the asset program. So that is what we are looking for today. It could spur markets into pricing a little more at the back end of the curve. Is madamepatrick, how lagarde going to differ from draghi . Patrick its hard to say, but unlocking fiscals out of germany will be the thing. That has been draghis bugbear. Monetary stimulus has run its course and you need some fiscal thrust. Hopefully, the politician lagarde is may be able to facilitate that. It is the only differentiator you could imagine the. Now. Francine i have a good chart looking at services and these economies. Can see pmis in front. How much do you worry about germany . Are you worried about recession and is at almost a given that fiscal spending is the only way out . This economy is slowing rapidly. In termshful thinking of hopes for some sort of fiscal policy to come through. It has to be big to take germany out of anything. It just seems there is no political will at all. It seems like a catch22 situation. As we said, they are looking for pick up. Of with the white house controlling the negative, it is a difficult sell. If you look at a metric, you got manufacturing and contraction indicating a recession. That is definitely here in those economies, pretty Resilient Services across not just europe and china. Services remain resilient, so that ongoing trend is likely to continue. Maybe given the whole Global Economy in terms of aggregate demand. But services are the bright spot if you want to be the optimist. Francine this is the chart you were tweeting about. Where does this go from here, and doesnt spell trouble for the rest . It is just telling of the Global Environment we are in. For us and currency markets, ands great for the yen gold, thats why the signal we take from that turns premiums back up. When you got the global qe engines turning up, potentially , thats a turnan from the negative. Francine do you agree . Patrick 100 . I like the yen right now. We are buying with Japanese Companies to get yen to the yield, which is hard to do. And gold is a nobrainer as a beneficiary of the low Interest Rate policies. Francine what do you do with the italian elections . Patrick its not that high. We are not playing it right now. Its funny, last year, we are buying when it yielded at 3. 2 and feel scarier than it does right now. Going from an unholy coalition to something that might be better, you might get some more functional coalition and an election. But we will likely end up with a similar mess to what we have. Not attractive. Francine what does this all mean for euro . What is euro . Is it a funding currency . It will play that role, especially in september. Especially if the ecb does frontload over what the markets expect. Weve got eurodollar neutral with the fed playing this dovish game of pingpong. Its very hard to call a direction here, especially with enough negativity priced in. Francine if you look at what we are saying with italy, do just look elsewhere . Patrick in fixed income, its hard to find anything in europe. The momentum is strong. Hard to beery attractive to anything in fixed income space. Francine thank you both. Both stay with us. Up next, hong kong faces and earnings recession not seen in a decade as businesses warn they see ongoing protests dampening demand. We have the latest as students hold a rally for political reform. This is bloomberg. Francine this is bloomberg surveillance. Hsbc has broken its silence on the protest roiling hong kong. Local businesses and tycoons have spoken out about the unrest. Hsbc is amongst the first global banks to publicly address the crisis. In a fullpage advertisement, the bank said they are very concerned about the recent social events and strongly condemn any violent actions that disrupt social order. Sayse meantime, qantas flights to the city have fallen as protest that have dragged on have dampened demand for travel. Groupke with the chiefs chief executive the groups chief executive. We have the flexibility of moving to slightly smaller very essentially, same aircraft and same product for with less seat but with fewer seats. We will take that capacity out in anticipation of this continuing for a few months. Are seeing in similar situation is that when the issue resolves itself and there is a rapid rebound and they maintain flexibility, it will move the aircraft to other markets. I take advantage of the demand their. It is a good way of managing this issue. You are obviously aware of the controversy around your ceo having to step down around what many view as pressure from beijing. Given the importance of the Chinese Market to qantas, if pressured by beijing, when you consider firing members of your own staff if they did launch or were involved in antichina protests . Are you concerned about that kind of pressure . First of all, i know him very well. He is a very good guy and i wish him all the best. This, everyto company has its own code of conduct and its own belief. And i wont go into hypotheticals about what could ispen, the reality for us that we have a big operation to hong kong the big operation in shanghai and china. It is a very important trading partner for australia and i think nothing has changed in relation to that. But we have seen not just protests in hong kong, we have seen it in cities in australia and other places. Policy if some of your staff do joined those protests . Joined those protests . When you approach of the same did . Ap they did cathay we have a code of conduct which determines what people can and cannot do. It is fairly clear out there. There is a range of spectrums people can get involved in. Some of that would be within the code of conduct. Some of that would depend on the individual cases. That was the qantas chief executive trying to not answer the question. This is what the yuan is doing. We have seen a little bit of a move, the most since august 7, trading at 7. 0845. What does the one do from here . Patrick i think you get a continuation. Until we get some resolution on a deal on trade is tariffs increase, you get a weakening of one weakening won. They will not want to great massive outflows, but the weakening is titfortat. Asymmetric risk management. You will probably see it nudged the 7. 1 or 7. 2 area, taking into account the delayed christmas tariffs. And when the dollar does weaken or you get risk back on, itll probably to stay there. Francine thank you both. Up next, brexit. This is bloomberg. At comcast, we didnt build the nations largest gigspeed network just to make businesses run faster. We built it to help them go beyond. Because beyond risk. Welcome to the neighborhood, guys. There is reward. Beyond work and life. Who else could he be . There is the moment. Beyond technology. There is human ingenuity. Every day, comcast business is helping businesses go beyond the expected, to do the extraordinary. Take your business beyond. Francine off to the mountains. Fomc minutes site a midcycle adjustment and President Trump blast the fed again. Its all about Jerome Powells speech in jackson hole tomorrow. Investors wait for stimulus clues. French pmis, in sunnier than expected. German manufacturing remains deep in contraction. Hsbc breaks its silence on the unrest in hong kong as the city not seen since the financial crisis. Lets check in on the biggest stock movers. Good morning. We have to kick it off with ambu this morning, plunging, down some 13 . Plunge falls on the fact that endoscope sales though short. Osram licht giving the green light for a miss to go ahead with ams to go ahead with their takeover offer. Nmcking of bidding wars, health the biggest again on the stoxx 600, up almost 29 on reports that two companies are competing for a 40 stake in its company. Francine thank you very much. Lets get straight to the bloomberg first word news in new york city. Headwindsce against from the trade war and lowinflation. Thats how the Federal Reserve saw its Interest Rate cut last month. At the time, chairman Jerome Powell called it a midcycle adjustment. Minutes from the july meeting reinforced that. The fomc sees a quarterpoint rejection as part of its the british bank among the first global banks to publicly address the crisis. It drew half of its pretax profit from hong kong. 2020 ision by fiscal what the u. S. Congressional Budget Office says the u. S. Deficit will widen to two years earlier than expected. It says the outlook is challenging, the federal debt unsustainable. It would be the first time the deficit has exceeded the 1 trillion mark since 2012. Thats when the u. S. Was recovering from the financial crisis. Deutsche Banks Division had now has to ask for approval from the chief executive deputy ceo and cfo to fill any open positions. The memo says only critical rules should be submitted roles should be submitted. It comes as a lender is undergoing its biggest restructuring in living memory. 18,000 jobs are set to be cut. Is a pilot strike. The pilots today walk out two day walk out beginning right before the countrys busiest traveling holiday of the year. Global news 24 hours a day and on tictoc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. This is bloomberg. Francine . Francine thank you so much. Lets get the latest on brexit. Angela merkel has sent Boris Johnson a challenge to solve the irish border backstop within 30 days. U. K. L says its up to the put forward Workable Solutions to the back step. The u. K. Prime minister agreed the onus is on us. Boris johnson prepares for talks with Emmanuel Macron, as france says a no deal brexit is the most likely scenario. Joining us now is Hussein Kassim , a senior fellow at the u. K. In a changing europe. Still what this is Patrick Armstrong with us is Patrick Armstrong. Professor, lets kick it off with you. Can the u. K. And Boris Johnson really find a solution on the backstop that would be palatable for the eu and for the u. K. And ireland . This has essentially been the eus lien, show us the backstop, line,s on alternative show us the backstop, show us an alternative. Francine will Technology Help us or is it too slow to come to the rescue . Are a couplee kinds of issues that have to be dealt with. One is simple customs. ,he other is sanitary controls other types of controls that are much more difficult to monitor through technological means. Emmanuel macron was saying yesterday that the base case is not no deal but is also saying that the u. K. Can revoke article 50 at the last minute and cancel brexit. Do we just say, throw that away . Is that possible or are we looking at no deal . No deal i would say is the base case right now. Boris johnson basically said yesterday that as long as the eu thinks its a possibility, we will remain. There will be no movement from them. He has to make sure they think there is a possibility of this hard brexit, even if he thinks he has something in the back of his mind that they can move out at the last minute. Francine what can the eu do differently that would not damage their border . Its very difficult. Any compromise will have to be almost, we are giving you something inconsequential just to say you have achieved something and not destroyed your political credibility. I think if there is an agreement, it will be the same agreement in place but some artificial mechanism were boris can save some face. Francine what does this mean for pound . Zigzag. If we get a no deal brexit, the tradeweighted pound moves low from here. If we get friction at some point, and moves 10 higher. Everything else is just shades in between. The pound is just a daily assessment of the odds of a no deal brexit come october 31. Every day, the odds are changing. Francine what are the odds . Out, if you it think about how sterling has been trading, its about two thirds of the weight pricing in wayit 2 3 of the pricing in brexit. If there is a solution that avoids the hard border on october 31, you could easily see the pound moving towards the middle of that range. Its too difficult to tell right now. Francine neither side, the eu are u. K. , has given up on a brexit a breakthrough. If we dont get a breakthrough, whats the next step . Can parliament stop a note of brexit a no deal brexit . Its difficult to do that. There are issues and questions about how that would be achieved. Momentnclear at the [indiscernible] francine which means that likely scenario is a no go brexit. What would that look no deal brexit. What would that look like . Hussein pretty ugly. All the provisions put in place are untested. The u. K. Site has contingency measures side has contingency measures. We dont know what they will look like. Francine are you doing i dont know whether you would be buying Health Care Stocks because there will be a shortage or is that impossible to figure out . Reasonable decision is looking at multinational u. K. Large caps that have revenues nonsterling but will be hit by tariffs and things like that and no trade deals. As a u. K. Investor, you want to have some of your exposure outside of the u. K. Obviously. If any good deal happens, you may have a stronger sterling. I think thats a pretty good hedge. I am worried about the reaction function from the Central Banks. There is normally a massive amount of stimulus after this kind of of yet. Of event. There is very little of the ecb would be able to do to massage this kind of event. Francine if we are going to be i dont know if its rude or facetious or whatever, you could see a bank of england having a set policy. If there is a shock, then they cut rates, but then have to hike because of inflation. How difficult is that for currency traders to get their head around . This is like the bank of england , the u. K. Possibly having to do this quick turnaround. I think we will see something similar to august of 2016. Acts as ask as flexible currency. I dont think the topside inflation will be the banks biggest concern. Francine the first of september we will have a clearer idea of whether we can get a noconfidence vote on whether the Boris Johnson can get a deal and whether we can get a no deal through without much disruption. Yes. I think thats right, unless actually by mps does materialize effectively. I will go back to the revoke issue, if i may. This clearly is an alternative. Its one of the three possibilities but not one we have seen put onto the agenda by anybody so far. It would be really difficult to get support for the possibility in the short Time Available to us. Francine definitely it would be very difficult politically to pull that off. Thank you so much all of you for joining us. Hussein kassim there, senior fellow for the u. K. A changing your. Patrick armstrong europe. Patrick armstrong stays with us. Still to come, we will get the latest from hong kong as students hold a rally for political reform. Hsbc speaks out for the first time. This is bloomberg. Francine this is bloomberg surveillance. Im Francine Lacqua here in london. Lets get straight to the Bloomberg Business flash in new york city. Any new carbon tax should be e. U. Wide, according to lufthansas ceo. He said German Airlines would be hardpressed to shoulder more environmental levies unless the nations partners follow suit. There is no room for toreases, but rather room see how money flows back into the industry to really reduce our impact on the environment. Thats what we need, not more taxes. We need less impact on the environment. At this point, this tax is not serving that purpose. Thats what we discussed today. Staying with airlines, qantas is feeling the drag of weak demand and higher fuel c osts. They are reporting a pungent pretax profit and preparing for a drop in passenger numbers flying to hong kong. We have the flexibility of moving to slightly smaller aircraft. Aircraft,y, the same same product but with less seats. We will do that over the next of months to take 7 capacity out in anticipation this will continue for a few months. From a strike today by pilots from ryanair. Flights taking off largely as scheduled. Walkout began right before the countrys biggest travel weekend of the year. That is your Bloomberg Business flash. Francine lets get the latest from italy. The president will meet with the countrys main political leaders today in an effort to carve out a viable governing coalition. Following this weeks collapse of the alliance between the rd rightly hard right league and the antiestablishment fivestar movement, is a new majority possible . Are we set for fresh elections . It is indeed possible. We have had relatively advanced contacts between two of the parties that could form a new government, the democrats from pd party and the fivestar movement. Today, the president will meet with representatives of all the major parties, including those two. There is definitely a possibility that something could emerge from those talks. There are some red lines between the parties, in particular, an that ance on the pd side new government not included the past Prime Minister, just happy eppe conte. Py gius francine how difficult is it to know what the president wants . If we do have snap elections, what do we find out . The italian president by nature bike tradition and by tradition and the nature of his role does not reveal what is proper tens art reveal what is preferences are his preferences are. He wants to hear that these parties have a viable program, something that could go on long enough for the government to serve out his full mandate, not just a patch up job. In the absence of a convincing program and figure to leave the government, the president would probably just call for new elections. Francine thank you so much. Still with us, Patrick Armstrong. We touched on italy a short while ago and you said it is not something you are looking at the moment. Is yours problem more negative yields is europes problem more negative yield . Great the bond auction did not go great. What does that mean for how the ecb can mitigate negative Interest Rates . Patrick its very difficult. The marginal benefit from cutting rates by the ecb is so minimal at this point. They are going to do it. They have indicated they are going to do it. At the margin, you get some benefits. If its focused more on countries that have more debt problems like italy, that would be good. There is no indication the p key favor the capital will favor those countries. How it will be is questionable at best. Not really attracted to italian assets right now. Shortd rather own it than it. I think the qe will probably drive yields down. Any news on what is going to be happening in early and the snap elections, i think you get a bit of a rally in italian debt. Francine some other charts we were looking at, which i will try to get up in a second. We are talking about the bank of england and how the inflation forecast for the bank of england looks like. Patrick euro zone is pricing in deflation almost. U. S. Pricing in disinflation. The u. K. Pricing in stagflation, which is a low growth economy with high expected inflation. Fiveyear board swabs in the u. K. Are at 3. 5 or Something Like that. Terrible economy where you have high inflation and a bank of england that is probably going to be forced to stimulate the economy with lower Interest Rates and more quantitative easing. The effect on the currency is already going to be so negative, its 20 be a very difficult balancing act. Going to be a very difficult balancing act. Francine what does that mean for the next bank of england director . Patrick its a very difficult job. Next bank of england governor is going to have a pretty messy situation potentially, were brandnew, innovative policies probably have to be employed. Sure forsting job, im many, but it would definitely be difficult. Francine will it be a political appointment . Patrick Boris Johnson will want to make it a political appointment. He wants somebody talking in line with the benefits of hard brexit and the need for sovereignty. Its hard to say, though. I think thats the direction it will go. Francine Patrick Armstrong stays with us. Coming up, we interviewed the Kansas City Federal reserve president , Esther George. We speak to her at the annual jackson hole economics symposium. You can see that interview 12 30 p. M. London time this afternoon. Up next, we will get some equity because with our guests, Patrick Armstrong. This is bloomberg. Francine economics, finance, politics, this is bloomberg surveillance. Im Francine Lacqua here in london. Armstrong is still with us. We talked a little bit about your inflation forecast. We talked about the fed, the bank of england, italy. Overall, if you are to construct a portfolio, i know you liked some things in japan. Is there anything more you like that is off the beaten track . Patrick in the u. S. , health care, defenses. Utilities, real estate have had a great run. Staples are expensive now. Health care has lagged. We think that is one sector where you get growth faster than the markets. In europe, i think there will be capital structure arbitrage. I think ecb is more qe, probably more corporate bonds. Companies get paid to issue debt. Companies that have a high dividend yield, its a nobrainer if you are a cfo to issue debt by back. Francine why do you Like Health Care in the u. S. . Patrick it is a defensive sector. I dont want to be exposed to cyclical earnings. The highTech Companies are too expensive in my opinion. The Health Care Region trading at a discount to the market, growing faster than the market. Francine is there anything in the Technology Space that you like . Patrick i dont mind any of the Tech Companies but its such a crowded trade. Facebook is reasonable, alphabet. We still hold those positions but is not something we have been adding to. Japan is the unloved region. If you buy domestically orientated companies, japanese 10 year yields are negative. Ntt the cuomo gives you a 5 yield in yen. If you hedge that into your local currency, that turns into 8 yields. It is an unloved country because of its bias towards trade. I think thats one area that looks very attractive. Francine is there anything in emerging markets that you like . Patrick emergingmarket debt is something that even with the cyclical slow down, the carry is so high right now. Given the choice between the argentinian 100 year and the austrian 100 year, i think we would prefer argentina right now. You are getting 15 yields on that on a current basis and a yields maturity of about 20 . Austria, you are paying 210 to get 100 back 98 years later. I think emerging markets, you get paid such a high carry. Its risky in a cyclical backdrop. Thecine patrick, given negative Interest Rates and the political concerns, have havens changed . Patrick i think havens have different types of risks. The thing i am morgan about with a lot of the havens, you dont get the characteristics in terms of valuations. The staples have priced in such negative Interest Rate environment already. I dont think you get the defensive characteristics. Yen, i think you will get the repatriation of capital into the yen. Historically, thats a reasonable safe haven. Gold is my preferred right now. The cost of gold in the past was you missed out on your dividend payment. Now its the Interest Rates. I think thats a beneficiary. Trade war is the end game. Trade war is stagflation. Francine patrick, thank you so much. Patrick armstrong. Bloomberg surveillance continues in the next hour. Scarlet fu joins me. Dont miss our interview with Peter Oppenheimer, goldman ternational chief Global Equity strategist. I know we have spent a lot of time talking about italy. We spent a lot of time deciphering the fed minutes. Some of the ecb notes are coming up at 12 30 london time. 111. Dollar, this is bloomberg. Francine off to the mountains. A midcycles cite adjustment and President Trump slams the fed again. Its all about chairman Jerome Powells big speech at jackson at jackson hole tomorrow. French pmi comes in sunnier than expected. German manufacturer remains deep in contraction. Hsbc breaks its silence on the unrest in hong kong, as the city faces an earnings recession not seen since the financial crisis. Good morning, everyone. Good afternoon as you are watching from asia. This is bloomberg surveillance. Im Francine Lacqua here in london. Scarlet fu in new york. Tom keene still on his week off. There will be a lot of speculation on what Jerome Powell can do tomorrow, how he will anticipate or try not to do the mistakes we saw at the last press conference. There is an outstanding editorial piece saying multilateralism is dead, long live the g7. We look forward to the g7 in biarritz. Scarlet a lot of the attendees will be looking for these one side meetings, bilateral they try toen as get together and solve big, intractable problems together. I cant wait for the group photo. It will be awkward with Boris Johnson making his debut, President Trump wondering where Vladimir Putin is. Francine it will be interesting. I always like the g7 photo ops. Scarlet herding cattle. Francine we will have plenty more on the g7 throughout the day but lets get to the bloomberg first word news. Reserves reasons for cutting Interest Rates in july supports another move soon. According to minutes from last months meeting, policymakers saw the move as insurance from the trade war and lowinflation. Over to italy. Thats where the president is beginning highstakes talks to end the political crisis. He will meet with main political leaders to create a viable, governing coalition. Only the president has the power to nominate a new leader. He may give the democrats and fivestar a few more days to enter into formal discussions. The amazon rain forest in brazil burning at a record rate, according to data from the countrys institute of space research. Take a look at these flames. They are only trounced by this statistic. There was an 84 increase in fires. Bolsonaro says nongovernmental organizations could be studying the fires to do setting the fires to discredit him setting the fires to discredit him, but he has no evidence. Ryanair flights taking off largely as scheduled. The pilot strike happening right before the busiest travel weakened of the. The year. Global news 24 hours a day and on tictoc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. This is bloomberg. Francine, scarlet . Francine we have what looks like u. S. Futures meandering a bit here. Francine mentioned the release of european pmi data. It gave futures a bit of direction but that faded quickly. 1. 58 ,year now yielding so coming in a little bit here. We also talked about an earnings recession. Hong kong cutting their 2019 profit forecast. We will discuss the perspective earnings recession prospective earnings recession in the city and globally. The euro erased its losses and has at least at least before 1 line, nowd the 1. 1 just below that level. Francine markets are boring. Today they seem to be fluctuating and little bit less. We had a disappointing pmi data out of germany. The euro is getting. I am also looking at treasure gaining. I am also looking at treasuries, steady. Its all about the g7 and what Jerome Powell says tomorrow. Its day one of the economic symposium in jackson hole. Expectations for further Interest Rate cuts are unchanged after julys cut was viewed as insurance against the trade war and headwinds. We are delighted to be joined by Peter Oppenheimer. Its always a treat to get you on. Its a little bit of a different perspective, but also you kind of have a great worldview, eagle eye view of the hotspots. How do you view what jay powell can say . He cant disappoint the markets but he can also go into what they are expecting can disappoint the markets but he can also go into what they are expecting. Peter unlike january, where the fed really shifted market expectations, this time its quite difficult to get ahead of market expectations. Markets are expecting so much. I think he will have to show a balanced picture and continue to guide to lower rates. The u. S. Economy at least is Still Holding up reasonably well, though i think the need is really to be measured and not fulfill some of the fears people have about growth. Francine if you are too measured, does it confuse markets . Last time he spoke, you could not tell if he was dovish or doing it with conviction. Is there a communication problem at the fed . Peter i dont think there is. It is a complicated balance to get right. There are some conflicting signals. Clearly, the Global Economy is weak and you have seen some weakness in the u. S. The labor market remains pretty strong. I think they want to give the signal that they continue to expect Interest Rates to come down, but not over emphasize the potential for that to continue next year. We think inflation will be rising a little bit, the labor market still strong. They may want to pull back on expectations that rates can continue to falter next year. Scarlet the fed rate had three reasons it on why they cut and the release of the minutes. The reason i am fixated on his risk management. What does that mean to you . What does that mean to investors . It sounds like it can encompass anything you want. Peter yes, i think it is deliberately loose. There are clearly risks out there that are being reflected in markets. That has gone some way to tighten financial conditions. The fed and other Central Banks are clearly very focused on financial conditions. Really run from everything to do with the weakness in Global Growth and particularly in the industrial sector, the fallout that we tradeget from further tariffs and a trade war, and there are a number of geopolitical risks out there which are raising levels of uncertainty, having an impact on investment decisions. There are clearly many risks that investors are facing. Some of them are economic, some of them are geopolitical. They are difficult really to measure or model in many cases. That is really what they are pointing to. Scarlet thats the backdrop for the rateir powell said cut last time was a midcycle adjustment. Looking at that midcycle adjustment, is it necessarily fuzzy, that phrasing as well. Is it 8 as well . Is it a case of cutting when we see it or is it quantifiable in any way . Peter in their view and indeed in our view, this is not cutting because we are seeing the end of the Economic Cycle and a recession is imminent. Clearly, Financial Markets are worried about some of the signals we are seeing out there, the inverted yield curve as an example, the weakness in pmis and industrial data in particular. It is important to also emphasize that if you look at the u. S. In particular, the household sector remains in a strong position. You have a very low unemployment, wages are rising in bit. The savings rate, importantly, is well above the longrun average. You dont have big imbalances in the household sector such as we have seen before other recessions. In that sense, i think what they are really emphasizing here is that there is a slowdown in Global Growth, particularly in the manufacturing sector. This does not really mean the end of the overall Economic Cycle but to reflect that weakness at low inflation, they are prepared to ease a little bit. Francine this is a good way of looking at the dynamics playing out in the u. S. You have the 2s 10s and 30 year u. S. Breakevens. What does this mean for earnings and equities . Earnings have not been bad. The concern is if chief executives stop spending or investing. Peter there are a couple of important headwinds for profits. We think the prophets growth is slowing a lot this year profits growth is slowing a lot this year. Last year, profits were growing at well over 20 in the s p, a good bit of that boosted by the tax cuts. This year, we are looking at 3 Profit Growth. In the case of europe for the stoxx 600, we are looking at 2 , run 1 in asia. We are talking about quite low Profit Growth. There are pressures coming in that we think cap margins. Margins have been a very big driver of rising profits in recent years. Because of inflation, Revenue Growth is relatively slow. Our view on equity markets is that there is somewhat limited upside. , if they rise this year, Profit Growth is likely to be slow. Profits are unlikely to fall. They are still generating reasonable cash flow and dividend growth. That should at least generate better returns than you are likely to get in fixedincome markets. Francine i want to go back to something you were saying earlier. A viewer has written in saying, what a change in the strength of households be probably the clearest signal that we could enter a recession . Peter i think thats a really good point to raise. If you take the u. S. As an essential example. Consumption is well over 70 of the economy. You really need that part of the economy to weaken to really threaten a broad recession. It could be that there is a Global Industrial recession. We certainly see then some places that are very levered to trade growth and the industrial sector. Germany is a perfect example. The household sector remains in reasonably good shape, particularly in the u. S. Though there is weakness in the labor market, and significant rundown in savings, weakness in the labor market, significant rundown in savings would heighten the risk we are toward the end of the cycle. Peter, thank you so much. Peter oppenheimer from Goldman Sachs stays with us. Coming up, our interview with the Kansas City Fed president , Esther George. That interview is 7 30 a. M. New york time. This is bloomberg. Francine this is bloomberg surveillance. Im Francine Lacqua here in london. Scarlet fu in new york. Scarlet, we are talking about the possibility of a recession, whether you see it or equities or some of the other benchmarks, or whether there is an inverted yield curve. We are back with Peter Oppenheimer, Goldman Sachs chief Global Equity strategist. Do you find more value in japan then european equities at the moment . We seewell, i think relatively similar value in both. I would say that neither are extremely cheap and neither are very expensive. The problem with both of them is that they have relatively low longterm growth prospects, in terms of profitability. I think it is worth flagging that if you adjust, particularly in europe and what the valuations for the sector weight, you find the valuations are pretty much the same as a u. S. Market. If europe had the same sector weightings as a u. S. , it would have the same valuations. Francine what makes you worried . We were just talking about german bunds. Germany is issuing a 30 year at zero. Is there something that makes this scream bubble territory and what does that mean for equities . Peter what i think that is indicating is the prospect for very low longterm growth and inflation, pretty much as we have seen in japan over the last quartercentury. That is not in itself negative for the equity market from current levels. You have to bear in mind that the equity market is cash generative. You have got a dividend yield of 4 or so against that longterm bond yield of zero, or in some cases negative. That very significant gap is reflecting really the high required return that investors are demanding to put money into equities in a region where there is very low growth. I think that is reasonable. I think low growth and low growth in sectors which dominate the european market, as we have seen in japan, is a structural problem for the index. Equally, there are some very Good Companies growing well that are not so expensive in europe. I think you need to look at it very much in a stock level rather than the index level itself for the opportunities. Scarlet i love this perspective of comparing and contrasting europe with japan. What does teach us about how germany or any other european country move forward with stimulus and spending and how much of an impact it can have on companies and earnings . Peter it is a very good question. There are some similarities between europe and japan. Both have got negative Interest Rates, they have used qe aggressively. Both are still suffering from a very low growth. Some of that is structural, some of that relates to demographics and other factors. You know,k that, clearly the ecb is signaling we would expect more Monetary Policy to come through in september, a package of different factors and some attempts to offset the negative effects of further rate cuts on banks through tiering. The big difference between europe and japan is fiscal policy. Japan has used fiscal policy much more aggressively then europe has overall. Some of the impediments to that are political, in the case of europe. Because of the structure of the single currency and having a single central bank. I think there will be more discussion. Discussiondy is about the possibility of increasing fiscal spending in europe as an additional set of tools to complement low rates to stimulate growth. Scarlet when you talk about europe, a discussion is what always everyone always has. There is a lot of talk and sometimes not action. The boj works in concert with shinzo abe and his government. In europe, that is not possible, because the ecb is one entity and then you have national government. How much of a limitation is that when it comes to anything the ecb can do . Peter i think there is a limitation here. The additional limitation in relation to japan is that japan is a single country with its own central bank and currency. Therefore, it has degrees of freedom about what it does in terms of policy. In europe, you have got a collection of countries with different growth rates and different fiscal positions. Of course, you have the politics of the constrained fiscal transfers, which make the degrees of freedom in terms of policymaking more complex. Of course, the ecb has done a lot of things to increase its toolset in the context of those constraints. It has been very aggressive in terms of monetary easing and we expect it to do more. The difficulty will come in terms of fiscal policy when you have some countries that have, you know, significant fiscal rules in terms of how much money can be spent, the size of the deficit, and also the ultimate concerns about fiscal transfers. I think that is and has been a constraint for europe in terms of policymaking. Francine peter, thank you so much. Peter oppenheimer from Goldman Sachs stays with us. Up next, we talk of course about brexit and u. K. Assets. Allianzs chief advisor. This is bloomberg. Scarlet we have some breaking news. South korea is ending military intelligence sharing pact with japan. I see the yen strengthening to its session highs. U. S. Futures falling to their session most, overnight session well. S this comes on the hills as japan and south korea struggled through their own kind of trade war where they are limiting exports to one another. Once again, the relations between south korea and japan worsen a little bit with south korea ending its military intelligence sharing agreement with japan. Francine it feel significant. Lets get Peter Oppenheim are from Goldman Sachs to maybe explain how the geopolitical events could become even more dangerous or that could actually go away, i guess. How do you factor into either of the chief executives thinking when it comes to equities or when you think about it from a markets perspective . Peter there are certain things that you can look at in terms of what you can create models for. They may be wrong, but there are ways in which you can forecast probability on gdpr inflation and Interest Rates. When it comes to geopolitical issues and things related to tariffs, trade wars, brexit, or changes in the Italian Government my these are things you cannot really model. Equities are risky assets. Risk premier goes up. We know there is a relationship between risk premier and ines and corporate equities and corporate activity in terms of holding cash and investment. Francine is that how you look at the u. K. . Peter yes. If you look at u. K. Assets, the risk premium on them is very high. Thats reflected in sterling and the equity market, particularly the domestic slice of the equity market, which is most exposed to brexit risk. That is an area where valuations discount to other equity markets have gone up a lot as a risk premium has increased. Very difficult to model the outcome here. Kind of anybodys guess. ,he range amount comes as wide thats reflected in a high required return or high risk premium. Francine peter, thank you so much, as always. Peter oppenheimer, Goldman Sachs chief equity strategist. Scarlet World Leaders packing their bags. On the docket, President Trump says he is open to read admitting russia into the group. We have more coverage on the upcoming g7. From new york and london, this is bloomberg surveillance. From the 5am wakers, to the 6am sleepers. Everyone uses their phone differently and in different places. Thats why Xfinity Mobile created a Wireless Network that auto connects you to millions of secure wifi hot spots. And the best lte everywhere else. Xfinity mobile is a different kind of Wireless Network designed to save you money. Save up to 400 a year on your wireless bill. Plus get 250 back when you buy an eligible phone. Click, call or visit a store today. This is bloomberg surveillance. We have quite a lot to talk about, g7, jay powell. Lets get straight to the bloomberg first word news. Viviana the Trump Administration is getting closer to unveiling its plan for the companiesmortgage freddie mac and fannie mae. Federal agencies are removing reviewing the proposal. The imf executive board paving the way for the chief executive to become its managing director. Recommendeds lifting the age limit. She just turned 56. She has the support of the e. U. Next month, Christine Lagarde steps down. Mexico will review its efforts to stop illegal immigration next month. They agreed to was sapped asylum requests. The field of democratic president ial candidates just got smaller. Governor jay inslee dropping out, telling msnbc he determined he could not win the moderate dutch nomination. Nomination. Global news 24 hours a day, on air and tictoc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. I am viviana hurtado. This is bloomberg. Scarlet here is what you should be paying attention to, ecb accounts due out today. Investors will be looking for clues on the size of the stimulus set to be unveiled in september. Next johnson stops in his stop on his european tour. On friday, fed chairman jay powell will take the stage at jackson hole. This weekend, World Leaders which for the g7 summit has the potential to upset the with manynal orbiter, threats high on the agenda. There are no shortage of catalyst from the market. Francine my mind is wandering. Markets andk to the what the g7 will bring. Lets start with the markets and go to the politics. Are you more worried about the g7 or jay powell . I am more worried about jay powell. I think the g7 might be a sideshow, although it could be interesting interaction between boris and donald trump. I think markets have got Expectations Quite high for what Jerome Powell is or is not going to say tomorrow at jackson hole. My guess is he will stick to the script of how central bankers deal with a world of low and negative Interest Rate, how to deal with Monetary Policy and the levers to pull. Francine this is g7. At will be quite entertaining to watch the first time boris meets other leaders as Prime Minister Boris Johnson other leaders as Prime Minister. Already thes sideshow we have seen with denmark and greenland reinforces when it comes to the donald trump era. Just because you have had decades of Close Relationships with the u. S. , that does not mean that much to donald trump. History does not matter. We will see that in play in france. Scarlet you are more concerned about chair powell at jackson hole, but if you look g7, most of the constructive conversations will be in oneonone bilateral meetings. Investorsing should be focused at . Donald trump generates headlines good and bad whenever he meets with anyone. Julian if you wanted to be a fly on the wall, the merkeltrump meeting could be interesting as well as the putintrump meeting. As he actually coming this time . He is not. So obviously not then. I would say to you that merkeltrump and i would like to be in for the trumpboris meeting because it could be amusing if not instructive. Scarlet my next question how relevant is g7 or g20 in a world that suggests news digests news in a minute and moves on by the time a carefully constructed . Ommunique is constructed isian as rosalind multilateralism dying or dead . Since trump came to power, we have seen a lot of struggles over communique that has been watered down to meaning nothing. See less of anly effort and focus on communique. They were set out to discuss big, global ideas, things like climate change, tech knology, technology, food security. There is less of a focus on that and more of a focus on who is meeting who. That usede groupthink to go on at these things. That is important because we are seeing significant headwinds for the Global Economy and coordinated conversation would be useful. Francine i remember in 1985 there was a race to the bottom. Is there any indication the g7 leaders would come together and coordinate action . Rosalind expectations have to be very low because donald trump is talking aggressively against his own centralbank, currency policy, and involved in a trade tradeth china and tensions with many european countries, with japan who will also be at the g7. It is difficult to have a constructive conversation. What you might do is set off trump to talk back at you on trade. That is the elephant in the room. Francine do they talk about centralbank independence, or do you start to worry that in part, jay powells communication which is mired in i am darvish but not that dovish but not that dovish, is complicated by President Trumps attacks more than we realize . Tweets if i was sitting in the treasury and Federal Reserve, i would be unhappy to say the least. They are trying hard to rise above this and there is a history of residence president s, Lyndon Johnson used to get the head of the Federal Reserve in for cocktails and berate him over his Interest Rate policy, but that was public. Trump is aiming at the man on the street and showing that he is batting for that guy in central ohio, wherever he thinks they may vote for him. Scarlet Julian Chillingworth will be staying with us. Coming up, we go live to jackson hole. Do not miss our interviews with a whole host of fed officials including today, Esther George and tomorrow, a full lineup, all here on bloomberg television. Francine this is bloomberg surveillance. Talk about brexit. Angela merkel has said Boris Johnson a challenge to stop the irish border backstop within 30 days. Merkel says it is up to the u. K. To bring alternatives to the backstop and johnson agrees the onus is on us. A no deal brexit is now the likeliest scenario. Thank you for sticking around. When you look at the concern surrounding this, both sides are keeping the option open they will find agreement, but how do you solve the backstop in a way the e. U. Agrees and Boris Johnson says that is ok . Rosalind only a few weeks to go until brexit is due to happen, what we saw yesterday was the tiniest hint there may be a willingness to talk, perhaps if Boris Johnson will promise to leave without a deal promise not to leave without a deal. Boris johnson wants the backstroke gone and europe will not renegotiate. They can talk about the future language. If they can codify some of that language, that might enough to placate Boris Johnson and then they have to get it through parliament. Francine is this a compromise . Is Angela Merkel softening or does she not want to be blamed and does not want Boris Johnson to come back and say no deal . Rosalind they are trying to give him as much help as they can without giving anything away. He is meeting macron today. In person, you dont know what he might say. They are trying to find a way, they are saying come to us, find a solution. They are so far apart it is difficult to see what might be possible in such a short time. Scarlet we focus on the personalities. Stressking a mistake by test are we making a mistake by stressing the difference in personalities or are these more institutional roadblocks where does it matter . Julian it matters a great deal. The whole tenor of the conversation has changed with the arrival of Boris Johnson. Theresa may was prepared probably to be more flexible over the backstop and push it through. The chemistry between Boris Johnson and Angela Merkel was pretty good yesterday. Discussing, she gave to small chain to try chink to try to improve the deal. The french have laid out their tactics and we will see what becomes of the meeting with Emmanuel Macron. Macron will be keen to make sure the g7 summit goes well from his perspective without squabbling around brexit. Scarlet he is ever mindful since he is host. Out thehnson pointed e. U. Tends to compromise at the last minute. Is there reason to think the october 31 brexit deadline will be different . A game of is always noh poker, this, and i think investor wants us to get to the 23rd hour and 59th minute. I would say if we can get an extension, which i would agree from the meeting with Angela Merkel looks more likely than 24 hours ago, markets will be satisfied at this stage. Francine what is your take on it to lee . Markets italy . Markets did not fall out of bed. His italy on the back burner is heavily on the back burner . Italy on the back burner . Rosalind they need a few days. Clearly, you dont have time for them to work out what they can achieve because besides an election, which salvini wants, coalitionps unstable that could collapse in a month or two. The markets are willing to give them a couple of days to see what is possible, but if it is a coalition between two parties that are polar opposite and have argued a lot, you have to wonder how long that would last we are probably headed towards election in six months. Francine what do the markets do . Julian the bond market rallied on the hope of a coalition. I think election is coming. It is whether it is october or february. If the Coalition Gets you to there is more volatility to come. Francine Roslyn Matheson and jillian shall jillian chillingworth stay with us. Some pmi data out this morning. When it comes to friends, they were not too bad france, they were not too bad. What can draghi do in september and what will lagarde do in november . This is bloomberg. This is bloomberg surveillance. Stocks and hong kong are poised for their worst quarter since 2015. A selloff raising more than six hundred billion dollars from their equities. Operating income is expected to fall 19 . 11 straight weeks of protests have pressured the slowing economy. s music publisher is suing spotify, alleging they used his songs billions of times without permission. Spotify has not responded. Itsas wants to see if passengers can put up with a 20 hour flight. They will run tests from new york to sydney. Willowing will boeing have about 45 employees on board. Will spend money to help thirdparty merchants boost sales. Amazon has been criticized for wielding too much power over sellers. Decideoard helps sellers what new products to carry. Took the while markets french pmi positively, german numbers have capped appetite for risk. Todaycounts are due later and may provide insight on the discussion around the design of future Monetary Policy easing. Julian chatting where the still with us. Limit of still at the what the ecb can do and met them lagarde will have to push for madame lagarde will have to push for fiscal spending or come up with Something Different . Julian we are close to the limit and whether we can come up she can come up with a solution, we will see. One window of opportunity is the concept of a green bond in germany. If they were to declare an extraordinary event, they could get support and launch a green bond which would give them a little bit of power to give back to the systems. Francine let me bring up my chart, if you look at pmi services u. S. , germany, and france, they are slowing. Is that the only positive thing in europe . Julian todays numbers were not that unexpected. A slight improvement in german manufacturing and france was holding up ok, but at the end of the day, germany is probably going to technically be in obviously itq3 and will require something other than an ecb stimulus to get the economy going. It will be helpful for germany if the chineseu. S. Tariff war eased slightly. Scarlet something other than ecb stimulus, there is u. S. Or china fiscal stimulus. Overallny and europe more sensitive to stimulus from europe or china . The u. S. Or china . Julian europe does not want a tariff war between the u. S. And europe, especially if it hits autos further. It will be helpful for germany if the chinese were to put more fiscal stimulus into the economy. Obviously would like to get stimulus into Consumer Products and services, and probably not into the state industries. Scarlet as we await all of that, i want to go back to the ecb because one thing we have been hearing consistently is the talking up of expectations of stimulus. It has clearly been laying the groundwork. Beforen be accomplished the september 12 meeting . Does the rhetoric need to get convincing, more maybe a variation of Mario Draghis whatever it takes speech, or do they have to to save do they have to save their firepower until they come out with stimulus . Julian you have one president leaving and one coming, both recognized in different ways as being market friendly. It is whether mario draghi wants to go out with a bang or hand the baton to lagarde and give her scope to do more next year, that discussion will be interesting. My suspicion is he will want to go out on the front foot. Francine what is europes biggest concern, Monetary Policy, negative rates, or lack of structural reform . Julian i think all three. If i was to worry most, i would worry about negative rates because it looks to be very hard time, and in a long if you are a hedge fund and insurance company, you are lending to the government and getting a negative return. Francine Julian Chillingworth, thank you so much. Coming up, we speak with Robert Hormats, kissinger vice chair. We will ask him about g7 and the lack of independence noise coming from President Trump. From the couldnt be prouders to the wait did we just winners. Everyone uses their phone differently. Thats why Xfinity Mobile lets you design your own data. Now you can share it between lines. Mix with unlimited, and switch it up at anytime so you only pay for what you need. Its a different kind of Wireless Network designed to save you money. Save up to 400 a year on your wireless bill. Plus get 250 back when you preorder a new samsung note. Click, call or visit a store today. Francine off to the mountains, fomc meant minutes side of midcycle adjustment. It is all about jay powells speech tomorrow. Investors look for stimulus clues from the ecb account. German manufacturing remains in contraction. Hong kong faces an earnings recession not seen the financial crisis. This is bloomberg surveillance. Folks on what jay powell will do, that could move the havens in treasuries. Scarlet it is late august and volume is thin, especially before jay powell begins speaking and g7 were leaders will be meeting and perhaps buffing each other. There will be interesting photo ops. Francine lets get straight to the bloomberg first word news. Viviana the Federal Reserves reasons for cutting Interest Rates in july support another move soon. Policymakers saw the move as insurance against the trade war and slow inflation. Futures traders are betting on another cut next month. Another signal europes largest economy is slowing down, journey german manufacturing shrinking for the eighth month in a row. Orders fell. Jobs growth in the Service Sector is still strong. Italy, the president is beginning highstakes talks to end the political crisis, meeting with political leaders to create a viable governing coalition. Toy he has the power nominate a new leader. In brazil rainforest burning at a record rate according to data from the National Institute of space research. The flames are astonishing. 2019, there was an 84 increase in fires. The president says nongovernment organizations could be setting fires to discredit him but offers no evidence. Global news 24 hours a day, on air and tictoc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. I am viviana hurtado. This is bloomberg. Scarlet looking at futures that have lost momentum, pointing to a slightly lower open after the gainedw, and nasdaq all on better than expected earnings , showcasing how strong the u. S. Consumer is. Year r the u. S. 10 1. 58 for the u. S. 10 year. The euro has given up its earlier gain given betterthanexpected pmi numbers from france and germany. Francine gold was dipping a touch and treasuries edging higher. The market is moving sideways but we see weakness in european stocks because people want to know how jay powell will play it tomorrow. European sovereign bonds are fluctuating after the Regional Manufacturing data. At focus is on eurodollar 1. 1081. Scarlet people keep talking about the recession possibility and in the u. S. , the rise odds of recession are rising. This chart goes back to 1960. Whenever the index tops 30 indicating odds are above 30 , recession follows. I look at this and see there has been an awfully long gap since the last recession, one reason people keep talking about the prospect. There is an anticipation because it is time for one, people are saying. Francine that is my favorite chart that we should watch on an hourly basis. Mine looks at the european economy, and given there are so many concerns about German Companies signaling this recession after we saw manufacturing demand, the bright spot in europe is services. Pmice and germany, services not as bad as a short time ago. One of the bright spots this complicated european economy. Scarlet in the u. S. , it is day one of the Federal Reserve symposium in jackson hole, wyoming. Expectations for further Interest Rate cuts are little changed after the roast recent minutes show the cut in july was insurance against headwinds from the trade war in july china. Do you think equity and bond markets are in sync when it comes to what to expect from jackson hole . Dana they are probably looking for a dovish statement. Our expectation is the fed will go one more time and it is done, but markets are pricing in more easing. Scarlet when we talk about jackson hole, keeping in mind the president ial tweet and what it does for the u. S. Dollar, because the president is convinced we need a weaker dollar for manufacturing to recover and gdp to get to 4 . Robert it used to be said the federal Bank Federal Bank fed was the central bank for the rest of the world. It is having to respond to what is going on in the rest of the world, and one thing going on is negative Interest Rates and a number of countries, and currencies that are depreciating visavis the dollar. That puts the fed in a position where the gap in Interest Rates abroad and here has become larger, and the higher dollar is seen as, by a lot of companies, as being negative for their growth for the overall economy. The trade war, which is an external event for the fed, the fed is having to react not just to the trade war but all the uncertainties it creates. It is having to react to a lot of things traditionally it has not had to focus on as directly as it now has to. Francine if the Federal Reserve were to be the central bank to the world, and that is debatable , what it be much more dovish than it currently is . The the challenge is that fed is looking at a number of areas. The domestic economy, growth, market,n, the labor inflation has been consistently undershooting. The fed potentially could be more dovish. They are looking at weaker growth as a function of slowing Growth Growth and weaker in europe, as well as the trade war. The fed has to think about the u. S. Economy in its decisionmaking. To only if it were focus on the u. S. Economy, what it be more hawkish . Dana potentially, because two out of three things i mentioned are doing well. It is important that powell will give a sense of, we are watching externalnd should the worsen, we are ready to act. In the i am interested intersection between what the fed and the white house are doing. The white house has a confusing economic message, because trump says everything is ok, but then says we need huge stimulus. Topeople pay less attention the tweets and comments from the white house . That is theobert problem, and the tweets change day today. Cut,ay there is a tax maybe in the payroll tax, and the next day, we have such a Strong Economy we dont need to do those things. What the president is focused on is the exchange rate. Ratests the fed to lower not just to boost the economy and the direct way that interest but visavis the dollar against major currencies. We have to focus on other things. And sos so many inputs much uncertainty from day to day. When the fed says it is datadriven, the question is what data . Affects what is going on in the u. S. And has a wider range of things to look at abroad as well as the fundamentals. Scarlet you bring up a good point about which data point should it focus on. Data point and country are you most worried about . Dana we are concerned about the Retail Sector in china because Consumer Spending is a bellwether in determining which way we will head. We are also paying attention to European Data in this sense of whether services are these start to weekend with manufacturing and with respect to jobs in the consumer. In germany, the consumer is doing fine. Business is a way for manufacturing are spending, but trade has been weak and Business Confidence has collapsed. Francine could that engender recession . Chart about a great the yield curve and how it wants recession. What if it were Company Spending that would trigger a recession . Dana depends on what kind of recession we are talking about. There is the potential you could have a weak spot, a few things that are kind of weak, but you would want to look at other metrics including the labeler market. Labor market. Aroundstill clocking in 160,000 job gains. Consumers are accelerating spending. Consumers believing there is going to be a recession and retreating in terms of their spending. Francine thank you, both stay with us. Withg up, our interview Kansas City Fed president Esther George at 7 30 a. M. New york time, 12 30 p. M. London. This is bloomberg. Francine this is bloomberg surveillance. Here is a look at what you should be watching for. Ecb accounts due today. Boris johnson reaches his next stop on his european tour, meeting Emmanuel Macron over lunch. Powell takes the stage at jackson hole. The g7 summitnd, in france which has the potential to unsettle the international order. Scarlet we are still with Dana Peterson from citi and Robert Hormats from kissinger. 1970s,the mid70s you were a sherpa at the g7 so you know what goes on in the back rooms when everyone is trying to get together and hammer out this communique. My question is the relevant today. Does it work in the age of the strongman later . How do you prevent a donald trump from hogging the spotlight and playing the spoiler role . Sherpa we are having it in france again. Scarlet full circle. Robert there was a notion among leaders they needed to Work Together. There was an oil crisis and concern of a global recession. They needed to Work Together and american leadership, you also german,trong french, and japanese leader at the time. Theyerstand it understand they had to Work Together. The u. S. Was the leader of the global system and the g7. Now you have the u. S. Which is picking fights with virtually all of those countries. Autoa, the threat of tariffs and aluminum and steel. There is a trade war with china that looms large over everything. Unless the u. S. Plays a strong leadership role in pulling countries together, this could turn out not to be a confidence or unity builder, but a source of division and growing mistrust among these countries. Macron is a good leader and he will try to lead the process, but without a strong american president committed to collective action among the g7 and others, it is hard to do. There is a fight over whether they put in antiprotectionist language in the communique. Language is symbolic but it is as important as what is behind it. If one is behind it is major divisions over the Global Trading order and the u. S. Is not the leader, this could be a divisive process. The language has to be put into Work Together. Robert and the mentality behind it. Tot how can the g7 be you . Dana if we see Cooperation Amongst the leaders and they say, we are headed for something intentionally negative, economists are talking about a potential global recession. The fed is doing the best it can but is constrained by the fact that is focused on the u. S. Economy and can only do so much for the Global Economy. We will be looking for signs of, we will do whatever it takes and potentially consider fiscal stimulus. We will try to encourage the central bank to consider Monetary Policy. Scarlet quite a wish list. Dana they Work Together. Francine i never knew you were a sherpa. Sherpas g20 in osaka, were working all night without a break for two days, subsisting of pasta with shrimp paste. At the end, they decided to do the meeting standing because that was the only way to stay awake. If there was something ugly happening like real currency wars, could the g7 come together to do applause court . Robert i just did a blog for the hale magazine on this kind of issue the hill magazine on this kind of issue. The currency war is not something we can put aside as irrelevant or impossible. The chinese have stabilized the rmb so i dont think it is imminent, but you raise an interesting point. When they did the plaza accord in 1985, there was cooperation between the United States and japan, and all the other countries. There was an understanding the dollar was too high and we had to bring the yen up. There is not that kind of consensus among these countries. You need to have china there, because they are a big player. There is so much mistrust and so much friction between the united ontes and its major allies the potential for auto tariffs and these other things i mentioned, that to get that level of cooperation is going to be very difficult to do to realign currencies. I am not sure they can do it. We need china at the table, and i dont think china is in the asd to let the rmb rise 50 the japanese were willing to do after the plaza accord. Other countries should be at the table, that having this big package deal but took ways a few blocks from dutch took place a few took place a few blocks from here will be difficult. Stabilizing rates to prevent a currency war is important, because a currency war could be more devastating than a trade war. Trade affects certain products affects crisis of all goods. Francine Robert Hormats and data peterson stay with us Dana Peterson stay with us. This is bloomberg. This is bloomberg surveillance. Little effect today from a strike by british pilots against ryanair. Flights are taking off largely as scheduled. Was before walk out the busiest travel weekend of the year. Qantas air wants to know with passengers can put up with the 20 hour flight. They will run tests from new york and london to sydney. It will carry about 40 employees, most of passengers, most of which are employees who will receive medical checks. U. S. Stocks rally on better retail earnings and after the close yesterday nordstrom came out with earnings that beat estimates. Gaining in the premarket trade 11 , reinforcing the idea that the u. S. Consumer is doing well and confidence is there in the Consumer Spending. That is the pushback against the recession fears. Francine it was interesting to speak to Peter Oppenheimer about how you need a household reverse to start seeing the specter of a recession. Slipping, u. S. Equities and european futures are down. Everyone expecting faye chow atl jay powells speech jackson hole tomorrow. European sovereign bonds are up and down after the Regional Manufacturing data disappointed. Prime minister Boris Johnson faces tough brexit talks after he faces the french president , after Angela Merkel sent him a backstop challenge. This is bloomberg. At comcast, we didnt build the nations largest gigspeed network just to make businesses run faster. We built it to help them go beyond. Because beyond risk. Welcome to the neighborhood, guys. There is reward. Beyond work and life. Who else could he be . There is the moment. Beyond technology. There is human ingenuity. Every day, comcast business is helping businesses go beyond the expected, to do the extraordinary. Take your business beyond. This is bloomberg surveillance. We will look very closely at the jay powell speech in jackson hole. Lets get straight to the bloomberg first word news. Viviana the Trump Administration is getting closer to unveiling its plan for the future of freddie mac and fannie mae. Top officials and federal agencies are reviewing the proposal that would free freddie and fannie from government control where they have been since the financial crisis. The imf executive board paving the way for its next managing director. Recommendeds lifting the age limit. She has the support of the e. U. Next month, Christine Lagarde steps down. Mexico will review the process of its effort to stop undocumented migration. The foreign minister will meet with u. S. Secretary of state. After mexico agreed to accept more asylum cases, donald trump suspended tariffs. The field of democratic president ial candidates just got smaller. Governor jay inslee dropping out, telling msnbc he determined he could not win the nomination. He was running as a moderate and was far behind in polling and fundraising. Global news 24 hours a day, on air and tictoc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. I am viviana hurtado. This is bloomberg. Francine thank you so much. Lets get the latest on brexit. Angela merkel has sent Boris Johnson a challenge to solve the irish border backstop within 30 days. She says it is up to the u. K. To put up workable alternatives to the backstop. Johnson is in paris to talk with a nouel macron as they say deal brexit is the likeliest scenario. Thing, i guess is the one that is binary. We have no deal or there is an agreement are we get something else. What is your base case . Do we know whether there could be a technological way of solving the backstop . Robert so far, they have not been able to find one. I think do not have a backstop of some sort would cause huge problems between Northern Ireland and the irish republic. The e. U. Does not want that to happen. Most british citizens do not want that to happen either, but to find a way you can do that where the pro brexiteers do not think that gives the e. U. A much greater say in the outcome of what happens in britain, because that would mean both parts of ireland would be in effect under e. U. Rules and other parts of the u. K. Would as well. Europes a lot of sway to and the final deal, and the brexiteers who are putting pressure on Boris Johnson will resist something that prevents a totally clean brexit because the irish backstop would not be a totally clean brexit. Francine what happens if we have a no deal . And cannot find a solution october 31 they are out with nothing. How difficult is it to set Monetary Policy . You may have to lower Interest Rates but then inflation rises and you have to hike Interest Rates. Dana we dont think there will be a soft brexit, that there will be a hard brexit. For the bank of england, it puts them in a tough spot. Most likely the boe would have to cut Interest Rates, maybe qed, qe, maybe somes stimulus. Our outlook for growth is to 1. 4 over 1. 1 the next few years, but that seriously is affected by a no deal brexit. Scarlet if we get this no deal brexit, it would slow the economy and complicate things for the bank of england governor. What does it do for the euro zone . And it infect the economy exacerbate the slowdown in germany and italy . Dana most likely it would. Financial markets would react negatively so we would see financial conditions worsen. There would be uncertainty with respect to, what does this mean for trade and the movement of people . We would place more downward pressure on the european economy being challenged by so many different things. Scarlet is there any reason to think there might be a breakthrough for Boris Johnson at g7 . He met with Angela Merkel today and is meeting with Emmanuel Macron. Could this be a form to make a splashy announcement . Dana anything is possible, but he has to still answer to his voters. It is unlikely he would back down. Francine what happens if he doesnt back down . Dana we would see a hard brexit and we would have to downgrade our forecast for growth, raise our forecast for inflation, and look forward to central bank easing and fiscal stimulus. Francine how do we know what Boris Johnson wants . Or dooris johnson know, we look at the people around him and his special advisor that seems to be preparing for an election . Robert dana is exactly right, the consequences of a hard brexit are very serious. Maybe when he begins to see that his options are very few and almost everything he does that leads to a hard brexit is harmful to the british economy. It also will cause disruption between britain and the rest of europe which will hurt europe, but britain even more. The notion of a trade deal with the United States, which has been held out by the brexiteers as their option, is going to be unlikely because nancy pelosi and many others are concerned about the irish backstop and dont want something that disrupts the peace in ireland, the good friday accord. Almost every option that leads to a hard brexit leads to a disruptive financial scenario and curtails their ability to make a deal with the european continent on trade. I know what he probably does not want. The question is, can he avoid that and placate the hardliners in his party . He only has a onevote geordie and Parliament Majority in parliament. Scarlet eventually there might be a hard brexit, or this thing gets kicked down the road again and again. What would be the material effect on the u. K. In Global Economy . A you might consider you continue to see outflows of people. We dont know when there will be a resolution and can no longer wait. You will continue to see businesses pull back, consumers start to worry, and you could say political upheaval where the Prime Minister promised one thing and the people are getting something else. Robert if there is an election, it may change the whole thing. If labour wins, they may be able to negotiate in a more effective way than Boris Johnson, who is not well loved on the continent. Scarlet and we go back to the drawing board again. Coming up, we go live to jackson hole. Do not miss our interviews with a whole host of fed president s. Ather george this afternoon 12 30. Tomorrow, a full lineup, all here on bloomberg. Francine this is bloomberg surveillance. Time for our single best chart. We are back with Dana Peterson and Robert Hormats. This one is looking at inflation, the breakevens in the and if the inflation keeps going down, what does it mean for the fed . Dana certainly, when we look at the july cut, low inflation was a reason why the fed decided to cut Interest Rates, as well as insurance looking at the Global Environment 12 to 18 months from now. The fed will be paying attention to these breakevens and also Inflation Expectations among consumers. They have said that the university of michigans expectations measure has been little changed from bargainbasement levels. The fed will be looking to see that these transitory factors fade and we will approach the 2 level within two years. Francine what if inflation is brought on by trade concerns and technology, and we are dealing potentially war for five to 10 years and technology will have an impact . Run, we willshort see upward inflation pressures from the trade war. If the u. S. Imposes tariffs on the remainder of chinese goods in september with the First Tranche and the second in december, over the longer term see structural factors weighing on inflation. Technological innovation is placing downward pressure on inflation. Changing Consumption Patterns where young people are looking more for bargains and deals and not interested in paying higher prices, i think the fed will have to Pay Attention to different Inflation Expectations. Certainly, inflation will be something the fed will be paying close attention to. Scarlet does the fed look at inflation differently than u. S. Consumers . Anecdotally, it is hard to find things that are cheaper i dont see signs of deflation, i guess im saying. The dallas fed one year pc inflation, there is a clear and dutch uptrend. Uptrend. There seems to be a disconnect between what the fed is fixated on, pce, and what people are experiencing. Dana there will always be a disconnect between what academics are looking at and people feel on the ground. On the ground, the consensus is that people still like to see low prices. They like to go to their favorite store and see sales and they are not expecting to see upward pressures. If you are a business stuck between a rock and a hard place, exposed to the Global Economy, you are feeling the pinch of higher prices but do not necessarily want to pass that to consumers. It is important for the fed to look at the number of measures, keep their ears to the ground in terms of what the consumers are saying, and the hard data which are these inflation print. Deal is how big a inflation for your clients when you talk to them, when you discuss the outlook for the Global Economy and various challenges to navigate . Robert it doesnt play much of a role in itself numerically, but the interesting thing about inflation that is supported by or stimulated by higher tariffs, as that while it does raise prices, either prices because you are taxing consumer goods directly or taxing intermediate goods and the producer has to incorporate those taxes into the price it passes on, the fact is it is a tax. In a way you get inflationary pressures but in a way you get a tax increase on the average citizen, which slows down growth. The fed sees higher Inflation Numbers but sees a tax drag on potential growth. This is the conundrum or one of the conundrums the fed has to deal with. Francine if you follow that europe, and bring it to we had Philip Hildebrand of blackrock coming on after paper. Stanley fischer was one of the cowriters saying in europe, the only way to get out of this rut is to give cash to the citizens. How crazy would that be . Dana these days, almost nothing seems crazy but our expectations for inflation in europe are pretty weak. We are looking at inflation averaging 1. 3 and 1. 4 in germany. If you give consumers cash, will they save it or spend it . A lot has to do with the outlook. If they are worried about the outlook for their country or region, they will save that cash, invest, pay down debt you have to have the proper general sense of what the economy is doing. Scarlet Dana Peterson, thank you so much for joining us today. Hong kong faces an earnings recession not seen in decades. Businesses are warning that street protests are dampening demand. This is bloomberg. Viviana this is bloomberg surveillance. Hsbc has broken that silence on the protests in hong kong, calling for a peaceful solution to political differences. The first global banks to publicly address the crisis. It derives more than half its tax profit from hong kong. Hong kong poised for its worst quarter since 2017. Analysts are slashing process profit forecasts for this year and operating income is expected to fall 19 . Protests have pressured the slowing economy. Scarlet we will stay with hong kong and the tensions, because Robert Hormats is still with us. Beijings playbook seems to be forcing companies that want to china and stay in business, to comply with its rules and worldview, which is the protesters are china and stn terrorists aided by black hands from the west, notably the u. S. I think beijing understands they would like to get this resolved without having to intervene in hong kong. I dont think they really want to do this. I think they would like to see thatresolved through means dont engage the Chinese Military or Police Action or anything else. They are trying to use what leverage they have got in that direction, and they obviously have a lot of leverage and influence. The corporate influence is one part of that. If the end goal is to avoid intervention, they probably will use as many as they can to influence hong kong. Companies,fluencing what about local tycoons who have begun speaking out and urging a peaceful resolution . We are talking about putting out ads in the paper. Will china target them more directly . Robert it is hard to say at this point, because they have had over a long time good relations with the mainland. Scarlet they have cultivated those. Robert china values hong kong from an economic point of view. A lot of the companies are intermediaries between hong kong and trade with the mainland. They dont want to interrupt these companies in these Companies Want to keep their relationships with beijing in good shape, but they also want to make sure they are still credible in the hong kong environment. My guess is they are urging caution on both sides of the equation. Francine what does it mean for how the u. S. Should treat hong kong . Mitch mcconnell writing an opinion piece warning china and President Trump has gotten involved. Should they stay out . Robert if the United States looks like it is too involved, that adds more tension to an already very fraught environment between the two countries. , some american. Officials have gotten more and more engaged in the process. There is a way of doing this which indicates america has some interest in the outcome, in a peaceful outcome, but without getting too involved in getting to the point where it looks like in beijing, interfering and something which would make beijing even more suspicious of the United States and make it more difficult to resolve some of these issues going down the road. We tend to forget they are having the seventh anniversary 70th anniversary of the founding of the peoples republic, and there are strong nationalistic feelings in china. Isit looks like the u. S. Doing things that intensifies thee, it does not improve ability of the United States to play a constructive role in the process. Francine how do you think this ends . Does it end peacefully . Robert it is very hard to predict, because it is very uncertain. I dont think the chinese want to move their police or troops or anyone else into hong kong. They are ready have 5000 or 6000 pla people there, who have mostly stayed in their barracks. I dont think they want to play a bigger role. They are putting pressure in hong kong to resolve this. We may or may not agree with the kind of pressures they are putting on, but the last thing they want at this point is to really take a position of going in with additional people. That is not good for them and at is not good for hong kong, and they want a vital hong kong and hong kong wants to maintain a Good Relationship with them. Francine thank you so much, Robert Hormats. Picturesoking at live of the courtyard in paris where Emmanuel Macron will soon meet with u. K. Prime minister Boris Johnson. This is bloomberg. Alix recession signs for germany. Factory orders fall, and Business Sentiment tanks. Recession clouds build. The fed disagrees on rate cuts. Claims of data dependence talks of the economy as the curve flirts in version. Investors wait for the main event in jackson hole. We speak to Esther George, Kansas City Fed president. Welcome to bloomberg daybreak on this thursday, august 22. Im alix steel. David westin is off in italy, so awa will be joining me for the hour. Luke its got to be great to wake up as a traitor and not be artillery shelled through bloomberg push notifications and see the s p already down. To help with risk appetite