Transcripts For BLOOMBERG Bloomberg Daybreak Americas 20170320

Down 1 10 of 1 on the s p 500. The euro is firmer. 250 on thestable at 10 year. Alix 100 Day Moving Average is down by 1 1 10 of 1 . Oil continuing its down slide, now off by only 1 , nine days out of the last 11. What a losing streak . Deutsche bank will issue a near 700 million new shares in an effort to raise 800 billion euros in capital. They will boost revenue after spending almost two years navigating legal protein cutting back risks. With us now is michael moore, finance reporter. Walk us through what we have. Weve got the pricing on the capital raise. It was in line with what most people were expecting, a 45 discount. Deutsche put out their annual report. Most of it is backwards looking into 2016 but they did have a 2017 outlook in the key take away their was the revenue being broadly flat. It is a negative given how bullish they were on the start of the year in trading. Jon it is an 8 billion euros share sale. But it has been offered at a deep discount of 35 . Banks typically offer a deep discount but 35 , is that big . It is on the bigger side. And it is notdeal the first time they have had to come to the markets to boost their capital. I think they wanted to attract some interest. They have some of the bigger shareholders on board. Jon great to have you with us from london. I am excited to continue the conversation. We are joined by chris wheeler, bank analyst. Thank you. Is that it for deutsche . Are the rates enough . I suppose we will say never say never. He has preempted all of the concerns about capital as well as how to build it in terminally desk internally. He has come up with the Biggest Discount since 2010 and he will be hoping now that this act as a platform for growth, not a more defensive issue to deal with. A lot of litigations have been played out. Is a 35 discount enough to move buyers compared with what they would have had for unicredit . 35 is common in deep discounts. It means the deal is done. It means an existing shareholder will take the shares. Have gotten and underlining case. That will get a reward to some of its peers. Jon lets talk about how they can use this money to make a bank pull through. About 23. 7ree raised billion euros. That is almost disappearing based on where the market cap is currently. How does this money get used and how does the bank become profitable again . You are right on the past issues. The one used back in 2010 was the final acquisition of the postbank which has not been the most successful transaction. But what you want to do now is absorb another 2 billion costs which youre going to have to take. You also want to be a position to get the business working again, particularly in the capital markets. We have had some robust fixed income markets. This will be the third strong quarter. We are seeing an income Equity Capital market. It will see the investment banks start to see returns move up to more respect the levels. Alix but on the flipside, 2017 revenue is going to remain flat. They also cited climate flows and equities are sluggish. Is this what we are going to have to reprice . On the equity side, most of the banks are actually having a good quarter last year. Uped income is going to take all of the big banks, be it jpmorgan goldmans. I think we have to face the fact that butcher has a Loyal Customer base. With all its problems it sits in the biddle the middle of the biggest economy in europe. Its name is important in germany. The key is they are going to have to rebuild around the edges. They lost some of the incremental business. Jon lets talk a little bit more about the outlook. The bank says revenues are probably flat this year. Talk to me about how important it is for a bank by germany to start paying a dividend . I am old enough to remember in the 1980s germany barely had a neck we market all. They were bond investors. When the equity market started to expand in the 90s, investors wanted a return in terms of dividends. In germany, in particular, it is vitally important. I think john sees that. It will likely be seen very quickly. Alix that is part of it. You also have to retain talent and keep the talent and build confidence for the shareholders. With this rushing out in terms of pay and layouts. John has been really outspoken in a positive way about the need for loyalty and the need for people to understand why they are actually working with Deutsche Bank. But we all know that Investment Bankers are going mobile. This time, when bonuses are being paid, with some of the u. S. Banks, they have a situation where they are going to be coming in. Jon if you work at Deutsche Bank right now, the bonus for last year with the smallest since 2009 and an analyst who knows this bank well and knows european lenders well as well, would you be able to tell the employees that the worst is over for them on the compensation side . I think i probably could. The problem is, having worked in Investment Banking for 25 or more years, you see the investment banks are skeptical of these kinds of comments. Most are smart enough to look at what has john done. He is making this bank change and he is making one that is much better positioned. That has got to be good for me. Alix wait for cash, youre not going to get it tomorrow. They want to get the equity tier one ratio above 31 . What do they have to do to sustainably preserve that . Does that inhibit their ability to grow . One of the interesting aspects of the postbanks sale or the cancellation of the postbanks sale was it was probably going to hurt their capital. I think that is now out of the way. If they can actually make some money this year which is what they are hoping to do then with a bit of luck and a bit of good security and weighted assets, they could boost that by the end of the year. Obviously, they are hoping they could cover the dividends in the state and have money to invest in the business. Banking is moving at a dramatically fast pace. Particularly around a lot of inflating areas. Jon i think if you speak to many investors and analysts around Deutsche Bank, the chief good job has done a last year navigating these essential risks. What he still faces is a profitability crisis. For you, hyperion how long John Cryan John Cryan have . He is going to have to really deliver in this year on actually not losing money and he is going to have to start to show when he goes into next year, the 10 return on tangible equities. And if he cant show that, then things start to be very difficult for him. Hes got another 12 months before it starts to build but i hope he is going to be able to show a pretty clear path to where he wants to be. Alix fair enough. Great to see you. Thanks realtime, chris wheeler. Coming up, and Neel Kashkari will be with us live at 9 00 a. M. Eastern. When asked. Jon heres the markets this morning, two hours and 20 minutes away from the cash open in new york. Futures a little bit softer, and in frankfurt off by a third with Deutsche Bank stock up. You are watching bloomberg. This is bloomberg daybreak, time for other stories making headlines at this hour. The president of uber is quitting after less than a year. Jeff jones came to the company after uber has been hit by a number of controversies including allegations of Sexual Harassment and a toxic work culture. The canadian owner of a Luxury Retail chain has tens of thousands of customers. Data has now been taken down. Information that was exposed. Ubs is in a trial in attacks from case in france. The bank says it is pessimistic about reaching a settlement. Ubs has posted a 1. 2 billion bond to cover any potential penalties. Im emma chandra. This is bloomberg. Alix finance chiefs of the Worlds Largest economies met over the weekend at the g20 summit. Jointoup said in a statement we are working to strengthen the contribution of trade to our economies. We will strive to reduce excessive global imbalances and. Uce and inequality the phrase missing, the promised to avoid all forms of protectionism which was in the Statement Last year. Frances finance minister commented on the omission. There is no change in the g20 position. It is only because the g20 wanted to block the mission because there is no it wasnt mentioned. Cole, Research Head and chief economist joining us in frank were desperate for it. It seems like what the french finance minister was saying was it is the u. S. Versus anybody else. How did the u. S. Get the word protectionism out of the communique . Where was the leverage . It confirms that we have reached peak globalization. When we look for the growth outlook, it is an important reminder that when we are looking for growth and looking at this Economic Cycle , it will go without this enormous boost of organization. New is not really something for the confirmation we have seen in the past few years. World trade is not growing much faster than global gdp. That is important to acknowledge for the gdp forecasts. Dynamics, whenh it comes to protection, i think what we need to prepare for is really the only selective protectionism we have been over in the past few years in terms fair. De being not we have seen all sorts of protectionist measures. They definitely are having headwind. Alix do you feel that markets have read rated to that idea . That we need lower gdp and peak globalization . Markets dont think have rewritten into that but nor do i think they should. I think there has been a lot of attention placed on the dropping of that sentence on that pledge, on not taking protectionist measures. One can also see the glass halffull. It is the secretary of the treasury engaged in the g20. Very actively at a time when other signals from the new u. S. Administration were pointing to less interest in global cooperation. Halffull story as well. Protectionism is nothing new. Despite the pledge, as you can see in every report from the wto, hundreds of protectionist measures have been taken by g20 members. What matters the most is not what they say, it is what they actually do. Here, i am more confident where we are in a Global Inflationary environment. I think what came out of that meeting forcefully is that everybody is interested in continuing to trade together. Everybody is interested in making sure that this benefits growth domestically as well as globally. We are already seeing an income pickup in global trade. Jon you nailed it. For many people some of the statements were incredible he halloween the first place. Maybe this is a reality check for the g20. Communique,he g20 we will not target our Exchange Rates for competitive purposes. How hollow is that statement . That still exists, it doesnt mean anyone actually follows it, does it . I cant think of any country right now using their currency. For that purpose. Please. Id, you all right. In terms of currency and competitive currency devaluations, that is still there. We are peaking at globalization. And this applies also to. Ompetitive valuations we have more protectionism and also competitive devaluation. I think the general understanding that some currencies need to move towards for a weaker level include the japanese yen and the euro and to a moreontribution coherent growth picture globally. We have achieved that. It started three years ago. It was a growth sector where there were more things. The European Union, they are growing much more robust. Japan, it was coming. On the flipside, we have commerzbank saying we are closer to a currency war than we have been in a long time. Although the g20 communique. Why do you not agree . Dont see any evidence of any country, any g20 country at this time using their currency for competitive purposes. The one country that has been talking aggressively about narrowing their trade deficit is the United States. As far as the others go, the main concern you here on markets is about the dollar going to hide. Now it is too low. As forest china is going, they have been intervening to limit the extent of the depreciation of the currency. Europe, perhaps the euro has been on the weak side but that is a lot of political uncertainty. Nobody is manipulating anything. Lets say dollaryen pushes 100. We could have a wager that they could stop making comments about japans ability to withstand the fx market. That would happen again and again and are we seriously sitting here and saying that japan, over the last 10 years has not manipulated its currency for competitive reasons . If you look at the g20 communique, it also states that there is a recognition that this movement is not good for growth and that people pledge to avoid that as well. The question of recognizing what and we havent been in that territory we talked about the last 10 years but the question is what is going to happen going forward. Is there a risk of countries using their currency for domestic purposes . At this stage, it has moved into a global trade war. But right now, it is not where we are. Jon you are both sticking with us. Coming up on this program, 9 00 a. M. Eastern time, Neel Kashkari , the new minneapolis fed president. Dont miss that conversation. From new york, you are watching bloomberg. China also front and center when it comes to u. S. Chinese relations. Rex tillerson had a 24 hour trip to beijing to smooth relationships with them. With us from blackrock and julius baer. What strikes me is that we have a more confrontational aspect on a trade policy and a political policy. But we are changing the story when it comes to china. Why is that . China, the u. S. Is surprisingly careful when it comes to a confrontation. There has been a tradition of confrontation because china is the obvious rising power and we have this lingering conflict in the u. S. And china. But so far on trade policy, i think the u. S. Has understood, when it comes to the currency, it wasnt focused very much for china as a year and see a currency minute later. In support of the interests of it is lessight now of a conflict than we have seen between europe and the u. S. If alix you are talking about currency minute relation on the campaign trail, china was front and center. Note of the election has happened it is about germany and europe. Does this mean there is not going to be a lot of trade shift between china and the u. S. Or if it is is that the margin . I dont know about trade shift. I think china is the second largest economy in the world and the u. S. Government and trade authorities, it is in their best interest to keep a small access as possible to it. Alix but, if they really wanted issues,about nontariff china is a place to do that. We are not really hearing that had of rhetoric right now. . You mean about the currency i would disagree with you. I think the issue is currency valuation right now. It is hard to find a smoking gun. It makes sense for the government to push market access. If that goes nowhere it to get to a more confrontational stage. But for the Global Economy is very constructive that it seems to be trying. Is there an opportunity here for countries elsewhere in the European Union, the likes of germany, to actually gravitate towards a stronger relationship with the likes of china and that the United States is making somewhat of a pivot away . That is indeed the case. For the European Union, china is the less harmonic relationship between the u. S. And europe. It is an opportunity to shift away. China is the second biggest economy of the world. It is natural to have strong ties and china is open to that. The European Union should use those opportunities. Jon thank you very much. Up, a conversation with the chief of the Minneapolis Federal reserve. We give you the preview coming up next. From new york, youre watching bloomberg. Careful joe, theyve got you outnumbered. The dinosaurs extinction. Dont listen to them. Not appropriate. Now im mashing these potatoes with my stick of butter. Why dont you sit over here. Something for everyone is awesome. Find your awesome with the Xfinity Stream app. More to stream to every screen. From new york city, i am Jonathan Ferro. This is bloomberg. , down. 1 ,king off negative six points on the dow. Day losinga four streak, the euro to a third week of gains, pushing higher. Offer onury market on the margin up one basis point. That is you up to speed on the cross asset check. Lets say good morning to emma chandra. The House Intelligence Committee will question james comey today about President Trumps claims that barack Obama Wiretapped him during the campaign. He will testify about russias meddling in the election as well. Germany has rebuffed President Trumps allegation that it owes a large amount of money to nato. Other u. S. Leaders have complained in the past that most nations, including germany, dont spend the 2 of their budget on defense. Scotlands leaders says it is not reasonable to make the scottish people wait until 2021 for another vote. Nicola sturgeon says two years would be a fair compromise. Global news 24 hours a day powered by more than 2600 journalists and analysts in more than 120 countries. This is bloomberg. I am emma chandra. Jonathan thank you. Breaking news from the u. K. And brexit negotiations, to trigger toxit on march 29, according Prime Minister theresa may spokesperson, so put that in your diary. I want to bring in our guest from blackrock and david, still with us. David, brexit to begin next week, sterling negative drivers, will this be one . I agree. Date that negotiations are starting is well discounted in sterling. The only thing that can drive inrling lower is a reaction terms of money flows into the u. K. We have very strong dark investment flows into the u. K. Financing a huge current account deficit. We think this will happen later in the negotiation process and the renewed weakness for the pound. So far all this talk about strategygotiations or is priced into the level of the currency for now. Have a rather neutral outlook in the shorter term, negative longerterm. The vote, aead of market selloff, i low probability event for negative outcome. Do you see that happening eventually . In the u. K. , no, i would agree with david. For now, things are on a set course, the risks have been priced into the currency and the triggering of article 50 should bring some additional news. Alix to broaden it out with moves aspolitical well, the potential of cute he, will they raise rates from the 40 basis points before the end tv. Here is what he had to say. Qe will endsay that of the same time Interest Rates are being maintained at their level. Between thesey components is very important. It is a package really. It is not a single measure one by one that we discussed. Answer,very diplomatic but nonetheless, you feel the ecb is less about targeting inflation versus a retreat from extraordinary accommodation . Yes, thats true. They want to get away from these extraordinary measures. This is the negative Interest Rates and guidance, and so far they see some room to withdraw from that. There is a strong commitment by taperb to avoid the tantrum of 2013. So to avoid any strong reaction, becausea difficult task markets are not used to the policy measures. This has to be carefully managed , and we expect the ecb to manage that carefully. When tapering triggers a Market Reaction, we would expect them to backpedal. Jonathan this opening paragraph of the ecb statement, they decided to keep the key Interest Rates unchanged and expect them to remain at present or lower levels and well past the horizon of our net asset purchases. Promise to keep rates low and unchanged be on the end of qe when the depot rate is 40 basis points . Is that a prudent approach to Monetary Policy . Of course there will be a difference or the ecb will try to have a difference between the deposit rate, it should be lower than the main financing rate. We would not expect significant changes in the main refinancing rate for a long period. Ecb will bring. Orward the negative rates they would do so as long as they dont trigger Market Reaction on the euro or Government Bond yields. Alix a tapering from 40 basis points to 20 doesnt feel quite right. If we get that incremental rate hike, does that mean we will see volatility pickup . It depends on when and how they do it. Blunt andave been awkward to change this ford guidance without any preparation. Have seen several members dropped trial balloons and indicate this is a debate they are having. They have committed to a certain path through the end of the year. They will not do anything brush before that. We know we think of the different measures as a package and want to remove the extraordinary accommodation in a gradual manner, and perhaps they all the rate removal first, that we know, but if we prepare well, its possible to have a smooth market adjustment to the terms of that move. Itx i was asking because seemed like the market was much more sensitive to when we got to negative rates, the implication being if you are hiking and in negative rates, that will be more instability and the market. Except the environment is very different. The financing conditions are easier. The access to various banks from the euro system to liquidity is less. Thefragmentation of european Banking System is less, so arguably the market would be better positioned to swallow that move, but not if they did it tomorrow or at the next meeting. This is something has to be prepared carefully. Jonathan david, lets pretend and we are at the current year eurolevel. The ecb, what they may or may not do with Interest Rates. Now pretend there are no elections. Where is the euro . It would be higher sentiment driven, but the difference between the u. S. And europe is not only a elections are what the Central Banks are doing, it is the cycle which is different, and the single best indicator is wage growth. In the u. S. , you have wage growth of 3 plus or higher so you have secondary effects from the inflationary backdrop. Europe is 1 or 1. 5 and it is not moving up, so you still have slack in this economy, and this is the real difference between europe and the u. S. , and it is reflected in the exchange rate, probably not so much as it is not given the sentiment factors , so 110 wouldro be the figure at most without these headwinds we have seen from sentiment and politics. Alix the dollar, the fed hike and the dollar falls coming and you explain how this make sense . Falls, and can you explain how this make sense . A lot of people are not pricing in fully hiking rates in the u. S. Given the strong economy. The best explanation is probably the adjustment to a rate hike in march has been risky. It happened in two weeks, so some overshooting had been there , and expectations of 50 basis points had not materialize, so a negative shortterm reaction from the dollar. We expect this to be a shortterm reaction and see good support for the dollar going for given the favorable rate differential. Jonathan without be validated by the fed speak this week, including janet yellen, are they going to validate what you are talking about currently . I think they will be rather careful on that. In terms of guidance, i think they would look into the economic figures. Be on the cautious side. This has been a common denominator, and beyond the likeatism in their tone, the march meeting, only two weeks was enough to propel the market. Alix so they still have time. Thank you for joining us. We are back 9 00, to hearing about all the fed speak. You can parse it with his for 20 minutes at 9 00. This is bloomberg. This is bloomberg daybreak. This is the Hewlett Packard enterprise greenroom. Coming up, Neel Kashkari at 9 00 a. M. From new york city, this is bloomberg daybreak. The u. K. Will begin proceedings xit the European Union on march 29. Since october has been to trigger brexit by the end of q1. We now have a date. Officialle 50, the notification to invoke that article, that is the official trigger and will happen by letter. There you go. Thats according to the spokesperson. Maybe someone else might do the tweeting, maybe. Lets get across to him a chandra. Bristolmyers squibb has extended its partnership in a deal worth up to 8 billion. Bristolmyers will have exclusive rights to six cancer and noncancer treatments. The two companies have collaborated on drugs, none of which have started trial yet. Hansteenne venture buys m properties. According to people with knowledge of the plans, apple bidembarked on an ambitious to bring augmented reality to the masses. The products being considered, connectedectacles wirelessly to the iphone. Markets come on falling as u. S. Drilling grew stronger, adding 14 oil rigs last week, 106 more so far this year. The International Energy Agency Executive spoke about the prospect for a boom in shale production. We see u. S. Oil and gas markets, we are going to seat we believe a major boom of u. S. Oil production, and more importantly , u. S. Shale production. Alix joining us now is stewart wallace. Does any opec cut or any extension dent this recovery . I think what the market is looking at now is to what extent opec and nonopec are prepared to carry this deal through in may. When they went into the deal, they said we will do it six months and that will be enough to rebalance reserves. That has not happened. There is a difference between compliance and barrels on the water. The net effect is that the supply to the Global Market is not dropping as much as expected. Production and inventories continue to rise in the u. S. That is not a great scenario for opec and nonopec going into this meeting in may. Alix if you are a u. S. Producer, you hedge this production. Aay resources is 100 head this year. Can inventories fall fast enough to offset that from u. S. Shale producers . Months,e next couple of we will see inventories in the producing countries themselves. Saudi arabia increase production in genuine we think to refill domestic inventories that had started to fall. That gets replicated around the world will tell us about the direction we need to go, but if you look at the speculative elements of this market, there was a big sea change in sentiment. The longs came off, but the shorts did not budge. We saw a huge jump in the shorts. My the most onlt record, and that is your about a uturn in sentiment. Alix the question is when does that rebalance happen . We have to see tightness first in the Atlantic Basin as that oil goes to asia and u. S. Oil goes to europe, where are we in that checker puzzle . We are a long way off from where one wants to be with u. S. Producers, but there is no doubt will happen. The question is when. I think that will be the second half of the year. They are pushing it down the road but still saying it will happen. Alix you can see oil below its moving averages around 48 a barrel. Thank you, stewart wallace. If you have a bloomberg terminal. Check out tv. On line graphs or interact with us. Check out tv. This is bloomberg. Alix on the campaign trail, President Trump promise to punish sanctuary cities, and shortly after his inauguration, he signed a federal order that can block funding for cities that have a lot of immigrants. The citys a lot to the u. S. Economy. New york, los angeles, chicago, houston come in philadelphia. By every measure from jobs to International Trade, the Economic Contribution of these cities far exceeds their 6 share of the u. S. Population. That was Matthew Winkler of bloomberg news. It was an interesting way to quantify the benefit of the sanctuary cities. What was your umbrella thesis . Diversity. S with we have statistics that show diversity wherever you see it is an engine for growth. Guess which places in the United States are most diverse . It happens to be the sanctuary cities. That is where we started, and just about wherever you look, the market, jobs alix lets look at jobs. Breakdown what you found out on how much the contribution was in new york. We have 6 of the population, but the nonfarm payrolls is well north of 20 for just the sanctuary cities. You are talking about orders of magnitude greater than their relative position measured by population. That is just for jobs. You see the same thing for corporations. Publicly traded corporations count for, it is closer to 20 , but not quite, of the market cap of the Biggest Companies in United States, so whether it is jobs or corporate america, the biggest part of growth in the United States is occurring in the sanctuary cities. Alix what about the importexport area . Areyork and los angeles coastal, but what about International Trade . Airports, a very big part of commerce in the United States, retail level, wholesale level. The sanctuary cities are far and beyond the norm in their clout in terms of contributing to american growth. The airports are the busiest in the sanctuary cities we have ourioned, and their Something Like 50 airports in the United States that people Pay Attention to. These are the ones that account to the biggest percentage of growth overwhelmingly, then take a look at wholesale. Last year and los angeles, the port of los angeles accounted for the biggest percentage of growth of any port in the United States. It was the only one in fact that saw a big increase when trade was slowing. Disrupted andt there was some catch up there . So itt was two years ago, had plenty of time to sort that out. It was a labor issue. Los angeles for imports and exports is far and away number one, and that is another big driver of growth. Jonathan lets look at the Financial Markets angle. If you look at the stock companiese market for that are based in century citys is in terms of weight and performance is way above anywhere else in the United States. So if you were just looking for opportunity for investment, this is where you would go. Let me give you some other data that we did not have the space to put in. Chicago for example, chicago gets talked about mostly on the political trail for crime, but in fact, chicago has probably of most diverse mix companies in its economy, Something Like 14 is the max for any one particular industry. You dont see that diversity anywhere, and its speaks to the strength of a place like chicago. Jonathan bloombergs matt winkler, thank you very much. The story is on the bloomberg. Coming up 9 00 a. M. , Neel Kashkari, minneapolis fed president , the sole dissenter at the fed voting against that 25 basis point rate hike. This,ages set like futures softer, the doubt negative five, the s p 500 almost negative three points. This is bloomberg. Jonathan the trade games begin, Global Finance chiefs of drop protectionism and the u. K. Gets set to trigger brexit. The greenback drops for a fourth straight day. Deutsche bank prices and 8 billion euro share sale and looks to a year of flat revenue. From new york city, good morning, good morning. This is bloomberg daybreak. Alongsidehan ferro alix. We are counting you down to the day. Alix will we normalize the Balance Sheet, then look at Market Reaction . Jonathan that is coming up in 60 minutes with Neel Kashkari. Futures softer this morning ahead of the market open, down. 1 . , thel get you up to speed euro firmer, treasuries on offer up a basis point. Rate sterling, the cable weaker on that news that article 50 would be triggered march 29. The vix higher, gold soft, but oil rolls over by another 1 . Began,n the trade games u. K. Set to trigger brexit on march 29 according to the Prime Ministers spokesperson, the g20 drops of pledge regarding protectionism. Matt, what do we expect the games to be once they officially start next week . This british in administration that the u. K. Chancellor, the exchequer, has even come to these meetings. Eurogroup here that does not include britain. Ecofinve to prepare for tomorrow. Previously the exchequer didnt we expect to see him or his delegates tomorrow. We plan to ask how he will respond or how the other finance ministers will respond to this letter next week. I expect we will get a lot of news out of it, so this is the right place to be. Jonathan since the vote was taken and the result given, the vote to leave the European Union, officials in europe responded with the following, they refused to negotiate until they saw article 50 triggered. What is the first question that will be asked of these individuals and how does this rollout potentially for the next two years from here . Matt one of the first questions will be britain needs to pay up. Please settle your bill before leaving the club. Havestimates for that bill been 70 billion. They were not want to pay the , but there negotiating europeans may demand that. Theresa may said she is willing to leave the Single Market in order to keep sovereignty over border and taxation policy. The question is how far away where she go. Trade is at the center of these negotiations. Following the g20 meetings when they removed the line about a resistance to protectionism, will we see a new trade paradigm pop up around the world with the u. S. Turning inward, with britain looking to be more of a tax haven . Will be issues discussed here over the months and the years. Those twocountdown to years begins and days. Matt miller, thank you very much. Joining us now is the head of global fx strategy this news was baked income and now sterling lower against the dollar. Come on, really . I think what is happening right now, there is a broadbased dollar weakness. This broadbased dollar weakness is on the back of disappointment by the fomc and the market has started recognizing that the dollar has stated overvalued levels for some time now. The unwinding of dollar longs across the board. I personally think we have seen the dollar peak and i remain bearish from here. Jonathan a massive week last week, but really because of what happened with the mpc. The negotiations will begin next week. How does that thought evil for the mpc even though politics could potentially get messy, does it spread . If politics get messy, that will have an impact on the real economy and to the degree it has an impact it will convince the mpc to revert back to a dovish stance. I think the general reaction of sterling last week was on the back of a significant widening of sterling shorts. We have seen a significant widening on the back of data at all time highs. Been extendinge their shorts against the sterling vulnerable to the slightest positive or hawkish news. Shortterm, we may see some tactical rally, but i find hardly any reason to turn bullish on sterling here. Alix scott, take a look at a broader equity perspective. What is already priced in . Now we have a date and need to get an agreement and have two years, how do you handle u. K. Assets . For me, hartline has not changed since the four this was announced. All these countries around the world would love to see their currency drop in value. Cable dropped like a rock, and believe me, they are probably pretty happy about it. Most major currencies would love to see some deterioration there. From an equity standpoint, you have to look longerterm. It, the eu, membership in the eu, at least in the 30 years i have been lowg this means you have economic growth, low productivity, high unemployment, so it makes total sense to us that britain voted for brexit. You want to get out of that kind of situation. A big trade deficit with the other 27 member nations. Those nations in my opinion will be tracking all over themselves to do trade deals with the u. K. In the long run, this will be of benefit to the u. K. , not a detriment. Jonathan everyone except germany will come back to the description of euro you just had, scott. About agree with scott europe and the benefits for the u. K. . I will take the other side of the trade actually. First of all, lets make sure that eurozone is one thing, the European Union is another thing. Of the European Union still had its own monetary , andy and fiscal policy the empirical evidence i have seen so far cooperates the message that there has been a significant improvement in Living Standards in the u. K. By joining the Single Market, by joining the European Union. As far as going forward, it is that if there is one region that has surprised to the upside, that is the eurozone. Months, thet 45 numbers are coming significantly ahead of expectations. I take the point the Unemployment Rate is higher, but the u. S. Tually compare and the eurozone, the difference and in employment rates can almost be accounted for by the difference in Participation Rates. There is a story if we broaden this out that if germany and u. S. Trade ties go south, the u. K. Moreeed than ever, so there is a chance of a softer brexit going for it and this could be the impetus for the pound to move higher. Would you think about the potential scenario playing out . You mentioned various different things. Could still move higher even if we go down a hard brexit scenario because a lot is already in the price. As far as germany needing the u. K. , my general take on this is that the u. K. Is for sure an important trading partner, but by far the most important trading partner for germany is the European Union it self, and china is growing in importance. I go back to my point ive made a number of times. I think the eurozone is more important to the u. K. Than the u. K. Is to the eurozone. Jonathan scott, here is a question for you. For the nine states, messy politics in europe, there has been limited followthrough in u. S. Markets whether it is brexit negotiations or what happens in france. Does that continue, and insulated u. S. Securities market . It does in a way. Our call is this. We were looking for the s p 500 to hit inside for the year for 2017 towards the middle portion of the year at the top end of our 20 to 302330 year and target range, we thought we would trade a bit beyond that. That is what we have done. It has come earlier than we thought, but second half head winds are fears of Wage Inflation in 2018, fears that that might be behind the curve, some of the markets played out pretty much like we thought, but we dont think we will see much more upside from where we are right now. As a matter of fact, we think will be lower at the end of the year. Jonathan we will switch things up in a moment and take it to the United States in a moment. A conversation with neel fedkari, minneapolis president joining this program. From new york city, you are watching bloomberg. , this is bloomberg daybreak other stories making headlines at this hour. I am in the chandra. There is a report that president and wilbur ross have discussed an aggressive trade agenda for the coming weeks. They will begin rolling out executive orders on trade this week. Ubs will face a trial in france. A 1. 2 billion dollar bond to cover any potential penalties. Raisehe bank clans to eight point 6 billion by selling stock at a 35 discount. Is tryinglargest bank to improve growth and shore up its finances. Shareholders will be able to buy one new share for each to shares they hold now. The bank says revenue will be change little this year. That is your Bloomberg Business flash. Alix thank you. What we are also looking at are the implications for Central Banks, the ecb and the fed. The central bank spoke out earlier in italy on qqq reduction qe reduction and a rate hike. Thatcannot say qe can in the same time Interest Rates are being maintained at the low level. Between thesey components is very important. It is a package. It is not a single measures one. Y one that we discussed alix our guests are still with us. Are we in starting to price in the potential of a tighter ecb, not only in terms of up on purchases, but in terms of rates . Sayight, firstly let me that in terms of reaching a point at which the ecb. Are a fewthink we quarters away. T matters for markets is the markets have started to sniff and ecb exit. We are starting to see at the longer end of the curve, european and german yields rising, and this is a supporting which has the euro undervalued for some time now. Alix the curve steepen more tightly than in the u. S. Are we at the point where it will be central bank convergence versus emergence . These currencies in my opinion will trade almost completely off which central. Anks will be tighter right now, if the ecb cuts earlier thanre what people thought, the currency would respond positively to that. When you are a global low level Interest Rate, that is what the currency market is sensitive to. Who will be tighter or perceived to be tighter, the ecb or the u. S. Central bank . To be honest with you the change is that the ecb might be a little bit tighter than what the fed is talking about over the next couple of years. Jonathan if we had a symmetrical tools on both policy moves, they took qe down because the inflation fear diminished, they took the depot rate to 40 with an increase in the qe package, so doesnt it make sense to take the depot rate to 20 to bring things in line with what they have done with qe . Doesnt that make sense . I have to say i have not been a big fan of negative Interest Rates, so from that perspective, i would be one of the first to start rejoicing if we started seeing a rate in europe converging towards zero. Last week didb show some communication problems. They confuse markets, but for now, we should go in line with what the governing body has put out in its statement, which means the depot rate will be at timeevels for an extended and way beyond the time that the ecb purchasing program will stop. Bank ceos are front and center. If you see and ecb tighter than the fed, is that a green light to buy european banks . What is the strategy around that . If Deutsche Bank is trying to raise capital, you know a lot of these banks probably will need to raise them capital too. We know these a tying banks are a mess. From our perspective, while i think if you bought the developed International World as a whole, we would argue there is some value there, that the appreciation between now and the year and versus the s p 500 will be better, so from that perspective, we like developed international stocks, but these banks will be very volatile and have to raise some capital and not bed be cautious and overweight european banks right now. Alix with this be the trigger for more volatility in the fx market . Inwe see a reduction negative rates, how much volatility do we see off of that . We cant just answer the question why isolating from what is happening in Global Growth. If we do see are raising more positive or negative or back to zero, as long as this is happening for the right reasons, which is an improvement and Global Growth dynamics and prospects, then i dont think this will be bad for risky assets. High volatility, potentially yes, but that is largely a the fact that we are trading at historically low levels of volatility, so there revert closer to means, but does not imply we should see a selloff in risk assets. Alix great stuff. Thank you very much. Good to see you. Coming up at 9 00 a. M. Eastern, Neel Kashkari will be joining us. He is chatty about his dissent. We will ask them about it. This is bloomberg. Jonathan from new york city, this is bloomberg daybreak. I am Jonathan Ferro. The u. K. Will trigger brexit march 29. Now is the former u. K. Ambassador to the United States. The games begin next week. The big question is whether the teams are in place. Have the team in place to begin those negotiations and accelerate them from the off . Good morning. The government would say they have everybody ready to go. Notractice because we have done any trade negotiations in particular for 3040 years ourselves because that has been membership in the European Union, we are short of people to therade negotiations, but agreements will come after the negotiations with the eu on the separation terms. So for that, the government is getting everybody and place, getting dicks in a row and brady to go. In a row. Will it be the advantage of europe from the beginning since they have the experience and the United Kingdom does not . European commission willxperts, so yes, there be people who are experienced. This is New Territory for the european side and the u. K. Side. We have never had article 50 triggered before. We have never had a negotiation on the departure of a member state. So this will be quite different for them too. The point to bear in mind is whether there will be enough technical expertise. I think they will be able to do that. Aways been beavering getting ready. There are certain things that are priorities for the brits, the European Union side. Theresa may wanted to get an agreement on the status of eu nationals and our country and british nationals and other eu countries, but the Firm Response from the european side was no negotiation until notification, so we will get into this stuff pretty quickly. The european side says there will be a large bill to be paid and some people say you have to settle that before you do anything else. The u. K. Side will say nothing is agreed until everything is agreed. My hunch is that we will get into political issues rather than get bogged down through lack of competence. Leverage will have the march 30 . The u. K. Or the eu . It depends on who you talk to her to on the u. K. Side, there have arong sense that we strong negotiating hand. The British Government feels given this is such an important export market that they were not want to be difficult on commercial terms. On the european side, they say they want to leave, so it is not entirely clear. Alix we have to leave it there. Thank you very much. This is bloomberg. Jonathan from new york city, this is bloomberg daybreak. I am Jonathan Ferro. 1 . Es softer, s p down what a difference a week makes for the treasury markets. Switch up the boards quickly. We trade at 250 on the u. S. 10 year, the euro firmer, the dollar softer. That is your up to speed on cross assets. Lets get up to speed on headlines and say good morning to emma chandra. Theresa may will begin the formal Brexit Process on march 29. A spokesperson says they want talks to start promptly. She does not intend to call an early election. In the u. S. , the House Intelligence Committee will last and director james comey today about President Trumps claims that president Obama Wiretapped him during the president ial claim. He will also testify about russias meddling in the election. The Senate Begins hearings on President Trumps nominee to the Supreme Court, neil gorsuch. Republicans are trying to get enough support for the 60 vote threshold. It has not been indicated they are willing to eliminate the threshold. Global news 24 hours a day powered by more than 2600 journalists and analysts in more than 120 countries. This is bloomberg. Alix thank you so much. Speakers this week, janet yellen rounding it out on thursday. In 30 minutes, we were hear from minneapolis fed president Neel Kashkari right here on daybreak. The markets seem to interpret the fed meeting last week as a dovish hike, but our next guest says that is the wrong way to think about it. This is awesome, guys. Thank you for coming in. A good round table. Why was that the wrong rhetoric out of the meeting last week . You have to consider expectations going into the meeting. We thought that hurdle was much too high for that, but when you look at the details of how the dots did it shipped, you can clearly conclude it was more hawkish. What is critical is how did it weft exactly, and what noticed is that it shifted from the bottom of the stack. Dovish members became less dovish, and to us that is overwhelming. Going into the meeting, there were six fed officials who sought less than three hikes for the year, and now there are only three, so it is pretty conclusive. Jonathan lets get the dots on the bloomberg. Had expect these dots to evolve . We will see continued upward creep in it. The big issue will be will they longterm dots go up . We think they will. We think some of these models have started to creep up, so the long term dots will go up, and that makes it hard to keep 10 year notes where they are right now. Nonetheless, 10 year yield a 2. 5 , that does not say a more hawkish fed. Of the day become i go back to the idea of expectations and the idea of there is probably still some growing skepticism about whether or not trump and company will oft this lofty expectation these progrowth policies. Im sure some of that is being built into where tens are at the moment. Trumpst need donald progrowth policies to have a nice year in the United States. It will be a 2. 5 year, and anything you do get from a progrowth policy perspective is icing on the cake. That could easily get you towards that 3 threshold, and is probably some skepticism in that regard. Influence do much domestic Economic Data points in the United States and Federal Reserve have on a 10 year rate still . Much more than they used to. , u. S. Le of years ago growth looked ok but risks were toward slower growth. Now we have upside risks in the u. S. , the so the focus has shifted to upside risks in the u. S. , so as a result we believe 2. 50 will be hard to hold. Jonathan that depends on whether a market buys decides this is a fed that will preemptively moved to protect the institute of upside risks. Wouldt shifts, then you expect the u. S. 10 year to remain pat. Would you disagree . I would disagree. If you look at the slope of the comparedund the u. S. To anywhere else in the globe, the u. S. Curve looks oddly flat. Some of these reasons for flat curves like structural stagnation should be more powerful outside the u. S. In these other countries than here, yet we are the flat is curve out there come a so we think we will see some bounce from that. As part of this tightening, we will eventually get to the Balance Sheet and put pressure on the back end of the curve. All the time that japanese investors will come in and buy in april because they had to sell in march. With this steepened curve in europe, that will entice investors into europe, so do we need the ecb to get more hawkish for the fed to have an impact on the curve . That is thehink case. At the end of the day, the thing investors in the United States that will have to grow more comfortable with is that there is more inflation out there than appreciated. More clear on this point. Anyone who watches headline inflation and that is how they are making a view on inflation, kick them out of your studios. Onyou are making a call headline inflation come the only thing you are making a call on is Energy Prices. We like to look at record levels of inflation and one area totally underappreciated is Core Services inflation. Thoseves home what inflation dynamics look like at in the United States, 3 at present. This is not such an esoteric idea. We think the market will have to go comfortable with the idea that there is more inflation out there. Jonathan they are responding with rates. At what point today respond with Balance Sheets . I brought the data up on the 2018, 400 billion in treasuries, how do you handle that rolloff if that is your policy when it is that heavily weighted towards the near term . That is one of the big questions. When that rolls off, the u. S. Treasury will decide how much pain they will put on the market and where to issue that extra debt. We think it will be in the bill sector. You had this money fund reform that push 1. 2 train dollars into government only money funds. There is a time of room to issue more bills here. More bills. Is down the road, it will matter down the curve, but initially a jonathan how much cooperation will be needed there . During the crisis, you had the fed buying and the extension of the average maturity debt. Will the Balance Sheet stay longterm . We think it will stay elevated for a considerable time. I think the one thing people dont realize is that the fed will have to start lying treasuries again in the not too distant future. Addressedill let mike most of this because it is his work, but the Balance Sheet will have to stay elevated and we can see the fed buying again in the next couple of years. Jonathan mike . Rule,ause of the lcr banks have to hold reserves. As the fed shrinks its Balance Sheet, it will lower the reserve stress onyou put lcr the Banking System. Depending on how that works out, which we believe will be less stress and the fed shrinks its Balance Sheet, otherwise you drive overnight and have dramatic tightening, so you dont have to shrink that far entail you stop, but huge uncertainty in this. We have never seen this before. We have no data to project this. It is a bit of a finger in the wind, including for the fed. If you have a Balance Sheet that is to . 5 trillion to four trillion dollars, does that imply you need to hike faster and more . If you get to neutral, you are how to other tools so much. One of the great ironies for the fed is they have three hikes builtin this year, but they will tell you that we have done four hikes this year because of the scaling back of the reinvestment. Again, we have written about this at great length, the models the fed are using to conclude its hikes are dated to some extent. Again, weve done a lot of work on that, but yes, there is no question the fed will think of it in terms if we are scaling back reinvest, it is worth x number of hikes. Jonathan you are sticking with us. We will talk to send dissent at the Federal Reserve and whether in matters. Neel kashkari will be joining this program, the man who voted against last weeks rate hike. From new york, you are watching bloomberg. Emma this is bloomberg daybreak. This is the hewlettpackard greenroom. Coming up, Neel Kashkari joins us. Emma this is your Bloomberg Business flash. The president of uber quitting after less than a year. Jeff jones came to the company after serving as targets chief marketing officer. Uber has been hit by a number of controversies. The tech blog recode that his buddies did not align with uber. Tim cook is betting on the next big thing, augmented reality. It overlays images, video, and games over the real world. Anle has embarked on ambitious bid to bring augmented reality to the masses. Among the products considered, digital spectacles. Of 20sia once the group to take a strong stand against protectionism. Weekend, g20 finance chiefs and dropped references to protectionism in their statement. Any direction on the Global Economy which is becoming more inward and protectionist is affecting indonesia. We still have an option in the short run. Indonesian government is forecasting the economy to grow around 6 next year. That is your Bloomberg Business flash. Alix in the markets, up 2 for oil. Last week, bloomberg spoke with the Saudi Arabian Energy Minister to talk about supply cuts and why they might need to be extended past may . It is a sign inventories are still above the fiveyear average for example. The markets are still not confident in the outlook. If we dont see companies and investors feel good about the health of the global oil industry, then we want to signal to them that we are going to do what it takes to bring the industry back to a healthy situation. Onx that will have impact how long those cuts will be extended. You can see the oecd inventories the blue line, the red line is the fiveyear average. They have a long way to go, 200 97 Million Barrels above that fiveyear average. Our guests. Ow how long does it take to draw those inventories down to the fiveyear average . Im not sure we will ever draw them down to the fiveyear average. The Saudi Oil Ministers family is living in an earlier era in which there was essentially opec eventuallypply and inventories would fall. What has happened is the market has moved on. First, there are many passive investors who, we call them speculators, if they decide oil prices are going up, they will theyre buying will encourage accumulation of inventories, so inventories go up. The second point many people are missing are that consumers hear these messages and adjust. They caught rational expectations and monetary economics. We saw it last week with the fed. Theynsumers are just, moved to bar ahead of time if they think Interest Rates are going up, and they do the same thing in the case of oil. Consumption,t oil we had 19 consecutive months from january 2015 of increases in gasoline consumption relative wethe previous month, then have seen saudi arabia talk about Higher Oil Prices, then seven consecutive months of declines. The probability of getting a run like that of heads and tails is one in 67 million. To the consumer saw what was happening and heard the message and began adjusting ahead of time. Theirou tell him insurance costs will go up, they began adjusting if they can. Demand is falling, and the minister misses this. Rationalyou buy that expectations can apply to a market like an oil market . Here is what is true. If you ask the consumer and look at any Consumer Confidence report, if you ask the consumer what is doing the driving from a confidence perspective, you would be given three options. If you think it is the s p 500 doing well, if it is gasoline prices falling or rising for that matter, or if you ask them about their Labor Market Outlook , what do you think of those three does most of the driving from a confidence perspective . It is almost always labor. If people feel good about the labor backdrop, wages, that will almost always drive confidence and do most of the driving from a spending perspective as well, so the terms are rational when it comes to the drivers of what matters for them, and it is almost always labor. Rising andtes falling can create a scenario where you get shortterm verse of spending or not, but bursts of spending or not. When we saw Energy Prices fall last year, most people thought the consumer would spend that come up at the consumer saved that. Alix to that point, what do you say about Something Like that, they actually saved that. They did not spend it. To goldmanivotal sachs is called to Higher Oil Prices comes to that consumer demand is really relevant. I understand. I buy the labor because it is what matters in terms of your budget. In what i am saying is that the Goldman Sachs call and everybody else when the looking at the oil market, they are assuming essentially that what productionr cuts in dont matter until the price appears that the pump, and the data if you begin to look at the expenditures on gasoline and so so, it is972 or changed. Consumers have become more sophisticated, and it is not surprising. We see it in the labor market and other markets, the news is much more clear. The consumers have the experience of four dollars gasoline early in this decade, they seeee labor other things, and they adjusted, but they are more sophisticated today. If you compare data from the United States versus other countries, the u. S. Is way ahead. The taxes onson is fuel are lower here. I take the point that labor clearly on Consumer Confidence and everything and Consumer Behavior is the most influential , most important and how they spend, but oil is becoming more dependent and so as you go back to the basic question, opec will never get inventories back down to the fiveyear average. Thats unless there is a major disruption. Alix thank you very much. If you missed anything from our show so far, check out tv on your terminal, watches online, click on charts and graphics come interact with us. Go to tv on your terminal. This is bloomberg. Jonathan the huge we go fed speak ahead, including janet of theand the president new york fed, mr. Bill dudley. Us now are our guests still with us. In seven minutes, we will have a conversation with Neel Kashkari. What you want to hear from him . Thunder,ng of stealing andhave a great question, maybe you dont want to let anybody know about it yet. Jonathan steal the thunder. I think you should highlight to people this key question. Idea,e talking about this dovish in the face of labor market data that shows there is not a hand of slack. That is something i would want to have a more detailed conversation on with him. Tv,nly have so much time on so if you ask him that question, he will give you a canned response. You need to drill into that. Is 3 ,ervices inflation so you are already targeting that. From our perspective, the labor market slack idea and focus not just on the broad Participation Rate but the working age population. That is what i would want to drill into. The dovishness and to what end. Jonathan my question, and i will steal my thunder, whether it is a protest vote or whether it matters and he thinks he can influence the rest of the fomc. If it is just a protest vote . In hearing hised plans for the Balance Sheet. He mentioned for his reason for dissenting on friday. If you think the bond purchases were about that signaling a fact or announcement effect, then it would make sense to put the plans in the markets and see what the reaction is like, then you could get that tightening out of the way and go for it with rate increases and may be everybody will be on the same page. Jonathan how much attention do you pay to this move against hiking rates . Does it matter to you . Matterst times dissent because you think someone might convince other members this is the right thing to do. The trouble is if you get too far away from the mainstream, you stop being a threat to convert people to your view. Jonathan we have to leave it there. Matt boesler, you are sticking with us. My thanks to our guests. Coming up next, Neel Kashkari of the Minneapolis Federal reserve joins us discuss why he voted against raising Interest Rates last week. From new york city, youre watching bloomberg. Jonathan the lone dissenter, Neel Kashkari joins bloomberg to explain why he voted against hiking Interest Rates. Begin, global ,inancial cheese drop a pledge and taking on amazon, the on time retailer has transformed the way consumers shop, but companies are ready to take it on. Good morning, good morning to our viewers worldwide. I am Jonathan Ferro alongside alix steel. Matt boesler joins us for the next 30 minutes or so. At the moment treading water in the United States after squeezing out a week of gains come a similar session in. Urope, the ftse softer the dollar softer for a fourth straight day, the euro firmer by. 1 percent. Treasuries unchanged, 2. 5 after a Federal Reserve disappointed last week. Speaking of the Federal Reserve, Neel Kashkari spoke out explaining why he cast that vote against raising Interest Rates. I am pleased to say that Neel Kashkari joins us now on bloomberg for a conversation about Monetary Policy. My first question, whether we should view this as a protest vote or you believe that you can exert some influence on the rest of the fomc . Which one is it . Its both. We all say we are data dependent, but im hoping to remind people to be data dependent. Mandate on stable prices, inflation, and the job market, maximum employment, and lets see what the data tells us. Ratest opposed to raising when the data tells us we are moving towards our dual mandate. The data is moving sideways, so im asking what is the rush to raise rates. Even governor Brandon Brainerd voted to hike Interest Rates. Degree a difference in rather than a difference in kind . It is mostly a difference in degree. I look back and say how has the Federal Reserve behaved. Every one of our Inflation Forecasts in terms of the summary of economic productions we put out, every one of our median forecast has been wrong, expecting inflation is around the corner, and being surprised when its not. I see as repeating the same mistakes over and over again, behaving 2 is the ceiling brother than a target, so im hoping to remind my colleagues to take a step back. For it, weta calls should remove accommodation. Matt if youre acting like the inflation target is a seething and not a target, west of the fomc be doing instead . Pc isour core measure around 1. 7 . It has been that way for several months. Our target is 2 . If the target is really a target, 1. 7 should not be more concerning than 2. 3 . We should be able to bounce around the 2 . If that is the truth and thats what we believe, why are we so worried and raising rates right now when the job market continues to be strong . The ecb has a 2 inflation ceiling, so that is not in a rational decision to take. But we should decide if it is a target or ceiling, but we are not behaving that way. Alix Service Inflation 3 , the mean pce hitting 2 , so do need to raise the inflation target to 3 . Neel i dont think so. I just think we need to be disciplined. There is cpi, pce, all of these adjustment measures, and you can look at monthly data, quarterly, or annual data, and on any given month, you can jump around and tell what storied you want. That means we need to be data seted taking what we think is most informative and sticking to it. Not being blind to the other day to come but not picking and choosing to tell the story we want to tell them is so i focus on 12 month year over year core pc inflation as the best guide i have as to what is happening with inflation over time. That has been creeping up ever so slowly. Inflation expectations remained very well anchored, and wages are starting to creep up, but not yet to levels we are concerned about. All this data tells me we do not have high inflation threat around the corner, and so why are we moving so quickly . I dont know. We did see an upgrade last week, so where do you see core pce at the end of this year and win do next record to reach 2 if not this year . I would be surprised if corp. Pcereaches 2 core reaches 2 this year. It looks like it will be a few years away before we hit 2 , but go back to a Risk Management perspective. We have powerful tools to deal with high inflation, so if canation surprises us, we raise rates to make sure Inflation Expectations remain anchored. We have fewer tools to boost it, so that means we should be patient and allow inflation to climb back to target and not be in a rush to raise rates. That was the argument made by governor brainard. It looks like the bias from the fomc has shifted aggressively away from that. Has that argument moved away from you come or do you think you can bring it back in . On what i cans control, so i am a voter this year, so i will vote yes on the best data i see and make arguments to my colleagues with my colleagues and have them challenge me, and i would challenge them and we will see where it comes out. I will let governor brainard speak for herself. We are data dependent, so lets be data dependent and transparent about what data we are looking at and lets let the data guide us. Jonathan lets move things on to how else you have presented your dissent. How data is normalizing the Balance Sheet . Neel this is a tough one. Entirely clear how much accommodation the Balance Sheet is providing right now to the economy. I think it was the right thing to do when the fed adopted qe once we were down to zero. Now that we are away from zero, the effect of the bounce sheet is not entirely clear, so the best thing we can do is articulate a clear plan to the absorband let the market that information before we start the rolloff, then let the rolloff go on on its own in the background. Once that starts happening come and hopefully smoothly, we can return to the federal funds rate to move with accommodation as the data provides it. We need to give the markets more information, then we can take the next steps forward. Jonathan you can see that that holdings of the Federal Reserve. These are big chunks of change that will rolloff the Balance Sheet. That withoutvigate causing an aggressive tightening of financial conditions . The first to step is announcing that plan. Just imagine a hypothetical scenario if in the middle part of the year we say it here is a detail plan of the rolloff and how quickly it will start. Lets say we started the rolloff is anuary, and this hypothetical, that would give the markets six months of advance warning to prepare for the rolloff, dealers, investors, everybody could prepare for it. We could decide to roll it all at once, or taper into it to these are policy tradeoffs we need to make, but this is the kind of information i feel like we need to give the market so they can prepare for it. The more information and advanced warning we give the markets, the less likely in terms of negative market response and weaken get back to the federal funds rate as the primary policy tool. Alix Goldman Sachs and you need to do this before 2018 because if you get new leadership on the fed it raises the risk of a faster roll down of the Balance Sheet and more instability in the markets. Do subscribe by that time line that you have to announce it before 2018 . I dont think we have to. I dont think so. I think when pragmatic people look at this, they will reach similar conclusions that we dont want to do anything to dramatic or two unexpected with the markets, but i think this is , sopic of active discussion i will do what i can to encourage my colleagues that we should move sooner rather than later and perhaps we will meet that timeline. The way you have laid this out where you pause on rate hikes before you announce the thence sheet plan and see Market Reaction before resuming, does that imply the qe if x are about the signal and announcement, and once that gets out of the way, it is a one time deal for the financial conditions . I think so. We are a little bit in uncharted water because qe is a new thing. It has not been done previously and exactly how it works its way through the economy is not entirely clear. You can get different opinions on that. There is no question the announcement effect is a big part of it, so lets it, lets get the Market Reaction and not surprise them, then if everything goes according to plan, it is an overnight Interest Rate adjustment. Alix how long does it take once you announce . When is the next type . The next quarter the next hike . Neel this announcement about the Balance Sheet is an alternative to two a federal funds rate hike, but all of those whether a Balance Sheet plan or rate hikes need to be driven by what the data is telling us, what is happening in inflation and the job market. The big surprise of the last several years is that labor force for dissipation keeps climbing up. We know that labor force petition patient will decline as the population ages and the but if you look at working age americans, we are still below where we were before the financial crisis, so that tells me and a lot of us at the labor market still has some room to improve. There are still people who want to work. That is one of the key factors i am looking at, are americans who want to work back in the job market . That is a good indicator of whether we will use up the slack , whether wages climb, and whether it is time to raise rates. Seen that Labor Participation only turnaround in the last year or two. What are you looking at is see how far that can run, or is it we will have to see how it goes as it goes . Of weit is a little bit will have to see how it goes as it goes. When do we reach maximum employment . So we look at the labor force Participation Rate for prime aged workers and the headline Unemployment Rate. Interact with each other. As the market has been creating 200,000 jobs a month or more, we would expect the headline Unemployment Rate to drop more quickly. That is because the labor force Participation Rate went up instead. Howook at those factors and they are moving and look at wages, and wages have started to move up, which is a good thing, that they are not at levels that suggests high inflation is in coming. Rateok at the unemployment and parttime workers who have given up looking, labor force wages, andon, and how these are interacting to give us signs of whether there is slack remaining. I think there is slack remaining , but we need to look at the data. Jonathan the rest of the committee is not persuaded by the argument anymore, so when you made the argument, what was the push back . Why are you finding it difficult to persuade them . Youve laid out the argument clearly, so why dont they buy it . Neel generally speaking, and i wantthis way too, people to return to normal and one has to get back to a normal Monetary Policy, and i agree with that, but that desire to return to normal has led us to make optimistic predictions about inflation around the corner, so i fear we are making one more optimistic prediction about inflation around the corner, so i am encouraging my colleagues to say lets be very data dependent, look at the data, let it guide us, as opposed to making this prediction inflation is coming. I hope it is coming and it is around the corner and my colleagues are right him a but we will see. Thethan do you share sentiment that its more important to normalize the Balance Sheet, to normalize the rates . I think so. The Balance Sheet has lots of questions. The Federal Reserve has decades of experience with Interest Rates. The Balance Sheet is a new tool, and so there are risks associated with the Balance Sheet we may not fully understand. If we can normalize the Balance Sheet to a normal level, i think people would feel comfortable about that. To usefor a bit we have it again, i think we would have more confidence we can use it in an orderly manner, so there are lots of good reasons to normalize the Balance Sheet. We need to take our time, do it right, explain what we are doing, and i think most people on the committee agree with that. Alix what is normal when it comes to the Balance Sheet . Neel that is a great question. We are not sure. It will be larger than before, but this is part of the active discussion. Grownthat the economy has and cash demands are the world has grown, the Balance Sheet will be bigger than 2006 or 2007, but we need to settle on how big that is so the markets know the ultimate destination we are getting too. I dont think we have an answer for that yet. Isx ben bernanke says it 2. 5 trillion to 4 trillion. You feel confident that is the window . Neel i need to look at the data. That feels large to me. I think we could get away with the smaller Balance Sheet than that. I read his blog on that topic and he makes some good points. I think there are policy tradeoffs to be made, and reasonable opinions could differ. Matt if you look at the dot for 27 that there are dots clustered near the bottom and not a lot of rate hikes, but 2018 and 2019, all move up significantly, so do see this clause as a 2017 story before getting back to our normal pace next year and the year after that . ,eel one of the big surprises if you look at our models and forecast, the mean reversion is the religion of the fed. We all assume in a year or two that things will revert back to the way they are supposed to be, and that is embedded in the dot plot. Im hoping in a couple of years that things will return to normal and we can get to a normal Interest Rate environment , but im hoping the data supports that. If the data does not support that, we should respond to what the data provides rather than what we are hoping to see, so im hoping to return to normal too. Jonathan im going to bring up ts on the bloomberg. That dot right there, are you in line with where the market is in terms of Interest Rate hikes next year . Neel i dont have the sheet in front of me and i cant see which are looking at, so i will not respond to the chart you are looking at. Toill come back to i want wait for the data to tell us where to go from here. To tell us where we go on inflation and what is happening in the job market, then out of that will come the appropriate level of Interest Rate hikes. 1. 60 is where the market is, so are you and line with the market rather than the median . Neel probably. I will reserve that for now. Alix what is your neutral target . Thinks itnet yellen is potential he zero, what is your neutral call . Neel a big question for us is not just whether the neutral rate where the neutral is now, which is probably zero or slightly negative today, then if you add 2 inflation on top of that, neutral rate at zero around 2 , you get to a 2 funds rate, the question is what happens over time. We are not just hoping we returned to normal. We are hoping that neutral real rate will drift back up over time. The neutral rerate as not something we control. It is driven by productivity, demographics, trade, Overall Economic competitiveness, and dynamism and the Global Economy comes a neutral real rates across the world are low now and have been drifting lower over time. This is the art and Monetary Policy to assess where is it today, but more importantly, where is it going over time. I agree with the chair that it is your or slightly negative. The neutral real rate is zero or slightly negative, but where will it be over time . That would depend on broader Macro Economic factors, including fiscal policy. My ownnot yet updated Economic Forecast for any actions from congress and the Administration Just because we dont know what theyre going to do. Once we see what they would do, we can update our models, and may affect the neutral real rate going for it. Matt there has been talk about how you guys have raised rates and financial conditions have gotten easier. Do you see that as a problem . Theou think that boosted to stock market presents risks to your Economic Forecast . Neel i dont think it is a problem. I am comforted by the fact the markets are not reacting negatively to the Interest Rate hikes, so i would rather have that in the big huge Market Correction, but it will be what it is going to be. I do Pay Attention to the stock market and what signals may be sending, but i try to check that with what is happening in the data. Contacts, is this optimism leading to actual investment, a change of behavior on the ground . The feedback i am getting is not yet. People are feeling optimistic, there is a exuberance, but they are waiting to see what congress and the administration will do before they change their active investments. Will drive real economic activity, so it is more of a wait and see. Some people have said we should be raising rates because markets are getting hot and the stock market keeps climbing. I think we should Pay Attention to markets if it leads to financial instability. Go back to the tech bubble. ,here was pain for the economy investors, but did not lead to any kind of economic collapse or financial instability, so if stock markets fall, it will hurt investors, but that is not the feds job. The feds job is not to protect stock market investors. We have to Pay Attention to potential instability risks, and the fact is there is a lot more data underlying the Housing Market than the stock market, that is why the housing bust was so painful for the economy. A stock Market Correction will probably be less painful. Alix who should replace mr. Tarullo and what should the cut off be . Plan,in the minneapolis we said banks above 250 billion, we consider them to be risky and should be subject to higher capital requirements. It is up to the president to decide who he wants to appoint him a but i would encourage him to a point somebody who wants to address the issue of too big to fail. Democrats and republicans agree we need to relax regulations on small banks and community banks, but the too big to fail problem is still there and the biggest banks are still too big to fail and need more capital. I would encourage the president to consider somebody open to those ideas. Thinkan do you sequential rate hikes is where the fomc is going . Neel i dont think its helpful for me or other policy makers to make such predictions because it adds noise and confusion to the markets. Thats why i go backward looking. On friday, i published why i dissented. That was a backwards looking piece to give you insight to my thinking process without adding volatility going forward. At the end of the day, we should let the data tell us what we should do next. Jonathan we appreciate your insight and time to explain why you dissented to the Federal Reserve Interest Rate hike. Neel kashkari, thank you for joining this problem. The market open is seven minutes away. You are watching bloomberg. Your matt, what was biggest take away from the interview . He is kind of positioning himself as the dove on the committee. Evans, not quite as dovish as he has been, but still we have Neel Kashkari, even though the outlook has improved. That debate about different policy options that might have otherwise been lacking. Jonathan you wonder whether it can have an influence. Governor brainerd had a big influence on the back end of last year. That is the real risk. , greatn matt boesler having you on the program. We count you down to the cash open. Youre watching bloomberg. Jon i am Jonathan Ferro. Moments away from the open. Futures on the dow, negative, about 1 . After squeezing out a week of gains, we are moments away from the market open. This. Age is set like treasuries unchanged. Two 50, your yield on the u. S. 10year. We flirted with this time last week, and aggressive repricing at the Federal Reserve. Open and this market get across to alix steel. Alix it pretty much opens nowhere, s p off one, the nasdaq unchanged. He much on the day. The nasdaq has posted gains seven out of the last eight days, potentially breaking that streak later today. Now movement happening in the equity market in individual names we are seeing some movers. Buy ratings first today. The target is 25 and it comes going tohat they are give it the benefit of the doubt despite the substantial execution risk. They see snap as a digital equivalent to channel surfing. An interesting upgrade there. Bank of america upgrading that stock to buy from neutral. There is the potential, a lot of upside over the next two years. Unique buying opportunity, because of ultra low expectations. On the downside, the stock was down 30 earlier. Withdrawing its melanoma drug application. Watch that stock as the trading day continues. We the question becomes, are going to hit new record highs, pair off, and where is that money going . You would think with correlation so low, that would be a boon to active managers. Look at the inflows january into february. So far this year, 121 billion in january and february alone. We take a look at how much of an etf inflow we have seen compared to previous years. If we wind up having s p trading around records, we have all of these inflows into etf. Can you have a meaningful pullback with that kind of inflow . It is an interesting question. When we talk a lot about when we talk a lot about the lack of volatility and correlation, it does not matter with etf flows. Jon our guest joins us. Oliver renick joins us as well. Great to have you on the show. Into utilities, what is the story there . Most of it is flowing primarily from fixed and him come fixed income into utilities. You see rates rising. We are in a low Interest Rate environment, and you need to deliver yields somehow. Jon what is the signal. Stocks and bonds rally, utilities, too. What is the signal that comes from a price action from a week like that . Bruneau with that markets are fairly fully priced. Are trying tokets find a trend when it comes to utilities. The yield is what is winning for them. There is a function i love on the bloomberg to get an idea where money is going. I am looking at etf go and i have clicked on the flow tab. This is sorting year to date. Liquid, investment grade. The past week, there has been this shift. This is interesting. Last week we went into small caps. We went into the risk year, high yield areas. Something interesting happening last week. But also what happened last week is there was that leadership in the Utility Group and the leadership in real estate, wish some of the with some of the bond proxy trades. They are starting to come back in some sense. There are some expectations for yield to move higher with a rate path moving upwards. Alix if you wind up with investors owning 14 of the s p and that stack comes from that stat comes from Goldman Sachs does that prevent a meaningful downside . What do you think . 14 is not too far off. We need a small amount of active management to move the market. On that standpoint, there is much more stable asset from that perspective. Etf flows move in and out rapidly. You were talking about the flows we have seen, equities. We have seen rapid flows out of equity. We view that as a stabilizer overall. A few months ago jon a few months ago we would have been talking about this egg cyclical turnaround story. You are still pushing it. hy he echo bruno infrastructure is slowing down. It is hard to get these things through. But infrastructure, if you step back for a second, it is a big deal. The Civil Engineers came out with a study they publish every four years, and they said the average rating of soup structure is be plus. The average rating of superstructure is a be plus. About 11next 10 years, billion. That is a lot of infrastructure spending. The we talk a lot about lack of correlation. Some of the lack of correlation is in sectors. Is part of the story. There is this narrative that it is going to be a better year for stockpicking. Whether it is true or not, there are plenty of people who will debate that. When the language makes headlines, and you see stocks near highs, Retail Investors come in. There is an interesting juxtaposition between what we see from Retail Investors and what we are seeing from more institutional investors. Numbers got some flow from bank of america showing hedge funds removing the s p 500 position, institutions pushing that down. If you look at flows in some of the more risky areas like smallcap stocks, there is a lot of money going into etf. There is a difference between what is going on mom and pop and on wall street in terms of sentiment. Alix lets dig into some euro some bigger names. The biggest laggard today, google, cutting shears to hold from a buy. Brian wieser joins us on the phone. Your reason for the downgrade . The safety issue came to light to many large marketers. As colluding pretty significantly on friday when you had a large Holding Company off. In the u. K. It was suspending all spending on youtube. I think we had a raft of additional marketers over the weekend, indicating that they were suspending their spending or exploring the same. Google has responded insufficiently, i think, to addressing what probably needs to be a zerotolerance policy to advertisement trends over jihadist videos or nazi videos. This has not hit the u. S. Yet, that in the u. K. It is a very big deal right now and it has global ramifications. Alix what is the flow through of this . It is pretty small, to be clear. We are talking about a quarter of global spending from companies with large brands. You see a few percentage point of impact on revenue, that probably flows through two a few Percentage Points on the bottom line. From a downgrade perspective, it was already at 170 price target, bringing it down to 950. Is there is much upside as before . No. Jon there is still an implied 8. 9 increase from the last close. What do you remain optimistic about . Brian google and facebook are the dominant sellers of digital advertising. It is not as if advertisers across the world are stopping their spending on google across all of google products, and not all advertisers will respond the same way. There are a lot of approaches to issue, andsafety many advertisers already have sophisticated approaches in place to limit the risks here. It is not as if they are not going to continue growing. They are still going to do over 100 billion of revenue this year in advertising. It is not like most advertising. It is not like that goes away. Bruno want to bring in del ama. Scale you think about the of that company and the scale of businesses that they have, obviously that is the place to advertise. There is a franchise where you cannot get away from it. When you look also at option properties, one of the biggest ideas right now is robotics and artificial intelligence. The company that owned the data are the ones that we will favor most from artificial intelligence. We think that is one of the big winners. Alix when you look at how you would value interim at the longterm growth rate, what you expect are they coming down regardless of this issue . Brian i cannot speak to an express i cannot speak to an s p perspective, but the etf around 40 right now for google, that is 18 up over 2016. There are several good things about alphabet. They are growing rapidly. Under the current cfo, they have done a very good job of applying more discipline to how their magic operations to how they mad to how they manage operations. You know, they still do very well in terms of managing the bottom line. Jon i want to take a snapshot of your stance of the sector overall. My numbers, you cover 18 companies. 14 are hold. Only two are rated buy. Bruno year, thereer this were expectations that everything was going to run smoothly under the current clinical climate. That seemed unrealistic, so that was a catalyst to downgrading half of my coverage. I am generally pretty pessimistic, i would say. Jon great to have you with us on the program. Bruno, ray to have you. Thank you very much. Google is down about. 6 . Which would make it the biggest oneday drop since early march. A. 6 drop. At 10 00 a. M. Eastern time, live coverage of the fbi director, james comeys, testimony. That is all coming up on bloomberg. Full coverage on bloomberg in new york. And marginal moved to the downside, down. 1 . In the red on the dow. You are watching bloomberg. Emma this is bloomberg daybreak. Coming up at 10 00 a. M. Eastern, we will take live coverage of fbi director james comeys testimony to the House Intelligence Committee. Alix Retail Stocks are on a softer foot along with the broader market. They are also the most expensive we have seen in 15 years. The white index continues to grind higher, and the blue line is the forward p e ratio, now at a 15 year high. Special retail analyst joins us. In still see value individual names. Walk us through your top picks. We have been highlighting the offprice sector, the single most disruptive factor tomballbest to m allbased retailers over the last couple of years. Our favorite idea right now is burlington stores. They can post continued doubledigit Earnings Growth over the next few years, and we expect them to continue the drive of topline growth by disrupting the mallbased retailers. Amazonhen we talk about crushing the mall you guys the mall guys, that is not true . Are both true. Amazon and the online retailers have hurt the mall. They do a lot on the margin side. Most of the mallbased retailers have been great about spending a ton of money to drive their own online businesses. It has hurt their margins and it has hurt their roic. Where the dollars are going is offprice. They are selling great branded product for much lower price, and they do not have an online component at this point. To get it, you have to go and visit the stores. Alix you mentioned burlington, but you also mentioned tjx. When you still have amazon, it definitely discounts a lot. Lorraine i think when you look at those three combined, they are takings of they are taking billions of margin they are taking billions of market share every year. It is not as fast a pace of growth is amazon, that there estimates are much higher. Alix what happens when we get a tax cut from washington . What is the feedthrough for that to Discount Stores like ross, burlington, and tj maxx . Lorraine it is a good thing that they all attract a trade down customer. If we see prices go up. The one big factor to take into account for apparel retailers is the border adjustment tax. For most of the mallbased retailers, they employ 100 of their product. This border adjustment tax would decimate their earnings. The way we look at the offprice retailers, they are not the importer of record on anything. They are buying mostly from on sure or leftovers from from onshore from retailers. Remember, these are retailers that feed on this rupture in, so any disruption throughout the supply change, be it from higher pricing or higher taxes, would benefit offprice. Alix what is your earnings estimate for ross, burlington, and tj maxx . Lorraine we are looking for high teens growth for burlington over the next two years. , ross it is low double digits. For tj, we are looking at high single digits. Alix the stock for burlington has had a nice run. The last year, the stock is up by 77 . How much more value can we squeeze out of that . Like you said, this is a wellknown story. Lorraine one thing to note, from a year ago, the stock absolutely crushed when we had the very warm winter. Burlington does sell a higher share of coats. When the weather was warm, we had a 70degree day in new york on christmas eve. We are coming off from that base, but it has done well. The stock this year is trading about 25 times. It is not cheap, but i have almost no growth. Most of the companies i cover will post negative sales growth this year, so to see a 5 or 6 topline, i am holding that 25 multiple over the next year. Alix especially in retail. Lorraine, great to get your perspective. Lorraine hutchinson of bank of america, merrill lynch. Jon two weeks ago, i am laying in bed, i am sick. No toaster in the apartment. I want some toast. Amazon prime now, get the mobile out, within an hour, i had a toaster at the bottom of the building waiting for me. Who will compete with that . Alix burlington does not sell toasters. Jon more broadly, who is going to compete with that . Amazon is crushing everybody. Coming up at the top of the next hour, Bloomberg Markets with vonnie quinn. Vonnie you are making me hungry. We will be speaking with a russia expert from columbia university. She will give us some intelligence into what we might hear from james comey, the director of the fbi. We will hear all of that live. Later on, neil gorsuch, Supreme Court nominee, will have a hearing. It will be the first part of the Senate Judiciary committees looking into whether he will be the next Supreme Court justice on the bench. Brexit, march 29. We will take a look at that later. Alix the countdown clock starts now. Jon it does. Two years, if you are lucky. Alix you can watch us online. Interact with us daily. Catch loraine talking about her top picks. Tv on your terminal. This is bloomberg. Jon minneapolis fed president neil cash carry explaining why he voted against raising Interest Rates right here on bloomberg tv. Back and saytep how has the Federal Reserve behaved over the last five or six years . Every one of our Inflation Forecasts in terms of the summary of economic projections, everyone of our median forecasts has been wrong. Always in always expecting inflation around the corner, always surprised when it is not. Matt, nothing extreme about the views of this guy as to why he voted against raising Interest Rates last week. That would be the consensus view. Why is the rest of the fomc not with him . Matt we had this debate last year about, should we kind of get purposely behind the curve, should we try to overshoot the 2 inflation target . That debate has gone away since the election. It is kind of unusual in light of what we have seen over the last four or five months. It is not that unusual if you go back to six months ago and look at where the debate was at. We have both sides of it in play. Alix it feels like he is on the data dependent world, but the rest of the fed has moved on to a more holistic view of the economy, and how long it will take to get a dual mandate. Outlookvery different in the economy in general, the two of them. Matt absolutely. If you look at one thing, maybe we have already gotten it out of the way. Others are saying we need to hike three or four times. That is premised on the view that inflation will continue to pick up. The Unemployment Rate will continue to go down. We have not seen much progress on core inflation or employment, at least in terms of the headline statistics in the last year or so. I wonder if he should be more embarrassed on his own, or with the rest of the fomc. I tried to click on a spot. We can almost assume that he is right here. He is actually not alone. Matt we have made a lot about the fact that the fed has brought the market in line with its own views, but only for this year. If you go out further, the market is discounting a lot what they will be able to do in the out years. That is partly probably because we have so many moving parts between rates and the Balance Sheet. It should be an interesting year. Alix jon matt boesler, fantastic to have you with us. 2. 49 of the 10year. Futures are suggesting a softer open. We tread water on the dow, and from bloomberg daybreak, i am Jonathan Ferro. For alix steel, thank you. This is bloomberg. This is a live look at the hearing room on capitol hill. In just moments, fbi director james comey and Admiral Mike Rogers will be facing questions before the House Intelligence Committee and are expected to get a grilling on key topics, rogers involvement in the 2016 election and President Trumps claim that the Obama Administration wiretapped trump tower during the campaign. From new york, i am vonnie quinn. Live from london, i am mark barton. We will bring you live coverage of todays hearings. Abigail doolittle is in new york with the latest on how u. S. Markets are trailing. Good afternoon. Good morning to our viewers in new york. Today, the major averages are flipping between small gains of loss and losses good not a lot of congestio conviction. Where we do have more distant action, tough, is for the commodity complex though, is