Transcripts For BLOOMBERG Bloomberg Daybreak Americas 20170615

Wages are getting squeezed, that is a problem, but we do have an upside inflation issue and that will be something we need to dig into. Im trying to look at the details who it was. Less thane only have normal membership of the bank of england mpc. Voting already effectively for a hike, now it looks like others will vote that way as well. Is an upside story, rather than a downside story. Christian Ian Mccafferty has been there before. Saunders to the mpc, relatively new compared to the rest of the mpc. Talk about three voting members running their hand up for an Interest Rate hike, when the politics have become even murkier. Those hawks as well, they are independent members, which is another fact you have to think about, as well. That is a factor, too. The governor of the bank of england will be speaking this evening, across the road from his usual venue and of course we have the chancellor coming through. There is extreme clinical uncertainty in the u. K. Right now, we are uncertain of a brexit. We dont have a clear course on a number of different areas, and of course this is where these people say it is time to raise rates. More fromng economists in london saying the next move is down, not up. Jonathan also the prospect of more qe. May push higher, not by a significant amount, up about. 1 on the day, but you see the sharp move on the charts. Woodt want to turn to rob and bring him into the conversation, for me and many others, it wasnt about the bank of england decision, it was about the speech a little later. Talk about house surprised you may how surprised you may or may not be by the decision. Looks ankly, i think it bit bizarre. One of them did vote for a hike before, the other two are on the hottest end. Hawkish end. Look atst spoke retail sales this morning or yesterday wage growth fell below consensus expectations. It looks a bit odd given the data news to my mind, it is surprising to me. 1 vote. Xpecting a 7 Kristin Forbes will not continue , but nonetheless, i think what we have learned from the past is tende who vote for hikes to do so meeting after meeting ajonathan we have had theory three days in a row, upside surprise to inflation, downside surprise to retail sales, the hawks at the mpc are looking at the labor market. They say the crash has decreased, but the demand is still strong. You have to think about whether those hawks gain any traction, or if all they do right now is put the prospect but the brakes on a prospect of more easing. Rob i think it is difficult to try and figure out which course were going to be looking at. I think it does make more easing harder. If you look at distribution of outcomes, probably that does make the easing element a little harder to achieve. Whether it makes the timing of Monetary Policy more plausible, i would think that we do have to say that it does, only because youve got this momentum that it is coming. The commentary from the bank this morning is maybe it feels a slowdown in the consumer is unclear how persistent that will be. Datably a little more dependent on watching how the consumer response from here. The other factor to mention, as thendicated, i wonder who ninth person will be and how critical that vote could be as well. Jonathan it was supposed to be just a runofthemill egg of england decision. I thought most people thought it would be a Decision Just on hold, boring, three votes for a rate hike. Mpchought the bulk of the would reach for the playbook on the mervyn king. Focus on supporting output, the core of the bank of england is still there, it seems. What do you make of the dissent . I wouldnt say it is significant, but the u. K. Finds itself in a tough position, there is huge political uncertainty. There is a stagnation shock, and that always creates problems for Central Banks. All three of these are the external members of the mpc, not the core members of the group. My expectation is they can hold the group together, they will be inclined to look through this, but it does illustrate the can beations stagflation for central bank. David doesnt have any affect on the majority, though, not in terms of moving right now, but how quickly they may feel they need to move . Hasnt in the past had a direct effect on the internal members. Remember in the past has voted to keep rates on hold. Clearly it does raise barriers. O any easing in the future i think probably one thing to look at here is obviously for these three members, they are focusing on the inflation number, which is above consensus this week and also on the Unemployment Rate itself. Faith that thehe phillips curve exists, that unemployment will eventually turn into wage growth. Skeptical, we have been running that story for years. It hasnt come about yet. My perspective, it seems like an odd assumption to make. David it is not just in the u. K. We have seen this, we see it in the United States, the labor market is tightening, but the wages dont go up. You refer to stagflation. If you move on the inflation part, what is the risk youre going to go further and stagnating the economy . Richard exactly. It is hard to thread that needle in practice. In the 70s it was common, but you are right. We are at a point that given unemployment is low, we would expect wages to increase. Part of it is a low productivity. I wouldnt read too much into it today. To me centralte banks are nervous, and appropriately so, about their independence. A lot of the interpretation of the bank of england is their policies have been hijacked by brexit. They are saying wed like to move away from the hijacking and get the economy back to where it should be. Jonathan as guy forbes and others point out, three becomes to, we will have that change as well. And it rob, ill post another question to you, whether the margin may be decided the brexit negotiations have gotten clearer. Interview one of those individual mpc policy makers at this point, i wonder if they would Say Something along those lines . Rob who knows. They have been quiet, rightly so. There assumption in their forecast is that brexit negotiations will be very smooth. I am not sure we have learned anything over the past few days that suggests that brexit negotiations will be smooth. Equally, the lack of majority in parliament, there is reason to assume we would end up with a worse outcome. They probably have personal views, who knows what it would be if you interview them. I think the assumptions are pretty optimistic, that we are going to go through a. Period of smooth negotiations. Bearing in mind that since the bank of america changed the climate of its policy meetings, have brought them further for award, there has been this feeling that they seem to maybe not react to the most recent data before a policy meeting. This feels like one of those, where just before the policy meeting we have had some downside news on wages, which should make you think the search last less likely for. We talked about the politics of westminster, we now have to talk about the policy you see the reaction on the fx markets, sterling up now. Guilt yield about nine basis points. Where the sterling goes, you see the ftse go in the other direction. About other politics on westminster, whether Governor Carney can keep the ship together. As we go into a storm for a couple of years, potentially. I think it depends on what happens with the u. K. Economy. Of lateioned the data has been softening. We will wait and see next time we get a count. We will see what the new membership looks like as well. There are a bunch of factors here, but i have to say the prise is white strong quite strong. I am scratching my head trying to figure out what is going on. Some of that is replicated around to be city of london. We will see. The data of the moment showing signs that the british economy is slowing up. If yound that spent time in the u. K. , you will todaya lot about, talking about a sharp shirt for. It is sharp shortfall. Much. Nk you so great to catch up with you. Rob wood of the bank of america, rich cleared up of Pimco Richard Clarida of pimco will be sticking around. Three people voted for a rate hike. You see the Market Reaction clearly. Up nine basis points, and. Omfortably back we approach one 28th of 12781. This is bloomberg tv. This is bloomberg. This is bloomberg. I am david westin. Inflation numbers may be softening, but said yesterday the bed should stick to its course. These price declines will, as restrainof arithmetic, the twelvemonth inflation figures until the extraordinary low marchraordinarily reading drops out of calculation. However with the labor market continuing to strengthen, the committee expects inflation to around 2 d establish over the next couple of years in line with our objective. Nonetheless, in light of the recent readings, the committee is monitoring inflation developments closely. Richardtill with us is clarida. Are picking and choosing their data here, do we believe them . That is an interesting question. Who knew that phillips would newme the most famous zealander ever. You saw it at the bank of england today, and it definitely the bible from which janet yellen and her colleagues are reading. Unemployment falls as far as it has, inflation is supposed to rise. But as you can see, it is rolling over. That is not supposed to happen. That is why the markets are not credit into the inflation path. They will be forced to raise rates faster in further in the future. You are in esteemed economist, at what point do you have to think about changing your paradigm, changing your model . That is an interesting question, the phillips curve is so embedded in thinking, that it doesnt seem that it will be something that people discard. At whatbe a question of level does it again, rather than does it take in at all. Unemployment rate to fall lower than had before, janet yellen seems to be experimenting in the same way. Jonathan is this no longer a ase of accommodation, is this matter of timing . Right now the funds raised around 1 , the real Interest Rate is still negative, so they think they are removing accommodation and not tightening. If you look at conditions, theit level, stocks, rates, is really easier right now. I think they saw an open door to give the get the Balance Sheet analysis in. I think Going Forward they really will be looking closely at inflation. The last year, they had a forecast of rate hikes, didnt deliver them. This year they set a forecast of rate hikes, the data moves, they stay steady. It is about a policy mistake, you do not think it is a policy mistake . No. Ard i think the data has been softening, but i do think the policy is still accommodating. I do think, however, we are going to have a handoff from the yellen fed into the next fed. Camp. Ot in the mistake jonathan coming up, we will be. Ive at the beave viva paris you are watching bloomberg tv. Jonathan from new york, this is bloomberg. I am jonathan pharaoh. Crew trading lowest in the last several months. I want to discuss this with julian lee joins us from london. Cuts aree about this, declining. This storywasnt that opec was trying to sell to anybody. Gasoline inventory up for the second week running demand down for the second week running. If you look at gasoline demand for the whole of this year so far, it is down by last years level by about 3 . Oil is the trouble is not being taken out of the system quickly enough by people consuming it. We are not seeing, yet, any big decline by the volume of oil moving from the persian gulf countries to the u. S. , which is still by far the most visible market. This is where we need to see things happening. The Saudi Oil Minister said at the meeting last month that saudi arabia was going to start making measurable cuts in its exports to the u. S. Those will take a while to filter through, but the problem is our tanker tracking is showing while saudi shipments may be falling, iraq shipments are going in the opposite direction. Jonathan talk to me about the policy of opec. Everyone is a member of the saudi ipo the our team pr team. Will they not be pushed beyond the ipo we expect to get next year . Julian i think that is one of the big uncertainties. And i think that is one of the reasons the market was not impressed by opecs may meeting. Guidance asto be no a what to do when they come to the end of this current accord. People remember what happened when they abandon outlets and supplies surged. Come the end of this deal, the same thing will happen again. Wont, we saying it are committed to market management, but that management of what happened in november 2014 is still very much at the front of peoples minds. And there are real questions about how opec will manage this Going Forward, particularly when we see capacity rising in a number of countries. Julian lee, thank you. Coming up, we will talk about how we have achieved gender parity in the workforce. From new york, this is bloomberg. Futures are softer on the dow and s p 500, down koin 6 on the s p, about. 4 on the dow. Percentagey one full point, the why is on the board. Byng higher i almost. 2 . Split decision over it at the thatof england, five vote the rates unchanged, one becomes three, voting for a rate hike. I can get you the gilt picture for you, there is a spike by nine basis points, comfortably. 1 after a oneday move over last year. Up. Much coming i want to get you to headlines outside the business world. Emma they give. The special counsel investigating russian interference in the election, according to Robert Mueller, he will also investigate whether donald trump tried to obstruct justice. He will try to find out whether the fbiident asked director to back off investigation of michael flynn. There was a shooting at the congressional baseball practice. President trump visited state eolice and hospital stev calise and hospital last night. Shooter was a man from illinois who posted antirepublican messages on social media. More than a day after a blaze started, at least 17 people were missing,any more Authorities Say they dont expect to find any more survivors in the london fire. Global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. Im emma chandra. We are going to have a return of the reports out of washington that Robert Mueller may be looking into whether President Trump sought to intervene in the investigation director. Mer fbi what do we know about this and also the white house reaction to it . Kevin last night the white house pushing back after the Washington Post report that the investigation will now include looking into the president s. Bstruction the president denied he said that, but this is the report that will only fuel the fire to democrats and those looking to continue looking into the questions surrounding the russia probe. It is worth noting that republicans do not feel that there is enough evidence to bring charges now against the president for obstruction of justice, but this type of report suggests that mr. Muellers investigation is continuing and expanding. David you are right to remind us, it is early going. Thank you so much to kevin cirilli. Whenever we hear the words residence and of section of justice, it is serious business. We are now going to be joined by barbara mccabe, a former attorney for the Eastern District of michigan, she is on the telephone now. Thank you for being with us. Barbara thank you for having me. My first question is, given what we have heard, is it surprising that a special counsel would be asking questions of other officials in the government about the circumstances surrounding mr. Flynn . I think it is actually a logical step assuming the reports are true. Testimonysed on the of james comey alone, that would be enough or Robert Mueller to want to investigate this. One of the things that is extraordinary, if the reports are true, there are other officials of him trump asked the same thing. David we heard from a former u. S. Attorney, like yourself, who said based on what he heard, there was too little to conclude either that there was obstruction of justice or was not, but there was enough to investigate the question, do you share that view . Barbara i do. I agree with that. Hes done what we heard from the comey testimony, there are elements there that would suggest there was obstruction of justice. Mueller, youbert want to see if you can probe other evidence to corroborate the story, or find evidence to refute the story. Sounds like the interviews of the cia director, the director of national intelligence, the nsa director, is an effort to try to see if the story stands up. Based on the reporting, it sounds like President Trump may have asked others to intervene just like he did with james comey. David one of the things that Business People are concerned about is the timing of this thed markets do respond to news of this investigation into obstruction of justice yesterday. Can you give us an idea of how long this can take . Barbara they can take a very long time. No doubt, Robert Mueller wants to be extremely thorough. Whenever you interview a few people, they may tell you a few more people that it is worthwhile to interview. He will want to leave no stone emails. , asked for the good news is Robert Mueller has a reputation for bringing urgency to his work. So much for you being with us, that is professor Barbara Mcquade of michigan. We will turn to a different subject, but very important, as well. We spent a good deal of time talking about the level of employment in the country, and increasingly important issue is to what extent corporate leadership takes advantage of all the available talent. Brian moynihan discussed this with bloomberg. Brian the real question is are you going to draw from 100 of the population in an industry, in a country, completely dependent on the talent. We have a very talented people, and we have a machines they operate. We do not make things. And so, if you dont get from 100 of the population, you are in trouble. Asid Valerie Jarrett served Senior Advisor to president obama in the white house. One of her roles was female leadership in corporate america. In d. C. Today, because she will be addressing folks on the subject. Thank you for being here. Thank you so much. I completely agree with him. Diversity is a strength, and there is a mounting body of evidence that shows that companies that have gender equity perform better. There is a very strong Business Case for why this is important, and that is what paradigm for parity is about. David where are we . 500, we haveur top women ceos. Women said, what are we going to do to start the momentum. There is a bloomberg, bank of america, cocacola, many others, who said what can we do. We know it is there, how can we train people. How can we increase the number of women and senior positions . How are we going to be transparent and communicate to our workforce . What are we going to do to ensure there will be more flexibility in the workforce . It shouldnt just be showing up for work, it should be what is your performance. Sponsors,ld have people who advocate on their behalf. Toadigm for parity will try make the Business Case for why this is so important. David women came into the workforce in a big way a generation ago. And increase the productivity to a very large degree, why has it not trickled up yet. In the middle and lower ranks, you dont see it at the top. Valerie not the least of which is implicit bias. We have to look at what we are doing in the workforce that is not conducive for women to excel. Women are now increasingly finishing college and graduate school at higher rates than men. The number one reason they leave, culture. What can we do to create a culture where everybody can thrive . Brians point was you are leaving talent on the sidelines. People join for a few years and then leave. David from your time and the white house and your time being involved in this issue, have you seen circumstance where it worked well . Is there a pattern at all . Valerie absolutely. That is the point of the. Paradigm. Have seen many ceos that see it is their business interest to parity in the workplace. We need to make sure everybody takes advantage of this. David they say the businesses will be more successful. Valerie they will be. To ask younot going about the mueller investigation, but you have been in the white house, and one of the things we are hearing had is it is not the president s fault, because he is the ceo. He is not a politician, is ignorance a defense valerie you actually know the answer from law. David should we give him leeway . Valerie i think we should take a step back and let Robert Mueller to his job. Frenzyit is a feeding and everybody wants to get into the mix, but i think part of the way our democracy works well is we have independent branches for filling their responsibilities. We should let them do it. David thank you. Jonathan someone who could benefit from d. C. Action,. Onathan John Chambers he will be live from viva paris. In new york, you are watching bloomberg tv. This is bloomberg. Emma i am emma chandra. Coming up, executive managing director of management, that is at 8 00 a. M. Eastern. Jonathan the startup scene is gaining traction by Venture Capital funds. Under new president emmanuel invested in paris last year. We are joined by John Chambers,. Iscos executive lets begin with france and how hopeful you are for the new president , investors are very optimistic. i think their optimism is justified, but it has been interesting to watch. 2. 5 years ago i said france would be the next big thing. All of my friends said francebusiness, that doesnt make sense. I said france will be the startup nation and europe, my friends said i dont think so. It actually is a startup nation in europe. Of 134nt from an average and mental capital per year, two 226, to 486. I dont think people know how great the opportunities are. Yet what isseen going to happen in france. I think they will lead europe in the transition for the next generation of europe. I am extremely bullish on france. It has gone up dramatically since 12 months ago. Jonathan lets talk about the reality of labor market flexibility. It doesnt leave the western world there at all. The challenges for Emmanuel Macron are pretty big. Do you think that is really big, as someone who has run cisco, how difficult is that with a labor laws that exist . John i think you have to look at three things. I got the chance to know president macron when he was minister of the economy. I have probably been on sessions with him in front of mba students at school. We have done a joint press conferences in terms of ciscos commitments. Them, they are a country that is going to disrupt others. They will be very different from the france we used to know as a place to vacation and have dinner. Ins he have areas to address terms of tax regulation and law, and also social issues from a labor perspective . Yes. Mi optimistic that he will bring the country with them . Oh yes. You wouldve thought you were startupsin silicon that i interviewed, but you would also realize, faster europe is moving than the u. S. I am optimistic about what president macron will do. I think you will be a strong leader. Are not allowed to sit on the fence on this, are you more hopeful for labor reform in france or tax reform in the United States . John i think both will happen by the end of the year. Jonathan will it be good for do thingst cisco to with cash, some dividends, some buybacks . Hn the answer is yes, and our president has outlined how he is going to do that, but i think also what is done in europe, they remind me, if the u. S. Cant get it together with tax reform, why dont you invest over here, because we are becoming a better place to invest in the future. If we dont create be tax opportunity to bring back the economy and jobs, people will have no choice but to invest somewhere else here to i think both parties in Congress Want to see that happen. I am optimistic. I think macron will do the same thing in france. He grasps how you take digitization and change the lives of citizens. Fiberis a company with a parking capability. Think of a self driving vehicle did it inof uber, we france and we did it in 12 months. Taking of change is breathtaking. There is a lot we could learn from france in the u. S. Continue the comparison with president macron and President Trump, maurice lee b says he has no doubt that on will be acr great president for innovation. Are you confident in our president of the United States being great for innovation . John what is going to be exciting for our country and france is both countries know how to dream, both countries know how to do startups. Both countries know if you dont disrupt, youre going to get disrupted. What is exciting to me is watching the french and u. S. Companies Work Together on startups. The United States has to be aware of republicans and nation is not entitled to win in the next era of startups. We are only going to take 100 public this year. You are seeing our counterparts grow at three to four times that number. , ournk it is important leadership but also the democrats and republicans figure out how to keep in front of the in the forefront of innovation. Jonathan thank you. John chambers, cisco executive chairman. And optimistic man right there. Were going to turn now largestns, the World Manufacturing of diesel products, sales in 100 different sales in 190 different countries. They will start making buses for urban markets. Chairman andmmins ceo tom linebarger. Thank you for being here. Tom thank you for having me. David address the larger pattern internal combustion how does this translate to strategy . This is who we are. Back when we brought the diesel e into the u. S. During the u. S. Truck buildout and most recently taking emission technologies onto u. S. Roads and then globally to china and india to help clean up cities in those countries, innovation is what we do. Cummins does best. Electrification is one of the technologies we have been working on for many years, but we are now seeing an urban market, a potential that battery driven powertrains and hybrid powertrains will be economically viable for Bus Companies and companies,portation relatively shortly. We want to be at the forefront of that innovation. We see it as an opportunity for our company to grow and to give customers more value. David talk about how youre going to manage that transition, you know sooner or later you will get there, you dont want to run away from your core business of easel too quickly . Diesel too quickly . Its a company that wants reliable today, and an innovator tomorrow, we have hips that go back many years. We know what we need to do, we we provideeed service and support on a global basis to our customers. That is an important thing. That means you have to deliver on your core business every day, but you need to be ready for the future, too. You have to innovate, be open to new ideas from the outside, not just from the inside. You have the same time to compete against upstarts, people like tesla, jose say they will have a class eight truck to compete with you. Can you do that . Can you compete with a small innovators . Tom absolutely. I think any company has to be just as aware of the upstarts as their every day competitors. The upstarts have a lot to gain and little to lose in your market. One of the things that we have done is we have opened up to ideas from the outside. Companiesd dozens of every quarter that we might went to partner with, acquire, otherwise capture technology from the outside, bring it into how it, and figure out will help our customers. Run it anywhere they want to run it, and they understand their application and how they will use the product. And support is available. Be open to the outside, not pushing away new ideas, instead of bringing them and, that is how we think we can innovate and compete. David thank you so much. That is tom linebarger, chairman and ceo of cummins. Coming up, jim caron will be joining us. I split decision at the bank of england, we will get to that in a moment. From new york, you are watching bloomberg tv. Jonathan the bank of england does the expected and keeps rates unchanged. A surprising vote reveals the biggest policy divide in years. Maintainsjanet yellen her output for Monetary Policy, even as the data starts to soft and. Muellercounsel robert is said to expand the russia probe to look into whether the president obstructed justice. Good morning from new york city. Im Jonathan Ferro alongside david westin. Alix steel is away today. 0. 6 ,utures softer off by treasuries up. The cable rates in focus. Sterling spiking higher, reversing overnight losses as a hawkish boe vote surprises traders. Government bond purchases at 435 billion pounds. Joining me now from london is jamie murray. Take a double check of the headline and then i had to look again. 53. Not many people expecting that. Talk to me about whether it is significant or not. I think there are elements which are significant and elements that are not. Lets start with the three dissenters. One was voting for a hike already. That was her last meeting, shes meeting. One of the other dissenters was always going to change his mind at some point. Hot hawk. Ious is the thirdler one. It is likely it is something to do with the exchange rate, what the effects of that will be on domestic demand where he might have a different view than the rest of the committee. He has views on what the structural rate of the rate in the in u. K. Jonathan take a listen to this. Odd, given theit data news, to my mind. It is surprising to me. I was expecting a 71 vote. This is clearly a hawkish surprise. Nonetheless, i guess what you learn from the past is that people voting for hikes tend to do so meeting after meeting. It is not just a oneoff. Jonathan that is the history. We have had the likes of Ian Mccafferty doing this. He had a friend doing this. A year later, they would come back and do the same thing. Is that the same story they expected at the bank of england . I really think you cant motivate the change in decision with the data that has come out s lasthe bank of england forecast. If anything, it is slightly worse. You dont need to be a genius to realize it is going to because and pressure on households and that is affecting the data. The data does not look great. Further slowing is very likely. For us, we are still of the view that rates do not go up until mid2019. Jonathan stick with us. I want to bring in jim carren. Does the portfolio have any gilts in it . Jim it does. Confusing. Me very i think we have to introduce the brexit criteria. It is an unknown. The recent election creates more uncertainty. Hasnder if maybe this vote a little to do with some of the political machinations going on behind the scenes that might be altering some of the calculus behind some of the governors to make this decision. David to what extent does this split reflect the dilemma that the entire u. K. Finds itself in . Mohamed elerian was saying he is really concerned about stagflation. Jim in one sense, you have a sterling that has gotten significantly weaker. In theory, that should give you inflation pressures down the road and that should prop them up 914 months out. Are we in that position right now where inflation may be at a low for now and then starting to move a lot Going Forward . That could explain some of the vote. I think if sterling is going to give us the biggest message right now, in how they are thinking about the lag effects, that might be something to consider. Jonathan we are looking forward to chancellor hammond and Governor Carney speaking. Maybe we should take the speeches with a big pinch of salt. This was Governor Carney back in the summer of 2014 at the very same event. Take a listen. Governor carney there was already great speculation about the exact timing of the rate hike and this decision is becoming more balanced. It could happen sooner then Financial Markets currently expect. Jonathan jamie murray, the summer of 2014 was a different world. We used to play the game, who would hike first . Thernor carney is not in mix at all. How much is changed in the United Kingdom in terms of the economic trajectory from one that speech was made to the one that will be made tonight . Jamie i think it is pretty clear that we have a very significant demand shock going on. There is elevated uncertainty that has not been helped by the outcome of the election. That is going to drag on gdp growth. That could potentially lead to a modest increase in unemployment, as well. The conditions could not be any more different, really, in gdp growth terms. On the inflation front, my feeling is that it would have taken longer anyway back then, when he made that speech, for inflation to pick up on an underlying basis. In some ways, we are in a similar position on that front. Jonathan the chancellor, Philip Hammond, has announced he will withdraw from giving that speech following the tower tragedy. Welcome, you have to respect what happened. Jonathan absolutely. David i take him at his word. I believe that. It is pretty clear that the u. K. Really has an algebra problem. There is a gdp growth issue that they have. Right after brexit, the bank of england stepped in to try to help the economy. Is there anything they can do now to help what is going on in the u. K. . What are they just need to stay out of the way . [applause] jim my view is that they need to stay out of the way. I think that centralbank policies in terms of how low they have put rates, it is kind of coming to an end in many ways. Maybe even ecb down the road next year might be doing the same type of a thing. I think what we are finding out is that lowering rates, making money more accommodative does not necessarily create real demand in the economy and they might do more harm than good. I think there is also a school of thought that says that part of the issues we are having with demand and lending and Everything Else is that rates are too low and they need to be a little bit higher to make it a little bit more profitable for the banks to lend and currencies to be steeper and things like that. I think the dynamic is somewhat changing a little bit and that is something to consider. David jamie murray, to come back to you, if Monetary Policy u. K. , come in to help the is there anything that can be done given the Political Developments in the u. K. On the fiscal side . They have to figure out who is negotiating brexit before they figure out what they are negotiating. Jamie absolutely. One reason Interest Rates have remained so low for so long is that britain has experienced a very large Fiscal Consolidation around about 1 of gdp per year. That is an enormous drag on gdp growth. If that was to moderate or go away, that completely changes the picture for the bank. Jonathan i wonder whether, as an investor, you need to see gilt yields higher to really get into that market. We caught up with neil duane of allianz a little while ago. Neil the International Investor is going to say maybe the u. K. Is not quite the attractive place that i would like it to be. We would probably argue that gilts have to go higher to attract capital in. Jim i do agree with that. I think it goes back to the ecb. Why are those yields so low . How can bund yields rise if the thatear rate in germany is 65 basis points . It has to do with potentially raising the deposit rate to something bigger than 45 basis points. To me, that is really the key. I dont think any yields can really rise significantly when you have some of the major Central Banks around the world keeping yields relatively low by keeping Balance Sheets really large and doing qe and things like that. I always start with the ecb and i think the world is going to take its lead from that. There is only so much 10year treasury yield or gilt yields can rise if they keep their policy the same. Jonathan the ecb holds the key to global rates. David big shift. Jamie murray, thanks so much. Jim caron is going to be staying with us. , live up, steve orbach from new york, this is bloomberg. David this is bloomberg. Im david westin. President trump may have been eager to get the flap over general plan behind him, but each day seems to put it front and center with the most recent reporting that the special counsel, Robert Mueller, will be talking with senior officials about the flynn investigation. The president himself tweeted this recently so, joining us now is chief washington correspondent kevin cirilli. We thought the president wanted to get this out of the way, but it seems to be obsessing all of washington, including the white house. Kevin so much for Workforce Development week. The president has used this phrase before. Witchhunt. Also has lines crossing the bloomberg, saying withver had communication the campaign. This is a broader example that this is going to continue and the white house is not going to be up to put this behind them until all of the investigations are made public and i think this is only going to add fuel to the fire or to the speculation, rather, that may be President Trump will ultimately fire director mueller. David we had the tragic shooting yesterday in washington. Is anything getting done in washington between that and this . Kevin i spoke to some of the ceos offcamera yesterday when they were heading out of the white house after their meeting withp Workforce Development week. Privately, some of the folks conceded that it is so hard for any policy initiative to break through right now and to get momentum, whether it is on tax , because of the constant barrage of headlines. And then the tragedy like yesterday. There is a frustration at how all of this not the tragedy, but the other stories dominating. David of course. Thanks so much. Jonathan lets bring in jim caron from Morgan Stanley. A number of weeks ago, dollaryen down aggressively, futures soft, we wake up this morning, we had a move overnight , completely reversed, why . Jim i would not have guessed if somebody had just increased Interest Rates and talked about the Balance Sheets. Jonathan probably not. Jim what is hitting markets today is probably the inflation. That is a conundrum that is out there. Janet yellen addressed this and brushed it off, she said it was idiosyncratic, technical factors. She is a smart lady, she has a very smart staff, as well, i have to believe theyve done the work in terms of looking through their models to understand that there probably are some oneoff factors. They probably have to take that may at face value. The key is where expectations are. Core cpi, very soft. A positive surprise in inflation and the bar is really low, we may say, maybe janet has it right and maybe there is going to be a resurgence. Her thesis is very testable. We can see what is going to come out in the future. If it doesnt, it will continue to put downward pressure on yields and it is going to stop or significantly slow the reflation trade. It is just a big bulk of upside risk . Jim lets look at where the fed is telling us the policy rate is going to be in one years time, in 2018. 2. 1 . Where is the 10year note today . 2. 15 . Are we saying that the fed funds rate and the 10year note are going to be equal in oneyears one years time . Both cant be right. Right now, the market is trying to figure out if the fed is in the middle of creating a policy mistake, which is testable, as well we will see or if just the backend is really just subject to some of the recent inflation trends. Lots of money out there trying to chase yield and it is just bringing yields down. David janet yellen must contemplate the possibility she might be wrong, even though she is a very accomplished economist. What if she is wrong . For the real economy . What does it do for consumer demand . Company investment . Be a significant downturn in the economy if she is wrong. If she is overhiking policy right now, im hesitant to say tightening, i think they are moving excess accommodation we are in a situation where the fed has increased Interest Rates several times already and financial conditions have gotten easier, the dollar has weakened, all at a time when the fed is increasing Interest Rates. This is unprecedented. One would basically say that the fed is not hiking fast enough to tighten financial conditions and some people have that view and, apparently, the fed might agree with that. Jonathan i will sit down with review for my midyear and i will say that behavior is transitory. [laughter] david you should look through it, boss. Jonathan look through to the yearend, as well. [laughter] jonathan they say, not so good in 2017, i say that is backward looking and transitory and everything is going to be ok. [laughter] david is your boss janet yellen . Jonathan no. Jim caron is sticking with us. The ubs director of equity and derivatives strategy is coming up. You are watching bloomberg tv. David this is bloomberg. Im david westin. We want to take a look at the real estate sector. Erik schatzker is joined by a special guest. Erik steve orbuch is here. He is the head of a 4 billion real estate business. Good to see you. I want to get big picture right off the bat. When you look at commercial real estate in america today, what do you see . Steve look, i guess i would start out at a high level and say, generally speaking, and i say generally because real estate is such a large and diversified asset class, that statement statement you make has an exception, but we think the markets peaked in 2016, likely the first half of 2016, and pricing. We think the markets have transitioned into a period of pricing discovery, usually the precursor to the next correction. Erik we think the markets have transitioned what do you mean by pressing discovery . Hase that a big ask developed in the marketplace. You see it most profoundly in transaction volumes. In 2017, they are way off levels from 2016. In particular, you have seen a foreign activity. Activity by foreign buyers. That is very important to watch. Foreign buyers are such a large driver of pricing and volume in this last recovery. There is aar that lot of dry powder. We know that Pension Funds are directing more allocating more of their assets to real investments, like real estate, for example, and we know that sovereign wealth funds continue to deploy more money into private markets. Is this dropoff in foreign transactions temporary . Steve we think, like anything else, it goes in cycles. Particularly, foreign buyers have been incredibly active in the u. S. Real estate markets, or narrowly in the primary markets in the primary markets. They are looking at the next tick in terms of where pricing is going. Erik cap rates are low across the spectrum, prices are higher, if we look at multifamily, if we look at office, if we look at hospitality, if we look at retail, where our valuations most stretched . Steve i might not look at it by asset class. I might look at it more by geography. In this last cycle, when you mention all of those individual types of investors, they have been very focused on deploying more money into real estate as Interest Rates have remained artificially low, but they have been focused on major markets, the top 610 markets across the country. Rates,u look at cap those major markets are up 40 over the prior peak level. They are up 120 over trough levels. You have never seen this type of cap rate compression and value appreciation. Our feeling is that as qe unwinds and Interest Rates wise rise, overtime cap rates will normalize in the markets that will be most affected are the primary markets. Erik when you say cap rates will normalize, when we look at office, multifamily, they are in the 5. 5 , 6 neighborhood, they will reset to what . Steve i would love to say that if they are in the 5. 5 area we would be much more active in buying those. We have seen cap rates drop on the multi family side, you have seen them do below 4 . On the office side, you have belowhem do below dip 5 . That is near historical levels. We are not saying they are going back to historical levels. As Interest Rates normalize, we think cap rates will have to normalize. Erik which markets are most vulnerable . Steve it is mainly those primary markets, the coastal markets, where most of the for an activity has been experienced over this past cycle. Erik if we are talking strictly in terms of price, things are going to reset by what . Steve obviously, i dont know. We dont have a perfect crystal ball. We would say, in todays market, and this is purely anecdotal, if you look at options in the bidding process and how many people are showing up and how long Due Diligence takes, we isld say the bidask gap 20 . Where it goes from here will be much more dependent on what comes out of d. C. And how effective those policies are. Erik what is different about the way that you and oz investigate invest relative to blackstone, where you once worked, or starwood or colony northstar, big Real Estate Investors . Steve in a similar vein, we all raise commingled funds, we all , what across the spectrum i believe what makes us different is how we have a death integrated the Real Estate Firm into everything that we do. Erik do you have more of an appetite for risk than they do . Steve we dont think it is risk. We think by casting a wider net, so we have invested in over 100 transactions, 19 different real estate related asset classes, the four major food groups, hotels, cell towers, gaming, senior housing, ski resorts, convenience and gas stations. We think by having a larger atal at the top funnel the top, but keeping thats big it tight at the bottom that spigot tight at the bottom, we can find the best balance. Erik given your outlook, how comfortable are you committing capital today and do you still think, as you look out, you will be up to generate the sort of mid20 turns you are looking for returns you were looking for . Steve it is a market to be patient and much more disciplined. What we look for today in transactions and in 2016 and the early part of 2017, that was surprisingly one of our most active years in deploying capital, but what we look forward areas devoid of capital where we saw a motivated seller, but stable underlying developments. Resortst 14 least ski from a large private group that was going through a liquidation process. In that transaction, we actually really liked the underlying fundamentals of the business, we found a motivated seller that was looking to liquidate its portfolio, and ski resorts is an area that does not attract as much s many of the traditional markets. Erik thanks so much for spending time with us. Realit is not class a estate in manhattan that appeals to oz, more along the lines of ski resorts and gas stations. Jonathan great stuff. Thank you very much. Lets begin by getting up to speed on the market action. Utures down by 0. 4 on the dow switch up the board very quickly. Here is the theme elsewhere. If you look at treasuries, yields up three basis points. Look at cable. No negative on the session. Does notes for a hike buy you much on the pound. It is now weaker against the dollar by almost 0. 1 . In about five seconds, we will that highfrequency figure of initial jobless claims, this is estimate, 2. 41, the 2. 45 the estimate. It is a drop of 8000. Pointing toward what janet yellen sure would say is a very tight neighbor market. Businessok at the fed outlook, that jumps high relative to the median estimate. It dropped from the previous number, 38. 8. It is an upside surprise against the estimate. 237,000, david. The estimate was 0. 1 . David we are going to bring in and mason issa. As we sorted through, you are an economist. What do you Pay Attention to . What jumps out at you that tells you something about the economy. There is no question the job numbers continue to look good and we are seeing a nice three bound in manufacturing, but the number i care about most is the import price number year over year, and that is because it factors directly into the Federal Reserve inflation model. This is how we see the impact of oil and the u. S. Dollar filter through to the u. S. Economy. We are seeing six consecutive months of positive import rices. The problem is that it this is eight this inflationary force, and it is a data point that does not get a lot of attention. David if this figures into the numbers the fed is looking at, what does it say about janet yellen looking through those soft Inflation Numbers . Frances she tried to be dismissive yesterday about what we saw with weakened inflation. The problem is that if you look at it historically, it has been since 2012 we have seen a 2 inflation target. We have not seen inflation above 2. 5 since 1993, and the average of the past two decades has only been 1. 7 . When i look at the big picture, i have trouble believing we are getting back to 2 by 2018, when he 19. 2019. Jonathan when you look at the fx market, is it a struggle to build a bullish case . A lot of that is predicated not just on the Inflationary Forces has become more inflationary more deflationary trenched in other economies. That provides other Central Banks to pivot elsewhere from being as they have been the last several years. You can full this data into the data we had from the labor market and put it into the Federal Reserve conversation. Everything else says reflation is him there. Jobless claims say we have a tight labor market. Frances steve as we were saying in an earlier segment, it depends on what you think of the phillips curve and things like that. The dollar view becomes very interesting because one would think that the central bank, with the fed hiking Interest Rates, the dollar we get stronger. Structurally, we are fundamentally and structurally underweight the dollar. We would be underweight the dollar against higheryielding e. M. Type currencies that are giving us more carry, and even from a fundamental perspective, some of these currency markets, particularly emerging markets, look like they can appreciate more relative to the dollar. Fxathan looking at the market, similar to the bond market, a lot of people have priced down the deflation story in a similar way. What will take us there . I think we are already headed toward a little more downside. To his point earlier, in terms of the fed beginning a straight normalization process, i think what is different this time around is that the shock value of the fed normalizing rates is been in the has past. That is because we have been in this epic scenario. Where we have had massive quantities easing massive quantitative easing elsewhere, that will resonate with the markets more deeply than doing an incremental 12 five basis point hike. David play this into the real economy. Mi disturbed by these numbers if they are not inflating because i will not be able to get Pricing Power . Or on the other hand, will it increase demand for consumers because prices will be cheaper and they will buy more things . Steve you are zeroing in on an environment of elevated policy uncertainty when it comes to the Federal Reserve and also when it comes to washington. With the Federal Reserve, we are unsure what their level of tightening would do. We do not know what the Balance Sheet reduction would have we do not know what effect the Balance Sheet reduction would have on the economy. If i were a business owner, i would operate slowly. That is why we are seeing new business activity. David if this plays out the way it looks now, it is cheaper to borrow money if i am a company. Does that change the way i structure my Balance Sheet . Am i going to leverage up more if i get cheaper that . Steve i do not think that is the answer. Plenty of Balance Sheets are levered and need to the lever to some extent. It is really what the productive use of the capital will be. Issuing bonds, buying cash, but at the end of the day that productivitywith and business investment. The money is cheaper, but it has been cheaper for a wild. Does it matter for the real economy . Unless you can get productivity higher. Jonathan a lot of money will come back from overseas with tax cuts, and they will invest it. If they have productive uses already in that capital, why would be thats why would they be putting it into steve i think were frances i think we are in an environment where we do not have Pricing Power, productivity is low, and i am not we are at full employment just yet. One of the more interesting components of the Federal Reserve commentary yesterday is they lower their estimates for unemployment to 4. 2 for the next two years and did not increase materially their gdp or inflation forecast. That says we are not at full employment yet, and the Federal Reserve has been underestimating how much slack is in the economy. Thank you very much for joining us. Jim caron of Morgan Stanley will stick with us. That wraps up the data in the United States. Deflationary forces the initial jobless claims showing some tightness. Where is wage growth . That is the unanswered question. Lets get you an update on headlines outside the business world. There is emma chandra. Emma special counsel Robert Muellers investigation has taken a new turn. According to people familiar with the data, he appears to be looking at whether President Trump tried to obstruct justice. He will interview top u. S. Intelligence officials. The issue, whether the president asked them to get the fbi to back off the investigation of michael flynn. The president tweeted this morning, you are witnessing the single greatest witchhunt in u. S. History. Inumbersome and remains Critical Condition after yesterdays shooting. President trump visited Steve Scalise in hospital last night. Attacker was a 66yearold man from illinois who had posted antirepublican messages on social media. In the u. K. , it is believed that theresa may and northern irelands democratic eunice party are close to a deal Democratic Union party are close to a deal. Her concern is that the party needs the support of the party. Global news 24 hours a day, powered by more than 2600 journalists and analysts in more i am emmaountries, chandra. This is bloomberg. Coming up on bloomberg markets, an interview with American Airlines chairman and ceo doug parker. That is at 11 00 this morning eastern time. From the World Headquarters here in new york, this is bloomberg. Emma this is the hewlettpackard coming up on bloomberg markets, sebastien 10 30 a. M. Eastern. Now to your Bloomberg Business flash 10 amazon is one of the Tech Companies that has inquired about a possible takeover. According to people familiar with the matter, a deal could ave slack and is slack evaluation of 9 million. This was frank is significantly overvalued. He says he is willing to do what is needed to lower it. Interventionrency or Thomas Jordan spoke to bloomberg tv. Thomas there are no specific limits. We do cost analysis, and as long as we are convinced we have to reflect monetary conditions through intervention, we are willing to do that. Emma the Swiss National central bank announced they would keep Interest Rates unchanged at record Steve Mnuchin wants greater scrutiny of Chinese Investment in the u. S. According to an administration official, he wants if they try to buy american corporations. Russia, north korea, and iran would be on the list. That is your Bloomberg Business flash. Jonathan you want to be on the same list as north korea, trying to buy companies. David know, thank you very much. Jonathan the South African rand, a big move today, tumbling. New political risks emerge in south africa after the countrys minister said companies would have to be 30 black owned. While theinvestment countrys economy has fallen into recession rejoining us from his office in new york is gerardo rodriguez. Still with us is jim caron of Morgan Stanley. The South African rand, at what point this year at one point this year was the talk to me about what is happening within the country domestically yeah is aerardo south africa laggard in the emerging markets. There is a secular decline mainly led by the political dynamics, raining down grains. The economy has been in recession for a while, and the prospects are not looking very good. The levels of unemployment and the potential for social unrest are there here it because of that, in our portfolio, we have underweightcantly for South African equities. These are the latest news only a point in the same direction of being curbed with equity markets there. Jonathan when you say south africa, where are you adding weight . Brazil is a country that we have like since the beginning of the year. There has been a lot of political noise recently with recordings of president tremor. In thea big decline currency, a big decline in equity markets, which only made us to like even more the story. There is a relative from an elevation perspective. The central bank has been doing an aggressive easing of Monetary Policy. There is 75 or 100 basis points more of easing to come, and it is an economy that at the margin is only improving after a couple of years of a recession. Brazil is one of our top picks on the equity side. David for an investor, sort through the South African contrast. Political dynamics gave you pause. On the other hand, you said there was political noise in brazil. There has been a lot of political problems there. Gerardo absolutely, david. What has happened in brazil is that for the most part, after a very difficult period, brazil turned a corner politically and economically. Going to have president ial elections next year, and the stars have been aligning in favor of significant reform, mainly on the fiscal and pension side. It had been a positive surprise that president kemmer president temer had been a to push mainly pension reforms, certainly some noise shortterm. Going into the next year possible elections with a fresh mandate of a new president next year, things are just going to improve in the case of resume. The case of south africa is quite the opposite because notwithstanding, the clear evidence of secular decline in there hasdynamics, not been in the horizon that makes us believe there is going to be a turning point. Jim caron, how much of this in brazil is a big 10 yield . Jim if it was not for politics this year, there would be no volatility. What we found is that a fundamental story is the reforms with Social Security and pension reforms, this is really what the country cares about. This is what the bondholders actually care about. I think it is positive. I think it is an opportunity to look at this yield and look at this backup. Plus the global backdrop is pretty good, too. You have strong fundamentals globally. You had a little bit of a hiccup well. Zil for us as brazil is in the position that we have for us as our in our portfolios. With temers problems, we added to bonds and currency. E. M. ,an as you look at do you want the local debt . Do you want to get exposed to the currency bump . The current environment where the reflation story has been moving of growth, stability, without inflation picking up to the extent that we expect it, i think that that environment is favorable for local currencies and for local debt in emerging markets. What we have been doing in the portfolios is clearly adding on weakness, particularly in the case of mexico, which has been subject to Noise Associated with the u. S. Administration, potential trade policies, nafta, renegotiation. Clearly the local rates has been one of our top picks, and it has been one of the top performers in our portfolio. The environment that we are leading, we continue to be supportive broadly speaking for em currencies and local debt. David we are talking about political noise around the world. Lets talk about noise in washington. That is about russia. You are still interested in russia. Why can you look past the noise there . It is a bit unclear how things are going to involve around sort of the u. S. President ial administration and the relationship with russia. Russian equities it is a market that we like. It is probably the cheapest market that we find out there. It is an economy that has been improving significantly not only on manufacturing but also in services. There is a bit of a headwind because of the recent decline in oil prices, but the central bank is also in the middle of a very aggressive easing cycle. It is very likely that this economy tomorrow are going to reduce rates. That will be good for equities in russia. Morgann jim caron of stanley, thank you very much. We go to the blackrock trading. Joining us, rick reed. And Jeff Rosenberg as well, apollo gold bird. Low op david if you have the bloomberg terminal, you want to check on tv. Interact with us directly. We will respond. On your bloomberg. This is bloomberg. David this is bloomberg. Im david westin. Bloomberg new Energy Finance has released its 2017 new energy outlook. It paints a picture of dramatic changes and how we are going to get our energy over the next 20 years. Joining us from london is the europe, the middle east, and africa. Thanks for being here. This covers a lot of territory. Take us where you want to go. One thing that stuck out to me is the extension to which you believe solar will be replacing coal over the next 20 years. Thats right. The report is all about Technology Costs and technology innovation. This transition from the old to the new. Couple ofo identify a tipping points. When we do that, we see clearly that so large gets cheap enough that its not to not only the preferable when you build new power stations, but it is to ofercut the existing fleets power stations. The big stores are coal and how solar can displace coal use in china and india. David up to this point, around the world it has been heavily subsidized why governments. Do you see this cost trend continuing . I am very mindful of President Trumps act to take us out of the paris climate accords. His government just not going to be a factor Going Forward . Seb it will be increasingly less of a factor. What we seek to do with this analysis is step away from that and look at the underlying fundamentals of technology change. Is, cancel our cell . Yes, increasingly more. It is cost competitive in australia and parts of western europe and certain parts of the u. S. You look forward and say, how did this change over time . Without subsidy, but 2023, so large gets cheaper. That is a really big conclusion for the u. S. , which is in the midst of a gas revolution, but solar may be on our heels faster than we think. And we push forward. By 2030, maybe the coalfired power stations in china and certainly in europe will start to feel will start competing directly without subsidy. It looks at the underlying economics. The results are pretty confronting. Jonathan is the conversation more about the price elsewhere that will kill coal and not the regulations . Seb coal is in a very difficult position. Immediate term regulations are putting a damper on it and increasing around the world. Increasingly, these regulations become secondary to the economics. We have cost declines for so large looking like 67 between now and 2040. There are similar stories for wind as well. Soon these regulations will be secondary to the underlying economics of the product. That is a powerful thing. When we strip it away, what can so large do . It can do a lot. Jonathan lets get to breaking news. The chancellor, Philip Hammond we understand the whole canceleds been following the fire that engulfed a tower. The dinner has been canceled. You are watching bloomberg tv. Jon Thatcher Jalan fed chair janet yellen maintains her outlook on Monetary Policy. Rob miller is said to that rob mueller a warning from Goldman Sachs last friday, a rate hike four days later and the tech sector is under pressure in this mornings session. Good morning, this is bloomberg daybreak. I am Jonathan Ferro alongside david westin. To the openingwn bell in new york or lets get you up to speed on the market action. Futures are softer, the nasdaq even softer. The cable rate down on the day, a pound that is weaker even with three policymakers calling for a rate hike. Treasury yields bounce, higher at what true basis points. That is the story. Lets get in to some movers. Here is abigail. Abigail we have movers on earnings. Shares are plunging for kroger, plunging 13 . It is the worst day for them since december of 2010 after kroger slashed the fullyear earnings guidance. It looks like behind this weakness, food and grocery deflation, plus competition from the likes of walmart on already razor thin margins. Faring much better, jiggle faringre up 2 , much better, jabil circuit. Since this company does receive 24 of its revenue from apple, the iphone 8 must be in decent shape to raise the fullyear forecast time will tell. Here are some of the tech losers you were talking about. Some of those highflying chip stocks over the last 12 months, videos up more than 200 . Amd up. Is the possibility that perhaps this rate hike is going to continue to take investors growth of tech index. We have highfliers selling office money. That, im glad you said it is up 200 , down 3. 05. Fed officials stated their course on raising Interest Rates despite concerns about less inflation, and they also laid out plans to trim the huge Balance Sheet. Joining us from washington is michael mckee. Mike, why dont you answer a question. We will talk about this. Are they tightening or not . Is this semantics . Mike technically they are tightening a little bit, but not beyond the neutral rate. Policy is not tighter than it would be otherwise. It is not as accommodative. That would be the way that janet yellen is putting it. There is still accommodation going into the economy, and the Balance Sheet has not been drained. They are not starting that yet. They are buying treasury securities. David they have raised rates several times, and yet financial conditions overall have become looser, not tighter. What accounts for that . Does that at carriage them does that encourage them to keep going . Mike it does not encourage them to keep going, but it may give them some impetus to go farther and faster if inflation picks up. Other Central Banks around the world are continuing to dump the to dump liquidity into the global economy. With u. S. Rates higher than other countries, and the movement of Global Capital being so easy these days, the fed is having a harder time transferring Monetary Policy into the economy. That does not bother them yet. They are trying to get rates up to a more normal level for this level of economic activity. David mike mckee, thank you for joining us from washington. The ecb is driving the bus, it appears. Jonathan yes. In global markets, here is the story. A techare worried about selloff, some softness this morning in tech. It resumes wednesday. Normalized Monetary Policy cant the move lower has been tech specific. The s p has been higher. Then the nasdaq 100. Its worst fourday performance in seven months. Reporter olliks rehn it joins us. Down across the board. Soft formoves, but certain. One of the things that was interesting about friday and monday pasta teary ration in the tech sector, it left a lot of room if you believe there is further to go on that trade. I have a chart here looking at to at the tech index relative to the s p 500. You are looking at the bottom panel spread between the two. Tech is the most expensive relative to the s p. If you look at this across a range of different comparisons. If you look at it next to value stocks, energy stocks, no matter where you pick, most of the sectors show tech being very high at an elevation relative to its peers. If you believe that will continue, you see a prebubble scenario. At that level, but if you are on the flip side and you say tech is overvalued and needs these more down to normal relationships, it has a long way to go. Jonathan steve, is that what you see, too . Steve the construction of earnings is important. The constituents of earnings was very important last month. Perhaps more interestingly is that the International Component of earnings in the u. S. ,he question is around earnings and i think it is a relevant one. We are inclined to look globally where valuations are not as much of a headwind. We are doing a lot of valuation work. David is this basically all technical, in the sense that people overbought fundamentally in the tech sector . The things driving tech are still there. David this is a microcosm oliver this is a microcosm of something larger. The economic fundamentals, the earnings fundamentals they look ok and are getting modestly better. These valuations require better than not good, better than good. David if this is happening with people aremeans taking money out of check, but they must be putting it somewhere. Where is it going . Steve what we have oliver what we have seen in the past days is differences with leadership in the market. Some of the industrials, but financials and energy were flat going in. Week,il about friday last when this started to fall off a little bit, we saw some of these sectors doing pretty well. One of the interesting things on the bounceback. Even though tech was deteriorating, the rest of the market held up well. Tuesday we got some green. If you looked at what was happening, a lot of companies were getting short covered as well. You basically took the s p 500 and is sectors and looked at the ones that were short, those were the ones gaining most and leading on the day. That is a pretty good indicator as well. Jonathan cutting in with breaking news, nike is cutting 2 of its workforce. Starting a new company alignment, david, in 12 key cities across 10 countries in a new plan, creating a new nike direct organization, led by oneill. The headline, the stock remaining where it is in the premarket, down 1. 21 . Putting some pressure on the company. The dry spot in this space seems to be at this moment, adidas. David there is a lot of concern about adidas. Now nike is under pressure. Maybe it is football, as you would call it. Jonathan the nike plan involves cutting cycle times and half. A key headline here, nike cutting about 2 of the global workforce. The stock premarket pretty much unchanged, down 1. 2 . Special thanks to oliver renick. I want to get to what is happening in london. We had a bank of england decision earlier five voting to keep rates on hold, three voting for a rate hike. Hawkish surprise on the vote for a rate hike that did not come. You saw the spike, then we rolled over at 1. 2736. The news kind of dripped out after that. We have been looking forward to the annual speech from Philip Hammond and governor of the bank of england mark carney. Block fire is cited as the reason why they pulled out of that dinner. Theresa may is saying there will be a full public inquiry. The mansion houston or is now being canceled. There will be no speech from chancellor Philip Hammond. Out of thews coming city of london. David this is bloomberg. Each day seems to put this front and center, with the most recent report being that the special counsel, Robert Mueller, well be talking with Senior Intelligence officials joining us from washington with more on this is chief washington correspondent kevin cirilli. What is the latest on this development . Is tweetingresident this morning a response to the Washington Post reported in which they suggest the investigation is now that mr. Mueller is investigating whether or not the president obstructed justice. In a tweet, he said they made up a phony collusion story, so now they go to up section of justice. In a followup tweet, you are witnessing the single greatest witchhunt in american political history. The white house pressing back, that there is not enough evidence for there to be obstruction of justice allegations. I can tell you that every republican i have spoken with on the Senate Intelligence committee, based on the testimony of james comey, says they do not believe there is anything to this. Democrats disagree, including senator mark warner, the top democrat on the committee. David as you pointed out earlier, there is not any evidence there is not enough evidence because there is no evidence of it may be months or longer before we have any sense of it. I suspect if i ask you who is calling the shots, you will say the president. So let me ask you, the people who take instruction from him, what message are they taking, that we should spend all of our time going on on what is going on with the investigation, or should we be getting back to tax reform and infrastructure . Kevin since this story broke, the sources i spoke with who work with the west wing told me that there is a frustration, a palpable frustration about and really any decisiveness about how to respond and indecisiveness. There is that continued storyline a frustration coming out of 1600 pennsylvania avenue. To your point about the timeline, speaking with the ceo s yesterday as they leapt as they left the white house following their meeting with evocative trump, they conceded that there is a bit of frustration because of all the dominating storylines coming up. They wish the president would focus more on the spotlight to use the bully pulpit and focus on initiatives rather than going after people like mr. Mueller and mr. Comey. David great to have you with us. There was a day not so long ago when the markets seemed to turn on what is going on in washington and with donald trump. But they do not seem to be taking it much to heart recently. Back aftere come being down. Still with us is steve wood of russell investments. To what extent do you take into account what is going on at 1600 pennsylvania avenue, and generally in washington as you look at Investment Decisions . Steve we look at not politics but policies. We spend a lot of time working with clients and investors saying we need to look at what will impact a president s portfolio over a recent over a reasonable timeframe. What policies will be impactful . What we see with trumponomics is that trumponomics could be added to the that could be additive to the economy, to earnings. But we are modest as to how impactful that would he in terms earningsrnings and at 3 or 4 real gdp would not be reasonable. It would be more if we get s atthing in the mid2 best. The legislative counter is that what you get in the United States will be at the end of this year. But really it would be at the end of 2018. With all their will look at dr. Yellen and what she is saying. Yesterday was the news story of the week and the month and the year. Jonathan what they are doing and maybe what they are not taking notice of. More Economic Data is a downside surprise. Is. 2 . An estimate , 0. 1 or dostimate we have had a series of downside in aises across the board lot of sectors for the u. S. Economy. Some key drivers as well retail sales, the reflation trade here it whether you look at headline numbers, cpi core, whatever you like. Steve i do not think the fed is ignoring that. To raise into mediocrity. The fed is in a normalization process. That feels like the economys are good enough. They probably will do it while the doing is good here there has been some consistent softness. We talked about the diversions between the hard and soft data. There has been recent softness, so that is why we think the fed is likely to stop at two rate hikes in 2017, and really fill in some details about how they are going to deal with the Balance Sheet. They will also want to see how that Balance Sheet titration works, and how the market reacts in 2018. They are going to tighten it to mediocrity, or move some accommodations, but the Balance Sheet will be important. Jonathan we had jim caron on earlier. Fed,orecast from the median year end to 2018, is 2. 15 . Is 2. 125 . Theone is really wrong or curve is going to be terrifically flat. Steve my axioms are between equity in the market, you want to go with the bond market, not the equity market. In terms of fed forecast, go with the bond market again. We think the fed will have some real constraints. Mike mckee brought up some fantastic points. In a globalized market, you have the jgb market, the boone market sitting at 33 basis points. That is creating some constraints over what the fed is able to do. The fed will probably move twice in 2017, and then they will see what happens as they begin to roll securities off the Balance Sheet. They will target the next couple trillions the mid2 makes sense. Be immaterialy to investment constraints at investors need to manage around. They need to be global and active and multifaceted as well. David steve wood will be sticking with us. We will be joined by Julian Emanuel when we come back, talking about the Financial Sector was julian and with steve. Live from new york, bloomberg daybreak. Live from new york, this is bloomberg. Jonathan janet yellen suggested weak readings on inflation. Financials,t to setting the fed to its highest level in about three must. Financials received some added help from treasury secretary Steve Mnuchin when he said he wants to unlock burdensome wreck burdensome regulations on smaller lenders. The u. S. Look at banking system, 50 of assets are in the about 12,000 other banks. We want to make sure that we unlock the burdensome regulation on those other banks so that they can make sure they are lending in their communities to small and mediumsized witnesses. Jonathan still with us, steve wood of russell investments. Also, Julian Emanuel, u. S. Executive director of equity and strategy. You can tell me a great story about financials earlier this year. Is it a bit harder to sell now . The long end of the yield curve is down. We are closer to 2 than we were. When we look at it, in terms of the Regulatory Environment, as we just heard, there is a tailwind there for the group. The other thing, if you think about the narrative over the last five or six weeks, the concern has been on the part of the larger banks that low volatility was likely to dampen trading revenues, and that is never a permanent state of affairs. When we look at how yields have moved the last several days and how the Technology Sector has moved over the last week, it seems that low volatility is not going to be the rule during the summer. Jonathan you can bring up the performance of every sector since the election. You will see that the yellow line at the top is financials, back on top if you based it the day after the day of the election. How dependent is that sector on therec. Agenda . Julian is definitely an element, but does doddfrank need to be repealed . No. Will it be repealed . Not likely. For us again, this far into the bull market, we are sensitive to valuations and financials, as we can see by the first few months sufferingr, still from the bearishness that has been with us for almost 10 years. That is positive for a sector trading relatively cheap. David would you say from the beginning that you took with a grain of salt that trump trade, what was going to happen. What about specifically for banks . Do you agree with julian that that could help . Steve we do. ,olicies that can be impactful in the regulatory space, that is something the president can affect. That has been something of enough drop of an updraft for financials. Also a trend from election day, the 10year move was not exclusively, but in large part a change of inflation expectations. I think the market in financials right now are recalibrating. , a realistictation expectation and a trumponomics expectation, we think that will be on the lower side rather than on the higher side. But with the Regulatory Environment, that will create some chopped upwards for nearterm financials. David how much has the Regulatory Environment changed . There are openings that have not been filled. Viceill do not have the chair of the fed on Bank Regulation in place. As other things develop in washington and Congress Gets distraction Congress Gets distracted at what point do we have a problem with people not in place . Julian it may be psychological. Risk in a firmwide meeting this morning, and the fact that we were talking about the potential elements of the volcker rule that could be rolled back was a complete seachange. The other interesting observation was that our Compliance Department was really largely silent on the topic. Jonathan we will have more questions about this in the commercial break. Steve wood of russell investment. From new york, youre watching bloomberg tv. [ mooing sound ] [ laughing ] its drivng me crazy come on. [ spitting from tongue ] time for my secret weapon. Sports, movies, tv, ah. Show me music to distract a minion. [ voice remote click ] [ pharrell starts to play ] ahh. Im pretty smart ahhh [ mooing sounds ] [ minions laughing ] show me unicorns. [ voice remote click ] together ahhh. That works too. Find your awesome with the xfinity x1 voice remote. See despicable me 3 in cinemas in june. This is bloomberg daybreak. Futures are softer. By 89 points on the dow. On a percentage point bases, the pressure on tech. In theery nasdaq down by futures market ahead of the cash open. Delivery surprises today. The hard data, downside. The treasuries dont know where to go. Firmer. Ar is that is the story across assets. Lets get over to abigail doolittle. Abigail the bears are in control of this open. The dow, s p 500, nasdaq trading lower after the dow set another record high yesterday. Pace00 the nasdaq are on for the second days of decline. The s p 500 having its worst open in about a month. As a declines for the nasdaq down more than 1 . Showing the textile of continuing after the fed raised rates tech sector contending after the fed raised rates. It seems we may be seeing a bit of a repricing of risk. Time will tell. When we look at the tech movers today, we will see some of those big declines for what had been are winners on the are, big gains on the year compared dramatically. Netflix, facebook, big declines. Up until last thursday, the stocks have been up about 30 on the year or more. Now were seeing investors going away from this sector. But but a downgrade also a downgrade. Overalleement on tech whether it should be high flying or if the selloff is overdue. Disagreement, sort of a micro example of what we have happening in check. On the selloff for tech, big return to volatility. Chart. A year to date in blue, the s p 500 vix. Where is the volatility . Themange, nasdaq 100 vix up at 17, moving toward its high from last friday. Perhaps were going to see the s p 500 vix finally follow. We will see. Jonathan thank you. Julian, technology is a little bit softer. Where we still stand on the year. Where is the softness coming from . The fact we have come from a big couple of months . For the most part, yes. I will preface this by saying looks as ant ubs overweight sector. When you have a relationship the first six month of the year where energy the Energy Sector is on a daytoday basis trading as if it was a technology put option, outperformed by the tech sector by 35 , that kind of relationship is inherently unstable. We did some work showing the fng stocks accounting for more than one third of s p returns prior to last friday was making investors and comfortable. However, it is not unusual. The softer side of the work showed that technology was likely to underperform on a one in three month basis, but eventually, what happens is it is a buying opportunity. Jonathan in some ways, it is been like a defensive sector. You get the secular growth story. You avoid the d. C. Agenda. Is that what happened with tech in your mind . I think so. We do a lot of work not only in the Economic Cycle and valuations, but moment him. Sentiment and momentum are very powerful in the nearest return. However, valuations win the day. You can run but you cannot hide. Looking at valuations right now in relation to fundamentals, that is something you need to consider within equity space and and significant. Weve been getting the valuation component in a global context, something that has given cause for concern. That is why we have tended to rebalance globally, looking at europe as the number one and globally within multiasset stop david the delta, the change of the allegations that you have seen over the last six months. You just said europe. What else have you gone up or down in . Equities versus debt . Geographical . Geographically, we have like europe. Looking at emerging markets where there is a stabilization process going on. I would also say in emerging markets, that is a great opportunity to talk about active management and the ability to discriminate not only between countries but sectors. Doing a lot of global credit work. This is a space where i think a lot of research is called for. Japan comes up in the conversation as well. If you have cuts intensity in your model, it is all hands on deck. Multiasset, multicultural he profile whereas the central bank continues to deprive the world of risk for yield. How do you reconstitute that for a client . David what are we talking about with multiasset . Something other than equities . Absolutely. If you look at the returns of the last 10 or 20 years, you can make the argument that in total, a lot of things seem fully valued, lets say. You really do have to distinguish and did deeper. Part of that Digging Deeper is sort of the clustering behavior that in large part has resulted in this technology outperformance. We would agree we think europe looks attractive. We think japan is a story that is being overlooked because unlike the concerns that chair yellen sort of brought to the surface yesterday about inflation in the u. S. And being vigilant about it, there is a real opportunity in japan because of the dynamics to see inflation uptick for the first time in a number of years. In japanese stocks like inflation. David quite a number of years. A big number of years. Jonathan make sense of what were seeing in the equity market. Ive had this conversation so many times. Alltime highs on the dow. Treasury yields off the level. How does the fed play into that story . You have equity markets, fixed income, which we spoke to earlier. I think the feds plan, they want to raise rates because they can get away with it they think right now, even though there is some softness. Valuations at these levels in the u. S. Markets, we think are being decreasingly justified by the fundamentals. For most investors, they do something simple. Get rid of their home country by us. If they do that and become global multiasset investor then aluations can be something of headwind or tailwind, but they dont need to stand on their head and make difficult choices based upon valuations. Jonathan is the Federal Reserve , looking at the asset prices, is that what is happening . Some people think it is. They are always looking at it, but i think you really did not hear too much commentary about low volatility yesterday. You do from time to time. It is definitely on their radar. In that respect, being that were so close to alltime highs, i think that is why some people interpreted yesterday as a slightly hawkish bias. Talking about the Balance Sheet and other rate hike intended. The dots did not move significantly. David from the investor side, given the uncertainty am a what kind of premium do put our liquidity as you put together a portfolio . You have to david is a larger today than the year ago . In theory it isnt simply because volatility is lower, but this is the point in the cycle where to us what we dont want to see is the type of cognitive mistakes that investors made in 2007. Volatility got very low. People took too much risk, and they got lulled into this trap whereby it looks like you should take more risk the lower volatility goes. Then when you get the turn, you realize the tide has gone out. Jonathan thank you to steve wood for being with us. Julian emmanuel will stay with us. Futures were softer, stocks are, too. The dow now down about one third of 1 . The s p 500 up by a half of 1 . The nasdaq, a full. 9 lower stop from new york city, youre watching bloomberg tv. This is bloomberg daybreak. Coming up on markets, chairman and ceo of American Airlines at 11 00 a. M. Eastern time. Jonathan nike is cutting about 2 of its workforce. I will get that out. Shares are falling by about 2. 5 . Joining us on the phone is sam poser. Price target. Still with us, Julian Emanual. A 2 cuts toith the workforce. Then i want to get into the supply change story. What do you make of the changes as you see them . They said their consolidating their divisions for their geography, reported geography from six to four. I think that 2 is probably just based on that consolidation. I dont think they are going out there cutting Product Development people. I think it is all about it is all about back of the house people, combining latin america and asiapacific. If you have accounts payable ofple, you have two, one them does not need to be there anymore theoretically. I think the editing of that is probably more reflective than the reported geography. Jonathan talk about the rebound to global operations, part of the bid to move faster. The very specific supply chains they have, their ability to react to things that so well in store do not sell well in store in the can produce a whole line in a very, very short time. Is that what nike are trying to achieve, to . Eva to some degree. Theres a lot of r d that goes with nike, especially to make out souls. Theres a much more technical element when youre dealing with nike or any of the athletic guys. I think that i think it is much more about being able to respond to a new color or something. Uppers are easier to do than out souls. Once you have something, you can respond or recover. Right now if you have a great selling shoe, you have to write an order and basically wait six months. They want to be a little recover faster on that kind of product. It is also about being able to drop colors in in a significant way at the right time and so on. Runningam, if you are nike right now and youre trying to grow it, are you looking at making these changes in order to grow the overall pie or is this a matter of taking market share from somebody else . If so, who are they taking it from . Well, i think that nike about two years ago saw adidas doing some big things. Ck record to that time had been we have a six thingsuccess story, then fade away. That did not happen. I think nike was on their heels back then. I think they recognize that. I think this is all in evolving since that. Have ink they everybody has to get faster just because the retailers are asking for that, the consumers are asking for that. I dont think it is a nikespecific thing. Nike is hotkey right now. They realize what they have to do. Wordis a company that the complacent i think that is the first time i would have use that word in 15, 20 years. It doesnt happen very often. I think they have a phenomenal innovation and pipeline and now they just have to make it work faster. That is clearly you talk to retailers, that is clearly the next notation they have from everybody and they want to see it work. Asle adidas has it set up well, no one has really seen the fruits of this yet. But they want to be a little drop newness in because Consumers Want new stuff all the time. Droppinghat is about newness income if it is big or small, is also recovering on an item that may performance better than they originally anticipated to be able to do that quickly. That also has to do with nearing the styles narrowing the styles. Jonathan the one your story is something else. Adidas is up 52 over the last year. Nike has gone nowhere. The ceo, what does mark parker need to do to kind of emulate what has happened over at adidas . Look, i think nike has put their they always built off of athletic, even when they get to fashionable stop if it is jordan or whomever. Has said were going to work more off of celebrity. I think nike i think nike has to bei think nike has quick or and fresher, but i dont think they necessarily have to in the late celebrity. Wouldl believe that kanye not have gone to do this unless nike said, go ahead. Nike looks carefully of what is right for their brand. I think that as i said, i think they did not take quite a seriously some of the lifestyle stuff that was going on in a adidas. I think a lot of the concerns about nike are very backwards looking. I wish i had, 18 months ago, said this looks like trouble. But i think nike is so competitive, that such a good innovation pipeline as i said. I think a lot of this stock reaction at the moment is , six months ago, rather than six month from now. David we have talked a lot about the changes. Focusing on 12 largest cities around the world, saying a diverse and of their business is going to come from these cities. What does that say . They want to be an urban brand particularly . Theyre saying 80 of their growth is going to come from those cities, not 80 of their business. 80 of their growth is going to come from those major markets. No, and if you think about new york, there is big opportunities here. If you think about shanghai all of the cities they mention here big opportunities. Nike is a broad brand where they can do very Different Things through their own direct business, through working with the correct retell partners to build it and so on. I mean, you know, i think it is probably the right way to think about it. I dont have any details yet. Earnings calls are in a couple of weeks. Jonathan talk about the pressure mark parker is under. The multiple apply to adidas is about 31 times earnings. The nike, about 22. That is quite a big spread. What does mark parker need to do to close the spread . To in the lake the multiples, doesnt he . Im not sure of the exact size of adidas, but nike is a 35 billion business that over the last three years has given away 3 billion from currency by itself, unfortunately. Because of the strong dollar. But i think what nike does is put their brand first and fixes it. I think their patient. I dont think it is a problem. The issue is, adidas can grow their business 15 to 20 a year, so they are getting multiple offers that. Nike gets back to the midto high single midsingles, low doubledigit Revenue Growth and theyre going to get it back. Theyve had a little bit of a blip there. I think theyre well aware of that. I think this is part of what they are doing here. David sam, thank you for being with us, sam poser. And Julian Emanual of ubs has been with us. Thank you both. If you have a bloomberg terminal, check out tv. You can interact with us. This is bloomberg. Years, Bloomberg Business week has cover the companies, businesses and people that appreciate the economy. Today, bloomberg relaunched its magazine with a whole new look, feel, and editorial direction. To take us through what her magazine has become, were joined by editor megan murphy. Julian emanual is still with us. It is great to have you with us. I have not worn the stresses election night. This dress since election night. David what are you doing . A lot of things. We have made the design of the print magazine cleaner and simpler. We want the journalism to shine through. Were committed to investigative journalism. We have three outstanding pieces in the book that show that. Give it to them cook interview. Digitally, were layering on new products. We have a new app with daily content that is regionalized. Whether you are in hong kong or all over the world, it will be tailored for you. We have redone the website. Cover. Tim cook is on the not his first appearance. It was great to sit down with him. It was after the developers conference. It was a time we just withdrawn from the paris accord. What was so fascinating is how candid he was about how he still wanted to work with the administration on things like jobs, manufacturing, potentially tax reform despite the huge differences on other issues. David how do you test the success of the relaunch . First of all, the success we have had even today is down to the Extraordinary Group of people who have worked on it tirelessly or seven months. The journalism is that the front. The success will be in really showcasing the readers respond to it the way we want. We want to be part of their daily life. We want business week to be the must is nest must read business. Jonathan you mention the paris climate accord. D. C. Bureau chief. Is it a business week consumed by d. C. Agenda as well to some extent . We will always take our lane with d. C. And wanted to marry politics. We think this is a time to be talking about it as we talk about that resurgence of economic populism, things like trade. Were looking globally. Spoke about brexit in the areas where voted overwhelming for how that is going to hurt them in terms of companies and jobs. We want to look at these political trends, economic trends, and frame them and a global perspective. Jonathan talking by the politics of d. C. As much as you do now . Absolutely not. Totally unprecedented. Nixon andg and the reagan days. You see how the markets move on a daily basis. You see the affect of 140 characters. You have to focus on it. You have no choice. David doesnt matter as much today as it did four month ago to market and business . I think people are still watching each and every day about what is going on. You see some of the correction and technology. The uncertainty. We have talked about this. I have always been surprised how Stable Companies and markets have been. I think you still come if you still dont see that Movement Forward on some of these key policy agendas, is that going to chip away further . Jonathan thank you, megan murphy, and the relaunch of business week. Julian emanual, thank you so much. Lets get you up to speed on what the session looks like. Are,es were softer, stocks too. We are down on the dow. We pull further back from the record high in the s p 500. That does it for bloomberg daybreak europe stuff that does it for bloomberg daybreak. The covering of the market continues right here on bloomberg tv. From new york, on vonnie quinn. Mark welcome to bloomberg markets. Vonnie here are the top stories we are covering. The bank of england shows to send quality Federal Reserve hawkish from janet yellen. In june. On sevenmonthng at a low. Remains upial reform in the air. Freebanks will do for capital. We h