Transcripts For BLOOMBERG Bloomberg Daybreak Americas 20170712

A 42 year high headline, low headline looks awesome but what is your forecast . Neil dwane probably in the next 18 months as we go through brexit negotiations you can see at the margins, unemployment will rise again. Would say is the u. K. Has done very well in the shortterm because the u. K. Consumer has borrowed and spent. Savings rates in the u. K. Have no collapsed to the lowest level possible and your headline is that there is a wage squeeze. Postbrexit, it will constrain the spending by the u. K. , if money isumers cheap, they borrow from the fed they now borrow and spend. The bank of england is worried about the system and all of the other things we have seen in the u. S. So everything has been pulled forward in the u. K. Which is why i am more nervous that we see a slowdown, even if we get the government be a more fiscally supportive. I dont think in the next 18 months that it is a good thing. Alix for the hawks are doves . Joshua feinman i dont think it will raise rates. Alix fair stuff. Neil dwane and josh feynman, thank you so much. You are sticking with us. Up next, we will talk the future of the fed. Gary cohn as the head . We will discuss. David this is bloomberg. I am david west and. Chair janet yellen of the fed will testify on capitol hill and now we go back to Kevin Cirilli with the man of the hour. Kevin the man of the hour. Committee chairman jeb hensarling, we are just a couple of hours away from chair yellens testimony. Where are you going to be . We are on track for policy normalization because keeping rates too low for too long was a contributing factor to our last crisis and i wanted to be next. We see that gives the fed a little bit more room to operate with their open market operations. But we also have a Balance Sheet that is huge. The feds footprint and our economy is so huge and that is troublesome to have a lot of Mortgage Backed securities. Is very worrisome to have a fed so selective in the credit market as opposed to a holistic, macroeconomic impact on our economy. I want to ask her about what they are doing as far as winding down this Balance Sheet to get to a more normal policy rate and a more normal Balance Sheet. Kevin this is something you have pressed on for quite some time in terms of trying to figure out a timeline for when this will happen. The Federal Reserve has signaled it will be the end of the year but how would you go about pressing her for more of a concrete timeline . I asked the questions and i hope she answers. less opaque than the one we have. We need for the Federal Reserve to set out, what is their policy . What is the rules they use . What are the variables . How do they react to each other. In some respects, i am very happy to be interviewed by you now, but there is so much hanging upon the words of the fed chairman. She has said she hopes the wind down on the Balance Sheet operates silently in the background. I would say all of Monetary Policy needs to be operating silently in the background and that means people ought to be able to know what the fed is going to do. Entireldnt be that the Financial Sector has to hang on the word of chair yellen but unfortunately, they do and that is why these hearings are necessary. There is not enough known about the Monetary Policy path. Kevin also about the future of the Federal Reserve chairwoman herself. Have you heard about her job future . No i havent. That is the president s call. Hes got a little while to make that call. Listen, i have a lot of respect for chair yellen. We dont agree on every issue but she is a very capable public servant. There are a lot of people who conserve well as fed chair. Kevin House Financial Services Committee Chairman jeb hensarling, i know you have a meeting to get to but thank you for coming on bloomberg and we will talk to you after the hearing. Back to you, david. David that was terrific to have him just before the hearing. As we mentioned, fed chair janet yellen will begin her two days andestimony before congress whether it is asked asked explicitly, one question in the air is the one Kevin Cirilli asked. Whether she will keep her job when her term expires. Politico reported it looks likely that President Trump will name his National Economic Council Director gary cohn to replace dr. Yellen. We asked him about this possibility. Toyou will have to talk janet yellen about Monetary Policy. That is her prerogative and she is an independent agent in the government. Do you favor her staying in that role . We are not at a time where we are even thinking about that. Her term runs the next year and she is running the Federal Reserve right now. Would you want to . What i want to . Would you . I have a great job running the nec right now. I work at the white house everyday. It is a dream come true job working as an advisor to the president. David that is alix steel cutting right to the core of the matter in advance. Joining us now is Bloomberg Intelligence chief u. S. Economist Carl Riccadonna. Still with us is neil dwane from Allianz Global Investors and global asset manager josh feynman Joshua Feinman. We have to talk about gary cohn and janet yellen. Will this be asked exquisitely and how will it affect it . It has been asked repeatedly and she has continually deferred her opinions on that matter. This is probably her last Humphrey Hawkins testimony as so chair in early february, now is as good time as ever to finally deliver her intentions, whether she wants to stay on or not. David how much would you assume gary cohn he said he would the a low Interest Rate guy. I think he would be of a similar ilk, trying to support the administration by keeping an accommodative stance of Monetary Policy. Janet yellen has taken a slight turn into a more hawkish direction as of late. I dont think there would be a huge disruption. Yellen. Bigger dove then interesting. Never thought that before. But this was Lael Brainard speaking yesterday. The fed funds rate is likely to remain close to zero in the mediumterm. If that is the case, we would not have much additional work to do on moving to a neutral stance. How pervasive is that kind of communication . They are getting closer to the neutral rate. You calling me out . That was a good quotation because she is suggesting it is not too far from where the fed currently stands but also, she said most prominently, the Exchange Rate may be more sensitive to the path of shortterm rates than the Balance Sheet adjustments. The fed is pivoting towards Balance Sheet policy because it has the belief, correct or not, we will see, because this is uncharted territory, that this would have less of an impact on the Exchange Rate. dollar was dramatically appreciating but was a contingent led by governor brainerd, convincing chair yellen to hold off on the path of policy normalization. This is telling you, watch the Exchange Rate. If we have a big adjustment as the Balance Sheet program commences, this could significantly change the feds intentions with respect to policy normalization. They could scale back the qe and they could significantly pull back on the rate hikes. If you have a big move in the currency, that could push core inflation even lower still and really jeopardize it. In our earlier segment, you said how would be u. K. Avoid recession post runs it, well, major currency depreciation could support the economy. We have the opposite if we have significant appreciation. Alix what do you think about that . Joshua feinman it is true but i dont know that we will. Raisedng the fed has four times, overall financial conditions have not tightened at all. They have remained quite supportive. The market is anticipating Balance Sheets as we start to roll lost so that is not a surprise. I dont suspect that when that happens that necessarily people will wake up and suddenly the on that. Going to soar so to the point of weve got a lower neutral Interest Rate, i think most people think that is true. That is one of the factors that will likely limit how high the rate goes. But it is also true that we have had 100 basis points of tightening and it hasnt tighten financial conditions at all. David so i suspect that janet and a halfal two hours from now is to not make any news at all. But lets assume she fails. Alix tune in at 10 00 a. M. David if you were to make news despite her desire, would it be by indicating more dovishness . We are going to hike or keep hiking. Even when the Inflation Numbers softened a bit, how would the markets react if they say, we are having second thoughts. Neil dwane if that was to happen, my guess would be the dollar would weaken. Many people get that the dollar is over around. We have it at 20 overvalued. A lot of people are looking to move out of the dollar and i think that maybe the money flows around the world are very much being governed by the ecb and quantitative easing. Any sign of tapering and more natural Interest Rates in europe inld stop what we have seen the u. S. , particularly treasuries and high yields. I might be concerned that fed policy is one we are interested in. You are right about financial conditions. We dont think the market is quite complacent. We think you will see these rises until the market gets the message that financial conditions are supposed to be tightening. On, our political hats there is also a tradeoff. If you get more trump, you get more yellen. I think they will use his fiscal stimulus in the way of getting rates towards the neutral level fastest. For a lot of us, we have to watch it because we need to see the policy he comes out with. Alix the ramification over the past few weeks has been interesting in the bond markets. Look at the chart. You are seeing the amount of bonds in the Bloomberg Barclays aggregate index that have negative yields that have been falling. It is 14 of the overall index. What kind of trade do you put on to deal with that, when it is not only the dollar or the fed that also the ecb . View, yousix month want to be short. Alix it didnt work in the u. S. Neil dwane but i think the u. S. Is in a different position. There is no sign of the ecb raising rates or doing anything in support of the european economy. The fed is in a different position. I would argue, tactically, that is huge redemption from the Government Bond market in july in europe, it is odd to see this setback in the book when they are printing any bonds. I would expect a rally in the bond but it feels like were going to see the bonds had towards 1 . David youve looked at this for many years now. What is the proper role for congress as they have chair yellen come before them . Is it appropriate to say, you have a theory about what happens with wages depending on unemployment. It doesnt seem to be working out. What is wrong with that and why arent you following . It is appropriate for them to be questioning chair yellen on these issues. Her obligation is to report back to congress. She will speak on behalf of the committee so it is not necessarily her own personal views, but in the interview with answering, he said fed policy is opaque and we dont understand the path of the rules. I disagree heartily with those assessments. The fed is telling us what they are doing over the next three years, what their attentions their intentions are, they have a clear mandate full employment and price stabilitys so this is not an opaque fed. It happens to be ascribing to a type of modified taylor rule and that will be a key component of chair yellens remarks which are released at a 30 because she is there speaking at 10 00. Based on the Monetary Policy report last friday, this is going to be a defense of the fed preserving and sending discretion and not simply hewing to an automated policy response. Alix and part of the reason you havent seen the flattening in the curve is because of that. Because it has been so transparent. Josh, what do you think about Going Forward . N, are wet a coh seeing a rulesbased fed or still a dovish fed . Joshua feinman i think it is rules versus discretion and i agree, absolutely that we will go to the mat with discretion, for sure. Every cycle is different. You have to have that human element. Joshua feinman and to say that there is uncertainty about it but there is uncertainty about the economy and how it will involve so you never remove that completely. Instead of being incredibly transparent in telling us what we intend to do, the economy does not always cooperate. But i dont think that is a lack of transparency. David nobody likes a boss even if it is a rule. Thanks to Carl Riccadonna of Bloomberg Intelligence, neil dwane of Allianz Global Investors and josh kleiman josh feynman of the lesson investment. Report toal monetary congress. We will be joined by Republican Congress and french hill, one of the people who will be asking chair yellen the questions. Next, we had out to sun valley where leaders and finance and politics join for the annual conference. For all of our viewers worldwide , including those in idaho, this is bloomberg. This is bloomberg daybreak. I am emma chandra in the hewlettpackard enterprise greenroom. Ceo. Today, the expedia that is at 2 30 this is can time. Eastern time. David this is bloomberg. I am david westin. An annual gathering of media moguls is getting underway in sun valley, idaho. Our colleague is out there commingle with the moguls. We go out to sun valley, idaho. Wait to see you, even in the chile cold. Tell us, first of all, who are you seeing . Secondly, what are the themes that you expect to discuss at this conference . You have a lot of people from media and technology. Its is fundamentally a media and Technology Conference that has grown bigger over the years and brought in more sectors and companies to the mix. But we have leaders from Silicon Valley come as well, executives from Smaller Companies and bigger companies. The themes vary by year and there is always a focus on foreign policy. David petraeus is here. There is a focus on ai this year. We talked about the magically. He is here to talk about the future of ai. As they arrived at the a lot, that is something all kinds of companies are interested in Going Forward. Health care is a big issue here. There are executives from big Health Insurers here. The head of the mayo clinic and the cleveland clinic. I took an opportunity yesterday to talk about about the Gop Health Care rule in the process for getting passage and here is what he had to say. I think the bill has to fail and i think it will fail. And then i think we need to go back and address what the problems are. Interestingly, what dr. Cosgrove was saying was that has been a conversation about policy but it has been entirely driven by politics. Is here toe he deliver a policy discussion on the Opioid Crisis in the u. S. This is an opportunity for executives across the spectrum to learn about other things and he is hoping to get more people interested in solving that crisis. David so whether washington is going to fix the health care thing or not, washington is a big player in a lot of these businesses. When donald trump came into office it was in part on the process on the promise of the regulation. What is their response . I caught up with kevin was own and he says the president is doing what he is doing at the right pace. I spoke with Michael Eisner, formerly of disney, and he said regulation is a good and bad ink. And i talked to the head of Discovery Communications and he says he sees the regular landscape, the burden becoming lighter. Here is what he had to say. The overall focus is, it looks like it is more likely to be lighter in the focus of how you handle antitrust so i think overall, it is less regulation, it is more positive. From that perspective, i think it is likely to be a favorable environment for business here. I was talking to people yesterday, five months into this administration, and in washington executives are still taking a wait and see approach. There is a lot of uncertainty that exists. David finally, one of the things that everybody is waiting for is what big deals we announced. My company, cap city, got bought by Michael Eisner and disney. Are there any deals kicking around out there . There is a lot of talk about content. Is there controlling content among other stocks . What Cable Companies and Telecom Companies are going to look like. I was struck by what he had to say about the longterm approach that lets you what he has to say about that. Youre are going to see distributor try to make a determination. Can they get exclusive content from Program Platforms or did any to buy . Cbs is still front and center. Yesterday, we asked if there was any interest in cbs by an lions gate, the filled studio and he said, unequivocally, no. We will see what is shaping up at sun valley. David it is always the night before they do it in my experience. Thanks to david gura. Later in the program, you will ceo tim with oath armstrong. Still with us is neil dwane and josh feinman. Lets talk about deals. Lets talk about the market is. Is this an opportune time to put together big deals . Joshua feinman financial conditions are favorable. From the macro perspective, i dont get into the weeds in specificthe sectors are companies but i think the macro and financial environment is still ok. What i find interesting is that yesterday, when we had the russia drama play out, stocks recovered. We didnt see that happen with the dollar. It stays low. It has not yet recovered. What does that mean, that the driver of the dollar is . I think a lot of the driving of the dollar is about the uncertainty around the politics but also the fact that i think theyre a Better Stories emerging around the rest of the world. I think it is a growth story outside the rest of the world and at the margin, i think a lot dollar andwn the marginal flows are moving to more attractive Asset Classes. To the m a, i think the important thing is when you go back, we will see a lot of u. S. Companies that have effectively been their margins are at record highs and they can borrow free in the markets. I think you look around the world for assets to buy because they are generally under investing in their own businesses. You will look at the dollar as strong and the ratio for the equity market is high. I would aspect to see a lot of m a out of the u. S. And the rest of the world. David the valuations are so high Joshua Feinman but i think valuations in the u. S. Are higher than they are in other parts of the world that i agree. People may look to other parts of the world as value or at least relative value. Alix great to see you. Thank you for joining us. Neil dwane, Allianz Global Investor and josh feynman of deutsche. Chief economist. Markets. Ng day in the if you have a bloomberg terminal, check out tv. Click on our charts and graphics. Interact with us directly. Go to tv on your terminal. If you missed anything of the conversation you had, you can go back and click on it and rewatch. This is bloomberg. U. S. Equity futures marginally higher, following the european stocks. Here are the movers we are paying attention to. European oil stocks, bp, shell, all slightly higher on the day. You do have some inventory numbers that came out yesterday that were positive. We have doe numbers at 10 30. That could be positive. The eia is revising their shale outlook down for 2018, potentially good for that european majors. Burberry is over 2 . Q1 come sales grew up by 4 . High Single Digits in europe and the middle east and asia. American sales to decline slightly but Morgan Stanley predicts a good quarter for leather goods. Retail story, that is not bad. Youve got amazon. Prime day sales are set to be the biggest ever. 2 billion, aach 21 increase. Ive got to be honest. I was on it last night and there was a gallon of elmers glue that you could buy on amazon prime. Like, who needs that . David your 2yearold had arrived with that. A ride with that. Bill gavin. The former fbi assistant director. More coming up. This is bloomberg. Gary cohn is said to be the front runner getting ready to face congress. A 42 year low. Real wage growth is weak. He is not ready to raise rates. The controversy could dim the u. S. Economic outlook. David welcome. Am sitting along alix steel. Jonathan ferro is off today. The a halfhour before testimony is released from the fed, futures pretty much flat for the day. Thehave the pound secondbest performing currency against the dollar, up. 2 after you got the better u. K. Data for employment as well as rages. Wages. Yearet 20 billion 10 supply later today to see how the market behaves as the needles back down by about one basis point. I dget this very crude up one point 1 . Still producing too much but go figure. I say that this visit positioning but not fundamentals. David what comes down will sooner or later sum up. A big day today for the Federal Reserve. We will get prepared remarks from chair yellen ahead of her muchanticipated semiannual Monetary Policy support report. For congressar in to deliver those remarks at 10 00 a. M. Minister questions. We watch for any image nation for how fast is. Afternoon, chair yellens fed in the afternoon is here from the president when she speaks in denver. It is not only the fed we will watch today. We continue to sue the legal aftermath of donald trump junior uez last night, he went on fox news and he said it was really much ado about nothing. Etiquette is ridiculous and overplayed. I think media has done themselves a disservice by picking sides so fleet flagrantly and they have driven people to think about it. It is a tough game. He might havetted done things a little differently had he done over again. We are joined for a report on how big a deal this is. Give us reaction from the president of the united states. He is standing by donald trump junior even after that interview last night. He tweeted earlier this morning that my son did a good job last andt, open, transparent, innocent. This is the greatest witchhunt and political history. Sad. They are trying to flip the and push back against democrats and the relationship between the Previous Obama Administration and russia. Question there are several questions not just from democrats but even republicans. There is angst and a feeling of lets get to the bottom of this. When will this trip of information finally stop . That is the frustration as they look to work on the policy agenda. Inid this is playing out bob muellers investigation things like that. On increasingl sanctions against russia passed by the senate. How might this affect things on capitol hill . Senate knew unanimously passed a legislation increasing russias sanctions. House. N limbo in the the white house is trying to tweak it, not necessarily democrats are accusing to get in line with russia, but to tweak provisions that some folks in the Energy Sector have some issues with here there is intense pressure for the house to get some kind of sanctions will done and chairman royce if someone working very carefully on this. I spoke yesterday with the House Freedom caucus about this, a member of the committee working on the sanctions will. Listen to what he had to say about the time i for sanctions. A frustration is trying to make sure we target those sanctions. And with the overwhelming vote we saw on the senate, you will see an overwhelming vote on the house floor in the coming days. A lot of pressure for the house of representatives in the coming days to get something done. David thank you. Politicians from both sides of the what to say how important revelations about the president s on our. Here is an example of what you have to say what he had to say yesterday. Few do not take this kind of help from a foreign adversary. We do not have anyone rechecked anyone to help you. Inadequatean campaign manager, i can assure you. Interference in elections, whether it be russians or chinese or anyone else. So we have got to get to the bottom of that. Isthe underlying question whether this is simply trauma or whether this is broken. Fbi assistantrmer director joins us. Bill, welcome back to the program. Put yourself back in your role here. Backwill probably not go do you investigated at all . Where you stand depends on where you sit but im sure the information is information bob mueller will have to do something with. Not reporting this to begin with. It is only a 15 minute meeting, and therefore he did not remember because it did not going to place, but by the same token, one would put a . Question mark in there. He may be totally innocent, who knows. It should all go over so he takes a careful look at it and sees where it fits into this whole investigation. As far as we know, he did not investigating things for the fbi, how does it work when someone does not i should follow through doing something that may be criminal when he conspires to do something even though it does not come to fruition. How do we investigate that . Giantthis case, it is a leap to reach to the conspiracy side of things. Law,tual violation of the there are certain constrictions and things that had to be accomplished in order to show the violation occurred. This is a cloudy and messy fear right now that does not sound good but it has to be teased out to see what is in the details or the devil always resides here to go to another subject david there is a confirmation hearing that starts this morning on capitol hill, the man who has , but willated congress be looking for as they question him . Conflict what they will be businesswho conducts of the greatest Investigative Organization in the world, i am biased to say that, but who conduct the business on a daytoday basis in hopes no one really gets to know his name well. He puts his temperament in the past. About e said eventually, getting it to waterboarding or Something Like that. They will see what his temperament was because he was associated with the attorney general on the criminal side of the house for prosecutions in the department of justice. Initial returns out of been favorableve on his temperament and expertise, his confidence and professionalism. How does congress reassure itself he can be as independent as an f ei director needs to be given what happened with his right assessor . You cannot ensure any of that era just by looking at the individual and listening to his remarks sensing what his temperament is, i think in any case, you have to take a little bit of a chance on some of these things. I think youre not going to take much of a chance. Whoe will be an individual will assume the role of director have the acceptance outside and inside with the employees in the f ei as well. David thank you, bill, former assistant director of the f ei coming to us from boston. Coming up, republican will be questioning fed chair janet yellen a short time from now. This is bloomberg. Still pumping too much oil. It says demand for its group will form below the level. Implemented at the beginning of this year. Veteran s turn to investment banks to outline its fortunes. He will succeed anthony, who will remain chief operating officer. That is your Bloomberg Business flash. Markets paying attention to Political Risk in d. C. Heres how the headlines unfolded tuesday. Spiked and then recovered thanks to the fed. Safe havens also caught a bit. Treasury yields moved lower. Equities recovered that yields in the dollar did not. Joining us for more is the Morgan Stanley global interestrate strategy and Wells Fargo Asset Management ceo. Lets start with equities. Which do you decide to Pay Attention to and which do you not . Headlines around trump are probably a little more drama than real market. That is why you saw equity markets take an immediate dip down and gradually recover. What is priced in his irritation what matters. I think that is where they will put most of their energy and intellect over the next several weeks. Someone else took the opposite or more negative field. Heres what he had to say. We know it is coming. It has been the weakest and. Ongest it seems like the dollar and yield would agree with that assessment. Really moving all that much outside of a couple of weeks. Here is in aeing nice range pier 1 one thing i Pay Attention to yesterday for some quotes from talking a little bit about how inflation would move into his mind toward the image the year. The fed is still expected to hike rates in december. They will have a Pretty Healthy debate about it. Issue. Ortterm longterm he said lets suppose the news about donald trump junior reduced by 15 the likelihood of tax reform. What longterm effect with that have apart from what happened daytoday . Be do not getld equity markets are pricing in a lot. You think it is basically zero now. A hank of is pretty close. Equity markets will like to see movement on the debt ceiling and basically an outline or schematic of tax reform or production. I think the potential disruption of a Reform Initiative on the basis of donald trump junior, probably not that significant for the markets. Echo the market gamers that we showed that the dollar did not. Was going on with the foreignExchange Rate . We came back and went lower. The market is waiting for yellen. Depending on what yellen tells us today, that is what will end up moving markets by march. We are waiting for the fed to opine on what is going on. It is below consensus but appropriately so. I think the trade is still on and people will look at equity markets. Have we seen a rereading in the market that makes you not want to go by equities . Asking if i think we will see a largescale move, i dont think so. Our expectation is very similar to yours. We are range bound. Where does the bond market get its cue from . Looking forward, most Market Participants generally understand with the ecb is about. There are more questions about how the bank of england will approach things. The bank of japan is an left have pushed back against the rise of the Government Bond yields. The fed will be important if you do not get the hike at the end of the year, not what we are expecting, but if we dont get it, it will have a big impact on bond on bond markets as well. How much is it because money is cheap . Globallymand is there versus is just easy to get you fired thing . Of supply issue. Theyre willing to move to equities because they have nowhere to go. I do not see it changing. What is important to equity markets is how the trade gets unwound. How does the fed go about shrinking its Balance Sheet . How do we see recalibration laying out . Those are important. Good stuff. Both of you will be speaking with us here next, the future of the fed. To replace candidate champ janet yellen. I estimate he would be willing to do the job. Job runninggreat the nec right now and i get to work at the white house every day. It is a dream come true job and i am very happy. Jobd will she keep her come february. To gary cohn about this. We are not at a time janet yellen job that i get to come and work in the white house every day. It is a dream come true job. I am very happy. David the mike wallace of today. Out steel in this penny him down. How the fed its a gift Exchange Rate. Garrow, take us into the delicate question about exactly what will drive the strength of the dollar . It is not just the export sector. U. S. Domestic reduction, workers competing against the cost of other foreign workers. This was a key factor when qe was initially launched in the dollar basically fell to a three qe,de low and each round of the dollar was lower than at the start of the round. We heard that the dollar was more sensitive in terms of shortterm Interest Rates so as maybe we can avoid undue appreciation of the dollar. Will be the that case. Normally, shortterm Interest Rates we can see that longerterm yields will be a bigger determinant than shortterm yields. There is what works in the long run and what works in theory and what set the moment. I suspect the fed could be caught off guard if we see a significantly stronger dollar once the Balance Sheet runs off. Alix lets look at that. On the one hand, you have a chart that shows the eurodollar. It works reasonably over the course of the last eight years or so. We can see the divergence on the far righthand side. The next chart shows a 10 year differenti. If the fedling you is running off the Balance Sheet, some of the recent backup has been driven by germany and the taper tantrum, if you will. If Balance Sheet runoff resulting higher or longerterm yield, you will see a stronger dollar and that is a significant drag on financial conditions and the broader economy. Is this a clinton ands or is there something driving this . The fed Balance Sheet is going to the rate policy itself. They said they would not start on the Balance Sheet until the rate normalization is underway. I think it is why we primarily dictation of whats going on in the currencies. You had to get another rate hike in, we do the bounce sheet in september and they were the two are linked closely. It seems like conventional wisdom is that we will see the andnce unwind in september december. If the balance will have a , do we have to a lot of the Balance Sheet winds down and is already in the price of government securities. Usually the yield curve flattens. Not seen as the yield curve flattening. We have seen it steepen up a lot and then flat back a lot. But the curve has not flattened over the past rate hikes. It is pricey and half of the next one. We have had three rate hikes from the fed and the yield curve has not flattened. I guess i would push back a little and say i know it is it it is a possible popular narrative, but financial conditions affect more than just growth. Affectand inflation we have not seen inflation in the united states. Why . The dollar is 20 stronger than three years ago and causing downward pressure on goods prices. Have financial pressure tightened or not . Generally, we see the have not. I do not think financial conditions have tightened to the point where we where it is impacting equity markets. I hear what you are in terms of a little tightening, but i do not think it is at this point. What about real rates . It has been on the move. That is a valid question and i do not think we know the answer. That is why it is so important the fed be so careful with what were talking about. How do they think about really giving the market good cues and signals for where they will go rate weiss . Havent they done that . Is a july, is at september . Started in program october and will they be able to stick to the program . If we see this move in the dollar, the fed will be caught off guard and a rethink interestrate policy and possibly Balance Sheet. They created a little bit of uncertainty in the marketplace, a little more dovish than what we thought looking in alone. There is a growing question of whether the interestrate prescription is appropriate given the Balance Sheet runoff. Remember this is uncharted territory. We can talk all we want about what in theory will happen but what matters is actuality. Yields are higher on u. S. 10 or on the u. S. Yield curve, there will be a Global Capital flow to chase the yield and that results in a stronger dollar. David doesnt this go to the essence of the discussion the more discretion you have, the less pretty to build the you have, the more predictability. We may want the fed to say we will alternate interestrate hikes and go back and forth on them. That limits them. It does. The funny thing is, i spend most of my time reading through fed language and parsing words and i cannot figure of the fed half the time. Is transparent. The messaging could probably be more obvious to people who spend most of their day looking but the reality is if theyre bound to a rule, things are going to change dramatically. Insight in the next 10 seconds, you guys are sticking with the spirit we are seconds away from Janet Yellenss testimony at 8 30. Pretty much flat across the board. Yellensckee has janet testimony. My you have to wait until the q a for any news. Just over five pages about as bland as it could possibly be. At aconomy is growing moderate pace so far this year. Picking up a little bit in the Second Quarter after a slow first quarter. Growth will continue to expand at a moderate pace in the coming years, creating more jobs in pushing inflation toward the fed target. When inflation will arise and by how much is one uncertainty for the fed. It is higher than it was this time last year but lower than earlier this year. Janet yellen blames a few unusual reductions in certain categories that will hold down the calculations of the annual rate until they drop out. In the past, she has blamed falling oil and cell phone it means more gradual, rate increases, until the fed gets to a rate that neither constricts nor expands the economy. She does not say where that is but it is not far from where we are now. As for the Balance Sheet, nothing new. They expect to reduce the Balance Sheet by adjusting caps , nothey hope to reduce it to an ultimate size that you could particularly tell, but smaller than it is now an larger than it was at the beginning of the financial crisis. Defense of the feds aversion to Monetary Policy rules. She may get asked about that. No one rule gives you the answer. There is nothing on Bank Regulation or cummings and going from the fed including her own status. Until the q a, there is no reason to adjust trading positions on the fed. I am not laughing. Now i am. Two things that i date to differ , she says the fomc does not intend to use Balance Sheet as policy. This will have huge and locations on policy. The headline is parsing the issue of the Balance Sheet operating quietly in the background. I am not sure it will be quiet in the background. Time will tell if they are as gradual as they hope to be. The other point is the fed continuing to emphasize a notion drivinga few factors inflation lower. Drug places are. If we look to the details of inflation data, it is not being run by a couple idiosyncratic factors. You are seeing an acrosstheboard, you see it in goods prices and an cool finkel stabilization and if you look at services, you see disinflation in an array of categories. Theyre missing the boat thinking this is just a couple of factors. I do not think we are heading into deflation. But i think the fed will reassess what is happening on the inflation front later this summer when we see that it is not just a couple of factors and wage factors are not picking up. I agree. There are inflations called median measures. If you look at the measures coming out, if you look at the trim measures coming out of the cleveland fed, they are going down. Something else is going on here and i wish the fed would Pay Attention. The fed is missed the inflation mandate continuously and it will ramp up hiking. Lets get to equities. How disappointed that we are not seeing inflation . We like to see a little bit of inflation and i would agree it is turning to think about the fed missing this and not putting enough emphasis on where the the markets are green with all of you are you see futures jump up and the dollar coming lower. Out. Is how it is learning kristi mitchum will be staying with us. Are joined now from one of the members who asked janet yellen some questions. He represents the Second District and before he came to. Ongress, he was chairman welcome to the program and thank you for being here. Heard a summary of the prepared remarks and they were characterized by large as being fairly neutral. I am sure you have seen these. Are you getting enough information from oversight to understand what the fed is doing . These are typical remarks submitted by fed chairman. The questions is and answers as your panel describes. Im interested to hear from janet yellen the relationship between raising shortterm rates and trick in the Balance Sheet. She said she would not think the Balance Sheet until she got the shortterm rate up a little bit more is the way she testified. To give herself more optionality and the letter the level of shortterm rates. Since then, the governor has outlined how the Balance Sheet will shrink over time. Have a discussion between rate raising and the feds view on that and how they normalize to get it down as a percentage of our gdp. Is it a an appropriate will as you see it to pin her down on what the timing will be for the Balance Sheet . As specific as, when are you going to start it . We would like to know the philosophy behind it. How is she going to go about it and how do they set the ratio and the collateralized mortgage and part of the portfolio. Im a big believer the fed should be only buying treasuries. Ton you allocate assets other Asset Classes like Mortgage Backed securities, you are doing credit allocation. It is not a neutral territory for the fed. I would like to see the mix and i would like to hear, will she limit the fed in the future to the treasuries only policy when it comes to market operations. You serve the bank for little rock little rock and you know banking. Are you more concerned about the Interest Rate of increases or how they handle the Balance Sheet . For me, we want to see where the market is for rates and see the rulesbased process for raising rates. I think one of the biggest questions around the world is how are we going to reduce this very large fed Balance Sheet 24 up around 6 . To me, it is the biggest economic puzzle and the policymakers of the fed have never faced this challenge before. Congress should perform oversight operation monitoring how that takes place. You come into this with a view about how they should do that, in general philosophy and reticular how it might affect the underlying economy. Chairman bernanke you lowered rates to zero and that is the right policy move for the fed. They took a lot of extraordinary measures during the recession. As a banker and a person engaged in the markets, i did not the achilles because i felt it was distorting the price mechanism in the economy and getting into credit allocation. That is a role i do not think the fed should half. Thank you for being with us. U have breaking news. Scotland world bank of jumping in. You will pay 5. 5 billion settlement to settle mortgagebacked security claims in the u. S. They held eight point 3 billion against those claims at the end of the first quarter. The cost is largely covered by what they set aside. They will pay 5. 5 billion. Hour, thein the next u. S. Equity and derivatives strategist who always gets in the weeds. We love that. Coming up, tim armstrong, former aol ceo. This is bloomberg. This is bloomberg daybreak. Coming up in the next hour, tim ceo at 9 00ormer a. M. Eastern. Now to your blue Bloomberg Business flash. Opec pumping too much oil despite cutting output. That is the assessment of the cartel itself. The group said 2018 demands fall below current production levels. Thatr market on concerns implemented at the beginning of the year on deep enough to clear a threat. Ease investor concerns after a series of scandals hit the company. They increase more than 10 last quarter while losses continue to shrink. Uberss attorney also said the legal battle over self driving be settledogy could before october. The chief frexit negotiator has before they start looking at that relationship. Far. So we now need to know the you ks position on each issue in order to make progress. Britneys to make sufficient progress on irish border issues ahead of any trade deal talks. Thank you so much. Did have unemployment in the u. K. Followed for a twoyear low. Then rod band says he is not ready to support an Interest Rate increase. Head of global Interest Rate strategy and wells fargo acid management ceo. How do you understand the boe right now . You have a little hawkish and little dovish rhetoric. We do not think they will move anytime soon but the market has been caught a little off guard with the changing communications. A Market Pricing more tighter policy in the future and from our perspective, it is not the time to bet on the bank of england rate increase at this time. What about you . Our base case would be exactly the same and a lot of the wiggle your getting is a reflection of the fact that we do not know exact help it would take shape. This morning saying the ecb hard line somewhat weakened by the coalition which does give a lot of uncertainty about how it will play out. The premium has really been narrowing. How do you trade it . We like treasuries and the models running general outlook buyest you want to look to treasuries at these levels. Based on the forecast, the forwards are a little higher. Having said that, the ecb is pulling back. We expect them to announce the beginning of tapering in september to start earlier next year. The market is buying into that story. Treasuries and that is how we are telling investors given tears else. To give in to yourselves. To really make things go the u. K. Beingis affected by this uncertainty . What is the check you could write that says just take the money and we will get it back. Unlikely. It is it is very interesting when we think about the bifurcation here. Negotiate what the playbook looks like Going Forward. The playbook Going Forward has the biggest potential to impact growth prospects. Across the european union. You have got it across the channel. That is what i assume is driving your call. We are seeing great growth data. Ecb will gradually remove stimulus. They are not rushing to the exit by any means. The ecb will feel more inclined to remove some of the stimulus. Similar to what we have heard from the fed over the last months. , as long as growth is above trend and the labor market continues to tighten, eventually, inflation will show up. That is the bet they are making. It is a big risk to take. Dollar, equities and on u. S. Equities, are you convinced the trade will play out in europe . It has played out effectively. Why would the trade play out across the bond . I would say because it started at a different place. We had european economies stall. Or quite some time i think we are a little bit of a catch up phase. In a word . That is what we have recommended. Really great. We loved to have you. If you have a bloomberg terminal, you can check out cv go, watch us online, click on our charts and graphics and if you want to, use it you can do so in this segment. This is bloomberg. David this is bloomberg. A new regulation to make sure that Financial Institutions in court not be limited to private arbitration. The regulation would apply to much of the nation, affecting credit Card Transactions and host of other business valuations. The potential costs of the banks could run into billions of dollars. Here to run us through what it could mean, welcome to the program. Great to have you. Thank you for having me. Tell us about this. Why are they doing this now . Because regulations take a long time and because the guy it, the former democratic Ohio Attorney general is kind of on a mission and will even though they would love to get rid of hemp a we will get to that and a second. Banks, anyone regulated by the agency, cannot simply say our customers have to be with us in private arbitration if they dont like if something goes wrong and they feel something has gotten burned by a bank and so on. They have the right to bring a classaction lawsuit. That is a big deal. It is Something Like the wells fargo situation. A classaction lawsuit would have cost wells fargo a lot of money. Isnt it a throwback to the whole tendency in litigation, 30 or 40 or 50 years, that you can have an alternative to court, isnt this a throwback throwback to the 1950s . Quite more to the 1980s but in this particular case, a lengthy haves of stories which may which basically showed most people because of the things involved, 3000 dollars, 4000, they did not arbitrate. They give up and that may have spurred this. That it iss true great to have an alternative to court, i think with the agency is saying is the arbitration is basically probank and the customer really does not have a good shot at it. It is elizabeth warrens jb. He administration is coming in how does this play out in washington . The whole point is to pare back if not get rid of doddfrank. Have a guy running it who trump cannot fire. He is in there for at least another year, it is not the kind of agency where it is a five person commission. It is one guy. He is hellbent on getting as much through us he can in the next year and he will not resign or anything like that. There will be congressional hearings about this. It will be a mess. Republicans Running Congress are really antithis agency. What about the statute that says you can pull back regulations at the end of an administration . . An they vote invoke that they can and they may well. You will have a big fight over that. Yes. Administrative nickel which has not been used much, has now me i think it is a good bet that could happen. On financial matters, the republican from texas who runs the House Financial Services astee and is is but anticfpb is you could get. Is there any possible backlash from constituents . You say this is everybody. Is there a possibility they get this reversed and have to pay a price back with constituents . It depends on whether democrats can make it big deal about this. I do not think this is on the radar of most people who have bank accounts. If democrats could say here is another great example of how the Trump Administration is stepping on the little guy and once again doing the bidding of the big banks, i think it could be. But there is so much else going on, and you have to wonder. David thanks. Really great to get you on. Coming up, a conversation with tim armstrong. We will go live to idaho for that. Is the sun really up or it is dark . It is live. The sun is coming up. This is bloomberg. Whoooo. I enjoy the fresher things in life. Fresh towels. Fresh soaps. And of course, tripadvisors freshest, lowest prices. So if youre anything like me. Youll want to check tripadvisor. We now instantly compare prices from over 200 booking sites. To find you the lowest price. On the hotel you want. Go on, try something fresh. Tripadvisor. The latest reviews. The lowest prices. Debitfed chair shows her dovish side. In pushing yields fall below the 50 Day Moving Average as gary cohn is said to be the frontrunner to replace her. D. C. Drama. Political uncertainty is back as donald trump, jr. And russia stay in the spotlight as they want controversy could hit u. S. Economic outlook. U. K. Unemployment hits a 42 year low but real wage growth this week. Broadbent says he is not ready to raise rates soon. David welcome to bloomberg daybreak. I am david westin alongside alix steel. Jonathan ferro is off today and we will be heading to sun valley, idaho and we will be ceo timfrom oath armstrong in a bloomberg interview. We are 30 minutes away from the open and alice has a check of the markets. Alix this is what it looks like when does cry. The highs of the session, a dollar lower. Alternate lower after you had the fed chairs testimony released where it appeared to be a bit more dovish on the market than it was expected. You have a ton of supply coming ne. I significant buying happening there. Crude gets another uptick, oil up by 2 . A real interesting move when you look at that data. It is a little bit more hawkishness out of the market and the market reacts immediately. The fed is relevant as we head into the testimony q a at 10 00 a. M. Go over to Abigail Doolittle who is looking at the movers in the market. We do have the shares of Paypal Holdings trading higher in the premarket on the news. They will be able to use paypal to purchase both iphone apps and itunes music with their paypal account. This is available in canada and mexico currently. But a Bloomberg Intelligence analyst think it is more psychological, less likely to impact numbers all that much. Apple users probably already have a card stored. From the spinoff from ebay two years ago. Lower in the premarket. Harley davidson has lowered its secondquarter retail sales. This is a familiar theme back on june 23. Ubs echoed similar sentiments and before this drop, shares were already down 10 . Bearish expectations there. Industrial and Construction Supply company are higher on a betterthanexpected quarter. Both showed more than 10 yearoveryear growth. The big surprise is growth margins betterthanexpected. As they hold these, they are on pace for their best day since the election of last year. Alix now for an update on what is making headlines outside of the business world. Emma chandra is here with first word news. Says hed trump, jr. Never told his father about a meeting he had last year with a person who he was told had potentially damaging information on hillary clinton. He attacked the medias handling of the story. I think it is ridiculous and i think people are getting it because the media has done themselves a disservice by taking sides so friendly and so flagrantly. This morning the president tweeted my son did a good job last night. He was open, transparent, and innocent. This is the greatest witchhunt in political history. Sad. Senate Majority Leader Mitch Mcconnell says he is ready to reveal his latest bill repealing much of president Barack Obamas health care law. Hikes thatkeeps tax obama proposed but mcconnell says the new bill will be introduced tomorrow and they will try to muscle it through the senate next week. Pay five pointto 5 billion dollars to settle claims involving residential mortgagebacked securitys in the u. S. Rbs is one of 17 financial dashedtions settle settling claims by the global news, 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. I am emma chandra. This is bloomberg. David the annual Company Conference known as the billionaires conference is underway in sun valley, idaho. Some big deals have come together from there and that is where david gore is there with a special guest. David . I am here with the ceo of. Ath, former ceo of aol it is great to have you with us. Let me ask you where things stand. The deal has been finalized. You have been traveling a lot. What does that look like and where do you see it headed . Good to see you out here. Oath is 50 brands, it has a billion consumers that use those properties. It ranges from yahoo to aol to help post, plus our ad systems. We touch about a billion unique every 24 hours. Site a significant internet global company. The deal closed a few weeks ago and we have been bringing those assets together underneath of. Underneath oath. It is a bebe holding company. We are focused on these three simple things. One is built pranced build brands people love, build platforms are companies love, so if you look at the deal we did with the nfl or Companies Like procter gamble, there is a lot of Global Companies that use our system to help build brands and the third is to build a company that talent loves and we have a big advantage there because we have a billion consumers. We have a limited size company from an employee standpoint so our employees can have a big impact and we feel good about where we are situated now. Now it is our job to make it in the great company. And really for the future. If you sift through those assets, are you finding any diamonds in the rough . Flickr. Of tumblr or are there any things you are discovering . The first asset, which marissa did a really great job on, is talent. There are talented people at yahoo . If you look at tobler for flurry for things people dont know about, like yahoo sports, there are assets within those assets that we are really excited about, overall. Our teams are highly organized. We are flying around globally to see all 12,000 team members in person. At the same time, we have our executive team honing the strategy down and one of the things i am excited about this week is to spend a lot of time those fromceos, like verizon here, and we will spend a lot of time on how to innovate we have. Sets are there things you would like to add to the company . I think there are a few areas where we believe we have strengthened where we could be a lot stronger in the next couple of years. One is video. As the world goes more and more mobile video, we have access. The second feature is in the advertising business. Google and facebook have done an amazing job and amazon is doing a good job with advertising but we have a differentiated approach and i think over the next year or two you will see us come out with a whole bunch of product that will be different iated. He third is trusted content we are big investors in content and when you hear the world saying is we want a high level of transparency and trust so you look at assets like the Huffington Post and others, they are great content assets. We want to build those out and then you lean away forward and we have assets like one of the vr companies on the planet. Using back and look at 2020 now, you have an industry that is 73 of Digital Advertising as mobile. 80 90 of the traffic is going to be video on mobile. Weve been building our assets against that based and we have superpowerful human connections with our communication products so we are touched we are in touch with consumers every single day and the trick is to turn those touch points into a Business Opportunity for those consumers. I think we have a clear plan and we are focusing on it and we are going to make all of our merger changes we have been making and get through those. I guess people really want to pay offense to play offense in the company. There is revenue there is focused on net neutrality. There is Regulatory Information in washington. What does that look like for you . At a macro level, there is a lot of Energy Around making that neutrality work overall. When you zoom into horizon, verizon put out a clear verizon saying supports that neutrality. It has been penciled in and congress should pass real laws around it. I think that has been organized. All of those things are really positive and the u. S. Government and the Companies Involved and the consumers involved have a real chance to cement neutrality. N a situation people like it goes from something that was crafted quickly years ago into something that will hopefully give the country and our industry a big advantage if it is done correctly and i feel good about our stance on it and all of our brands have their own stances on it which i think everybody is leaning towards net neutrality. That is the good news. Now it is up to congress and the government to make sure that it gets incremented. David, back to you in new york. David our very own david gura from sun valley, idaho. Up next, u. S. Equities and strategist, Stewart Warther reacts to yesterdays moves and the political pressure on the markets. Live from new york, this is bloomberg. Alix welcome back to bloomberg daybreak. The move this morning came from fed chair Janet Yellens testimony at 8 30. S p futures one that reacting a jump higher as the fed chair thena touch more dovish markets expected, saying the central bank is on alert for prices remaining below the 2 target. Her list of concerns about the fed outlook, the number one concern was inflation. Joining us now is Stewart Warther, bnp partner and u. S. Equity and derivative strategist. Where are we in the dilemma . Are we more hawkish or dovish . Is the testimony a game changer . Marketsit does mean for , given the changes in treasury futures, long versus short in the last few weeks, iss signals the market it not interested in increasing the Market Pricing of the fed until we see a pickup in inflation. It really puts the onus of this on thursday. We have yet to see any type of inflation pick up but other Economic Data has picked up in the last few months. Alix the debate is starting to brew of whether you are a ratist or a Balance Sheet unwindist. Which will impact the curve more and which will impact fx more. Where do you stand . Brainard pointed this out in the past. Most influenced by short and rates. Ishange in the target rate going to have a more pronounced impact on fx and spill into other economies. If we look at the Balance Sheet, that is probably going to have a larger impact on the price of equities as we have seen qe has had such an impact through the mentfolio rebalance mechanisms. Ding ding. From the perspective of equities, the Balance Sheet is the juggernaut we have yet to fully be able to price and comfort and. David i am a little confused this morning. On the one hand we hear that the markets dont believe what the fed is telling them, particularly what is going on in 2018 but janet yellen then says i am a little bit concerned about inflation and the markets react. Where the markets really discounting what she was going to say anyway . They can be reacting . They shouldnt be reacting . Stewart warther throughout the history of the post financial crisis. , the market is always underpriced. Alix yes. Stewart warther so on this basis, the real concern i think the fed is having is about inflation which is probably most likely to have an impact on their rate outlooks as opposed to their Balance Sheet outlook. Even brainard, who is very dovish on the scale, said she would like to see Balance Sheet normalization happening soon, which is potentially keeping july on the table but also likely a reference towards the temper. David did you read what Lael Brainard was saying as a difference between raising rates or raising Balance Sheets without having much effect on the strength of the dollar . It is him of free shot but rates may be a different matter. Stewart warther it has something to do with the signaling effect and if you tell the market it is not a big deal, hopefully it wont he of the deal because it is unprecedented territory. No other central bank has undergone such a significant tapering after such a long period. They are setting up the market to not react but at the end of the day, we will see where that goes. The key concern will be Something Like a taper tantrum but if you look at the s p overall, the impact was not that great. It was really on emergingmarket equities and growth year equities, not necessarily the largecap stocks. Alix what is the level on the 10 year that if the search for yields to unwind . Stewart warther i would say anything over 250. If it keeps going lower, really we have seen the market becoming increasingly reacted to these changes. It might not necessarily be the level. Nominal gdp expectations have declined over the last 10 years. On a forward 10 year looking basis, it is not necessarily an absolute level. It is more, what is the next change in the number basis points that is going to cause equities to react . Alix yields dropping like a stone today, the 10 year yield below that 50 Day Moving Average. It is 2. 3. Definitely up from 2. 5. You will be thing with us. David later today, the reddit chairman and cofounder. Live from new york, this is bloomberg. David this is bloomberg. I am david westin. The drama that the trumps russiarelationship with has become continues to play out in washington. Donald trump, jr. Went on fox news to describe how his meeting with the russian lawyer to get negative information on Hillary Clintons campaign was no big deal. He did admit that he would have done things differently if he had it all to do over again. Joining us now is Kevin Cirilli on capitol hill. Yesterday, this is coming fast and furious. Focused on janet yellen and the confirmation ay . Ring of mr. Wr or is it for the development of this donald trump, jr. Story. Kevin people have been quiet in the aftermath following the email release. The white house is defending him but you havent seen many republicans speaking out forcefully in his favor with the exception of saying that they need to get to the bottom of this. The president has tweeted out since the last time we spoke, an attack against them across regarding their relationship with the russians but i spoke with senator mark warner, top democrat on the Senate Intelligence committee about the type of question he would like donald trump, jr. Or Jared Kushner to answer when or if they decide to testify before the committees. Take a look at what he had to say. Those questions are going to be, why was he so excited and why did he not understand that having this kind of outreach from Russian National acting on behalf of the russian government to provide this kind of information to tear down clinton and bring up his father, i think anyone, even if they were a rookie would realize that is inappropriate. Kevin i think the bottom line is that the white house is urging that republicans move on. Republicans on capitol hill are saying they are not criticizing donald trump junior but they are saying they need to get to the bottom of this. David thanks to Kevin Cirilli and capitol hill. There is a lot of turmoil in washington and a little bit in the markets. Alix it was really interesting. The s p came down and it wound up recovering due to the fact that the 10 year yield in the dollar just kept getting pummeled. Is still withr us. How do you know which headlines to look at . Stewart warther it is really hard to tell. What we tend to look at is the immediate Market Reaction and what it means for the probability of tax reform and that is the market yesterday. We have a headline at 10 00 a. M. Regarding russia and the futures hold off but then it wasnuntt mcconnelannounced they would be breaking the recess for another two weeks that the market came back. With all of the volatility, the market actually ended up unchanged on the day. So zero when you look at the close to close measure. Really the key Market Driver for equities related to the developments is the implications for tax reform. What is interesting is that what mcconnell released yesterday taught us is that the market repeal, if that happens, then tax reform. A number of other commentators have said this is an impediment to the out the tax reform because it is actually just delaying the legislative agenda. That gave us a very interesting piece of information. Alix so if we get a vote on health care in the next week or so and it doesnt go through and then you have the senate move on to tax reform or they say so, is that risk positive or negative . Stewart warther at this point it is somewhat unclear and it is unclear because we dont really know what the nature of tax reform will be. If it is revenue neutral, that is not necessarily a positive in the s p. If it is revenue neutral plus a type of repatriation, that is a rotation within equities to those companies with a high proportion of overseas cash. So i think we were of the assumption that sometime earlier this year and last year the market elite tax for is a positive for largecap equities. ,ow, it is less clear especially because the potential to actually induce more growth from a revenue neutral form is unlikely. David in the meantime, what is an investor to do . Especially in health care stocks. Capsbroadly, if large benefit from the tax cuts or reform, what do you big into your decisions . Stewart warther from the perspective of corporate boards, this may actually be a net negative when we look back on this in the sense that it is very difficult to do both investment and Financial Planning if you dont know what tax policies will be. From the perspective of institutional investors, i think it is interesting to take a longterm view but know that in some ways, markets suffer from an availability bias. You can only price what is right in front of you or what is somewhat obvious. Some of these things, there is no way to price them so you have to ignore them in the meantime. Looking at injured a rotation, what rotations do you see . Stewart warther the key rotation has been between financial and health care and also related to the fed, some of these more defensive sectors. Whats interesting is nasdaq, overall, some of these growth stocks, tech, for instance, have exhibited high volatility. That has driven volatility in the s p but as of last friday it was actually defense. Alix Stewart Warther, you are with us. In the u. S. You are seeing equity futures on the highs for the session as yields move lower. The dollar moves lower and the fed doves are out. This is bloomberg. Alix this is bloomberg daybreak. I am alix steel. Moments away from the opening bell, we are stacked up in the yellen induced rally. By half a futures up point. Nasdaq up by 42 points. A cautious janet yellen in her testimony, highlighting inflation as the number one risk that they will have to accept. That gets the market very excited. Look at the bond market as well as the dollar. The dollar is flat on the day. It had been moving lower but you are continuing to see buying coming into the market yields, by five basis class now. Nonetheless, a big move lower. Fruit is moving to its own drum, up by 2. 5 despite the fact that opec said it is producing more Oil Next Year than it needs to. Lets see where stocks open for trading. Abigail doolittle has the latest. The bulls are out on the open. We have the dow and s p 500 and the nasdaq also the be higher between 4 10 of 1 and three quarters of 1 . The nasdaq leading the way, this the dovishduced by commentary by fed chair been a gallon. Ben evans at intellectual partners says this, credit expansion in china, all of this is acting as a shield to the d. C. Drama around donald trump, jr. We do have some of the Big Oil Companies trading higher. Rallying. L, all this is the top sector for the s p 500 yesterday. Today, we have oil higher once again as the inventories were on the year. This was one of the worst sectors. Look at g btv 2134. This is the chart. In blue, we have oil down. Andworst year since 2015 the oil crash. In white, we have the s p 500 earnings sector estimates as we see the sector is expected to earn 15. 10 in the Second Quarter. This is closer to 50 just a few years ago. Check out that divergence between oil and earnings. It will be interesting to see as earnings get underway, which that falls. Alix everything has to do with oil, i keep telling you guys. Stewart warther is joining us now. Also steven desanctis. I want to start with you, your firm recently downgraded to market weight from overweight in terms of energy stock. Talk about it. It is a very humbling business where you have to learn every day from where you go wrong and you get the scorecard here. The upgrade in early march was the fact that we had a lot of interest in energy and the sector was down, double digits at that point. It felt like there was sentiment and it looked like our forecast , and thenwti obviously, it shifted dramatically. The sentiment was really bad. It is just one of those things where you just go to the sidelines. You have quite a bit of volatility as you go down. You are dependent on global macro factors that dont go into the fundamentals. You have to chart up the revision trend. It is all about sentiment and trying to figure out where people are lined up. Just a little bit more challenging. It was just a lot easier to go to the sideline and go, i can do better in other groups. Alix small and midcaps are getting hit harder. Ig names are still adding. But the mom and pops have pullback. There is a rating to be made. What the oil price is embedded in Market Expectations for energy . Steven desanctis we have a great energy team led by jason demo. He recently talked about oil prices and the potential for a little bit more challenging to get to targets at the end of the year. 57 60 depending on what you are looking at. It is not necessarily oil as opposed to the sentiment. Butre seeing outflows nobody wants to step up and own energy here. It is just a small part of the small cap benchmark. You make a point on highyield. If you have a little bit of a pickup of highyield spread widening out, that is that for the mom and pops because their Balance Sheets are in correction mode so you have the downside for the smaller names. Alix nonetheless, the opec chief is optimistic. The secretarygeneral spoke earlier to bloomberg. The fundamentals at the us thatontinue to show we are on the right course. That we are on the path to ofieving our objectives drawing down costs from these unsustainable high levels to the five year industry average. Alix stuart, do you buy it . Stewart warther it is not for me to decide but if you look at dividend futures, which is the key derivative instrument we follow, they have actually showed a slowdown in growth expectations so the market is not buying it. I look earlier in the year when oil was rallying and the 2018 versus 2017 applied growth rate was above its growth rate and now it is back below seven. That rate is a key contributor to the dividend. Even though it is about 6 of market caps. If you look at dividends underperforming the s p, which they have, i think the market is telling you they dont buy it. David we havent had much volatility in the equity markets. Alix or oil, really. David if it comes back, what is likely to come out of energy and oil . That Stewart Warther is a good point. I think there are two key assets. One is the tech sector and the other is energy. From the tech center, that is central bank driven. From energy, at this point, above 40 a barrel, it is both in the direction and magnitude of the moves in energy that will potentially drive a spillover to the s p. I dont think it will become systemic until we can break down maybe another three dollars or five dollars a barrel. David so pullback, i think it is fair to say, on energy here it is there a point you would come back in . Steven desanctis i have tried this for a number of years. Obviously, we have to think about Global Demand and talking about global gdp. Part of our story was around consumer driving, the economy doing well, getting in the car, traveling more, so with that, you see a better demand balance. We just havent seen that play out. You look at the fundamentals and provision numbers are coming down. Talk about Balance Sheets. You know, i think valuations, and just because the stocks are going down doesnt necessarily mean it is time to step up and ive got to learn my lesson at this point. Alix out to small caps in general, weve seen small caps rally over 5 in the second order. Our earnings going to live up to that . Steven desanctis in the small caps phase, earnings look to be down 1. 5 . Between a big dichotomy Earnings Growth between the Larger Companies and the Smaller Companies and a lot of that is actually driven by the fact that the larger Cap Companies have global exposure and the Global Economy is doing better and it has driven the multinational on the Earnings Growth, small caps being more domestically oriented has not gotten that bump up. We had a pretty big spread between Earnings Growth between large and small for the last three or four quarters. That is going to continue in the Second Quarter and that drives our concern on small cap versus largecap and smallcap in general. Alix same question for you, stewart. Will earnings match valuations . Stewart warther i think this quarter there is something to do with a narrowing of a spread that took place in q1 which was a sense that, into what stephen said, earnings from abroad and were actually brought. Overall, they did not match up with s p earnings. Look at the gdp report and it is very weak but s p was very strong. This time around, expectations are coming down so roughly 6. 5 yearoveryear for s p. Look at valuations. They are based on numbers that are still too high rates on the large gaps the large caps. David the relation between growth and underlying economy, gdp growth and Earnings Growth, at some point, the money has to come from somewhere. Line or cutting costs, there is a limit to how much you can. If you are looking at projections for future Earnings Growth, how much do you look at what the gdp is doing . Stewart warther i think our chief economist was on surveillance and he brought up a really interesting point. Alix shameless plug. [laughter] Stewart Warther related to Earnings Growth, this is part of the issue we are seeing between unemployment and an asian, which is that labor substitution, especially with multinationals to foreign sources of labor have increased. That without the investigative you ramping up, we could still get that continued Earnings Growth. David we want to look at washington for a moment because Christopher Wray has been nominated to be the next director of the fbi. He is just starting his hearings. I dont remember a time where it has been this dramatic, given the fact that his predecessor, james comey, was fired, reportedly for not killing an investigation. On the eve of this, we have this revelation about donald trump, jr. It is a lot of drama. Alix a lot of drama and will that be reflected in the market . Steven desanctis of jeffries. I called it jeff like four times. I had four cups of coffee. [laughter] alix you are staying with us. 10 minutes into the open, we have a modest rally, s p and the dow up. Triple digit rally, s p up by 15. As well as in the ftse, that is also help by less hawkish comments from fed chair janet yellen. Real estate, utilities, industrials, all of that on the upside and oil in a strong bridge. This is bloomberg. This is bloomberg daybreak. I am emma chandra in the hewlettpackard enterprise greenroom. Later today, live from sun valley, chairman of private equity house bain capital. David this is bloomberg. I am david westin. The recent momentum in the market has been tied to tech which meant a rocky few days when the nasdaq 100 sold off but now the momentum trade has reemerged. And in full force. For more on that we are joined by dani burger and Stewart Warther is still with us. Explain this trade and why it has been working. It momentum the momentum means you bet on stocks that have one of the most in the past 12 months. As you mentioned, we have that tech selloff and stocks have done the best in the past 12 months, tech stocks. So it his it has been hard to find in the market. The one place where we are seeing trend following very well is in equities. When you look over the past four days and see the july 4 holiday, it has done the best in over a year. It is that strategy of going long. The stocks have done the best and shorting the stock does worse. David but it is also selling ones that are not doing so well. Dani so conveniently for these strategies, the ones that have not done the best have been retailers. Under armour is on that list and macys is on that list. Just a fluke. Is you dont necessarily when you do this strategy take specific companies. You are just looking for the ones that have done the worst. It is an automated strategy. A lot of them use their use this strategy in their portfolios. Alix the dow rises to a new record closing time. When you hear things like that, momentum trade, the dow closing at a record high, what do you think . Stewart warther momentum and low volatility are Equity Factors that have done well late in the investment and economic cycle. That makes sense from that perspective. At,thing we are looking that is tied to the tech sector issue. If you look at the nasdaqs own n index, and you look at that spread over to the vix, that spread is the widest since qe began. That is indicative of overriding growth, in the sense that if the fed is potentially interested, concerned about asset valuations in the context of financial conditions, then the companies that have done the best, growth has been one of the best performing factors over the last few years. That will be hardest hit. Alix how does that play out in earnings . We have banks reporting on friday and you can make the argument of financial versus tech at the same time. Stewart warther that is very fair. One thing is for sure, when you look at what we mentioned before was that earnings estimates for the Energy Sector have gone down the most of any sector. Earning sectors for tech have gone up the most over any sector. If you look at tell today, it has been an underperforming Equity Factor but it has done well over the past few weeks. It is potentially indicative of something you might see in the next week or so. I think the trend is a little bit above value. David in the system of mechanics, you said since july 4 which was not that long ago. The mentum can change. How do you not get burned when it turns one way or the other . Dani this is a quickly reversing strategy. I do want to point out, stewart mentioned the nasdaq 100 volatility index moves above the vix. The series on the tech selloff, when you look at stocks , they were pure momentum names. There were names floating out there where may be a fund with momentum thats was unwinding. Its easy to get hurt when you are in this sort of trade. But if you are in the middle of that and you decide, im going to cut risk and do things towards stop loss because of momentum trading that you are going to miss the upside we have had since july 4. Late in the cycle, low volatility and low momentum, they are going to do well and you have to stick to that. Alix really interesting conversation. Fascinating to see how it plays out. Dani burger, thank you very much and Stewart Warther, you are sticking with us. In your bloomberg, you can watch us online. Click on our charts and graphics and interact with us directly. Go to tv on your terminal. Click on something if you missed it and rewatch. This is bloomberg. Alix earlier, we got the release statement from fed chair janet yellen that she will deliver to the House Financial Committee in about 10 minutes time. It was the shortest. Just about a page and a half and offered no announcements on timing for the Balance Sheet but it did offer some context on inflation, saying stronger growth of incomes and jobs should increase resource utilization somewhat further, thereby promising a stronger pace of wage and price increases. Uncertainty is always in the economic outlook. There is uncertainty about when and how much inflation will respond to tightening resource utilization. Running is now, Michael Mckee and Stewart Warther of the mike, it feels like the market took it as a more dovish yellen. Did they overdo it . Mike i think they overdid it. She just repeated what the fed has been saying in just about every area for quite some time. People are coining to the line about inflation uncertainty but the fed is uncertain about the response of inflation. They have said they are watching it closely. That was an issue at the last meeting and they put that into the statement which she repeated today. Her assessment of the economy is almost word for word what we got out of the fed so no real changes but she came in trying to make no news and did a good job of it. Alix it was interesting to see the uncertainty of ranking them. Inflation, fiscal policy, and Global Economic challenges. What can we read about her list and what came first . Mike inflation is obviously a concern with the fed. It is supposed to be going up that it is not. The fed issue is there are these unusual circumstances like cell phone prices and they overhang the fall in oil prices which is pushing down on inflation and we will see those prices move higher. Other people argue we are not seeing any kind of price pressure. There has been a secular change but that argument has not been settled yet. If we dont see a movement in inflation by the end of the year, maybe they hold off but at this point, it is too early to say. Alix the dow touches intraday record highs. Another high. What is the one thing you need to hear to stay bullish on equities . Stewart warther i will give you two things. Alix all right. Stewart warther one, a potential for a meaningful and stimulative tax reform alix i meant from janet yellen. Stewart warther oh. The fed will be gradual and the fed is concerned about reflation with respect to its policy rate hikes because what the market is most concerned about is the fed potentially having a more hawkish than expected 2018. If you can put the quash on that, it might respond favorably. David you first talk to us about this prepared remarks, that there isnt a lot apprising those. Take us into questioning. Are the members on that Financial Services Committee Going to be satisfied with i dont know but we are not sure what we are going to do. Are they going to press her . And has congress ever really moved a fed chair . Mike i dont think congress has ever moved a fed chair. It has worked the other way greenspanke when alan said we could afford tax cuts because we had a surplus but nothing much comes out about those meetings. Particularly on the house side where we are today as members try to foster for the cameras and have some clip of themselves talking to the fed chair. Some members Pay Attention to economics and you could have the potential for some industry interesting questions about the neutral rates. Where is it . What might push it higher . How fast do you need to get there . She did some preemptive comments on the idea of Monetary Policy rules. A new viceg to have chair who favors Monetary Policy rules and she could go into detail about why she thinks those dont work. And of course, somebody will ask her about her own 10 year and i will ask her to respectfully declined to comment. David there was a report for politico that said maybe gary cohn is in line for her job. Stewart, is the real audience for these questions not janet yellen at all but actually pennsylvania avenue . Is this enforcing rules versus discretion and things like do you want gary cohn or janet yellen . Is that we are seeing . Stewart warther the issue of rules versus discretion and independence of the fed is not necessarily something on the table yet. I think Central Bank Independence is paramount. It is unlikely to change anytime soon. But the idea of what kind of questions these members ask the chair could inform the white economicwn view of policy and Monetary Policy with regards to what things are important to committee members. Alix it is going to be fascinating. Thank you so much Michael Mckee and Stewart Warther. Great spending time with you. Up. s where we stock we are 25 minutes and the session d here is where e markets stand. The dow hitting an intraday record high. The s p up by 16 points and the nasdaq higher. Watch those stocks as well. Europe, the ftse is getting some over 1 . Cking up steam in other Asset Classes it is a story of a modest dollar and what is lower on the testimony modestlyis modesty higher and the move in the bond market is similar. Yields down six basis points. Some yields down by four basis points. Gets narrowerat as the day goes on and oil gets a bit over 2 . We are four minutes away from fed chair janet yellen testifying before the Financial Services committee. Very good day to you. This is bloomberg. Vonnie breaking news at this hour. Janet yellen will testify before the House Financial Services committee. On the feds Monetary Policy a look. Potentially her last testimony. From new york, im vonnie quinn. Mark in london, im a mark barton. Today kicks off two days of testimony and remarks. They will say inflation is the surrounding the u. S. Economy and additional gradual rate hikes will be needed. Markets in the u. S. Higher while news compared to we wait for the hearing to begin, lets bring in Michael Mckee. What will be front and center here for panelist questions after her. Prepared remarks . Mike one would hope that they would ask about the fed funds rate, how high and how fast. That is the unknown question and the fed has tried to avoid putting any