Going at the moment. Off by 1 . Its all about the meeting between opec and their allies as to whether they can start to restrain supplies. Its time for your morning brief and a look ahead at the week. Nonopec members will discuss compliance with production cuts. Disney out after the close on tuesday. On wednesday, south african faces at Jacob Zuma Vote of noconfidence. Friday is u. S. Cpi data. The markets will be paying the most attention to those numbers on the heels of strong jobs numbers last friday in a continuing question of why we arent seeing more inflation. As you can see from this chart, the cost of protection inflation is largely down so far. Markets, two bond market tightens, black mark and blackrock and vanguard journey me now is paul richard. Welcome back to the program. Answer this quandary. Where is inflation . Shouldnt it be higher given all the other phenomena . Is hiding somewhere. I think vanguard and blackrock are right. It is coming. We just dont know when. You cant ignore the data we saw last friday. This is incredibly positive stuff. Inflation has to, or else weve all got this one wrong. The question is when. The great thing for the central bank is theyve got until december to make a decision because september is effectively out of the equation. Numbershere were robust coming in. Many more than were thought. At the same time wage pressure only went about 2. 5 annualized which is fairly modest given where we are on unemployment. Why is that . Why arent we paying more to our workers . There are still plenty of employees out there to hire. Theres a whole debate about whether you can hire the right people. There are still people coming out of retirement. We are getting to the point now with unemployment where we are at a breaking point and thats where inflation has to kick in. Thats why the market breathed a sigh of relief that we got 2. 5 and not 2. 2 . The market would have been really worried about cpi friday. Slightly higher confidence. Caroline im looking at the wirp function on the bloomberg. See a hike. Entially its not coming in december. Just a 42 chance the market seems to be telling us. Do you agree theres not a hike on the equation for 2017 . I dont agree. The primary reason is we have seen the markets fight the Federal Reserve and its following the Federal Reserve, you would have been right. Saymarket wants to somethings wrong. Look at the fact the market has move inhting this whole equities this year. If you follow that you were doing extremely well. I dont buy this with respect to the data. I think the fed is right and i would stay with it. When you are saying we have been fighting equities as well the s p 500 is very close to that record high. Youve got to stay with it. I worked from home last week. I had bloomberg on all day and it was funny. I noticed a lot of your guests kept trying to warn of the correction that is imminent in equities. Once again equities go to new highs. This has been a theme for the last three to four months. Pointme people some people have to accept the facts that hopes for tax reform are still growing. In this environment its incredibly positive for risk overall in markets. The next would be when does the bond market react to it . Thats the question everybodys asking right now. David when is it coming . How important are the cpi numbers . Are a goodthere start. Weve got patience on our side. We have another four months until the federal deserve reserve has to meet and decide. The fed it really patient. They are incredibly well positioned. The market wont wait that long. The last few inflation pieces of data or low. I think the market would immediately start to rethink december. At least maybe taking it to 50 . As a practical matter they never move when its below 70 . How important is this for the real economy . We talk about fed rates and technicals. What about growth . We getortant is it that workers making more money so they can buy more things to get gdp of . I dont think growth is a major concern. The market is a lot better about growth on a global basis. As we go into the second half of this year. Not reallygrowth is a concern. Obviously theres lots of elements and cpi is one that would really help us. On the streets people are feeling good. The market feels great. This growthting story at all and im certainly not fighting it on an international basis because it feels extremely real to me. Caroline you mentioned bonds. Where do we see the yield . Ande remain at low levels therefore for the demand that we are seeing later this week . Whats interesting with bonds is the 10 year, i felt it was too low last week. We saw it correct. After unemployment data. I think we see consolidation. When people say could we see a bond rout im not necessarily in that camp because the one thing investors really lack is yield right now. Theres going to be a point where demand is going to kick in on the bottom curve. On the 10 year even if we were and more explosion trend growth in terms of inflation and general gdp growth in the u. S. And globally the 10 year can push itself. I dont expect this to be running back through 275, 3 anytime soon. If wee simple reason that saw those yields investors would come in. Theyre looking for an alternative to equities. There a point where however aware investors will say, i will take that, thank you very much. David do you believe it investing in pits tips . Im conscious of the fact that people are being very hurt on that. I would be very cautious. Anything the market is being cautious on you are not going to see a lot of people lining up for it. What does that mean for stocks . Weve been talking about bonds. How are they affected by bonds if we go back to 2 in terms of inflation . I think they completely survived. Youre seeing fantastic data. Youre seeing oil around 50 right now. The stabilization of the dollar at reduced levels. Another thing to consider about inflation on friday. You have a 10 depreciation against the euro in the last six months. Thats 57 of the dollar index. Its all good news and for equities its very hard to play against that particularly if youre in my camp. We think every day the chance of tax reform in q4 is growing. David Paul Richards of Medley Global Advisors is staying with us. Coming up this week, a big lineup of guests. Sir martin sorrell. And you control of pimco. This is bloomberg. David this is bloomberg. Im david westin alongside Caroline Hyde. The president may have left the city but washington continues to be in the news over the weekend. Of six hard at work on their plans for tax reform to be taken up after the break. Joining us now is chief washington correspondent kevin cirilli. Lets start with north korea. Its quite something to have a unanimous vote out of the Un Security Council. This is a win for the president isnt it . It is a win for president trump. Haleyhe weekend nikki announcing there was a unanimous vote with the Un Security Council including both russia announcing new crippling sanctions totaling more than 1 billion against the north korean dictator. Thehould also note relationship economically between north korea and china. Both russia and china did not label the intercontinental holistic Ballistic Missile test despite secretary of state Rex Tillerson several days pressing aggressively against russia and china for their lack of ability to work with the United States in targeting north korea they were able to get new sanctions against north korea. Remember that more than 80 of north koreas exports and imports are directly tied to china. David a big Foreign Policy win for the president. Hes up in bedminster. He says hes not vacation. Congress has gone home. By gary cohn on friday hes hard at work in the white house working on this new tax plan. What do we know about the process and will we get one in Early September like he promised . Thats what they are promising and thats what congress is hoping for. Trying to get something done on tax reform. Skepticism inside the beltway and that there would be any comprehensive tax reform by the end of the year. They might be able to get something done on extenders inside washington or some type of Corporate Tax cut. Several congressional leaders are planning in mid august to visit the reagan president ial library to honor the anniversary of the last time there was a universal comprehensive tax reform and they are hoping that type of anniversary in the setting of president reagan will be able to inspire them when they get back in september. Seems a long time ago. I am afraid to ask where you were in 1986. I wasnt born. David thats what i was afraid of. We want to talk about whats going on. We talked to gary cohn on friday. This is what he said about how hard hes working. Quiteare now working actively with the ways and Means Committee and the finance committee in the senate to get some muscle structure on the skeleton. To really drive tax reform to where we have to drive it. We will continuously meet over office august. David you have said you think the people are discounting too deeply the possibility of meaningful tax reform this year. Why is that . The market doesnt trust anything coming out of washington. We have discussed in the past that this looks as if its going to be pushed out. Weve still got the fact that weve got midterms coming up in november of 2018. What do you do if you are a republican and you want to get reelected . Do you decide trump is an issue . The fact that health care is seeing a lotwe are more possibility around the debt ceiling, somethings got to give. Be tax me is going to repeal however minor it is. Thats the other thing i would say. Expectations are lowering by the day for what we get. Just give us something. David if you look at midseptember weve got reportedly well have a tax plan how can we got a debt ceiling and a budget. There are very few legislative days in september. How concerned should the markets be about getting that much done at the same time . A lot of concern. I think investors are relieved that health care has been parked somewhere else. Septemberme back in we can say, fine. We are ok on that until 2020. The focus becomes on tax. And right now that is not in the psyche. Win we are seeing on markets this year, this becomes quite a binary outcome for q4. This either happens or we see a stock correction. If we do see expectations and optimism go up about what can really be achieved in the tax repeal dialed down, how much have we seen tax reform dialed in to , maybes, bringing back help inject a bit of m a. I would answer that by saying right now i think the momentum we have seen in risk asset have largely been based on earnings in the strength of the Global Economy and the recovery in europe. And a lot more comfort around emerging markets. Element ofd see an tax reform, gary cohn is right and mnuchin has been really busy behind the scenes. If gary cohn wants to replace yellen is probably going to get tax reform done. When you start to put this all into play the market would get a really serious wakeup call to the point where i am effectively saying i dont think tax reform is in risk pricing right now. Caroline what are you expect in terms of the Corporate Tax rate . Whats your lowest case common denominator . Than we expect. I really dont know. I think 15 is obviously the start of a bargaining tool. The market is saying we should expect Corporate Tax around 22 to 23 . I think it is somewhere in between. The market would react somewhat positively. The other thing is to consider is tax repatriation in whatever bill they are going to be putting forward. When you see the depreciation of the dollar this year that could cause quite an interesting rally in the dollar. That is something that is not on the dollars price right now. Caroline Paul Richards of Medley Global Advisors, you are sticking with us. Thank you. Coming up, adam posen from the Peterson Institute. This is bloomberg. Mrs. Bloomberg daybreak europe im emma chandra with your bloomberg dismissed business flash. Sprint is facing increasing. Ompetition in the u. S. The companys biggest shareholder is softbank and the ceo is pursuing all options of industry consolidation. Theres a takeover in the Home Health Care business. Germanys care has agreed to buy next stage medical. Will allow the Worlds Largest dialysis provider to expand in the u. S. Theresa mays office is dismissing a report of the country will pay 47 billion to leave the eu. A Government Official called the figure speculation. Brexit supporters are pushing back against the idea of paying any sort of exit fee at all. Theresa mays office dismissing the report that the u. K. Is prepared to pay a 40 billion euro bill to leave the European Union. With us to discuss, Paul Richards. We know from the eu side of need this billy settled along with the irish border before we can Start Talking trade negotiations. This seems to be a death by a thousand brexit cuts. Do you think we need this bill pushed forward . Wholeittle bit like the u. S. Tax situation, getting a little bit bored of the whole subject right now unfortunately. It is looming and you cant ignore it. At the end of the day the u. K. Decided to leave. Its going to cost them something. If they want to be able to put themselves in a position of negotiation its clearly going to be a number. I dont know what that number is. Its probably not 47 billion. Its probably also not zero. They will have to get to a point where they can find a threeyear period. Pinto ofy need to get to some kind advancement other than where they are right now. Market groups saying we saw the u. K. Consumer spending drop. 8 . We saw downgrading from the bank of england. Does this hit the real economy Going Forward . It must. I was listening to the npc last week and they were clearly very concerned and bullish on the pound. I started to play that one back a little bit and i think thats why it is settling around 130 now. I think the june data is really starting to look more depressed than the market. Question this is heading the u. K. In a way that europe is actually doing very well given the fact the ecb is rating the start of normalization. I think they are paying the price of the decision they made. David we are told the real we have made enough progress on the bill to talk about real market. How with the pound react if we did have you come out and say, thats enough progress. Move forward. It would be tremendous. At pound finished the night 130. Most currency traders would say give me 50 of that. Aroundd probably run to 133 to 134 very quickly en route to 138, 139 again. It would be a very positive development for currency markets and risk markets in the u. K. Extremely low. Which probably tells me there at the wrong end and they should be a little bit more optimistic just like tax repeal. David Paul Richards of Medley Global Advisors will be staying with us. Coming up, Francisco Blanch area bank of america global lynch. To talkng to be here about opec meetings going on in abu dhabi. Can they plug those holes in their agreement . Oil prices have been going down rather steadily. Live from new york and london, this is bloomberg. Caroline this is bloomberg daybreak. Im Caroline Hyde in london. About. 1 in the s p 500. Dax up by. 4 . In german trading on the back of m a news. We saw asia gain. 5 in japanese stocks at a twoyear high. Lets look across asset classes. Looking at the euro shaking off that number. P. 2 is the dollar weakness playing into this . With thesee parity british pound as soon as the end of the year. , Nymex Crude Oil off by 1 . Opec and allies talk about how they can reduce supplies. Concerns about the supply not going anywhere. I just want to focus on steel. Metals up 4 . Seeing them outperform in europe. Emma chandra is here with the first word news. North korea is vowing harsh retaliation over you and sanctions. To launch threatened thousands of revenge attacks. Gainst the United States the north koreans say they wont enter negotiations on their Missile Program until the u. S. And hostile policy. Maduro isnicolas claiming victory after what he called a terrorist attack on a military base. The attackers confessed they were working with opposition activists backed by foreign governments. Elizabeth warren is blocking president trumps pick to run the Justice Department antitrust division according to people familiar with the matter. She described the nomination as a sign the white house will put the interest of corporations ahead of the american people. Global news 24 hours a day powered by more than 2700 journalists and analysts in over 120 countries. Im emma chandra. This is bloomberg. We have been seeing oil trade off today. Slightly lower as representatives of opec and known new pick nations meet in abu dhabi. Joining us now, julia lee. Julian lee. Who keeps oversupply . Culprits are predominantly iraq. The United Arab Emirates itself which is where the meeting is being held. And venezuela is probably the third. I dont think we should expect too much from this meeting. This is not a ministerial meeting. Its much more of a technical meeting. Its one of a series of monthly meetings that opec has to monitor this agreement. They will be looking at issues around why these countries arent complying and perhaps what can be done to encourage them to comply little bit more. Caroline is there a sweet spot that opec wants to see . The minute 50 comes into the equation does the u. S. Turn on again . Once you get to 50 a barrel . A lot of shale producers are starting to hedge their forward production. Means they are in a position to luck in future output growth. They start putting more money into drilling more wells. So this is extraordinarily difficult for opec and its not made easier by the fact that compliance with their own agreement is starting to slip a little bit. Getting together to figure out why they are not complying. Isnt it Pretty Simple . Arent they just cheating and if so how can this Technical Agreement make any progress on that . Ultimately they are. Several countries are just cheating. Why, what can they do to persuade these countries, what pressure can they put on countries like iraq to cut back their production a little bit more. I think its extraordinarily difficult. The beginning that they objected to the secondary source estimates of their production. Everybody was underestimating their production so their starting point was too low. They also said they felt they ought to be given an exemption like libya and nigeria because of the war they were fighting against islamic insurgents in the north of the country. Are trying to find a way around this and one way maybe to measure x boards rather than production which is something they rejected when it was suggested. They are really running up against difficulty with three or four countries that arent complying with this agreement as much as others. Paul richards, expand out the discussion from oil to commodities. There are a variety of ways in which markets are responding to oil and other commodity price. One of the most sensitive is foreignexchange. The big hedge funds are placing their bets on countries who make their living exporting commodities. Contracts of futures on these commodity linked currencies are way up. You can see it shooting over the right. That orange line is down. Explain to me this phenomenon. It at the same time by and large the australian canadian new Zealand Dollars are down . Line iswhite positioning and it tells you theres a point where positioning is either going to be very right. Something has to give. Commodities are going up. In july. N 8. 5 rally i think in the case of these currencies we are seeing turnover quite markedly overnight. We saw the comments a week ago from the reserve bank they didntsaying like . 80. I think they are positioning that white lines is going to start to trim down. Its not only commodities stories but also the market has been chasing yield. If we are to see a higher yield globally particularly in europe and the u. S. That would take pressure off of their positioning. The vulnerability of that chart should come down. David why did the hedge funds pile into it so far . It was not only commodities but also yield. As the tenure moved to 220 two saw the new Zealand Dollar and thetralian dollar loonie is about oil so it can do whatever it wants. Rates and its oil. Caroline Interest Rates, oil. Weve got so much at play. We have also been talking heavily about the supply side of the equation. Movement, is that supporting the underlying technicals of oil. Talking about electric vehicles as well. That doesnt play into the longerterm. In the short term we are seeing more robust demand growth. Certainly the Second Quarter have to be stronger than people had originally anticipated. If you look at the full year bounces for organizations like the International Energy agency they are very heavily skewed towards a Strong Demand growth in the second half of the year. An annualbalance on average basis to come out right we need to see this very Strong Demand growth continuing and there are questions over that as we move out of the sort of summer peak and into winter. Worries thate wont continue. We had a Strong Demand picture over the Second Quarter which has certainly helped to tighten that allens a little bit. We still have vast excess stocks. Youline im going to take back to a line you said a little while ago. You said dont bet against the saudis. Theyre like a central bank. Are you expecting to see a breakout anytime . Im expecting stability at a higher level. With the market was so concerned about was that a move down to 40. This is a market that fought the bull rally every step of the way and effectively missed it. I think the natural tendency to expect a move back to 40. I think the saudis would take 50 any day of the weekend and were still trending towards 55 to 60. I am bullish. For now i would take consolidation and i would not bid against the saudis. Before the last deal was done the saudi energy minister, he flew to visit a lot of these members personally. I would not take that on. We know weve got iraq that needs to rebuild mosul and so forth. Everybody talks about shale. We have never seen a shale cycle. Who really knows what the outcome is going to be. All of these determinants out there. Bottom line is i think 50 is going to be a stable level en route to 55. Caroline great to have julian lee in london. Coming up, we have none other than adam posen from the Peterson Institute. This is bloomberg. This is bloomberg daybreak. Wednesday, Kathleen Hays interviews james bullard. This is bloomberg. David china is in the news today for two reasons. It released numbers on changes in its foreign reserves showing a slight increase. A turnaround from where it was earlier in the year when it was drawing down on reserves. China joined with the United States and United Nations to impose tough new sanctions on north korea. Joining us now is one of the foremost authorities on u. S. China relations. She served as the Deputy Assistant to u. S. Trade representatives. Negotiatorbeing the on various agreements with china. She now serves as senior fellow of the paulson institute. She joins us today from washington. Welcome to the program. Good to have you. The things i mentioned. On the one hand, trade. There are pending issues. They said they will look at a 301 action which is pretty stern for the u. S. Government. Theres the pending steel issue and north korea. Is there a little bit of a quid pro quo going on . Theres a lot of frustration with china on market opening for foreign firms and this administration has put a high priority on how to recalibrate the relationship with a real focus on exports. They have also been very clear northleaking progress on korea. There was a lot of talk last week about launching a special 301 which focuses on intellectual Property Rights. Chinas support for action on north korea since its responsible for 90 of trade with north korea may buy it a little time in terms of how aggressive the administration is. Theres no question it will still continue to push on market opening for our firms. David we hear a lot about various sorts of sanctions going on. How big a deal is it for china to join in the national Security Council to sanction north korea . It was a really important step. The administration was able to get unanimous support for the sanctions. Theres a lot of frustration with north koreas continued action and theres been a lot of pressure by the administration on china to really step up its actions. The fact that it was willing to in supporting additional sanctions. Hopefully theres more going on behind the scenes. Over the past few months their trade has been up 10 with north korea and areas allegedly not part of the sanctions. There is some flexibility of additional steps to try to cut off the trade with the regime. Keep up the pressure while not bringing down the whole regime. Im fascinated to get your take on how much trump plays into all of this. You talk of the administration but all of this can be heightened by 140 characters typed into twitter. Does the consistency need to come from donald trump as well the rest of the ministration . Thats an excellent point. Its very interesting that this president puts a lot of stock in personal relationships. Going into the summit in maralago between president she asian thing and donald trump jinping a she personal relationship. If you look at the tweets have been coming out by and large, they may be tough on some of the china trade issues. They have been actually quite late and on the president himself. It seems as if they have a which helps inon terms of building up the ties and the ability of the working level people to try and Reach Agreement at the level below. Caroline given her years of experience are you optimistic Going Forward with calls over the administration that we will see china opening up to u. S. Companies . Its very important to keep up the pressure. It has been 15 years since we have had a major trade agreement with china. Obviously the point of a wto was to bring them into a rulesbased organization and we saw significant changes in their trade regime as a result. We havent had the kind of bilateral negotiations that are very focused on sectors where the u. S. s most competitive since then. Intellectual Property Rights is a really good example. In the 1990s we did three major trade agreements. Both to help them create a legal structure for ipra and to focus on market opening for our content like movies and music. And business software. These kinds of areas where the u. S. Is so competitive. Since then we havent seen any kind of action like that. We have seen trade case in the wto. I think it is time to combine a when theral approach wto has a certain role to play. Also its very important to pursue these bilateral negotiations so we are really focused on where the u. S. Interests are and when the u. S. Can bring pressure on helping china continue to open up to our firm. Those take us into bilateral discussions. Last time we spoke on this program we were in the middle of a conference on economic dialogue in washington. High hopes there would be some progress in certain sectors such as steel. Was that a setback with that part of the negotiation . Its unfortunate they werent able to Reach Agreement because there was a broad range of topics that both sides were discussing for some progress. It did break down over discussions when there was a sense that what the chinese put on the table didnt go far enough. Hopefully the chinese will also come back to the table with some additional aspects. If you look at what both sides are talking about they have translated this into a year agenda and their active of discussion still going on. There have been some very important meetings in china recently and they have made some commitments and we have our history to see steps for further market opening including in Financial Services. It doesnt necessarily go as far as we would like to see. Theres no reason china should be limiting investment banks, Insurance Companies and others. At the same time they are expanding the scope of business and we are starting to see some progress and hopefully after the big leadership meetings later this year the chinese are having with the start to see more progress. To have you back on the program, deborah m lehr. Andheck out tv interact with us directly. Just go to tv on your terminal. This is bloomberg. This is bloomberg daybreak. For the first time this year german Industrial Production has fallen. June figures fell 1. 1 . Its unlikely to be a turning point for the german. Strong orders point to a likely pick up in manufacturing. Despite the drop in the data from germany the euro resuming gains against the u. S. Dollar. Still with us to discuss the euro is Paul Richards. I want to take you to a chart of got on my screen at the moment. If the euro going to parity with the Great British pound . It keeps trending higher. Do you see the euro continuing to versus other currencies . Ever talks. S. No one about it. Its all about wheres the euro going versus the dollar. I think eurosterling could get as high as 95. I think parity is too far. I am more positive on the potential outcome of the whole brexit discussion. If they fail, its going to parity and beyond. I also feel the euro needs to take a little bit of a breather because at the end of the day if you are buying the euros you are selling the dollar. What happens if the fed hikes again in december . No issue with the budget and debt ceiling. Thats going to be relatively positive for the dollar and youve got draghi coming up speaking at jackson hole. No issue with the budget and debt ceiling. Thats going to be relatively its also the currency. The fact that weve gone 10 on the euro in six months, he might have had on his radar. I think eurosterling at parity is a push too far. We might see the draghi talk down of theits als. The fact that weve gone euro potential he. I would never discuss regard disregard the possibility. I have been a bold since 105 and i took a lot of heat on that call. My Natural Inclination is a minimum consolidation and possibly correction. Is the master and verbiage on his own currency and i think hes close. 118 is a possibility. David if the euro worth to go to 120, what would that do to the Growth Prospects in europe. I was just looking at the data that came out before. Is the currency have an impact . Some sorto announce of impact. I cant quite put a percentage point on it. You do have to consider the fact that the euro has been very cheap for very long. Europe and germany in particular make extremely good stuff to buy with a lower currency. David how much does reform affect . I like mccrone. I like the new access between germany and france that we havent seen since the late 80s. At least its a step in the right direction. To affect popularity it. I dont know what its going to mean but its a very good step. David many thanks to paul richard. Coming up, Merrill Lynch global head of commodities. Talking about opec meetings and later, adam posen from the Peterson Institute for international economics. Live from london and new york, this is bloomberg. Is this a phone . Or a little internet machine . [ phone ringing ] hi mom. It makes you wonder. Shouldnt we get our phones and internet from the same company . Thats why Xfinity Mobile comes with your internet. You get up to 5 lines of talk and text at no extra cost. [ laughing ] so all you pay for is data. See how much you can save. Choose by the gig or unlimited. Call or go to xfinitymobile. Com introducing Xfinity Mobile. A new kind of network designed to save you money. I enjoy the fresher things in life. O. 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. Jobs are up with inflation isnt. Players williggest this be enough to keep them from playing hardball . Leaks in, plugging their improvement as crude heads back down. Welcome back. I am david westin in new york. I am delighted to have my coanchor, Caroline Hyde, joining me from london. Caroline lets you look at the markets today. Futures coming off the recent up. Near record highs. The euro shrugging off the production data. The first slowdown in six months. Up about. 25 . Numbers, yields creeping higher. Going up towards the u. S. Bond, falling. We have three years, 10 years and 30 years coming. About opectalking meeting with other allies to see how they can send the supply got. David time for the morning brief. A look ahead at this week. Opec and nonopec leaders will be meeting in abu dhabi. They will be talking about production cut. Earnings. For disney after the close on tuesday. Jacob zumas faces a vote of confidence and then the cpi data. Markets largely dont believe as you can see from this chart, the breakevens are down this year, showing inflation of less than one point percent. The two of the biggest players disagree. Blackrock think we will see inflation of 2 or better in the next few months. Joining me now to explain that and vadimsheets zlotnikov. Happened to inflation . This is an extraordinary junction. We are seeing sustained growth in the United States. And in europe. And in the Global Economy, more broadly. And notwithstanding that solid ongoing growth and declining rate, inflation has fallen. Over the last several months. A time that, on the one hand, caught Central Banks by surprise but on the other hand, eventuallyks, inflation will return. And so standing vigilant, ready to move. But they need to see more evidence on inflation. Id is this a timely matter . Or has something changed in the market . Jason on one hand, we may see some of the recent drop in inflation as a ace effect. So i do think it will go higher, moving forward. But part of the reason we still see inflation at these levels is because of the apparent health of a hot job market is that Labor Force Participation has never recovered. Look at where labor force ticipation rates are slowed since the 1970s. So we have a lot of slack on the sidelines of the labor market that still havent made it hot. Is Holding Back Wage inflation. Their other people who could be participating but they are just not. Caroline i want to bring you in, vadim. Where does the fed . You agree with where the market is positioned at the moment . Im i think the markets are too optimistic about the fed remaining dovish. The graphics you have seen the retirements of the baby boomers. Making more money. And they have actually depressed wages. But the one driver that we have is low productivity which is continuing to drive unemployment and eventually as we move through 2000 18, it will transfer to the higher inflation rate. Caroline how much should we be paying attention to oil in all of this . Is that an effect . Vadim it has an impact. It tends to have a temporary impact. The markets can get worried about the credit issues but it is not an inflation issue. David are you looking for a reason to hike or not to hike in the fed . At this stage, most central bankers are looking for reasons to hike. With an Unemployment Rate at likely remaining solid as far as the eye can see, the presumption is, labor market slack and there is still slack out there but it is diminishing. Wherever the limit is, we are getting closer. So i think the majority is move. G for the and that his consistent with expectations in the market, that they will do something with the Balance Sheet in the nature in the near term. What is your view on this, jason . If you look at the past few hikes, it has not tightened financial conditions. Why not hike again . On the big argument is what if the growth doesnt materialize that has been priced into tax reform . Bolsteredng that has equity markets over the last eight or nine months is the expectation of Corporate Tax cuts. And here we are talking about how low inflation is but there is an expectation up there that there is a reflation trade. So that notion, we need to throw it away. And accept the fact that inflation markets are up because if they revalue the inflation trait that is predicated on a lower Corporate Tax rate and if the tax rate doesnt come, the disappointment in equity markets will result in another revaluation trades that put everything back to what happens if a Corporate Tax cut doesnt happen. And that would be quite negative. That kind of thing poses significant risk which means fiscal policy is the wildcard here which will consider which will determine whether the fed is being to hawkish or two dovish. Caroline what would happen if we didnt see the tax reforms that are being debated on . Nathan if vadim if the tax reforms are dead, it would cause a onetime decline in the equity markets. There could be a onetime gain in terms of earnings so it could be consistent with the type of decline that you would see. I do think it has more of an impact broadly in terms of function. It could bring doubt of persistence of an economic cycle, more generally. Caroline how much are you looking at Political Risk or at the lack thereof . Money into equities while suddenly money remains cheap . Nathan i think the Political Risks in the United States and geopolitically are significant. Said, i think another of policy which is driving the equity market that is important is the ongoing cross towards deregulation. I think there is expectation that there will be some that will be supporting equity prices. As Vadim Zlotnikov was talking about tax cuts, you should your head, did you have a response . The idea that we have a onetime drop and it is a small one, i think that might be an optimistic view. A onetimehink that drop could trigger a technical selloff. The moving day average as a supportive floor for the dow. And i think if we saw a failure of fiscal tax reform, i think there could be a more move. Ficant downward roo i think the disappointment would be significant. And in a year when auto sales are weighing a bit on growth, this year, it is more important. Last year they help to carry the growth as we spent part of the year in recession. This year, Business Investment is helping to support growth but if those reforms fail and investment pulls back, growing on a fundamental basis is larger. Furtherink we see downside risk. I dont think it will be a onetime blip and we move on with happy lives. I think there is further event thatsk in the tax reform goes. Caroline Vadim Zlotnikov, nathan sheets and Jason Schenker. All are sticking with us. Up, opec talks. Posenlater, adam weighs in on the inflation debate that we are having. This is bloomberg. Emma this is a bloomberg daybreak. Sprint talks about the merger with tmobile. That is according to people with knowledge of the matter. Sprint has been facing increasing competition. The companys biggest theeholder is softbank and softbank owners son is considering all options. North korea is in harsh retaliation over the new sanctions. Kim jonguns regime threatened to launch a thousandfold revenge against the United States. That is the Bloomberg Business flash. David chinas foreign reserves are climbing. 3 trillion in july. This points to continued solid growth for the second largest economy. Helping to restore the confidence in the countrys economy and easing outflow pressure. Sheets quite a title you have their, the ersecretary for affairs you follow this. You have followed this for years. Tell us the significance for us . For the markets . What the numbers we are getting right now from china on Foreign Exchange . Nathan i think the Foreign Exchange reserves, unfortunately, are seen by the theet as a key signal of ,ealth of the chinese economy for prospects of china and the underlying economic risks. So the latest rebound we have seen in reserves, i think the markets are taking that as a isnal that the outlook somewhat more sangria and then they had thought. David you just said explain that to us. I think the question is whether they have to intercede in the market to keep Chinese People from taking their money offshore, a vote of confidence in the chinese investors . Is that wrong . Nathan the reason i said unfortunately is because china has a massive stockpile of trillion er 3 exceeding almost every imaginable metric. And unlocking some of those reserves would be a powerful impulse for Global Growth and for chinese growth. Chinas reserves stocks diminishes, it will happen in a it doesnt, necessarily pose any fundamental risk but if the market see it as a risk than it does become a problem. Caroline as we see china potentially wanting to flush the cache elsewhere, maybe abroad, maybe investment abroad in the soted states, there is still much reticence about that occurring. How do we see governments realize it may be a force of good to have that money coming into their economies . Nathan i think that having a disciplined Chinese Investment in the Global Economy can be is there ahat constructive and the way i would think about it is a twoway portfolio diversification flow. Constructingnd, chinese investors to have the capacity to be able to invest abroad. Importantly, that does need to be matched by the capacity for Foreign Investors to invest in china. And we are seeing slow progress with theirection various connects that have been created. Similarly, once Foreign Investors are in china, it is important that over time, the chinese economy open up and it be possible for investors to move their funds. And this process of opening that is the key, i think, for making Chinese Investment constructive for china and for the Global Economy. Interesting how you said the foreign reserves in large part help the rest of the market, maybe unfortunately, dictate how strong the overall chinese economy is looking. Yuan . Bout the is that a sigh of relief . Nathan i think we are likely to moving to a regime over the next six months until the National Party congress, where the andmber the is trading flat in a range. Chinese growth has been stronger. Been, as i alluded to, a bit of tightening in terms of the capacity to remove funds from china. Hasin addition, the dollar been on a softening trajectory which also takes some of the downward pressures off. So i would expect a broad, range currency coming from the congress. Cargo fascinating. Nathan sheets. Lets bring back Vadim Zlotnikov and Jason Schenker. , first, yourov notes. U. S. Equities give us your thoughts there . Vadim if you look at the way the emerging market trade has changed somewhat, stronger exports and that drove emergingmarket. That may still be the case but we are seeing a little bit less of a driver coming from either commodities or from exports. Is reallythat important about emerging markets today is declining inflation. And that is occurring almost across all emerging markets. A great looks ability visavis Monetary Policy and i do think that is one of the positives. The second one is the significant reform in the emerging markets which is driving growth from the local markets and investment. David how much of this is because of the weakness of the dollar . Down 8 this year, does that help emerging markets . I think so. And i think we have seen chinas growth improve. China had been in a manufacturing recession for 19 2016, that isune the mid stream the Global Economy. But, europe solid growth china is a more midstream economy. And all the way upstream, when china does better, economies that reduce Raw Materials tend to do much better because we see a big manufacturing demand in china be stronger. Manufacturing pmi over the last few months, it does support Commodity Prices which the arts commodity currencies. And as long as the euro and u. S. , a chip support the chinese economy. David Vadim Zlotnikov and Jason Schenker will be staying with us. Coming up tomorrow, cheryl hamburg joins emily chang for an exclusive interview. Live from london and new york, this is bloomberg. David this is bloomberg. An internal battle over diversity at google has gone public. It began when a male employee sent out a memo, arguing that google has the politically correct culture that ignores differences between the sexes. Now the diversity chief has waived in. She said the employee made incorrect assumptions out assumptions about gender. It exposes the womens long struggle of employment in the tech industry. Only 20 of those jobs are held by women. Caroline, you are an expert on tech. There is a real problem, isnt equality in gender Silicon Valley . Cargo it wages on. Gender or ethnicity. They are also underpaid. . 88 on one dollar versus the mail is what Women Developers are paid in Silicon Valley. And this really has been coming to the forefront. You see new diversity chiefs being hired. Google has only just got her feet under the table. The one at twitter say they have been hiring a diversity chief. And that is the topic that emily chang is trying to bring up when she will be here talking about diversity and gender. She spoke to jack dorsey about that. We will have a listen. Focus hasy our really always been on a inclusion first. Making sure that we are building an organization and environment at a company that people feel. Ike they belong and people feel like they can contribute to. Do you think this is something you feel like the east coast is also talking about . David the east coast has been talking about this for a while. It is one thing to talk about but another thing to walk it. It has really been a challenge racial gender and ethnicities. Coming up later this week, a big lineup of guests. Jeff curry from goldman sachs, julian emanuel. Live from london and new york, this is bloomberg. Who knew that phones would start doing everything . Entertaining us, getting us back on track and finding us dates. Phones really have changed. So why hasnt the way we pay for them . Introducing Xfinity Mobile. You only pay for data and can easily switch between pay per gig and unlimited. No one else lets you do that. See how much you can save when you choose by the gig or unlimited. Call or go to xfinitymobile. Com. Xfinity mobile. Its a new kind of network, designed to save you money. Cargo this is bloomberg daybreak. Am Caroline Hyde in london. Lets check out the equities. We could see green in the United States. Futures are tentatively close to the record highs. The dax is off by. 4 . German production falling in data today. And one of the key loggers on that particular index say they will be splashing cash in the u. S. The ftse 100 up. 2 . At the highest in two years in the japanese index. Lets switch up against. The euro is shaking off the german industrial number. Is this a recalibration after the jobs numbers on friday when we saw the euro selloff . The u. S. 10 year yield, up one basis point. The tenure is down slightly. We have the three year, the tenure at the 30 year auctions this week. Nymex crude oil off with opec meeting with its allies talking about how to islam some of the weeks they have had in the supplies. 29 is where we trade. And it want to bring your attention to steal. We are getting a boost in metal today which is helping to drive mining higher. That is the outperform up 1. 3 . Lets get an update on what is happening outside the Business World with emma chandra and the first word news. Emma theresa mays office is dismissing a report that the country will pay 47 billion to leave the eu. A government figure called a Government Official called the figure speculation. They are pushing the back on the idea of paying an exit fee. In venezuela, the president is claiming victory after what he called a terrorist attack on a military base. They thwarted to attackers and detained them. The military says the attackers confessed they were working with opposition activists backed by a foreign government. And in the u. S. , Elizabeth Warren is trumping is blocking trumps decision. She has described this nomination that the white house has interests of corporations ahead of that of the american people. He is a former lobbyist for anthem. Global news, 24 hours a day. Powered by our more than 2600 journalists and analysts, in more than 120 countries. Powered by more than 2700 journalists and analysts in more than 120 countries. David oil has traded slightly. Ower joining us now is the bank of america Merrill Lynch head of research, Francisco Blanch. Great to talk with you today. You are over there to cover this. Is it simple why theyre falling behind . Cheating . Francisco i think the group is meeting to review who has been compliant with the agreed cuts and who hasnt. And then try to deliver a more consistent message. Obviously minor members like ecuador have to pull out and are much moreaq important to the overall strategy of the cartel. Reluctant too been continue with their commitments but there are discussions that will take place over the next couple of days, as well as what is happening with libya and nigeria. So these will be major topics of conversation and there will be topics over venezuela and what is also likely to happen next. David on we first heard about the agreement, the price of oil moved up nicely. It has come back down since then. Does that put more pressure on the cartel . Because people are saying theyre not getting out of it what they hoped to get out of it . Francisco opecs plan has misfired. The reason is simple they took too long to implement it and the cut was not big enough. It would be better to do a deeper cut over a shorter amount of time. Effectively, opec announced the intention to agree to a cut in they increase production until the end of the year and then finally cut to a level that was actually higher than what they were producing in september when they announced the cut. So all these barrels made it into the market in the first half of the year in 2017. And i think that has been most frustrating for opec and for a lot of the traders and commodity hedge funds that were invested with the view of a rising price. So i think the cartel has lost a lot of credibility at this pace. And a lot of analysts and Market Participants really wonder if toy can do what it takes rebalance the market. Additional cuts. But the question everybody is asking is if you cut more here, are you sending market shares from opec straight to west texas . To the basin . And this is pretty difficult, a pretty difficult problem to solve for opec. Shale production comes back to quick then you have all of the barrels coming from the basin. And i do think that is what the cartels are really struggling with. If they were to cut production further here, they would need to ensure that anywhere over the you are over the u. S. Will be in a nice place and you will increase the problem so im not sure if theyre going to do much. I think they will sit there and hope the demand for oil improves. Cargo was that caroline was that a sweet spot of where you expect production to come back online . They came out and said they were looking to move the market, meaning that they have to they have not been able to do that. To come them the choice down. And they have failed on delivering the inventory reduction. Mostly because of all the circles they created in the Fourth Quarter of last year. Ofopec doesnt have a lot choices. They have to stick to a strategy. And hope the demand takes the market higher, at least on a small basis. In the meantime, we dont see fuel prices moving below 55. We think they will stay below 50. Im talking about wti prices. Fascinating. So we will be sticking about 50. That was Francisco Blanch, fantastic to get your views. Lets bring back Vadim Zlotnikov and Jason Schenker. Reallyyour view, is 50 where we are . Jason we are likely to remain in that range for wti but maybe a little bit higher for brent. Explicit cut off point. Shale can be produced quickly as Francisco Blanch said. And shale producers are trying to gain more efficiency and cut their way to profitability by using more Technology Solutions and improved supply chain try to choose. Caroline im looking at my bloomberg right now if you are a bloomberg user you can type that in nc to see the expansion of the opec supply output. Do you believe and agreed that opec has lost some of its credits in the market . Lies with aault large extent with wall street and the Financial Market which provides Energy Companies with a dramatic increase in financing a couple of years ago. As a result of that, Energy Companies can tolerate negative cash flows and continue to invest in drilling despite the fact that they are not making money. Thel that passes through, fact that the financing is readily available, it will continue to keep shale oil as a threat and significant driver of marginal supply. The one positive i do want to point out is that you are seeing a Strong Demand growth. There is a depletion in the shale wells which is rapid. Withdrawnng could be and we will get more disciplined energy prices. David what happened to inflation, a reoccurring question. We had from lack rock on on friday. What drove Interest Rates, the volatility of Interest Rates, was inflation. Interesthifting the rate dynamic with incredible force. And now you have equilibrium in the world around energy. You have other forms of energy in the world that you cant have an inflation spike now, driven by energy. David do you agree . Is it all with shale . Vadim if you look at core inflation, much more important for the Interest Rates of the fed, the relationship between oil prices and core inflation is miles. Jason Vadim Zlotnikov and schenker will be staying with us. Coming up, adam posen joins us to discuss Inflation Expectations and the fed. Live from london and new york, this is bloomberg. Caroline this is emma this is bloomberg daybreak. Coming up on wednesday, an interview with this is bloomberg. Now, to your Bloomberg Business flash. Spending on the new model three electric car, sales will bolster the Balance Sheet. Account 1. 2 billion in cash. Warren buffett is closing in on a milestone that he probably is not happy about. Berkshire hathaway had almost 100 billion in cash at the end of the Second Quarter. Pay its dividends and rarely buys back stocks so they have to find a way to spend that money. And alibaba and marriott are teaming up. The companies will join ventures. Marriott has 6000 hotels including the sheraton and ritz carlton chains. That is your Bloomberg Business flash. Caroline . Caroline is the race for the brexit bank jobs paris will beat frankfurt to become the European Union pus Main Financial center after britain leaves, even as big knowledge that the french capital is playing catchup. Caroline connan spoke with him earlier. We will win the race. We will win the race. Of attractiveness. Because we are taking the right decisions and because we are standing firm. I think the question that the roles during the last month will they stand firm . We will stand firm. We will take the difficult decisions. We will lower the french taxes. We will make our country more attractive. Take Structural Reforms and decisions that are needed for needed. For instance, we will simplify the market. And i think that many banks, awarenvestors, should be that france is changing. And that this is not something fake. This is something true. Things are changing, deeply, in france. And that is why we will win the battle of attractiveness. Caroline still with us is Jason Schenker and Vadim Zlotnikov. Jason, i ask you first. So far, frankfurt has taken in double the amount of jobs in paris when it comes to the fight evacuation from london. Do you think the idea that france hasnt always been that fond of its bankers will start to a road . Jason i have lived in frankfurt so i might be biased about this. I think that they are two very different cities in terms of size and composition of workforce. Theret will depend are a lot of Different ReasonsCompanies Make decisions to relocate and why people move where they do. Are to european cities that i cannot almost not think of that are more different than frankfurt and paris. Caroline i want to get your take, Vadim Zlotnikov. Intending to move to the netherlands, ireland. We will see quite dispersion across the rest of the eu does therefore, does london manage to keep relative strength within the financial industry within the u. K. , despite the fact that it leaves the eu . Vadim the single most important question for brexit. Britains trade with the eurozone is driven heavily by services, rigid girl he the export side. The import a lot of the goods. So the whole negotiation a lot of the import the goods. You will see movement from large Financial Institutions as they move people to the netherlands and frank for it and paris. In thery will be told next couple of years and i think britain will do everything in their power to avoid a loss of those service exports. David we heard the minister say that they will be firm. They will be firm. What he has to be talking about are the labor laws. The french labor laws are longer than the bible. I have talked to people who run banks who say they will never go to france because you cant fire and take care of employees in the same way you do in other countries. Will they really have that kind of reform . Jason france versus germany, there is also a significant amount of labor law in germany. The question for companies will come down to a few things. Gap it will be the how expensive is it for companies and people to be able to buy buildings and offices and renting apartment and other factors. If we think of frankfurt versus paris, the real estate costs are furtuch lower in frank and you have a condensed a downtown area as opposed to paris, which is a much larger city. If we were in the u. S. , the comparison is similar to charlotte versus new york. That kind of a decisionmaking process here. Even if they were to push towards reform in paris, the cost of operating in frankfurt are lower. And that city is a banking city. People in frankfurt refer to it kfurt. Thats what they do. Those will be important factors there. David looking forward to the future. For a big i worked operation at one time. When they moved headquarters, they lose people every time. Is that a convenient way to not hire as many people . Particularly with stantec coming on board . What might this due to the overall size of employment . Outm what you just point is exactly it. Lookre seeing corporations at the need for labor and where the labor resides. And using that to focus redistribution. One thing you shouldnt forget, even though we talk about the eurozone, each country is fairly different. As a result, we will see dispersion. Caroline jason, it is about sin tech here in the United States. I think the disruption will continue but we will see jobs leave london. They are going to the netherlands and london and other places. And there is one other thing we should expect that it is going to accelerate over time. In some areas it will reduce jobs but he will also see fundamentally different parts of Financial Services crop up and grow. David many thanks to Vadim Zlotnikov and Jason Schenker, great to have you both on the program. If you have a bloomberg terminal, check out tv. You can watch is online and interact with us directly. Go to tv on your terminal. Live from new york and london, this is bloomberg. David this is bloomberg. A big week for fed speak. Starting today and through the week we hear from president s bill dudley and robert kaplan. Friday, the latest read on inflation with the cpi numbers. Joining us now is gina smiley. Welcome back. Speak on the fed what will he be looking for . We have the numbers coming out. A lot of people got hired. They have to get the numbers up higher so what are we looking for . The way thew from fed functions is that they will not preview december yet but what we might see is continued confidence that they will see inflation move up on the back of the employment numbers. Numbers withment wages coming and inflation is coming so we may hear that. On the Balance Sheet, we may hear a little bit of chatter. Theirre still playing cards close to the chest but we saw last week that we have clear signaling that it is coming. David what about cpi numbers. What are we looking for . What might make a difference . A it is hard to overstate how important these numbers are. They will be looking at the long trend. And then indexes like apparel, you will be looking for revision there. That will give them confidence. Caroline gives them confidence but it will shake the market a little bit. How much are we seeing the fed respond to the market . i think the fed looks at data and not the markets but they cant ignore the fact that they operate in a world where the markets are important to what they do every day. What they are most focused on right now is getting the inflation of 2 over the medium term. So i really think the cpi number, it is difficult to overstate its importance. Interesting. So thatll be at 1 30 local time in the u. K. Will we see the numbers,. Do you expect any reaction coming in the runup . Will they Pay Lip Service to this number coming on friday . They may. They say generally theyre looking for a trend over time without putting too much importance on any given number. They will be talking about the outlook for inflation, Going Forward. What they hope to see in the coming months. They may look for details as to what indexes they are looking to move up. We have seen that before. Preferred do narrowed down index of inflation. And they will talk about the department gauge that relates closest to the cpi data. Caroline caroline all eyes on e bloomberg function. Coming up next, adam posen. He weighs in on the inflation debate that we are having, heating up here this morning. This is bloomberg. A quick check on the equity markets. Futures signaling that we could take higher on the open. This is bloomberg. Up but inflation isnt. The markets may not see the white and inflations eyes but some of the biggest players think they are wrong. China agrees to work with trump on north korea. Would that be enough to keep the administration from playing hardball . And media madness. A letdown on subscribers from viacom has investors keeping an eye on numbers today. Welcome to bloomberg daybreak, Jonathan Ferro and alix steel are off to i am particularly glad to say that Caroline Hyde in london is joining us. Caroline 30 minutes until he opening bell in new york. Check it out. 1 higher on the s p 500 futures. Mining has been leading the charge. The euro is up. 1 shaking off the german production number. Nymex crude oil is off by 1. 4 . We have been talking a lot about oil today with the meeting of opec and its allies to curb the declines. But now, lets look at some of the stocks on the move ahead of the u. S. Open. Julie hyman, i am excited about you talking about m a . Julie we are looking at technologies because we are talking about possibly United Technologies making a bid to get Rockwell College avionics. O create an Aerospace Giant so this would be one of the Biggest Aerospace mergers we have ever seen. So we are watching these chairs. By 7 . L collins is up atcoin is up 16 , as much 16 today, and we are seeing a reaction in the chipmakers. They have been moving more in tandem with it quite because they make some of the various tools to mine bitcoin. Nvidia up. Advanced micro devices up over the year in part because of the gain in bitcoin. Another potential deal that could be back on the table this morning tmobile and sprint. Back in talks here, at the same time there are talks with cable companies. From softbank trying to salvage his investment in sprint , ongoing, getting told the company in 2013 but has lost billions of dollars. Sprint gaining a little more than 2 . David Central Banks keep talking about inflation being around the corner but markets largely dont believe them. As you can see from this chart, the mark for the u. S. Treasury breakevens are down this year, showing likely inflation of 1. 7 . But two of the biggest players in the bond market disagree. Then guard and blackrock think we will see 2 or better in the next few months. Joining us now is David Lafferty , who helps oversee assets under management. And from washington, our favorite, adam posen. Adam posen, where is inflation . Adam inflation is very reluctant to come out of its shell. And it will peak its head out. Merits toere are some the article that you published. In the fed forecast, we could see an uptick over the next six months but it will not be real inflation. Not inflation with momentum. Nothing the fed should worry about. David there was another fed piece that came out over the treasures ouran most what you think of that . That two years ago and i wish he had wrote that before he wrote his column. We are all talking about that. Theimportant point is that bank of japan did everything textbook that people like me and more this english people said and more distinguished people said. To buy longduration bonds, everything and it didnt work. So there is a genuinely troubling question there. It is a paradox because it isnt so much troubling in practice the guys having sticky inflation, as long as it isnt deflation, isnt terrible but it is troubling in. Because it means we dont fully understand what is going on. Of what isbe part going on is energy, oil . Blackrock on friday said part of the reason was because of shale. Drove the volatility of Interest Rates was inflation. What drove the volatility of inflation was energy. Be discountfting rate and you were shifting the Interest Rate dynamic with incredible force. Now you have equilibrium in the world around energy. You have other forms that you cant have an inflation spike driven by energy. We what about that cant have an inflation spike driven by energy . It is part of the explanation. I think technology is driving huge deflationary forces, globally. Japan earlier. As adam posen said, they have thrown the book at inflation and they havent been able to generate it. That withtells me is technology and demographics and the fact that the oil will stay, i see the oil that im not expecting a huge amount of inflation. But that doesnt mean theyre not reasons to hedge against it. I want to bring in the expertise of a central banker. Someone who has worked for the bank of england. What do you say to the fed when you look at these expectations . Have been talking down the market. That therey signals are not many rate hikes for 2017 . David lafferty it is interesting to look at the parallels. Talking that they will raise rates and forecasting that there will be inflation. And i realize it is sincere. It isnt gameplaying. But you have to look at that and reevaluate. And you have to say ok. We are confident that in inflation isnt going to take off in a big way. They gave a good speech the other day talking about the i wouldnt agree with that precisely right now. I think it should be in the context of everybody admitting that we are not on the nice edge of inflation here. Caroline we are not on a nice edge. What does that mean for u. S. Treasuries at the moment . We are seeing them the lowest of 2017, do we keep borrowing costs . David lafferty our view is that nominal rates will continue to back up slightly. Partially by inflation and partially by real rates. A dramatict see spike in real rates and inflation rates. The chips market right now looks fairly valued. Nominal relative to treasuries. While we are not expecting a spike in inflation, there is the thing to be said about put option. We are not seeing inflation emerged yet. There are lots of talks about whether the phillips curve are dead. The slack in the labor market will continue to get eaten up. It doesnt necessarily mean we will see a giant spike in inflation but what if we are wrong . Hedgea good way to against that even if you dont think inflation is going to spike. You have protection if you are wrong. David is the Central Banks are cannot gett they inflation going, is this the failure of a handoff over to the fiscal side . If washington had major fiscal stimulus, would that get inflation going . Your guest has it right. There is room for wages to pick up without it going into inflation. Is onecal monetary link wethe biggest confusions have. In a time of real low rates, you need the fiscal stimulus and there is very little harm to doing it, as long as it is temporary. This is the argument many have made about infrastructure and the u. S. And the u. K. Is wasting a huge opportunity here,s either you spend on infrastructure and push wages up or you spend on infrastructure and wages and inflation dont glut but you have the infrastructure really cheap. So it is a missed opportunity. David a winwin. Adam posenrty and will both be staying with us. Coming up this week, a big lineup of guests. Sir martin sorrell, jeff curry, julian emanuel. Live from new york and london, this is bloomberg. David this is bloomberg. The president and congress may have left the city but the fed continues to be in the news. With north korean sanctions and the group of six at work on their plans for tax reforms to be taken up after the break. Joining me now is the chief washington correspondent, kevin cirilli. They are hard at work and they say they do have a plan. Kevin they will be huddling in next week at the Reagan Library in california. The tax writers are. And they will be continuing through the august recess. They released the blueprint the other week but whether or not they will be able to have comprehensive tax reform, that remains to be seen. I think inside the beltway, they are anticipating the Corporate Tax cuts. It is a tall order but the Treasury Department is hopeful. David it is ironic that they are getting together to commemorate the 1986 tax deal. That involves both republicans and democrats. Are they open to that this time . Kevin it is unlikely that they will be able to get on board with any tax reform. Too divisive, despite republican thing they want to work with democrats. The david there was a big announcement over the weekend about sanctions with north korea. Explain why that was important . Kevin because the of ministration was able to get russia and china on board with crippling sanctions for the north korean regime. In particular, all of this comes as a backandforth between the United States. China and theen United States. We should note that the top exporters and importers are china. I want to dip into my terminal. And i want to take a look right have cutina, how they off their imports from north korea since trump took office. If you look over here in december, they have to magically andced, between december march, their imports from north korea. But they have maintained their level of exports to north korea. I can tell you there is pressure from the financial standpoint and from the Treasury Department and others to really step up. That is what you saw the United States ambassador to the United Nations, nikki haley, thanked china for what they have done with regards to this. Look for that to be a continuing storyline. David thank you so much, kevin cirilli. We want to focus on tax reform. We talked with gary cohn on friday and he left little doubt that he will spend the rest of his summer working on that tax reform. We are now working quite actively with the house ways and Means Committee and finance committee in the senate to actually get some muscle structure on the skeleton. To actually drive tax reform to where we have to drive it. We will continuously meet over august and hopefully will be able to deliver a copy of the tax bill early in the fall. David lets talk about where we are headed next. Still with us is David Lafferty and adam posen. Since we have you here, explain something to us that is important. The difference between tax cut and tax reform . Does that make with the economy, overall . Adam you put your finger on the word. Everybody uses the word reform but a reform would be something that would be taxed based, lest based, lesty distortionary. More sustainable meeting over the longterm it would have a steady stream of more revenue and more competitive meaning it would allow u. S. Companies, some of whom get unfairly treated and who behave unfairly as a result of the tax code it would mean we are more just in terms of fixing the tax code and therefore, seem more fair to the american people. That is reform. Theyuts, depending on who are given too, could be a stimulus to the economy. Could add to the indebtedness of the u. S. Economy but unlike infrastructure, it wouldnt necessarily lead to direct benefits for the american people. I want to bring it to you. You outlined what we spoke before, talking about how september and october could be ugly in washington. What are your fears and what are your hopes . David lafferty my hope, very tax, has been argued reform is in doubt but i think tax cuts are very possible. I think that in front of the 2018 elections, republicans have show something. So i am expecting tax cuts, not comprehensive tax reform. Even that could be a struggle because the calendar gets messy theeen the sessions of budget and the debt ceiling, which has to take place in my mind at the same time if not before we get to real tax cutting or tax reform debate. This in thesaw treasury market. I still think the likelihood of some type of technical default isthe u. S. Treasury market low. Certainly below 50 . It isnt something investors should bet on. This will behink brinksmanship and they always figure it out in the end. The case. T is i am a little worried that wont be the case. Cargo what are your thoughts your thoughts are on the brinkman ship . The effect to the overall u. S. Economy when it comes to the play . Adam i agree it is a pointless exercise if you try to take hostages in the budget process. So even if you are a rightwing Freedom Caucus member, you have to look back and say at least every other year we have tried to make a fuss over the budget deficit and every other year we have played with the debt ceiling and nothing has changed. That raises the risk premium on Interest Rates. Even though they are low, there is a higher risk of a premium than there has been. Cohn and mulvaney they have finally gotten on board, to have a clean bill on the budget ceiling and then worry about what they will do on tax reform. David this would not be the first time if they were to shut down the government that they have done so. Does this have any longterm affect or is this just for the Media Coverage . There is a lasting effect on the credibility of u. S. Debt. And we have talked about this. Every time it occurs, David Lafferty said, they tend to discount it. I do want to emphasize that when they shut down the government for a few days, there are full or will people who are excluded from things they need. For several days. And it actually matters to Peoples Health and education and wellbeing. It also matters there are plenty of employees who are trying to do their job and who are hardworking people and it is like a walkout or strike situation. They lose pay for no good reason. It is in the end of the world as long as they resolve it but it is costly longterm and shortterm. Aine a sobering and to sobering note to end on. Adam posen. Ty and coming up, Sheryl Sandberg joins emily chang. This is bloomberg. Caroline another deal. The contract for the atp world tour from 2019. The new home of mens tennis. That is outside the fall grand slam tournament. Now, for the First Time Since 1991, sky sports will hold no rights to one of the most popular sports. The question is whether tech will wipe out traditional broadcasters. It is a key question for someone who knows media very well. It is fascinating. Amazon wants in and it is managing to scoop up all of these. David we had a flirtation last year when twitter broadcast nfl games. So we do see it over here. Tennis may not be as big as football here or football there but you wonder whether this is the beginning. Caroline they have them between a rock and a hard place. Amazon and netflix are enforcing the likes of sky to spend more on the likes of entertainment, our addiction for the likes of house of cards or game of thrones. But is this crucial for amazon to get in on soccer or football . The premier league right cost a fortune. It takes a hit on sky possible bottom line when that dries up. David you would know better than i with their earnings at this point, when you compete against somebody who has a completely different model, is this model, they dont have to make amazon all of their money off advertising or subscription. It is really hard to compete that way. Eatinge and they are into everybodys lunch at the moment. We did see sky potentially being squired by Rupert Murdochs twitterverse century fox. That continues. Andthey had rising profits we are seeing an erosion of the bottom line as they have to spend so big. So it is on when it comes to media and how we view. Because will be be viewing our sports online, while we are on the go . Is it all focus on mobile . Have cvs coming after we have cbs coming after the bell and that we had disney. But my son, he consumes media very differently. He is on his smartphone all the time watching. So my question is, who will be watching . Will it be us old folks . Me, not here, caroline. Caroline we will have to see. I think we all will be turning to mobile. The opening bell is coming up next on bloomberg daybreak. A quick check on equities. We are up. 1 on the s p 500. Aftern germany on the dax german manufacturing. This is bloomberg. Mrs. Bloomberg daybreak Europe Caroline were moments away from the opening bell. Dow jones futures are up a 10th of a percent. Record high on friday. We will continue to maintain that. Snd nasdaq features future also trading higher. Lets take a look at the rest of the asset prices as we go into the market open. The dollar down a tiny bit. We did rampup on friday amid the job numbers. The yield is up on the u. S. 10 year. 2. 27 is where we are trading. Crude oil is off a percentage point as they meet with allies today to try to restrain the supply. We are now looking at the open of trade. Julie the dow is up nine straight sessions going into today and initially it is up once again, any gain today would be another record close for the index. We have had a divisions between the dow and nasdaq in particular with the s p 500 and nasdaq only making records on two of the sessions when the dow has continued the winning streak. We will see how the week develops. In terms of the movers, interesting deal in the chinese travel industry, it has led to a tie up. Marriott and alibaba partnering up so that marriott will use Alibaba Travel Services to draw in asian customers, in particular a Marriott Service will be featured on a travel site owned by alibaba. And courtyard, charlton sheraton will be featured. They will also partner up on royalty programs and payments sent to Alibaba Alipay as a part of this. Alibaba shares are rising. Aswanted to check on ctrip well, does this prevent present a competitive threat. But the shares are up a quarter of a percent. Doing ok. As we watch the moves today, we are talking about the lower volatility, but there are individual stocks moving. Overall, looking calm on the service, but underneath it is not so calm. This is a story that was coauthored by oliver renick. And this is one way of looking at it. S p 500 equal weighted index, meaning not like the rigler s p 500, it is as if every stock in the index was equal, equally weighted, no matter the actual size. The white line, you can see how it has underperformed and had the worst week of the year versus the worst week on an absolute basis since may. As we see big individual drops within the s p 500, the drag down, the equal weight index even though it does not have an effect on the overall s p 500 because stocks like microsoft keep doing well. The s p 500 continues to show calm, even as the equal weight index underperforms, showing there is more divergence or lack of correlation between the individual stocks. David fascinating. Still with us, David Lafferty, and here is oliver renick. Do you have a piece out about the calm, despite the surface. A lot of turmoil going on. As of right now, we are setting a new record, nine straight days. Hard to find much pain in the market, but you are finding it. Oliver things are starting to break down a little bit. Part of it comes from what julie was talking about. The story with individual securities and of the market over all. All the oliver people are talking about the subdued nature, the activity in single stocks that are offsetting each other in creating a low volatility environment. You can see it on a broader scale, the equal weight versus the market cap rate, that breakdown starts to happen when fewer stocks are keeping up with the bigger winners. That is what we see right now. I have another picture of this. We are looking at the green mine, a large line, the large caps. They are up here, 10 , this is normalized. Incaps in the hill and small warned. You can see the variation taking place where it is not all games happening at the same time. David david, does that give you pause . Are we putting fewer eggs in fewer baskets and does it make the market vulnerable . David we are not negative on the market, but i think where the valuations are, the risk return tradeoff is becoming more challenging. Ivers over to ol chart, it is active versus passive. Maybe one of the most important factors into why the active underperforms passive, is the effect of the equal weighting versus the cap waiting. For managers, it is hard to be overweight with all the biggest things in the index. So when the megacaps do really well, that is a harsh environment. You can see were the underperformance comes from, but i think the small caps eventually will probably get some tax reforms, fight better for the small caps, they pay a higher effective tax rate and we might the little bit of a return. Historically, the equal weight indexes have outperformed the market cap weighted indexes. That return to that mean should be good for active management in the long run. Caroline what i think is fascinating about the piece, is this is not just a u. S. Phenomenon. We see a globally. I am looking at hong kong, and that tech behemoth is what early drove them to outperform. About 50 of the stock move. Is this something we see across the board . Oliver when you look at markets over all, around the world, there is dispersion. If you want to call it into market dispersion. We have talked about this with the divergence of what is happening in europe and the u. S. , that will be in adjusting thing to watch. The gains have been a bit more unanimous across the board, just looking at last week for example, the stock 600 was green across the board. Subsectors, 19 out of 20 of them were up. Not the same dispersion that we see within the u. S. Markets on a sector basis. Last week was a great example, we had tech and financials leading the market, but if you look at single stock moves, about 15 can be lost 10 or more. It did not happen on the upside. It will be interesting to watch, because we did have a bounce back in the dollar with the trade on friday that has really been sort of at a consensus. It has usually been lower dollar in the past couple months. If that rebounds, looking at the tradeoff between european stocks and u. S. Stocks, because some of the downside has been the fact of the dollar has been weakening. We will see where the money follows that trend as well. Caroline it will be interesting, they have been talking about breakdowns. I want your take on where we should be putting the money and whether we see the dollar holding on to the highs of friday or continue to go back lower. You are liking tech and banking . David l. those are the two sectors, when you look at the managers underneath, the Global Asset Management umbra look, that is where we are focused right now with the Global Equities portfolios. Thanks are demonstrably the banks are demonstrably cheap. Banks have underperformed largely for macro reasons and to the curve has been flattening, but i think it is a little bit of a misnomer. It does not put the same pressure on the bank margarines margins that people think. They do not to compete for deposits at this point. There are so many excess reserves in the system, and even as the fed raises Interest Rates very gradually, is that all in the next couple months, and you see the flattening of the yield curve, check at a local bank. The deposit Interest Rates are not going up, because they do not have to compete for reserves. I think the macro argument against banks is overplayed. They are demonstrably cheap. Itlike tech largely because is a premium sector trading at an average multiple, so to all over olivers point, you have to be selective because some names have had big run ups. You have to be a little bit more selective. Tech has gone from being fairly undervalued to being in line with the market, maybe a little more expensive to the market. David talk about that. As you look at the chart, how much is attributed to tech . Caroline goes overseas and she goes to . 10. Alibaba. The big tech guys are driving a lot of this. Tech is up 15 , it is leading and is a part of the market. Earnings are solid as well. It is a flirtation between the companies that investors are willing to pay for because they are offering growth, which is hard to find across the market, versus a company that have run up a long ways and now they are starting to see some of these indications of on behalf of investors. The earnings moves are a great example. Some of those have happened within the tech space a lot. That is the type of thing to keep in mind. Look, there are still companies here that are lofty prices, but in terms of contributions of gain, that has been a part of it. No denying that. The elevator of the same stocks being responsible for the market is pretty misplaced. I think we overplayed that a good bit in terms of having the exclusion of things, but overall it is part of the bigger picture. Caroline thank you for breaking it down for us. Thank you very much indeed. Now a quick check of the markets. 10 minutes into the open. We are up on the dow, at a record high and maintaining the lofty highs that we hit on friday. X. Rman reduction on da and a good day of green in the asian markets. Opix at a twoyear high. This is bloomberg. This is bloomberg daybreak. Coming up tomorrow on bloomberg technology, facebook ceo sandberg joining us for an exclusive. Coo sandberg joining us for an exclusive. Almost 500 billion flowed from active the passive funds in the first part of the year into has grabbed the attention of the biggest participants in the market, including paul singer who called it a growing threat the markets. Saying that passive in investing is in danger of devouring capitalism, what may have been a clever idea has grown into a blog which is destructive to prospects of the market capitalism. Is craig, great to get your point of view. You say maybe the passive move will decelerate. Craig there are a few factors. Number one we have the fiduciary state of rule, which was implemented this year, it was supposed to be released in april, delayed until june. It is accelerating a lot of activity and bringing it into 2017. The other data point, passive will be about half. My point is we are already a large part there. Quantitatively, we have tos acceleratingart into 2018 and 2019. Caroline fascinating, what will happen . You are in alignment with paul singer that this is in some way destructive and could put pressure on general capitalism in any way, anything that destructive to do with passive . In the future, if we are talking about 70 or 80 , you could be talking about the price discovery mechanism breaking down for the active managers, but that is a long ways away. We may never get that close. I think active investing is game, wherezerosum you have some losers into some winners. What really happens is, we add the different fees into the different Investment Groups and it creates a backdrop where maybe you only get 40 of active managers are performing. But actually it is important to know, one is percent of passive underperforms every single year, because they also have the benchmark. David so that is from the point of view of investor, but what about from the point of view of governments . Said therele on his is an issue here, because historically the owners of the companies that are shareholders have some say in the government. If you do it through passive, does that remove discipline on management . Investorshink passive are getting more serious about governing, but i also think from a Retail Investor perspective, the backdrop for active investing has not changed except for a few things. To create a better backdrop, you need dispersion and volatility. We have not had that the last five years. You also need a small cap. Also, when you have hike opposition of retail ownership high composition of retail ownership, that creates a high volatile backdrop. It has not happened for five years. Theit could be at a low dispersions are lower, they will probably get higher next year and it should create a better backdrop for active investing. David there is a general perception that there is a shift going on from active the passive, how fast is it happening . Is there a ceiling or will it eat up the entire market . Craig there are two points, there has been a big acceleration this year and we think that there will be the acceleration over the next three years. David why is that . Craig the department of labor put forward flows into this year, because a lot of burgers in washington dc brokers in washington dc, they are scared of they do not pick a passive product, they will get sued. David there are spots in the department of labor that may go away, the new department of labor is not actually defended in court this far. If they goes away, will there be a shift back into active . Craig i do not think there will be a shift but the de acceleration will be aggressive. You will have moving money into passive and i think it will accelerate next yar. It will be more severe if there is modified change. The other point, there is another part that is growing aggressively. It is the off space. We call it the barbell. Traditional product is moving into smart data, which is low fee on one side, but it is also moving into high liquid offs. Real estate, equity and credit, and infrastructure. Is reallyle capitalizing on this. Caroline i want to break it down from a regional perspective. I am in london, what about europe . Is it the same scene . Craig the sad thing about europe, you are about to have a five years behind the u. S. In behind the5 years u. S. In terms of these trends. In europe you have new regulations. In the u. K. You have the fca review. The u. K. Is probably moving first, and europe is moving behind in markets like germany, france and spain and what will happen when you think about passive adoption, pricing cuts, europe is probably following the u. S. Somewhere between 25 years behind depending on the country. David it is really fascinating. A lot to learn. Craig, thank you. If you have a bloomberg terminal, you want to check out bloomberg go. Interact with us directly. Just go to bloomberg go on your terminal. This is bloomberg. David this is bloomberg. It will be the Corporate Bond market now for elon musk as bolster theto Balance Sheet among debt on the most Affordable Electric car. The model 3 is the companys cheapest yet, starting around 35,000. Tesla burned to a record 1. 6 billion in cash in the Second Quarter, german by spending on capacity for the model 3 and boosting battery output. Joining us is david welch, welcome. I thought i heard in the Earnings Call that we should not worry much about the cash burned because he would be generating cash out of operations. Now they have raised this money, so what is the truth . David so, look at the numbers. 3 billion on the books and they would spend 2 billion in capital is predators for the second half of the year. They should have a billion dollar balance after that, but it will not be equal. They will continue to burn money operationally. They will be ramping up for model 3, for the entire second half of the year and into next year. They are staffed up as if they are making almost as many cars as they need to, which is 10,000 a month. They have a big staff, they are getting ready on the Assembly Line and a lot of wages and costs going up the door, but youre only making about 5000 is abouthich half or they want to be. David interesting it went to the bond market this time, wasnt it stocks before . David he did say he was looking closely at that and equity debt and equity. More delusioneven down the road at the bonds convert, they have been issuing stock, so maybe it is time as the coming matures and presumably gets to a profitable position or cash flow positive, to reward the shareholders without delusion and adding some debt on the books, which is a cheaper way to raise money for the stockholders. Caroline david, looking at the debt distribution, they are a company that has more than 7 billion of it and they have had loans. And the company he took over has also been issuing bonds. Convertible debt. Could they actually just be turning to a new area of exuberance, because no matter how much he dilutes in equity, we still see the share prices rampup. Could it turn into a whole new part of the ecosystem that will be as excitable about this but you are aspect . David it could be. They have bonds out there and do some investors were bullish on tesla and they like the convertible debt, because if these shares keep soaring, they will continue to cash in. They are protected from a downturn in the price, because they do not actually own the shares, they own the debt that will mature in 2019 or 2020. So this will be another type of investor in tesla that can, will not have quite the liquidity, but will have a lot less volatility and they can really take advantage of potential rise in the companys value. Caroline we are expecting 1. 5 billion of senior unsecured notes. How has model 3 continue to come out of production . There is so much expectation. David by the end of the year, they will reach 5000 vehicles per week, half of where they want to be what they think will be the demand. So the ramp up will take a long time, because elon musk said that they will get to around 10,000 a week by the end of the year. And if they get there on time, tesla does not have a good record of getting ontime, although they do have the model 3. You can really not see the company up until full production and heavy sales until the end of of next year. It will be some time before we see the cash flow from this car. Caroline thank you very much. Tony five minutes into trading. Checking in on the markets. Equities have been going up. We are Holding Onto Gains in the dow jones. David that does it for us today. Thank you so much Caroline Hyde for joining us from london. From new york and london, this is bloomberg. Got you outnumbered. The dinosaurs extinction. Dont listen to them. Not appropriate. Now im mashing these potatoes with my stick of butter. Why dont you sit over here. Find your awesome with the Xfinity Stream app. Included with xfinity tv. More to stream to every screen. It is 10 00 in new york, 3 00 p. M. In london, from new york im vonnie quinn. Im mark barton. Welcome to bloomberg markets. Vonnie here are the top stories we are covering around the world. Another day, another record open for the u. S. Stocks. But is the quiet about to get shattered . We will check the outlook with our chief meteorologist chief strategist. And the latest of that meeting getting underway. Will they cut production levels . And in politics, an exquisite interview with the finance minister in france. He says things are changing in france and the nation will prevail over frankfurt when it comes to Bank Business post exit. Brexit. We are about 30 minutes into the trading day in the United States and a julie hyman is here