Transcripts For BLOOMBERG Bloomberg Surveillance 20180201

Lets check on your markets. We are getting some euro area manufacturing pmi figures. 59. 6, thatphone to is pretty much in line with what economists expected. Higher. 10m also looking at the u. S. Year yield twoyear yield. The dollar you can see steady. We have a lot coming up right here on bloomberg surveillance. We get the latest equity market calls. Find out why he sees a correction soon. Userwe talk facebooks big news. To someone from Credit Suisse. Here is nejra cehic. Nejra u. S. Oil production has surged over 10 Million Barrels a day for the first time in decades. That comes just weeks after the International Energy agency said american output would push past saudi arabia. Decades of declining output has been reversed and the nation has been turned into an exporter. The u. K. Will agree to in transition. Told themn china, he that free trade deals would still be some time away if there is a transitional phase in which britain cannot negotiate with third countries. The uks Prime Minister has vowed to fight the European Unions attempts to extend protections for expats. Theresa may said the bloc should stick to its original cutoff date. India has said it will miss its deficit target as the Prime Minister looks to placate angry voters before National Elections next year. The country also ended a tax break. The budget shortfall will be 3. 5 in the year ending march the first. Canadas minister of Foreign Affairs has said that she is cautiously optimistic about the nafta trade talks with the u. S. And mexico. She made the comments and an exclusive interview with bloomberg. Significant differences remain. We have a hard work to do to bridge those differences. I believe it is absolutely possible. I think a winwin outcome can be achieved. Our approach in canada is to hope for the best and prepare for the worst, and we are doing both. Global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. I am nejra cehic, this is bloomberg. Francine thank you so much. And its last policy meeting under chairman yellen, the Federal Reserve kept Interest Rates on hold. Said. S. Central bank has that gains, employment, household spending, fixed investments have been solid. Market now sees a march move as a near certainty. Following the latest decision, some heavy hitters weighed in. Were dealing with a fiscally unstable longterm outlook in which inflation will take hold. The breakout is going to be on the inflation upside. The only question is, when . The Federal Reserve is tightening, they are easing up on the Monetary Policy. They are tightening through rate hikes and they are also shrinking their balance sheets. That is going to get more and more complicated. The deficit is moving close to 1 trillion, and that is because the fed itself is reducing its balance sheet. I wonder who will buy the current level of bonds. I think there are two bubbles. We have a stock market bubble and the bond market bubble. I think at the end of the day, the bond market bubble will eventually be the critical issue. For the shortterm, it is not too bad. Francine for more on the fed and the impact on the market, Peter Oppenheimer joins us now. Peter, welcome to the program. Thank you for joining us. Let me get to your notes in just a second. Youre expecting a correction, when it come from Monetary Policy or just from the fact that it could be a frothy equity market . It is difficult to note what the trigger is. A rise inink that Interest Rates beyond what the market is pricing is one of the plausible triggers. You have very little term premium priced into markets. There is still a very benign forward path. Pricing in a march increase in the u. S. Rate risescting 4 this year and 4 rate rises next year. I think it could be a surprise for all asset markets. Francine how can we be so sure that inflation is coming in the u. S . This was the big story of 2017. It never quite came. There are some signs that inflation is coming through in parts of the economy. We have seen higher commodity prices, companies, some of them are talking about higher input costs. Even without higher inflation, we have to recognize that Global Growth is extremely strong and very well synchronized. It may require just a bit more normalization of policy rates. In the u. S. , financial nowitions, they are looser than they were even when we had very unstable and weak growth, significant uncertainty. Just to compensate for that itself, we may require some moderately higher Interest Rates. Francine how much is weakness in dollar a culprit for these loose financial conditions . Youve got very tight credit spreads, the loose dollar, the Strong Equity markets. Sameare feeding off of the things, and that is to help keep financial conditions loose. No means certain that a rise in rates would trigger inflation. Equity markets have tended to absorb the first rise in rates pretty well. Rate go back to the last rising cycle in the u. S. , there were 17 consecutive rate rises and equities coped with that pretty well, because growth and profit were strong. You can argue that the same is true today. The difference is that valuations are a lot higher. There is no vulnerability to surprises. Francine tom it is in bonds and also in equities. Where is the money going into . Are seeing the money going into riskier assets. This is a reflection of having zero Interest Rate policy, near zero riskfree rate, the effect of quantitative easing, and so on. We have historically high valuations in nearly all Financial Assets at the same time. That inflation in Financial Assets has come at a time with very low inflation in the real economy, which has allowed Interest Rates to be at these very low levels. If you start to get an adjustment in any significant way, that could have a negative affect. It could spill over into riskier assets as well. I should say we dont think the risk of a sustained bear market, for example in equities, is very high. Francine you also described as a buying opportunity, right . As the correction starts, you dont how long. As we argue, we have had the longest period now without a correction in the u. S. Market since 1930 of more than 5 . A 5 correction, i do not worry much about that. In a correction, it may be more than that, and it could be more painful. Francine thank you so much. He stays with us. Global stocks are in their longest. Iod without a correction in more than five years. Well talk more about that. Will get back to we will get erck to Peter Oppenheim from Goldman Sachs. We will talk Political Risk later. This is bloomberg. Economics, finance, politics, this is bloomberg surveillance. Cehic. Nejra nejra the price rally has proved to be a doubleedged sword. Profits were lifted to a threeyear high while trading fell short of expectation. Adjusted profit came in at the highest since 2014. Cash flow was the weakest since 2016. We i am very confident that th we can meet the commitments, the promises that we made for the end of the decade. Said theyy have expect Profit Growth to come to a sudden halt this year. Results Quarterly Results highlight how the car industry has shifted into an intense rebuilding mode. Latin america is paying off the spain banks. Net income came in at 70 Million Euros compared to estimates of a. Oss of more than 140 million in extendeded trading after ebay said it it shifting its payment business. Paypal will remain a checkout option until at least 2023. Paypal separated from ebay in 2015 to concentrate on expanding its business without been thekled been shackled to online marketplace. That is the Bloomberg Business flash. Francine lets focus back on the markets. The msci world index has entered its longest period without a correction of more than 5 . Our guest inks there is still reason to remain bullish. Appetitean sachs risk indicator nears its highest level ever. Peter from Goldman Sachs is still here. Were talking about some of the indicators that would trigger a correction. Do you worry about protectionism . I dont know what youre canary in the coma and your canary in the coalmine is. Seeing positive surprises in Global Growth. Very stable on deals and Inflation Expectations, so the perfect environment for risky assets, particularly given the backdrop of tax reform in the u. S. The economies are still very strong, the question is what happens at the margin from here . We suspect that you will get some slowing of the momentum of Global Growth. Still strong, but a slowdown of the momentum. That was sotion supportive last year, which generated the secondbest risk adjustment returns in the msci world index in decades come that kind of backdrop is going to be slightly less supported. I think the disappointment could come either from rates rising a little more quickly than the market has priced or from some of the macro data being slightly slower or some growing fear of protectionism. Francine does it mean that we are in a bear market or that we are seeing a correction in a bull market . Peter we have described it as the most loving bull market ever. Importantn distinction to make. Of bearseen quite a lot markets, but we have seen a significant number of corrections of more than 10 within underlying bull markets. 22 10 corrections or more with them bull markets over that period of time. Our indicator that we have suggests that there are some factors which are consistent with what you would normally see in a market. Veryrong growth strong growth, very tight labor markets, very height valuations. What we do not have is rising core inflation or indeed an inverted yield curve. These sorts of monetary triggers which come at the end of a bull market cycle. We think that the technical setup right now, the surge in makes the market more vulnerable to a correction, but not to the bear market itself. Francine is it certain Industry Groups that look much more expensive . Peter a correction would do everything. You would see rising correlations in that sort of environment. Of course there are some that are more expensive than others and there is areas where the markets have concentrated towards winning the sectors winning sectors. Often that is what happens when you get a correction that comes through. Francine peter, thank you so much. Up next, we will focus on nonperforming loans, or a nonperforming government. What it means for the markets. That is coming up next and this is bloomberg. Francine you are watching bloomberg surveillance. The antiestablishment fivestar movement is leading in opinion polls. He told bloomberg that people should not be concerned that a victory for his party would lead to major disruptions. We will not leave italy in chaos. Lets be rock receipt, lower less bureaucracy, lower taxes, and a focus on justice and infrastructure. Francine were back with peter from Goldman Sachs. If you look at european equities, it seems like it was quite a bullish market last year, but then there is this Political Risk with elections in italy. How disruptive can they be for markets . Peter on this occasion the market is largely ignoring the Political Risk. This is the first time we have had such confidence in political events not having a downside tail risk potential, really since the financial crisis started. If you look at previous elections in europe, in recent years, going into them you tended to find european of volatility rising in relation to u. S. Volatility. This year you see the opposite. It reflects and a positive way the underlying confidence in the european economy. Vulnerablehe market to anything that is surprising, in terms of the sort of. Francine do you worry about the German Economy overheating . Do you worry about the level of euro strength hurting exports . Still the economies are doing very well in europe despite a rising euro. The growth trumps the exchange rate. When growth is strong you tend to get a rising euro. It does have a drag on earnings to some extent, and of course on performance. European it dollar terms have done significantly better when you look at comparisons in local currency terms. I think in terms of overheating, you are seeing the Fourth Quarter. Over 3 at the moment in the eurozone. The extent that seeds into cedes into concerns, particularly if that were happening at a time when the japanese also decided to tighten policy. That would be quite material shift in terms of markets expectations. Francine i guess the biggest move would be on the currencies come if that were to happen, or on yields . Peter i think on both. You mentioned earlier it has been the best are on riskadjusted basis for equities and many decades, three decades or so. It has actually been the worst to start for bond markets since the early 1990s. What is different about this year relative to last is that this year equities have been surging ahead while bond yields have been rising. There is more volatility that has come into the market. That could accelerate, particularly if you get any hints that bond rates might rice. Rise. Francine our bonds in a bubble are bonds in a bubble . Peter liabilities would come down. We have reached levels of bond yields which imply that longterm returns are extremely negative. T even i think it would be welcomed. And a reflection of the fact that we could absorb high yields. The calibration is just the speed of the adjustment and whether that spills over into asset markets, causing a bit of a setback. Francine when you talk about the speed of adjustments and if you look at the biggest essential banks in the world, which does not have one are you most worried about adjusting to quickly . Peter the u. S. Is more advanced and its cycle. Financial conditions in the u. S. Are particularly loose. Ours there really where expectations are most different relative to what is priced into the markets. Adjustment priced in the march rise, there is still a gap between what we think is likely and what the market is pricing. Lots of other bond markets will be would be highly correlated with a rise in u. S. Bond yields. Iny tend to correlate, even european sectors, they tend to correlate very strongly with changes in u. S. Bond yields. Is the uks separate from Everything Else because it is a currency story . It is benefiting from generally strong Global Growth. The more domestic stocks have been extremely weak. We have been quite cautious about the u. K. Economy. Even there your starting to see some reasonable earnings growth. Will be think it particularly different from the rest of the markets, once you adjust for currencies. Francine peter, thank you very much. Theater from Goldman Sachs joining us this morning peter from Goldman Sachs joining us this morning. We were expecting 56. 5, came in at 55. 3. I will have a complete breakdown of the manufacturing. It is having a little bit of an impact on pound. Is will have plenty more on the next. Lets get to the bloomberg first word news. Nejra u. S. Oil production has surged to over 10 million billion barrels a day. New drilling and production techniques have opened up billions of barrels of reversinge u. S. Oil, decades of declining output. Britains International Trade secretary has cast doubt on agree tohe u. K. Will brexit transition phase. The official u. K. Government position is to seek a transition years. Of about 2 the uks Prime Minister has vowed to fight attempts to extend protections for expats. Theresa may said the bloc should stick to its original cut off day of march, 2019. Canadas minister of Foreign Affairs has said that she is cautiously optimistic about the ongoing nafta trade talks with the u. S. And mexico. She made the comments in an exclusive interview with bloomberg. Significant differences remain. We have some hard work to do to bridge those differences. I believe that it is absolutely possible. I think a win win win outcome can be achieved. Our approach in canada is to hope for the best and prepare for the worst. We are doing both. Global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. I am nejra cehic. This is bloomberg. Francine lets get to one of our top corporate stories today. The Oil Price Rally proved a double edged sword. Refining and trading fell short of expectations. Higher earnings and cash flow in 2017 are also helping. He discussed the companys results and future strategy with bloombergs matt miller. Have. Oft is basically an effect the tax history,. If you like. We had to take an adjustment on our deferred tax assets. Billion noncash hedge to our earnings. The United States is our single biggest investment destination. We invest for the next few years on average, 10 billion per year. That is going to be doing well in a muchore more advantageous market. There is upside to the reduction in Corporate Tax. Tt as an oil company, you are already cohn to a gas and oil company after the century of big oil. What is the next iteration of shell . How do you see it . Above . Not all of the you are certainly right. Over the years we have shifted from a Oil Portfolio oilrich portfolio much more to wait gas a gas rich portfolio. We have a well performing and growing Chemicals Business. Ourre going to double Chemicals Business in the next figures and i would imagine we will see continued focus on doing so. There is a Massive Energy transition on the way and we want to be part of that Energy Transition as well. Were going to focus significantly on what we call new energies. That is basically focusing on new types of fuels but also focusing more on power. You have seen as making the initial moves in the last quarter. Anotheroing to build up value chain next to oil, gas, and petrol chemicals. Now from oil to technology. Investors focusing on User Engagement after broader questions arose over facebooks societal impact. It reported its lowest user growth on record. Here is what Mark Zuckerberg had to say. Zuckerberg one of the most important things that we can do is make sure our services are not just fun to use, but good for the wellbeing of people and society. We have announced a couple of updates. The first is prioritizing meaningful social interactions over passive consumption of content. Francine now for more, partner at passion capital. Thank you so much for joining us. Is this a turning point for facebook . They still have a lot of users, but they just spend less time on facebook. I think it is a meaningful turning point for the company. Now the company is realizing that maybe it is more about quality over quantity. Probably thinking more about the time being spent, but that is on the right type of content. I think the point is with fake news, with the influence of various forces, maybe there should be a bit more attention about what people are actually doing on the site. Facebook does knows what it wants to be five years from now . I dont think they do. I dont think anybody does. I think they are going about it the right way. , believe they were led to this but it is the right approach to take it back a bit. Are they still connecting with other people, which was the original sort of focus. What are they sharing with one another . Instagram, they own instagram, what they continue buying things up will they continue buying things up . I think they will. You are right, a lot of people talk about instagram been the friendly facebook. I think they are two different extremes. It continues to try to be innovative and look at what users really want to do. That is important. Ive heard everything from facebook should launch a bank, to facebook should manage your money or do the driver less cars. Is there something that we do not know that they thought of which would be a killer for them . I dont think they know. I think they have the opportunity to do so much. I think if they focus on their original thesis, which was connecting people to other people, that will help guide them. Perhaps doing business transactions is a little bit of a stretch. Autonomous vehicles, to the extent that youre trying to help people socialize and get places, maybe. Francine talk to me about apple. Everyone is excited. Everyone is excited about the last quarters earnings. Everybody is worried about what is happening now in this current quarter. Coming off the christmas hi, you have issues in january. There are hints that it might be more of a seasonal dip this year than usual. Francine is it the pricing or the fact that there is no home a button anymore . Are they changing it too much . I dont think so. People seem to catch up with the changes. I think consumers will forgive them for that, but the price points might just be starting to make people uncomfortable. The Company Needs to boost up its Services Business and not be hardwareliant business. Francine will the customers forgive them about the slow down of batteries . That is interesting. Everybody has forgiven apple time and time again. Whether or not people will upgrade as often as they used to, so now people might just hold onto their phones. Maybeis more expensive, im quite happy with my iphone 6. Im not sure theyve invested heavily enough. I say that not knowing what they have internally spent. They have not invested as much, or they started to much later than everyone else in terms of their Artificial Intelligence. They have not come to take loud as much asc amazon or google with their cloudbased services. Francine we have this director from the European Union opening of the Payment System this year. I think payments is fascinating. I think opening up is always going to be better for consumers. Technology is going to enable a lot of choice. I think the one that is the is goingto use is to be the one to when at the end win at the end. Francine does brexit have a big impact on you . Not really. Techink for a lot of fin startups, they probably dont have that. I dont think the big issue will be on passporting. On talentpact will be and the ability to continue to track people to the u. K. Francine up next, come fly with us. The state ofith the private jet market. This is bloomberg. Francine good morning, everyone, this is bloomberg surveillance. Unilever has reported underlying sales for the Fourth Quarter that beat the average analyst estimates. The ceo discussed the companys growth and future strategy. If you look at some of the others reporting, you might see that we have had a very strong volume component, but our pricing was fairly decent. With a Going Forward for the next year, we probably would see our growth of being half pricing and half volume, and that is how it should be. Significantly spend behind these new initiatives over the first half. In 2017 is a seen very high quality of earnings growth. Gross margins up 40 basis points. That results in a record cash flow of 5. 4 billion. That is a new record for the company. It is been a year since he promised increase profit for shareholders. How close are you to reaching the 6 billion euro . Every year we have increased our top line growth and our bottom line. It is every year that we are giving increased profits to our shareholders. Nothing has changed their. What you are seeing now is a strong increase in basis points. That reflects the continuous work we have done to make this a better company. Alonen the last two years we have done about 20 acquisitions. These acquisitions are in the future growth areas and that is increasingly starting to be reflected in our numbers. D. C. Anymore acquisitions for moreyear do you see any acquisitions this year . We do. Acquisitions that appeal to millennials and are in the healthy for the future. We will continue to look at some of these opportunities. Are there any segments that you think unilever is not represented well enough . There has been under enormous pace of change driven by the technology and consumers. You see the millennials going to very rapidly towards natural, organic. So we will continue to accelerate our changes there. We want to simplify our headquarters into one. As structure is going to be structure is our going to be fairly small. It is not that big a change. What is important is where we put the headquarters of error divisions of our divisions. We are running the company with 3 divisions. So we can expect some guidance on it . We will continue to communicate with the market. Central bankers from the fed to the ecb are hoping for a pickup in inflation. You are on the frontlines of this come what do you see in the next 12 months, in terms of inflation . We see the Global Economy picking up a little bit. It was also clear, in the mode it is the first time that both the imf and the oecd, the world bank come in with figures that are more positive. Stronger growth in europe is a very pleasant thing. Stronger growth in the u. S. , the tax cuts will lift in the near term some of the global economies and that is a positive thing. Those are the good regions for us. We think we will see an acceleration in our own business. Francine that was the chief executive officer of unilever. Democrats suggest that republicans secretly altered the memo on russian meddling in the election. This is bloomberg. Economics, finance, politics, this is bloomberg surveillance. We just had some figures out of the u. K. Manufacturing expanded the least in seven months in january. Is another twist in the story of a controversial congressional memo about how the fbi investigated russian meddling in the president ial election. Democrats now charge that House Republicans secretly altered the memo and never told them. The white house is deciding whether the document will be released. Lets go straight to new york. Joining me now is Michael Mckee, who is filling in for tom mckean. What we do do we know about the memo being released . All we know is what President Trump told members of congress on the floor when he gave the state of the union address. That he wants to release it, 100 . David lynch was the director of peaks, and everybody said the show got so weird that they could not watch it anymore. That is what is going down right now in washington. The fbi director said that relieving it releasing it ve danger togra national security. The president still wants to relieve it. The guy that they are investigating for being against donald trump is the guy who urged the fbi to prosecute Hillary Clinton. You cant make this up. Francine do people care about this . Does trumps base care about this . Or is it just insiders in washington . It seems to just be insiders in washington. Francine michael, thank you so much. Next we will be joined by keyu jin from the London School of economics. We will also spend some time looking at your Asset Classes and your markets. I think a lot of the time today will be spent on pound. A lot of the talk will also be on treasury. Investors trying to look at the outlook for growth in corporate earnings, deciding for the moment that it is Strong Enough to quell any concerns about the recent jump in bond yields. The dollar is steady. This is bloomberg. Francine a hawkish exit, the fed keeps rates on hold but since the state for a hike in march. Changes to its news feed has cut the amount of time users spend on it by 50 million hours per day, ken Mark Zuckerberg turned it around . Goldman sachs felt rushed by the rollout quickly of bitcoin futures, knocking 44 billion off their market value. This is bloomberg surveillance. I am Francine Lacqua in london and Michael Mckee is in new york. We will look at strength and europe. Michael we are seeing the markets ignoring everything in the u. S. , the u. K. , and around the world. Janet yellen having more effect than anybody else with strength from Central Banks. Janet is gone he had to take the day off to recover. Francine he is crying in bed. Lets get to the first word news. Federal reserve officials have set the stage for an Interest Rate increase in march, wrapping up their final meeting after Shannon Yellen by leaving borrowing costs unchanged. Janet yellen is being replaced by jerome powell. In the story of the controversial congressional memo about how the f dei investigated russian meddling in the president ial election. Democrats charge that House Republicans secretly altered the memo and never told them while the white house is reviewing the document to determine whether it will be released, the fbi says the memo is not accurate. Theresa may has reopened the brexit fight over the rights of eu citizens, vowing to fight a sense to extend protection for 2021,iates until after she says the eu should stick to the original cut off date of march 2019. India has hit apple and other mobile phone makers with other terrorist, duties will rise from 15 to 20 and that may hurt apples ability to compete. Apple is negotiating with india on terrace for several components tariffs for several components. Global news 24 hours a day, powered by more than 2700 journalist and analysts in more than 120 countries. I am taylor riggs to this is bloomberg. Michael forgive brexit and the u. S. Political scene, mark wall street marches on, s p futures higher on the day. Be on the stock futures, the story is sovereign bonds around the world with the u. S. Spread steepening. The euro a little bit stronger. Interesting. Is not only is it u. S. Treasuries moving up but yields around the world moving up. A little bit lower in the u. K. And germany, but earlier the yield on the 10year german, the highest in more than two years. Britains twoyear was the highest in 21 months 10 year was the highest in 21 months. The new normal. Francine stocks in europe, asia, kicking of february with earnings,porate treasuries resuming a slide with the dollar is steady. Government bonds across europe are down, tracking 10 year treasuries with the count increasing for a third day. Thatel i have a chart gets to the heart of stock features being higher again after a very short debt for a couple of days. This is the u. S. Conference board survey of what americans think about the stock market. It is at the highest level ever. More people think the stock market will keep going up than ever. You remember the famous story about joe kennedys shoeshine tips andng giving that is when he had to get out of the market. When everybody is bullish, it is time to take your money off the table. So far, not happening. Francine the head of equity for Goldman Sachs earlier said that, except taking this was a correction still in a bull market instead of the bull market turning bearish. This chart goes back to what we os, world trade as a percentage of gdp which is falling. Even though we are in a cyclical upturn, a lot of people at Credit Suisse say we are not paying enough attention to this track. Back to the top story, it is one capdp, trade, the fed Interest Rates on hold yesterday but paved the way for a march rate hike. The market sees a march move as a near certainty with fed on futures indicating 99 chance of a hike. The u. S. Central bank says gains in employment, household spending, and business fixed investment have been solid and upgraded the outlook for inflation. Some heavy hitters weighed in on the decision. We are dealing with a fiscally unstable, longterm outlook in which inflation will take hold. The breakout will be on the inflation upside. The only question is when. The challenge is, the Federal Reserve is tightening in two ways, easing on Monetary Policy and tightening in two ways, that is one, through rate hikes, normalizing the process but also shrieking the balance sheet. That will get more complicated. The deficit is moving up to close to 1 trillion and that is because the fed itself is reducing its balance sheet. I wonder who will buy the current level of bonds. , athere are two bubbles stock market bubble and a bond market bubble. At the end of the day, the bond market bubble will eventually be the critical issue. For the short term, it is not too bad. Francine that was Alan Greenspan speaking to tom keene. We are joined by Christian Keller from berkeley and keyu jin from the London School of economics. When you look at the fed concerns, inflation, is inflation going to come back and forth, therefore forcing the fed to hike more than the market expects, or is inflation still tricky . Could it be slower than expected . Chances are it could be more than expected but markets indicating they believe it will settle where it is. On friday, we will get Important Information with the labor market. All eyes on core. The weaker dollar and Higher Energy prices will help on headlines. We have not seen core inflation. Yesterday, the print in europe, core inflation is weak. Central banks will look at that because it should determine the longer trend of inflation. Francine this was my first chart, world trade as a percentage of gdp. You were on some amazing panels talking about where growth goes and what happens to Monetary Policy. What is the biggest risk you see, Monetary Policy . It depends on which part of the world we are talking about, that policy fed policy will bring uncertainty. The u. S. Are in a dilemma, we are not seeing inflation pick if we delay, we have great financial instability. In terms of the world, trade risk of trade tension is very much a part of the story betn china and the u. S. I am not sure these countries are aware of the consequences of the kind of trade wars i could come about. Michael i want to ask you about inflation, christian, it is not just Central Banks that are watching this, it is the markets. Do we start to see a much more rapid pace of bond deals rising, not just in the u. S. But around the world like we saw overnight, and that is does that hit economies and Market Sentiment . That is the key risk, because the stock market, they are still built on having long Interest Rates low. So far, Inflation Expectations do not indicate bond deals should rise. The risk of it coming as symmetric. We had some supplydemand affect. , supplyr, g4 country positive as tv qe is scaled back in japan and europe. There are a lot of factors coming together and you put that with strong growth and there is that risk. Factors like technology, what it does to wages and inflation. That seems to call markets for now calm markets for now. Michael does this fit asia . The bank ofng about japan, does action rate move by the end of this year . The fed policy in the u. S. Very much affects centralbank policy elsewhere. We can be sure that the Chinese Government cares about where the thatthe one is going and u. S. Monetary policy will take action. China is trying to tighten its Monetary Policy for the reasons of reducing debt and leverage. Francine what is the biggest risk in the market . A repricing of treasuries that is brutal, or Something Else . I look at things macro economically, there are geoPolitical Risk, trade risk, particularly if it was a u. S. Titfortat trade war, it would have global implications. Macroeconomists, i think a repricing would be the biggest risk. We are living for years and this conundrum where both equity markets are doing fine and fixed income markets. That is only possible if strong growth, which brings us good earnings on the stock market, at the same time will not drive inflation. Forever, orolds whether the narrative breaks, that is key. , we see high asset valuations at least say significant part of the low Interest Rate, not because were fundamentally more productive with higher out up the growth. Output growth. Francine keyu jin and Christian Keller stay with us. Coming up, a Credit Suisse global we want to talk about cable and eurodollar. The interview coming up in 46 minutes. 6 00 a. M. In new york. This is bloomberg. This is bloomberg surveillance. Microsoft has gotten a boost from its Cloud Computing services, cloud sales almost doubled in the fiscal second net lossthey posted a after taking in almost 14 billion charge for the latest taxes owed on overseas cash. Facebook says its business remains strong this five major changes at fixing its impact on society. They said time spent on facebook in the most recent quarter fell by 5 but the company intended that in order to promote a Higher Quality experience. They spoke reported another record quarter for sales. Unilever is rolling out new products to boost sales volume, the Consumer Products giant says underlying sales growth for percent, they are trying to make up for tough thing pricing pressure on longterm products. We spoke to their ceo. Going forward for next year, we will probably see growth, half pricing and half volume. In the last year, unilever about a takeover form kraft heinz from kraft heinz. Flashs bloomberg is this business flash. Predictedsome davos protectionist rhetoric would lead to sluggish Economic Growth and lackluster stock market gains but that did not happen. Donald trump reminded the world of that. He said that when the united. Tates grows, so does the world tom oprah used the speech to urge corporation with american efforts to curb north Koreas Nuclear and missile weapons programs. Still with us is dr. Keyu jin of the London School of economics and dr. Christian keller of barclays. Thank you for sticking around. You were in davos, and on a panel with Steven Mnuchin. The talk was going to be on world growth but turned to currency manipulation. It was two hours after Steven Mnuchin said that a weak dollar is good for global trade, is that currency manipulation . I think it is a form for currency medicare relation currency manipulation. They are missing a weak currency , the other side of the story, import prices will go up which will lead to inflation. Talked about the hikes Interest Rate hikes putting pressure. U. S. Final goods products, a big share of intermediate input, which means they will get more expensive and export prices will rise which will offset the weak dollar. And confidence in the dollar is everything for the unique status and privilege of the u. S. Has in the Global Financial system. Francine are we talking about currency wars, christian . Bit outs taken a little of context, growth is a tradition of the treasury secretary, saying a demand for a strong dollar is good for the u. S. , it was corrected by the president. It does show that, if you look at the weak dollar, it has helped equities by foreign earnings boosting foreign earnings in dollar terms for u. S. Companies. Signaledunderlying that the u. S. Is still probably unhappy with the trade deficit and how they inc. That is one way to alleviate it. Sides. Two the trade imbalance is the main reason why President Trump started this tariffs that have been put on from china. Trade and balance is not a matter of just currency, it is savings and investment, macroeconomics, just not something the currency value can resolve. I have a question about the president. He has talked a protectionist talk but not walk the walk. What could donald trump do to invite retaliation perhaps from the chinese, and start a trade war . He has already play some kind of tariffs on washing machines and satellite. Products,not critical because china is trying to move away from producing and there is excess capacity. They have agreed on a number of contracts when President Trump visited china and china can easily cancel some of that. China has made a step towards liberalizing some of the Financial Services in china, which is a serious step forward. Those could be rescinded. That it has to turn from being a global systemic take her to a giver taker, to a giver, i would say Start Talking rather than starting a trade war or currency war. Michael if the president starts a trade war with china, does that bleed into the rest of the world, is there Collateral Damage . If he does, it would. These are the two largest economies in the world, a web of value, valuetion, change that would be disrupted. And value chains that would be disrupted. It looks like he does not want to do this. The rhetoric was harsher in the beginning and he now did talk about safeguarding tariffs. This is nothing that really hurts the chinese. It may be was geared towards the domestic audience. Thate quite optimistic they will not follow up with something that is basically to entice the chinese with a response that would go into a titfortat war. Michael Christian Keller and stay with us. Coming up, a man who worries about a lot of stuff like that, Gary Shilling. Look for that interview at 6 00 a. M. In new york and 11 00 a. M. In stay with london. This is bloomberg. Francine this is bloomberg surveillance. I am Francine Lacqua. Michael mckee is in new york. While Goldman Sachs may have a reputation for being ahead of its rivals come is not ready for bitcoin futures, to exchanges got the green light to list contracts tied to bitcoin but Goldman Sachs Goldman Sachs felt rushed and bitcoin is headed for its worst monthly decline as its futures are clumsy. We are with our european reporter who just wrote a piece for Bloomberg Markets magazine on traders turning to cryptocurrencies. Turning lawless is one of the phrases i picked up. Still with us is Christian Keller and keyu jin. Your piece is out soon. Crazy tols are bitcoin make a quick buck. It says something about what has happened in banking since 2008. These guys join the Financial Services industry just as the crash it. The golden age vaporized before the rise. Before their eyes. It became a regulatory story. They said, we got bored. Along comes bitcoin, and it opens up this greenfield where they can reinvent their own parallel Capital Market with all of the expertise and features they have learned and were wanted to the point in banking. Francine we talked about cryptocurrencies, how much compared to the broader financial markets, how much of a percentage is it . Total market cap for all cryptocurrency is around 500 billion, maybe a little less. It reached a point in december or early january where it was around 700 million, 800 million. Francine is a growing . It was until about last week or today. It is roughly around half 1 trillion. Francine will it be regulated . Difficult to say it will not be given the action with numerous instances of theft, and japan over the weekend and numerous instances of concerns over fraud. And you also have a lot of Retail Investors and households starting to put their savings into these things, that gets regulators attention. Francine we will talk about it later on. Thank you, and robinson. Ed robinson. On pick up the latest edition of Bloomberg Businessweek. Retail. Under pressure like never before. And its connected technology thats moving companies forward fast. Ecommerce. Real time inventory. Virtual changing rooms. Thats why retailers rely on comcast business to deliver consistent Network Speed across multiple locations. Every corporate office, warehouse and store near or far covered. Leaving every competitor, threat and challenge outmaneuvered. Comcast business outmaneuver. Morning. Good this is bloomberg surveillance. Michael and francine from london and new york. Lets get to the first word news with taylor riggs. In virginia, federal safety investigators say it will look at a crash between a train and a truck. They will not have a probable cause for several months. One person in the truck was killed. Jason lewis was briefly hospitalized for a concussion. A sign of another major shift in global oil markets, for the first time in more than four decades, u. S. Oil production has gone about 10 Million Barrels per day, new production techniques have opened up billions of barrels of oil in shale rock formations, turning the u. S. Into an exporter. Former federal chair Alan Greenspan once talked of irrational exuberance and now says investors are at it again. He told us that there are bubbles in stock and bond markets and that eventually the bond market bubble will be the more important one. Stock indexes are near historic highs. The written International Trade secretary doubts whether the u. K. Will a great way brexit transition phase for businesses. He tells sky news that free trade deals for countries outside the eu would be sometime away and if there is a time when the u. K. Cannot negotiate with countries. Global news 24 hours a day, powered by more than 2700 journalist and analysts in more than 120 countries. I am taylor riggs. This is bloomberg. Francine thank you. It is a big day for tech earnings with alibaba, amazon, appleet, output revealing revenue in concern about how many hours people spent on facebook. Shares in the social Networking Group initially fell after the company said daily active users in north america, they reduce then they rebounded after their cfo said he did not expect the trend to continue. Joining us to talk tech is Neil Campling and Christian Keller and keyu jin are still with us. Should i be worried, if i was facebook . We probably spend less time on facebook but can they regroup the trend or will they become Something Else in five years . They risk and why they made the changes as they saw worrying data on the algorithms. Regarding usage. We had the admission of 50 million hours per day less and quarter for and that could accelerate and quarter one and quarter to. There is too much information on the network and not enough relevant information. The other problem they have is with the paid search offering. What you have seen is the organic reach, defined by getting rich to number of people has declined. Francine what will facebook become in 5, 10 years . Google is different from what it was 5, 10 years ago and so is amazon to integrate with the cloud service. Become ais likely to social media gaming company. Which is probably outside the realms of most peoples thinking today. Gaming is now the biggest form of media in the world. It has overtaken broadcast tv for the first time in 2017. That is what generation z cares abou. About. Michael is there another company that will be the next facebook . These things go in cycle and a facebook is on the downswing, what next . Looking at the history of facebook and lying instagram four 1 billion and whatsapp, people questioned buying those ispanies and whatsapp probably the most powerful technology under their platform. Reallyfuture, can they find technologies and become effectively be consent of the tencent of the western world because they are leaders and social media, combining communications with the social networking capabilities. We chat is becoming extremely powerful and you become a platform and network affect i offering transactions such as payment services. They are having these things called mini games within the we chat service and something we need to see facebook investing, apps within the platform. Michael there is so much publicity about er wechat and tencent, are those transferable to the west or will it be a china only thing . Is there something that can appeal to the entire world . , thenceptually, yes problem with the companies is they want to become global but are also facing a letter resistance, political and awareness of the cultural adaptation, which a Foreign Company going to china met this kind of china challenge. Conceptually, as we heard, it is brilliant. Christian, we talk so much about this impact. Do we see it in data from these companies . Or is that swallowed up in general advertising . Hugeat is a good question, question whether we do not manage to measure this entire revolution that happened in digital economy. We do not measure consumers. The average consumer in the u. S. A huge surplus on an annual basis by using facebook and other platforms, which we do not measure in gdp. There is a theory that the productivity decline we see in the data partly is related to not properly measuring gdp anymore because the market price no longer exist as it would for a tangible manufacturing good. Francine this is one of my favorite stories, measuring productivity but lets measure Battery Power for apple. Do customers have the faith and apple, they admitted to slowing down batteries. That is an issue for them. Consumers are willing to look past the challenges if they are buying a product which they think enhances their experience and time. When we look further out, we have to think of a couple of things, on the one hand, smartphones are 1000 are a very expensive consumer good. That brings challenging challenges. Over time, we are waiting for the software to catch up with the improvements, when we look at augmented reality, we see consumers wanting to upgrade in the future but it bring shortterm challenges and you will see that in the guidance tonight. Francine when you look at Artificial Intelligence and the robots race, is it an arms race, china versus the west . And who will win and how soon can we tell . , but iould be a race think that china has an intention to Work Together with the u. S. China wants to dominate the technology, not only in ai but electric cars. They want to become the producer for the world. Whether it turns into an arms race, the same thing as the currency wars, we just need to talk more and they would benefit by coordinating. Francine thank you, Neil Campling, Christian Keller, and keyu jin. Both stay with us. Bloomberg has launched a new platform called bloomberg hyperdrive and it is the inside story on batteries, flying cars, ai, and rockets revolutionizing the future of transport. Hyperdrive. Francine this is bloomberg surveillance. I am Francine Lacqua in london and Michael Mckee is in new york. Concerns over Economic Data and from, recent analysis Bloomberg Economics find the countrys growth rate in 2015 was likely overstated by a few Percentage Points. Our researchers found anecdotal evidence of bookkeeping while on a recent trip to the southwest where they uncovered techniques that locals used to massage the numbers. With more on the data concerned we are joined by our chief asia economics correspondent. How big of a deal is this . We talk about fake numbers in the past and we thought we were over it. This is data relating back to 2015. Yes, the questions around the stability of the chinese gdp, particular with volatility in situations with their markets in 2015. There was some investors and analysts were questioning how gdp came in on target. Suspicion that there is political pressure to meet gdp targets and that is what some numbers are massaged. On the practical side, measuring an economy is complex. We did some work on this and found that in 2015, when you look at electricity output, an indication that perhaps the final figure that came out did not match the provincial level as the national level, which reflects volatility. There is a suspicion that, even if transparency is improving, a feeling among some people that the gdp numbers do not capture the full story in terms of what is going on in the economy. Francine does it change the growth story out of china . Should we be worried . Should traders just watch it . I think fewcture, people argue that china has managed to stabilize the economy right now, even if you argue the finer points, why gdp is picking up . The markets are stable and consumption on the Service Sites are coming along and progress being made on the technological side of the economy, even if some people say they should be going harder on reforms. Nonetheless, there is a sense that chinese are continue building transparency and modernizing and speeding up the vacancy of collection if it wants to give it to the standard level of data that you see in economies of similar sizes. Michael this is stated that comes up from the provincial level. The Chinese Government has started to give indications that they will crack down on this. If they do, how does that impact china and the banking system, and the provincial governments . Are we looking at the possibility they pull the plug and more water goes out of the town than they anticipated . Chemchina told off Deleveraging Campaign dashcam china pull off a Deleveraging Campaign without hurting the economy . Though they will pull it off. 2017 was good and 2018 off to a good start. Do not think they will do anything that threatens overall macro stability. No government would. Want is a feeling they more transparency and cracking down on some past practices at the provincial level and want to clean up how the numbers are gathered in china. Michael how much more open do they want to be . Do they want people to see all of the data or do they want to manage it for outside consumption, even if they are cleaner on the inside . They are making gradual progress. Is a monthlyeau press conference and they take more questions on the numbers. The government will get more involved in collection of data at the provincial level with admissions of guilt among some of the provinces. It is in the interest of china and the World Economy that they improve the veracity of their data. All indications are that they are sincere about moving in that direction. Francine thank you, our chief asia economics correspondent from hong kong. We are back with Christian Keller from barclays and keyu jin of the London School of economics. There were many more questions in the past about whether we could rely on the figures. Big brokerage houses going back to look at the data themselves. What does this tell you about how we should look at chinese data . The first thing i should mention is that since the 19th party congress, it has been made clear by the president and leadership that gdp growth rate numbers will be less of a priority. That changes the political incentive of the provincial leaders, which care more about other things like environment and quality of growth. If you look at a systematic study of using all kinds of data , not only on energy but imports and exports, academics have looked at it and until 2009, the data has not been that off. The Chinese Government used to try to smooth out the cycles to act as if there are no Business Cycles in china but not move it up or down. For every local province that tries to jack up the growth rate , other provinces that say, if we report a lower growth rate we get more subsidies. It is not that clear. A few Percentage Points off would be a gross exaggeration. More recent years has been more problematic. Francine do you worry about deleveraging in china . Net, at least a positive or a neutral at least. The rapid accumulation of debt. Chinese own the debt to themselves, that is a different story than in a lot of the emerging markets or the euro area crisis with countries running very large external imbalances, borrowing from abroad to fueled domestic credit boom. In in china, it is in one part to the other. Once you had a number of , it will unlikely trigger the type of financial crisis we see in other debt crisises. Michael when you look at the data, the gdp numbers may not be correct. We have the electricity data and retail sales data. Other lower level indicators. Plus, what they are buying in the commodities market. Do the markets really matter in the end . A measurement of gdp and even using these kinds of alternatives data is very tricky. There have been systematic studies that look at this. It is true to say that the recent years, there has been increasing and senate to manipulate the data a little bit. Going backeresting, to the previous conversation about big data and ai, there are a lot of Different Companies now ofviding microlevel data activities across regions. A richll continue to be resource of estimating gdp and inflation figures in china. I am looking into that. Aboutl do you care chinese gdp can you are trying to make a forecast for what will happen in asian economics, christian . It is a good question. We used the data to compile Global Growth forecast. Activitylternative indicators which have shown us 100011, starting from then, 50 basis points lower growth forecasts and we do not use them, but they indicated the data was overstated. Is chinaares if demand the commodities or importing . Are they losing reserves and our people confident in the currency . Are people trying to bring Capital Growth . Show that china has stabilized recently and the ,dp numbers, there is a debate a lot of questions about gdp, it is a good debate. Its markets for now will not pay too much attention. Francine you both stay with us. If you are a bloomberg user, ask difficult questions to christian and keyu. Log on to tv. It will be our pleasure to answer questions on your behalf ask questions on your behalf. This is bloomberg. Taylor lets get to the Bloomberg Business flash. A major blow to paypal, ebay will go away from his longtime partner, the Dutch Company will gradually take over processing ebay payments. Hate how was spun off from ebay and 2015 but they remained intertwined through an agreement that fully expires and 2020. Royal dutch shell has posted its best profit since 2014, better than expected. They were making as much money as oil at 60 a barrel at 100 a barrel. Cash flow was the weakest in 2016, their ceo says that will change. I am confident that we can meet the commitments we made for the end of the decade. Dollars, 30 billion of Free Cash Flow or chemically. They have been paying down their debt debt by those more than 2. 5 times its debt just three years ago. Over a francine month until the italy general elections and the leader of the nations Antiestablishment Party has promised to make it easier for the countrys ailing banks to recover assets. He was in london meeting with International Investors and spoke with our rome reporter after the meeting. Here are his views on the strength of the eu overall. We believe that in this historic moment, the eu has countries with governments that are weaker so italy can get more results. Germany has not formed the government and france, traditional parties are at a minimum by emmanuel macron. Spain and portugal have a minority government. Italy can bring results home. Francine Christian Keller of barclays and keyu jin of the London School of economics are still with us. Christian, i have a good chart. A simple spread between a tie in government bonds and German Government bonds. Do you worry about the italian elections disrupting the markets . It is surprising how the spread continues to decline, given that we have all indications it will be a very divided parliament. We probably get a government that is a coalition and unlikely to get much done. The person just said that they believe they were stronger and pointing the finger at other governments in europe. The polls say italy will have a fragmented and Weak Parliament and fragmented coalition. Francine nothing is priced in the markets, should we worry come after the french elections, they said do not worry about it, everything fine in europe. Nothing ugly in italy out of the elections that you could have lack of reform, which is worse. Lack of reform will only come to fruition later on and now a cyclical upswing which is not spared italy. Italy growth is up and the labor market is improving. There is some hope that italy will improve. If germany and france decide to do european reforms, that will benefit italy through the european monetary fund, etc. Michael Christian Keller from barclays and keyu jin from the London School of economics and public policy. Thank you for joining us. Coming up, we speak to Shahab Jalinoos of Credit Suisse. This is bloomberg. Francine a hawkish exit, the fed keeps rates on hold but says the state for a hike in march. Facebook out of fashion, they say changes to its news feed have cut the amount of time users spend on it by 50 million hours per day, ken Mark Zuckerberg turn it around . Goldman sachs says it felt rushed by the will that of bitcoin futures. Adnoc 44 billion of the market value. This is bloomberg surveillance. I am Francine Lacqua in london and Michael Mckee is in for tom keene in new york. We ask ourselves whether this is the end of a bull run or a little bit of a blip and what will continue to be equities rising . Michael almost a new new old normal. Everything around the world, markets keep chugging along. They have been decoupled by the new cycle. Francine lets get to the first word news with taylor riggs. Taylor Federal Reserve officials have set the stage for an Interest Rate increase in march, wrapping up their final meeting under janet yellen by leaving borrowing costs unchanged but policy makers emphasis to the plant for more rate hikes. Janet yellen is being replaced by fed governor jerome powell. Another twist in the story of the controversial congressional memo about how the f yard investigated russian fbi investigated russian meddling and democrats charge House Republicans secretly alter the memo but never told them. The white house is reviewing the document to determine whether it will be released. The fbi says it is inaccurate. Theresa may has reopened the brexit fight over the rights of , vowing to fight attempts to extend production for expatriates until after 2021. She says the eu should stick to the original cutoff date of march of 2019. India has hit apple and other mobile phone because with higher tariffs with import duties on phones rising from 15 to 20 and that may hurt apples ability to compete in the worlds fastest smartphone market, apple had been negotiating with india for lower tariffs on certain components. Global news 24 hours a day, powered by more than 2700 journalist and analysts in more than 120 countries. I am taylor riggs. This is bloomberg. Michael as i mentioned, a lot of news but the markets do not care. What correction . Futures higher and we are back to the same pattern for months. The story is not equities but bonds following the fed meeting and concerns about whether we are in bubbles as Alan Greenspan talked about. We see a steepening in the u. S. Yield curve. Tw a while it was the moving but now theo tens are joining them. It is happening around the world with 10 year yields in germany and the u. K. Up to the highest levels that have seen in about two years. Sovereigns reflecting concerns about what is going on with the possibility of future inflation and what Central Banks will do. Europe, stocks in asian stocks also are gaining. This is as investors look at the outlook for growth, corporate earnings looking ok. Treasuries resuming their slide and the dollar is steady. Michael thank you. Fed,to the top story, the the last policy meeting under janet yellen, they kept Interest Rates on hold and pave the way for a march rate hike, no surprise. The market seen a march move a near certainty with that fund futures indicating a 99 chance of a hike because they say gains in employment, household spending, races fixed investment has been solid and upgraded the outlook or inflation. Following the latest decision, heavy hitters weighed in. We are dealing with a fiscally unstable, longterm outlook, and which inflation will take hold and the breakout will be on the inflation upside. The only question is when . The challenge Going Forward, the Federal Reserve is tightening in two ways, easing up on Monetary Policy, tightening in two ways, that is one, the rate hikes, normalizing the process. Also shrinking their balance sheet. That will get more complicated. The deficit is moving up to close than 1 trillion because itselfcally that the fed is reducing its balance sheet. I wonder who will buy the current level of bonds. There are two bubbles, a stock market bubble and a bond market bubble. , the bond of the day market bubble will eventually be the critical issue. For the short term, it is not too bad. Michael for the shortterm, not too bad. Shahab jalinoos, Credit Suisse global head of Forex Trading strategy. The canary in the coal mine is the currency markets, stocks and bonds doing their things with troubles first of their. Are we seeing anything that reflects the kind of reaction or future that Alan Greenspan is talking about . A pickup and fx volatility, that is a low levels. Over the course of the year, fx volatility will continue to rise. It is a good idea to buy protection against that. While it is still cheap. Issues that were raised are into that. The u. S. Dollar, if we see the u. S. Currency accounts deficits widen, the fiscal deficit also start to post to some numbers that raise eyebrows, you have a twin deficit potential story for the dollar, not immediately but in mediumterm. The market will look and react to that down the line. Michael if they react, could they push a lower . It is already down and people saying why. We have stronger growth and the fed raising Interest Rates. How much lower could the dollar go . It can go lower because from the perspective i wish and, not yet at what you can call a cheap level. It one that includes further losses. Deficitsics around the are fairly new. We have had some years now where the physical story has not been an issue for the currency. The trade deficit was financed by capital inflows. Into wherecould move you have both of the issues problematic at the same time is one that naturally takes currencies lower, that every currency suffers when you have a twin deficit problem, until you raise Interest Rates enough to attract enough capital to pay for it. That is the issue the u. S. Bond market could face. Michael dollar vigilantes. When you look at markets and dollar weakness, is there a danger that dollar weakness makes the u. S. Economy overheat . That is something we do not need to worry about quite yet. Simply because Inflation Numbers are low enough in the u. S. To mean that the idea of overheating does not matter yet. Once inflation comes through sufficiently to be a genuine concern to bond markets, i still do not consider cutting rates a real concern. Once inflation comes through, the concept of overheating becomes more of an issue. At that point, the question is how does the fed react . If they show they are independent and comes through with rate hikes the market needs to see, the dollar would stabilize. If it does not come through, even then the dollar could weaken further. Francine if it weakens, is a more likely the fed will have two raise rates four times . The pace of weakness would need to pick up further from where we are at this point. If we had another 10 weakening over the course of 2018, yes, both in terms of level and rate of decline, sufficients, nothing concern to make it onto the table as something the fed could talk about. At that point, the market would Pay Attention and start looking at the dollar is a two way to as a twoway story. Michael when we talk about the dollar going lower, what is the care you are watching hair you are watching . Pair you are watching . The dollaryen rate is still very important, right now below 110, despite ever higher u. S. Interest rates. Normally the expectation is when u. S. Rates go up they do not go up. The market is beginning to wonder if japanese Monetary Policy needs to tighten down the line. I feel that the twin deficit idea i mentioned before, that is exactly the kind of story that should play out through the dollaryen because japan represents the opposite story, not in a physical sense but in the trade side. Dollaryen should be done overtime. Michael the yen is a little bit higher against the dollar. Shahab jalinoos stays with us. Aning up, susan story interview at a 30 in new york. York,0 in new infrastructure spending, where do they get the money and where do they spend it . This is bloomberg. Taylor lets get the Bloomberg Business flash. With rising causes mercedesbenz, the one that harassment is will continue to death and Profit Growth. Our say these is investing in a new lineup of electrified vehicles. Microsoft has gotten a boost from its Cloud Computing service , clout says doubled in the fiscal second quarter, they posted a net loss after taking an almost 14 billion charge related to taxes owed on overseas cash. Unilever is rolling out new products to boost sales volume, the dutch consumer done giant says underlying sales growth 4 in the fourthunilever is rollinw products to quarter, they are trying to make up for tougher pricing pressure on longtime products such as hellmanns mayonnaise. We spoke to their ceo. Going forward for next year, we will probably see growth being half pricing, has half volleying. They rebuffed a takeover offer from kraft heinz and sold struggling brands to a private equity firm kkr. Michael thank you. Retreatus from the gop in West Virginia is our chief travel correspondent washington correspondent, kevin cirilli. [laughter] michael everything going on with the fbi memo and this investigation, we talked about the old show twin peaks which was very weird. As tom would say, you cannot make this stuff up. They rip up the script every morning. The fallout against immigrants and republicans on what has been the latest cause i political saga with regards to the Robert Mueller probe, republican pressure to release the memo. Reuters first reported the allegations coming from democrats that the memo was , thed by devin nunes republican congressman who is driving the efforts to release the memo. Republicans on the flipside gathered today in West Virginia for the retreat, pushing for the transparency of this. They feel it should be released. If you are outside of washington and trying to figure out what this means, it is the latest politicization of the russian investigation. , the fbipeter struck agent accused by republicans of being antidonald trump, according to reports, he told the fbi that we have to go back and investigate Hillary Clinton two weeks before the election. It is a revolving door of a task cast of characters in which and one second it works for them and the mexican it does not. The next second it doesnt not. Momentum driven by the white house and the president and republican leadership, they are headed to releasing the memo and we could see it as early as today. Yesterday, public statements coming up that it could be released yesterday but they decided against that. A dramatic start to the republican coverage in. There was a train crash in which there was one casualty yesterday in which more than 50 republican members of congress leaving washington, d. C. To travel to West Virginia. The retreat is still going on, as is a plan, with a slightly adjusted schedule. What was supposed to be a , following the president s first state of the union to map out legislative policy for the year, has cast a shadow with this memo and the tragedy. Francine away from the memo, President Trump wants 1. 5 trillion for infrastructure. When do they get back to business and figure out how to pay for it . Kevin i spoke to sources yesterday regarding the proposal infrastructure and it seems like there is to competing areas for how they will fund it. The first is a repatriation of funds drawn in by the lowering of the Corporate Tax rate, trying to infrastructure and its like there is to competing incee corporations and businesses to use the repatriated funds to resolve the lower Corporate Tax thisto somehow invest in type of infrastructure the president wants to see. The second conversation is to try to bring in privatepublic partnerships and you see democrats united in their opposition for using that type of private investment as a mechanism for funding the infrastructure. They feel any type of private investment coming from private businesses, investing in Something Like a look 40 airport would take the 40 airport laguardia airport, would take that and put it into the private sector. Whether enough democrats have concerns about that or centrist will break away from that, we do not know. We are at the early stages of the infrastructure talks. ,rancine i was reading something about the American Trucking association proposing a . 20 per gallon fee on transportation fuel. Would that not hurt the consumer ultimately . Kevin when you look at just the Trucking Industry lobbying power in washington, you cannot ever count them out. Hey are talking about a tax it is difficult to see how republicans would get on board with some type of tax increase, particularly as it impacts the energy sector. On the flipside, the Trucking Industry with the rise of autonomous regulatory regimes just the beginning, the foundation being late and starting to increasingly make their voices more heard. Michael thank you very much. If the memo comes out today, you will be a busy person. Will be busy but listening to john denver. [laughter] michael have a good time in West Virginia, almost heaven. Joining us is an old friend of the program, Gary Shilling. And Shahab Jalinoos of Credit Suisse is with us. Gary, you had been a round for a long time, not to call you old. Careful. Michael you have seen the political stuff come and go, do the markets care about any of this day today step in washington stuff in washington . They do not seem to, amazing how blase the attitude of investors as. Investors is. Whether there is too much overconfidence, that is a factor. Tohave to always come down the possibility that the markets are smarter than they some of the media, not bloomberg, but in overreacting to very ephemeral situations and separating bp wheathe chaff the from the chaff. If i am in a remote area and do not have access to the media, i come back and realize how much went on in the meanwhile that is not relevant and has been superseded. That is something you have to keep into perspective, maybe markets are correct and saying this does not matter. Suckeduld be very much in by the idea we have had since the long bull market, nobody cares. Francine we care about surveillance. We will be back with Gary Shilling and Shahab Jalinoos of Credit Suisse. We also speak with the ups chief financial officer, look for that interview at 10 30 a. M. In new york and 3 30 p. M. In london. This is bloomberg. Michael bloomberg surveillance who let get back to Gary Shilling and Shahab Jalinoos. We went from yesterday, it is present chance of a fed move in 99 a 91 chance 80 chance of a fed move in march doing 90 naprosyn chance 90 naprosyn chance. D. C. Difference coming to the way fed makes policy in the near term . The framework is set, they agreed on a lower natural rate of interest. They are going slow. They want higher rates but to get there slowly, they remember the taper tantrum of 2013. It is a steady course, not terribly exciting. Michael we have three rate hikes in the forecast. Is the currency market thinking about a fourth . The market is so much more focused for now on the potential for tightening Monetary Policy. Even in the negative rates based, euro area. They are superseding what the fed is thinking about at this point. That is a bigger driver for currencies and a big reason why the dollar is weak. Michael when would you start to think they may go faster . If the economy showed a lot more strength. They are datadriven and recently the data has been stronger, earlier it was weaker. Michael Gary Shilling is staying with us along with Shahab Jalinoos of Credit Suisse. Stay with us on bloomberg. Do not forget to pick up the latest issue of Bloomberg Businessweek. Looking at the great barrage of ge. A stock everybody is watching. This is bloomberg. This is bloomberg surveillance. Tom keene has the morning off. Elon musk is venturing outside of tesla auto sales to pay for his proposed transportation tunnels. He recently sold 20,000 flamethrowers. Tesla has millions of dollars of bonds. Is the companys inaugural after charming buyers in the convertible bond. Joining us now to discuss all this is bloombergs bonds reporter. Meanthis success actually teslas funding problems are behind them . Not necessarily. The company will burn through its 4. 2 billion of cash this year alone as it tries to ramp up production for the massmarket model threes. Deal likely a single bond will not get rid of those issues. The demand for these bonds was amazing. 14 times oversubscribed. The demands for the bond was 14 times bigger than the supply. Opportunity is an to sell a lot more. Francine is tesla the darling of the bond market . Tesla has with a big cash flow problems it does not make it seem like a darling for Bond Investors and it has had. Last year it sold junk bonds in august that of traded below the issue price and even till this day are still below. There are investors who do look at the main portions. In this instance there has been incredible demand. Francine so why so much demand . There is the elon musk appeal with tesla being an interesting name that hasnt done much in the credit market and is therefore an interesting diversification. Also the yields are quite good on the bonds. Of the deald were offering 260 basis points above benchmark rates. Not enormous but not tiny. There is some ap appeal on that level. Now lets get straight to the bloomberg first word news. In virginia, federal safety investigators will spend several days at the site of a crash between a truck and a train carrying double dozens of republican members of congress. One person was in the truck and was killed. One congressman was briefly hospitalized for a concussion. The side of another major shift in opel desk oil markets. Oil markets. U. S. Oil production has gone above 10 Million Barrels a day. New techniques have opened up billions of barrel oil in shale rock formations. That has turned the u. S. Into an exporter. Britains International Trade secretary doubts whether the u. K. Will have a brexit transition phase for businesses. Businesses outside will still be a sometime a way. The u. K. Is a period cant negotiate with third party countries. Global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries. Im taylor riggs, this is bloomberg. Michael the liam fox trade story and the story about possible trade wars in the United States have a lot of people wondering whether any country is going to use its currency as a trade weapon. Shahab jalinoos and Gary Shilling are still with us. Davos the big topics that were the comments abouts from Steve Mnuchin about the weaker dollar. Is there any fear we will get to competitive devaluation . Shahab the ecb had draghi directly refer to those comments in an irritated tone. We had other ecb members discussing the possibility of higher volatility being a problem for the ecb. Agreements that ofe existed on currencies not engaging in currency devaluation. Any idea that this is frayed is a problem for the market. Im going to go back to Gary Shilling. You have seen this play out for a long time. Ruben 1995 that robert said a strong dollar is in the interest of the u. S. Have we really had a strong dollar policy for many years . Gary we really havent. That was in mantra but he never said anything beyond that. We have the question is this part of the rejectionist movement of the America First that trunk what desk trump was advocating . Currency manipulation trump was advocating . This is really nothing new. Whether it is an official policy or not is another issue. We are straightening up the borders, keeping up with the competition. Francine it should be different from the dollar right . You behave differently if you are reserve and not reserve. Shahab i guess that is the issue. The markets expect some degree of responsibility that goes with being the reserve come currency. We dont need an explicit change is higher all we need uncertainty about what that policy is. That should weaken the dollar, given the fact that the trade deficit, increase in physical fiscal deficits ahead. Mix intentionally down the line. I think that is important to watch the reaction of other policymakers around the world. If they react more aggressively against this, you will get more in markets, but not quite a oneway street lower for the dollar. If they take a more passive approach, you get further confidence down the line that point to a u. S. Preference for weaker dollar and in the dollar will worker we can from there. Michael gary if you look back at the first postworld war ii period. The u. S. Was protecting the western world from the communist. I think now we have gotten to the point where we are really saying we are no longer in that position. We are not supporting the rest of the world and now we want to see a more level playing field. I think there is a distinct transition that we are no longer in this trends position. We are still the dominant currency, but we can no longer afford to support the rest of the world and have trade deficits the size that they are. Let me ask you what the most undervalued, overvalued currency pair are right now. Yen is going to be of great interest to the market. It is still a currency where you have very supportive longterm flows in the sense of firstly, the country having large trade surpluses. Of the huge assets japan has overseas. And all the inflow of money going back into japan. So what you then need is an offsetting, easy Monetary Policy in japan to try and get money out of the country again. At some point in 2018, the market will focus on how sustainable that Monetary Policy in japan is. ,nce that becomes a hot topic the yen will go up. Michael that may bother the japanese for their longterm outlook. If a country wants to manipulate of currency, given the size the markets, can anybody do that anymore . Shahab it depends on how you define manipulation. What has become difficult to do is to basically sit there and buy all the flows that come into your country in order to keep your currency weaker. That could cause problems. What they are trying to do instead is by their own assets buy their own assets and keep yields so low that weakens the yen in that sense. Sensesent the market that there is a time limit on the durability of that policy for whatever reason, at that point, bulls for the yen will come out of the woodwork quickly. Francine just getting some breaking news out of alibaba. The company is beating estimates. Earnings coming out a little bit earlier. Alibabas and Financial Success is largely due to its online platform. Over the last couple of months or so, we also saw it branching out into physical retail. A rick little bit of santorum mortar plus fixed trend that we have been sick brick and mortar. Alibaba agreeing to 33 equity stake. There will be no cash impact following the completion of this deal. For the moment, adjusting earningspershare for alibaba beating estimates. We will be back with Shahab Jalinoos and Gary Shilling. In the meantime, we have launched a new platform called bloomberg hyperdrive. On flying cars, ai and rockets revolutionizing the future of transport. This is bloomberg. Taylor breaking in the last few minutes, alibaba earnings are out. Adjusted quarter earnings per revenue beat estimates. Alibaba agreed to a 33 equity stake. A major blow to paypal. Ebay will shift its payment business away from its longtime partner. Will gradually take over processing email ebay payments. The two Companies Remain intertwined through an agreement that will expire in 2020. Royal dutch shell has posted best profits in 2050 2018. With making as much money oil at 60 a barrel as much as it was at 100. Im very confident that the we will meet commitments for the promise of the end of the decade. Taylor shell has been paying out its debt. The Company Still owes 65 billion. That is your Bloomberg Business flash. Facebook is insisting its business remains strong despite recent changes with fixing its impact on society. The Company Reported changes to the platform have reduce the time spent on it by roughly 50 million hours a day. Khan. Th us is jeremy we have to talk about facebook and apple. With facebook, is it a negative or positive story . It is negative in the shortterm, but then we will get it back. If youre a facebook investor, there is some cause for concern. They did say daily average users in north america declined slightly. They have some issues about how long people are spending on the app. They say in terms of revenue, there are plenty way of ways to generate revenue. Revenue continues to increase and they believe the changes longterm will add value to the platform. If you look at the numbers, i think there is some reason to question that and be skeptical. Francine it could be quality over quantity. Jeremy that is what they are saying. We want to make sure people have a really good experience. This is all going to be positive. Monetizedt, they based on the number of minutes people were spending on the app and the number of people on the app every month and both numbers are not going in the right direction. Michael we knew this had to happen. The law of large numbers had to catch up at some point. What do you invest on now . They will never be growing the way they were growing. Jeremy that is right. I think the answer now is how are they going to bring revenue out of their existing user base. They claim they will raise advertising rates so they will charge more for ads because this is a better quality experience. And also own whatsapp instagram. Both of those properties continue to grow and there may be ways to monetize those. Michael who is the biggest competitor right now for advertising dollars . Is it google . Jeremy google is the other one that dominates in terms of market share. Google is a slightly different experience, it is not quite the same platform that facebook has. Francine talk to me about apple. They are coming out with earnings. The fact they have admitted to , worse down the battery news with the maybe not so popular iphone x. Jeremy what are the revenue numbers for the quarter tom and did the iphone x do. Indications from apple providers. It seems to indicate that sales might be week. Weak. The market is looking for 84 billion to 74 87 84 billion for the quarter. Than 84, ie in lower think you will see a negative market reaction. There is some indication, we dont know how week these how weak these numbers might be. Ncine should apple to go should apple go to more hardware than software . Jeremy ultimately they are a platform company, they need to do both. Is usedof the software for the sales of the hardware. A lot of excitement is on the hardware side. I dont think you will see apple make a huge transition to be a software company. I think hardware is in their blood. The question is, can they get the hardware in equation right . Michael jeremy khan, thank you for joining us. If you want to catch what he just said over again, go to tvgo on your bloomberg. You can find everything you could possibly want in a television broadcast. This is bloomberg. That is beautiful. , a city that. C. Cant figure out which end is up, but they can enjoy their sunrise. A very quick bit of headline news. Communications will not make a payment due on its bonds today. Period a 30 day grace and are looking to restructure the company. Iheart not making a payment today. It is time for the single best chart. Francine i picked currencies. I picked the euro. This is basically my chart of the year, chart of the last 18 months. European Central Bank Policymakers have been uniting to try and keep the euro down. If you look at the governing council, they seem to be growing more worried about the recent strength. Eurodollar, we brought it back to early 2007. It back to Gary Shilling and Shahab Jalinoos. I did this chart for you. If you look at euro strength, at one point does it become a concern for ecb . Is it at 1. 30 or does it need to be higher . Shahab if you look the trade weighted euro, it has not risen as sharply as the eurodollar because the dollar has fallen against every major currency. From the ecb perspective, what is the trade weighted euro, thats what determines monetary position. As long as that is not going up, for now they will remain in the mode of worrying about how volatility comes down the line rather than saying this is the level of eurodollar we cant tolerate. Francine if you look at Central Banks around the world, you could argue the ecb because of its unique position could have the upside surprising the markets more than others. Shahab the reality is as long as the ecb has a negative rate environment and is on right underwriting that, yes, the numbers are strong, there is a vulnerability there which will keep the markets looking to buy euros. Once that comes through, all the outflows from europe we have seen over the recent past that have helped to recycle the huge , those outflows become more questionable and that is a good enough reason for the euro to go up. Height see the hiking cycle go up. To that point, the euro will want to keep going higher. Michael we have got the euro versus the trade weighted euro. The blue line continues to go up but the trade weighted euro has not been following. How soon do we see that happen and does the Dollar Euro Exchange rate effect that enough to make a difference . Shahab a lot of factors go into it. Sterling is a big component. China is in there as well. I think what we are seeing is broadbased dollar weakness. Which is the opposite of what many expected to go into this year after the trump tax cuts. The market was looking for to strength. The story of dollar weakness is something we need to consider and that goes back to my earlier points. Michael the market was looking o strength. When do we worry about the dollar . Gary i dont think we do. It is true that europe has picked up, and all countries are on a more equal basis, but it seems there is an inherent demand for the dollar. It is a safe haven and i rather suspect we will see a stabilization of the dollar and maybe strength. Thank you michael both for joining us this morning on bloomberg surveillance. They will both come with me over to bloomberg radio. Join me and jon ferro coming up. The financials of this quarter are spectacular. It is the most powerful platform in the world. Alix you have alphabet, amazon, all on deck. The fed hits a slightly more hawkish tone in Janet Yellens last meeting as fed chair. 80 oil. Goldman sachs boosting its price forecast by a third. David welcome to bloomberg daybreak. Back with an excited alix steel because of oil. Alix it is a good day for me. Welcome back, david. 2. 5 hours to the cash open in the u. S. Futures are modestly higher. It has been a wishy washy morning. A broadly mixed dollar on the whole. Eurodollar 1. 24. The selloff picking up steam