Transcripts For BLOOMBERG Bloomberg Surveillance 20170705 :

good morning, everyone. this is bloomberg surveillance. this hour, we are joined by the global head of strategy at martin's family -- morgan stanley. we also talked to the current coo and soon-to-be ceo of the bank of morreale. in the meantime, we have a little bit of breaking news. pmi out of the eurozone. this is exactly what we are getting. we are looking for a little bit of euro reaction. pmi falling to 55.4. and little bit better than expected. not as strong as the month before, but they have been revised upward at 54. we were expecting 53.7 figure. these other markets over all. we are seeing a little bit of a risk reversal. this after the u.n. is set to meet on the north korea threat. what it means for the markets is yesterday there was clear demand, but today not really phasing the yen. gold is down a touch or pretty much flat. stocks seeing small gains, gaining 0.1%. we will have plenty more on the markets but let's get to the first word news. >> bank of england policymaker says u.k. households should prepare for tighter policy at one point. in an interview with the guardian, he says the currently giving. policy does not have to stay on hold because of brexit negotiations. today is the 10th anniversary of the last time the bank of england raised rates. the institute directors says theresa may selection disappointment has given business leaders greater leverage to lobby for soccer brexit. -- software brexit. -- softer brexit. to attractlooking talented and skilled labor. meansg ties with qatar the latest developments. qatar'ss received answers for the demands list. qatar's credit outlook has been cut to negative by moody's which thed the risk from list. that is according to four russian government officials, one saying any further supply reductions so soon after the existing agreement was suspended will hurt the existing market. on july 24. the federal reserve could give some clues about reducing its $4.5 trillion balance sheet before another rate hike. policymakers lifted rates in june, signaling one more like this year, and have said how the fed will gradually unwind its portfolio. janet yellen said they could begin soon, but sheila the precise timing industry. timingleft the precise on the street. global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. francine: thank you. the united states has confirmed the rocket launched yesterday was an intercontinental ballistic missile. this is threat to america and its allies according to some. dominatee is likely to the g-20 meeting in hamburg, or president trump is set to meet his chinese counterpart. let's get the very latest on that from bloomberg in berlin. with the u.s. pulling back from a global leadership role, how much greater leadership do the likes of china and germany have at the g-20? >> they are being seen as the new power couple at this week's g-20, partly because it is being hosted by germany and angela merkel. you have the world's number one and number three merchandise exporters with those two companies. obviously they pack a punch and have a joint interest in free chinesehich german and leaders have been emphasizing for months, ever since donald trump was elected and inaugurated. there are shared interests, but there are also -- they come at it from different political and economic traditions. i keep hearing about pandas. is that really significant? diplomacy.nda it has worked before, or so we think. it goes back at least as far as richard nixon and henry kissinger and the opening to china. these two pandas arrived in berlin at the berlin zoo, the first two pandas in years. arrived this month. angela merkel and xi jinping will take part in an unveiling at the berlin zoo. .t is a gesture it is a classic chinese gesture. there is talk in berlin of panda fever. francine: thank you so much. let's bring in hans rettig or who knows a thing or two about panda fever. this is an escalation. there are a lot of questions about how north korea has built these missiles so quickly, why did we not know about it earlier. there are implications far and wide about china and the u.s. how should investors look at this? isthe launch of the icbm negative. consider the consequences for the next few days and next few weeks, and i think that will force the rest of the globe into bigger and better cooperation. it is very likely to make america much more cooperative. it is going to reach out to others and become that much more global. between russia and china was interesting yesterday. they are rejecting this move by north korea, saying this is the wrong step. i think what we are getting out of the g-20 is they will look into that and agreed to take measures against them such as increasing sanctions against north korea. it will take time to see if this is successful or not. i think the immediate risk iscerning market impact going to be fairly minimal. that is a reason why i continue to recommend buying dollar-yen in high quantities. francine: we have seen tensions rest between the u.s. and china. is that yen positive because it is a haven? >> it is a selling opportunity for the japanese yen us the border and particularly towards the u.s. dollar. why did i signal getting out of the u.s. dollar? first of all look at the economic surprise indicators, first of all they have come down heavily. look at other indications of the u.s. economy. costat the atlanta no indicator. that is now at 2.9 and has been improving. look at our own morgan stanley indicator, which is called area, measuring domestic demand in the united states. that has improved. last but not least, inasmuch as the framework for central banks has changed. they are becoming more hawkish. they are referring to financial conditions. there is the recent dip in inflation. that is meaningful as a data point. that tells you something about the new sensitivity. this morning look at the screens. equity markets are back again. there is do you think going to be pricing movement ahead of the g-20 and on the backs of the g-20? >> i think the u.s. dollar is is topic.y to be a big we have seen the u.s. the -- dollar declining for the last six or seven months i. internationals on cooperation. the tradealk about issues, which are still pending, and i hope we will go into a more relaxed mood. if you take that into account with a potentially better earnings numbers, which are being released for the second quarter very soon, that should actually be positive for risk. that should be weakening the yen because of that relationship the yen has the international unit curve.yield francine: thank you very much. we will look at the canadian dollar as well. >> monte dei paschi says it has asn headcount cuts as much 5000. the details unless than a day after the embattled lender won eu approval to receive 5 billion euros from its government. entertain talks with regulators for quite a long time. i think the outcome is what the bank needs to move forward. the u.s. government is hardly getting involved in apple's text is good with the eu -- tax dispute with the eu. a report withd the eu. volkswagen plans to sell cars and iran for the first time in 15 years, taking advantage of easing sanctions as growth source in asia. they could offer compact suvs and the tehran area. rebuildruggling to operations in the u.s. after the diesel cheating scandal. francine: it is exactly one decade since the uk's central bank last raised interest rates. been 10en there have cuts. a new interview with the guardian member says the bank probably doesn't need the current level of stimulus and has warned hustles to prepare for tighter policy at some point. i have never seen so much talk about whether mark carney said the right thing, whether there was a change in tone over the last several weeks. how do you make this out? >> the town has changed over the last three weeks. the next point is we need to dive into the structure of the british economy. thatyou do see his unsecured debt has gone sharply up. then we see that wages are growing at a smaller degree than inflation is rising. inflation is rising, but also sterling. you have decline in real disposable income. domestic not generate inflation measures but inflation is coming from the exchange rate, you have to look at the exchange rate is the right thing to have them or should you stabilize the exchange rate level that that help you stabilize the inflation level. that tells you sterling is getting additional support from the more instructive best of the british government in respect to brexit. i think the bank of england has to take that into account five or six weeks ago after the election rebranded sterling -- we promoted sterling because of this environment. i guess the market slowly gets into our direction. our call for cable his still a valid call. it orne: will they do because they talked it up so much, this is where they kind of wanted, so there is a 50% of something happens this year, and even if nothing really happens, it has been talked up. >> the main achievement is here. he stabilize the exchange rate and see where to go from here. if you can achieve the stabilization of the exchange rate, but i think you take that. therefore i think it is a hard guess if they are going to do the move. i think the rhetoric we have seen recently is really leading into the direction that the next move for the bank of england is up. francine: this year or next year? we have this interview in the guardian that says brexit does not make much of a difference. it does make a difference because if you are adding something like business unfriendly brexit, you need to make it differentiation not between hard or soft do you incorporate the views of the business and therefore is business going to be worse or better in respect to your negotiation position, so if you take that into account, i think the improvement on that side has an impact on the debate within the bank of england. if you want to nail me on if this is going to be a rate hike, i think the risk in that direction has increased. francine: there is danger of all policy mistake or not given that the timeline -- we know by the time this supposedly interest rate happens what kind of brexit we would get. >> you would have a very bad outcome. you have business condition suffering a lot. retrospectively, he could and that would be a mistake. -- you could claim that would be a mistake. this book policies are becoming a little more expansionary compared to what we had before. business are getting better involved in the next negotiations financials are getting better involved. that is pointing in the right direction. under those circumstances, based on justifications -- that is what they're taking the insurance out. -- that is what they are doing it they are taking -- doing. they're taking insurance out. francine: thank you so much. you are staying with us. up next as monte dei paschi has obs.d a plan to cut 5500 j this is bloomberg. ♪ ♪ is bloombergs surveillance. we are in london. we are getting news on the banks and focusing on italy. earlier this morning the countries present has said a snap election in italy is unlikely before february of next year. a 5.4 has approved billion euro plan to salvage the world's oldest bank. joining us with the future of the italian economy, we have a guest. great to have you on the program. italy believe this puts and better place to achieve the economic it needs? now that the bank seven dealt with, what will happen to the rest of the economy? >> it will certainly help the resolution of the two banking issues, meaning monte dei paschi on one hand. they will help settle matters with the italian banking system, which have been improving. the improvement has been constantly achieving over the last year and a half or two years has been in the shadow given those two situations. i think that will help restore confidence in the system, and that will certainly help. francine: where do you see and when do you see elections in italy taking place? that is the question a lot of investors will want to know on whether this is the right time to put money in italy or not. >> well, elections -- setting the election is the prerogative of the president of the republic , of course, so it is not for me to speculate. it would be fair to say that given the political situation given the fact that we have not yet settled electoral law, it is probably likely that elections will be held early next year. you are overseeing the spending review. what are the prospects for italy bringing state finances under your control? >> well, over the last three nearly 30have reduced cost.n f -- of over that same time, italy has been the only oecd country with the exception of greece that is not increased spending. our cost structure, if we call the machine of public services, what is called in the statistics of the european community, the final consumption of government, which means the cost of running schools and health care and so forth, we are now at an extremely competitive cost level as a percentage of gdp. we are below the u k and below -- the u.k. and below germany. deficits are under control. with a little growth, next year we will start reducing debt to gdp ratio in a meaningful way. francine: you're right it is about growth at this point. is the current growth rate sufficient, will it be sufficient or the government to meet its public finance targets? debt toart reducing our starting doingre 3% nominal% to growth, which is what we will definitely achieve next year. francine: what is the biggest unknown apart from the politics? what do investors look to you for answers about? >> i'm sorry, could you repeat that? francine: in 10 seconds, what needs to be addressed by italy in the next six months? >> i think the economy is continuing to pick up. the good news is that italy is doing well. the job market is healthy. i should point out that in northern and central italy, our levels are now above the precrisis levels of 2007. we still have a problem in southern italy, which is picking up, too. the dynamic is good. i think there will be good news: ♪ francine: this is "bloomberg surveillance." i'm francine lacqua in london. let's get to the bloomberg first word news. nejra: michael saunders says u.k. households should prepare for tighter policies at some point. in an interview, he said the british economy doesn't need as much stimulus as the boe is currently giving in the policy does not have to stay on hold. today is the 10th anniversary of the last time the bank of england raised rates. russia is pushing back on any proposal to deepen oil production cuts and will oppose the idea and an opec meeting later this month according to russian government officials. one said that any further supply reduction so soon would send the wrong message to the oil market. the federal reserve could give some clues about whether it will begin reducing its balance sheet before another rate hike. it releases the minutes of its last meeting at 7:00 p.m. u.k. time. chair janet yellen said the process could begin relatively soon but left the precise timing a mystery. global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries. i'm nejra cehic. this is bloomberg. francine: thank you so much. we are getting breaking news for u.k. services and composite pmi's for u.k. for the month of june. the pmi for services falling to 53.4, a little better than estimated, but a touch below what we had the previous month. .n to the middle east foreign ministers from the arab nations that cut ties with qatar meet in cairo today. saudi's state-owned press agency said the kingdom has received qatar's answers to a demand list that includes cutting ties with iran and closing the al jazeera news channel. joining us now is yousef gamal el-din. welcome to "surveillance." where do negotiations go from here? yousef: we haven't seen the letter with the response. that is the only clue we have as to what that letter could say. arguably, from what we heard, it is not enough to come in -- convinced the saudi-led block to let go. there is a foreign ministers meeting slated for cairo later in the day. they will be able to discuss what they are going to do next. experts saying economic sanctions are on the table, possibly gcc expulsion, further capital controls, or even asking trade partners to take a firmer stance. so choose either between qatar or the saudi-led block. francine: the longer the crisis drags on, the heavier the toll on qatar's economy. what are you seeing across asset classes? yousef: the first risk is the credit risk. we've seen a note from moody's. they've changed their outlook to negative. if you look at the 12-month, they are relatively stable. resilience over the last two trading days slightly lower. let me show you qatar bonds. i put this on the bloomberg. #btv 1060. this is qatar. i've highlighted where we were. this is treasuries at the start of the blockade. , theyou can't see here bond spreads are still lower than they were despite the political tensions. that is what analysts and experts are worried about, that you are going to see a more aggressive repricing as tensions continue to drag on. francine: thank you so much. still with us, hans redeker, global head of fx strategy at morgan stanley. does this just inflate global risk when it comes to foreign policy or could it have an impact on oil, which has an impact on currencies? hans: if you assume the whole thing would escalate, and are assuming qatar is the biggest liquid gas exporter, and given that liquid gas tends to correlate well with the oil market, then you are right. you could look in this direction as a potential threat. then you would have a problem coming up from supply-related oil price increase. we are in the oil market at pretty low levels. we are at the lower end of the trading range. the big question for me is, on the oil market, on issues in the isn'thale oil industry, the downside more dangerous than the upside? you could make the claim that when oil prices drop below the production cost of new shale producers, $38 to $39, that is the estimated oil price, under those circumstances you could have a credit event getting to the shores of america. i think that risk is equally high as if you would have oil prices going higher. i think the oil market is in a fairly balanced situation and i'm not expecting a lot. i made that statement before. it is important that we look into other commodity sectors. you have at the moment soft commodities going sharply up. in the last doue weeks -- four weeks, you have seen wheat and rice prices going through the roof. we have to think of implications of that. what are the implications on those currencies which are dependent on bond yields and real yield development? all of a sudden you are back to you in weakness story. francine: citigroup in the last couple minutes put out a note saying that oil gains mark the start of a sustainable rally. do you believe that is true? hans: sustainable rally? francine: sustainable rally is what they believe. hans: there is a majority view in the market. this is reflecting a majority view in the market. as well, to remind the audience, the majority view concerning oil was pretty wrong. it was pretty wrong because people underestimated the dynamic on the shale revolution. output at running its current levels and not improving, then i'm afraid that shale is becoming a dominant factor going forward. francine: talk to me about the canadian dollar. this is what you get on "surveillance." this is new zealand-canadian dollar. this is one of your favorite pairings because the bank of canada may surprise? hans: the canadians made it clear by comments from the bank of canada that the next move is going to be up. in market has priced potential of a rate hike. we are now getting into the grace period and that means the likelihood the bank of canada to act is fairly high. the bank of canada is making the point that there's a lot of leverage in canada. you look into the housing market and it is becoming expensive. tightnessis early coming out of the bank of canada. when you look at new zealand, there seems to be a different attitude. the is happening is that market is basically going nowhere. at developments, we have seen that canada increased its supply by 275% within a year's time. you see that in the case of europe. that means that on that side, you will not see a lot of movement at the moment unless you are getting a severe price increase. therefore you have a second round effect, but it is down the road. canada isell be that going to benefit from the development we are seeing. francine: thank you so much, hans redeker. we talked everything from soft commodities to some of the futures. as the bank of montreal celebrates its 200th birthday, we will bring you an exclusive interview with the company's ago chief operating officer. he joins us next. ♪ francine: you are watching "bloomberg surveillance." let's get straight to your market check with mark barton. mark: fed officials have been mapping out plans to reduce their balance sheet. they have left out one key detail, the starting points will be released later, so investors will be parsing the minutes to see whether we will have some indication of the starting point. janet yellen told the post meeting press conference in june that the process could begin relatively soon. the bank has left the precise timing and sequencing a mystery. one more forecast this year. balance sheet yellow line. s&p 500 is the white line. this is the wonderful gauge of the day. the boe last raised interest rates. if there's one thing the bank of england cares about now, it is domestically generated inflation. they have ways of generating it. it has been replicated by us here at bloomberg. the white line there for the u.k. is now available on the bloomberg terminal. the vent line is the 2% inflation target. blue dottedne, the line, is the estimate of precrisis inflation. domestic generated inflation very important for the bank of england. jinping and merkel had supper last night. trump pushes back from his global leadership role. this is exports to china from germany and imports from china to germany. germany is exporting one and it is importing. the msci emerging market currency index is having its best year since 2010, despite a 5% slide in the bloomberg commodity index. halvedrrelation almost in 2017 from last year. wonderful chart. francine: thank you so much. 200 years since the bank of montreal became canada's first bank, predating the official birth of the country itself. joining us to talk about business and the country, the cielo and incoming ceo of the bank, darryl white. great to have you on the program. ,ou are in london, celebrating and you are about to take over. what will the strategy look like? darryl: thank you for having me. the strategy will look reasonably similar to the one we've seen. 200 years is a long time. we faced many changes. i think we faced them well and we've overcome a lot. that would be particularly true in the last 10 and 20 years. as we pivot into the future for the next 200 years, we see real opportunity in terms of businesses where we've chosen to invest. we've chosen to invest in canada, in the united states, here in the u.k., and in asia. and in places where we've got great investments, our customers, culture, market shares, are lower than we think they could be. i think you will see a continuing push into those chosen investments, whether that be in commercial banking, capital markets and personal banking, asset management, we are consistent. francine: where do you think you can significantly gain market share? darryl: the place we are going fastest is in the united states. if you look at the businesses that we have been successful in in theda, our business united states is not a new experiment. we entered the market in the united states 198 years ago. we've made acquisitions along the way. at this point, we see that depending on the line of business, we could have as much business in of our the united states currently, which is a nice share of our total business. francine: in terms of loan losses in the u.s.? darryl: the loan losses have been fairly consistent. the credit environment in the united states has been good since the global financial crisis. idiosyncratically, you could see some risks in particular credits as you go from quarter to quarter, but we don't see a trend through a particular sector that causes us to worry about loan losses as we look at the basis points. we will see losses from time to time that will be individual to the circumstance. francine: what does concern you? i don't know if it is regulation, interest rates -- darryl: regulation doesn't worry me as much as you might think. interest rates, i think when you look at the 80% of global industrialized economies operating near capacity in a low interest rate environment for a decade, a return to a neutral rate is inevitable. me is thees geopolitical environment it self and global growth as a result of that. we spent a lot of time thinking about how we position against that. we think we are well-positioned. francine: how do you position against that? darryl: we stay pretty focused on our clients. we've been -- we've built our business on customers. we've been there through thick and thin. to us, that has really been the core to the success. focused onto stay geopolitical risk. francine: do you worry about brexit? we have about 1000 employees in the u.k. and they are operating in the asset management business and capital markets business. we think a lot about brexit. the first question that came to us the day after the referendum came from our clients, last us, are you going to be able to service me the same way tomorrow? francine: and your answer was, we think? darryl: our answer was, we will. how we get from here to there is for us to sort out. we spent a lot of time doing exactly that. we continued to service them the way we were before. we have a lot of optionality. we've got banking licenses in europe. we've got asset management licenses in europe. we've made no decisions because we don't have to. we do have the optionality to do that should the need arise. we don't have clarity of information. francine: soon, maybe. thank you so much. darryl white stays with us. he is the chief operating officer and incoming ceo of bank of montreal. we will pivot and focus on the bank of canada. still to come, will the central bank offer clues into its balance sheet reduction plan? we preview some fomc minutes as well. this is bloomberg. ♪ francine: this is "bloomberg surveillance." the federal reserve could give some clues about whether it will begin reducing its balance sheet before another rate hike as it releases the minutes of its last meeting today. inicymakers lifted rates june. chair janet yellen said the process could begin relatively soon but left the precise timing and sequencing a mystery. how do banks cope? let's ask darryl white. he's the soon to be ceo of bank of montreal. we talked a little bit on interest rates. you said, at some point they have to rise. how much easier does it make it for a bank when interest rates are normalized? we can see a lot more volatility and things can happen like they used to. answer to your question is that it does make it easier in the sense that it is system'so the banking profitability. something that is helpful to profitability is good for capital ratios and good for the customer. that is the net of it. in the interim, certainly you could see the opportunity for some volatility. you could see some opportunity for asset repricing. markets have always adjusted and i would expect as we see a rising rate environment, which the world hasn't really focused on, or hasn't had the necessity to focus on, we will see the markets adjust. the pace and the global coordination or lack thereof of rate changes is something the market is going to have to watch. we are not particularly concerned because we will be net beneficiaries, barring material dislocation, and that is a stress that we think about but we don't dwell on too much. net positive with some potential bumps. francine: what about bank of canada? we may be on the verge of seeing bank of canada increase for the first time since 2010. darryl: you are quite right. , whoank of canada naturally i can't speak for, is set to prevent -- pronounced next week. the governor has been quite clear in his recent commentary that the rate cuts that we've seen over the last couple years have had their intended effect. we've also seen the canadian economy stabilize and find a new base in the oil environment. the combination of those things i think does set the canadian economy up well for a measured rising rate environment. whether that happens next week or in a month to follow, i can't say. we will have to watch for that next week. from our perspective, any of those eventualities are fine. our ability to deliver with our customers is not going to change. we are in a reasonably positive state. francine: how does stronger cad affect your business? canada broadlyr affects our business extraordinarily. the core of our profitability is in canada. we don't have as much of a growth prospect because we have such a high market share. helpedfitability gets and that is a very good thing for us. francine: thank you so much. it was fun having you on the show. darryl white, incoming ceo of the bank of montreal. "bloomberg surveillance" continues in the next hour. tom keene joins me. we will be speaking to deutsche bank economist david folkerts-landau. we will be talking about geopolitical concerns. coming up later, we speak to the ceo of monte paschi. this is bloomberg. ♪ >> a new escalation. intercontinental ballistic missile launch. issues looming large. set tonese president is meet into the merkel in this hour. and a restructuring and a bank will cut over 5000 jobs after the eu approved billions of euros in state aid. good morning, this is "bloomberg surveillance." we have quite a lot of news in industry in italy. there is a lot of focus on geopolitics and north korea. tom: the weaker yen move. but off the fourth of july, 2.5 days, the tuesday missile launch has picked up rhetorical steam. francine: it puts the chinese-u.s. relationship at the g-20 in the spotlight. taylor: a pointed response. north korea's response that it had put up at intercontinental listed missile for the first time. orderedrea's president trump's approval. the u.s. calls north korea's launch a new escalation of the threat to america. the united nations security council meets on the matter today. may's disaster's performance in last months toction may have been a gift business leaders. it gave them greater leverage to negotiate for a softer brexit. they are working for ideas and solutions for the split. and minutes from the last meeting may give clues on when the bouncy sheet runoff will begin. the minutes are released today. they haven't said when they will start. global news, 24 hours a day. powered by our more than 2600 journalists and analysts, in more than 120 countries. i am taylor riggs. this is bloomberg. i believe the markets are open the entire day today, unlike monday in the united states. the big equity monday, it is always a goofy day with strange volume dynamics on monday. we saw back with up to new record highs on the dow. the vix is at 11.21. i noticed the german 10 year yield is unchanged. but an elevated german 10 year yield. what a joy to talk to david f olkert-landau. toncine: we are pointing volume and reassurance but there is less than a risk on mode. gold is unchanged. tom: an extraordinary chart to get you started on a wednesday and thursday into job stay on friday. this is the unemployment rate in the united states. and what is amazing about this is the difference a 10% unemployment rate. down we go. we vector down here even further. many going sub 4%. yes, go in on. that is honest -- that is extraordinary. we will get more information on friday. i love this. with our team coverage. francine: team coverage is always a good thing, especially something like this. francine: here is what i have. do you like that? this is another way of looking at financial conditions and whether this could need the equivalent of rate hikes. i chose this because it is also the 10 year anniversary of the last time the boe raised rates. was five point 75. a lot of the younger members in the newsroom were thinking of mortgages and thinking 5.75? they haven't lived through that yet. for assets have amped in the wake of north korea's missile test. the u.s. confirmed the rocket launch on july the fourth was an intercontinental ballistic missile with rex tillerson calling it a new escalation of the threat. nikki haley, the u.s. ambassador a the u.n., has requested meeting with the u.n.. .oining us now is peter pay great to have you. now that we do have confirmation koreahis was what north claimed it was. how are they doing this so quickly? their ability of launching this intercontinental missile is exponentially faster than we thought. peter: you have to remember that the entire nation and the focus has been development of a nuclear weapon. resources areir centered around that. and as a result you get this accelerated program. sanctions have not worked. any pressure they put on north korea to slow it down has not worked. so that will be the main focus as all of0 meeting the leaders, including south , talk aboutident what they can do now. they really haven't done anything to keep north korea the accelerating intercontinental ballistic missile. tom: let's talk about the engineering. we have gone from riveted to streamline, we're worried about stages of three stage rockets or two-stage rockets. he was doing the north korean engineering? are they doing their own racketeering? are they bringing in outsiders? been: analysts who have observing us -- the country is shrouded in secrecy -- we can surmise. they started with scud missiles. iraqis use that to bombard and it was rudimentary stuff. but over time, they have been able to take the and learn from it. reverse engineer technology that they have perhaps gotten illegally from other countries. some of the best rocket engineering, they have scoured the world to be able to create this technology, develop and advanced it. and that is their singular purpose, and as a result, you do have this development. andcine: how, if the u.s. donald trump can't persuade china to deal with north korea, who in the region can? does any to be more pressure from certain countries? peter: one of the things that the united nations council at the meeting that is upcoming, the u.s. will attempt to pressure countries who have not willing to abide by doing sanctions. basically, increase enforcement. gets them to participate. there is a significant number of north korean guestworkers in other countries. big fuel,een a economic fuel for the country. they would like to have those countries stop that. francine: peter, think you so much. .hat was peter pae our guest for the hour is charles diebel. think you for coming on. this is getting serious. how should we deal with this. charlie: given the magnitude and risk involved, one would clearly will that cooler heads prevail over time. and that won't escalate into something more meaningful. things do happen. and that is raising the stakes, given the way the u.s. administration is talking. from my read of the articles and the stores -- and the stories that i have seen, it tol be down to china effectively try to control north korea. particularly with, what are you trying to achieve? if this is a statement or a standoff, what negotiation are we talking about? is it time for a different approach? maybe the lot more engagement rather than threats? who knows? it isn't my field of expertise but clearly, there is a lot going on and many parties are involved. and it will require something significant to get a shift in the ground. francine: does this have the potential, the more the geopolitical risks rise, does it has the potential to run a recession? itself, not really. it creates a demand for safe haven assets. but the real risk here is what it does to risk assets. we have seen strong gains here you have the s&p chart there. gains with most risk asset doing terribly well. and that is based on an environment where we have a very a good paced with of economic growth. at the moment it is holding up very well. there is no reason to seek aid rolling over. but the valuations are quite rich. so if you see tensions rise enough, it may be to capital -- it may be the catalyst. that would be the mechanism to start with. francine: think he so much. charles diebel, he stays with us. coming up, cutting over 5000 jobs. we will be speaking to the ceo in a couple of hours. this could be the beginning of a healthier italian banking system. this is bloomberg. ♪ taylor: this is "bloomberg surveillance." cuts are on the way in italy. has outlined ai five-year restructuring plan that includes cutting 55 hundred jobs and selling assets. european regulators approved a proposal for italy to reject capital. the state will get the monte dei a discount.s at we will speak with the ceo and a couple of hours. the bank of england once british banks to prove that the consumer lending policies won't leave them weaker in a downturn. they must show their not underestimating the risk of credit cards and home loans. and a chinese smartphone maker is snapping up more -- it has acquired intellectual property from nokia. smartphonelipped in ranking since 2014. that is the bloomberg business flash. francine: thank you. foreign ministers from the arab nations that cut ties with qatar are meeting to discuss the situation today. qatar'sdom has received answers, cutting ties with iran. is --g us now from dubai do we know what is in the letter back to the reply? what is in theow letter. but they have reaffirmed their theting position through qatari foreign minister, saying they're committed to fighting terrorism but leaving the page saudi ledfrom the bloc. they have always insisted that none of the terms of the 13 on that list are up for negotiation. the administrators will have a chance to hash things out and consider further escalation. economic sanctions or an expulsion from the dcc. tom: help me with the history lesson we are getting. tothe telegraph, alluding these events going back to austria servia of 1914. what are the tensions that will occur out of these meetings? can it involve some form of belligerence he? contextthe historical here is critical. they are vying over the control of different spheres of influence. and this isn't a decision that --l be made on a golf level ulf level. ministerhy the german has been speaking to the counterparts. we have to see what the next response is. because the feedback is that it will go down before it comes up. tom: we look at where we are with all of this. that this iso me not affecting the price of oil? the prices up -- is it because of these events? not necessarily or directly. so far it hasn't reached a degree that has shaken up the energy market. having said that, it could still happen. -- rememberqatar that qatar does export a lot of gas through the pipeline. fromng as they stay away the shipping lanes and the lng that goes through there, you are unlikely to see any further reflection. it was only a few years ago, 2011-2012, when the geopolitical premium was significant on the terms of oil. thank you so much, yousef gamal el-din. there could be inflation? charles: the link here is the energy price. the overall energy complex. we had been in a fairly sustained selloff with oil prices until two weeks ago. we have lots of headlines declaring a bear market but then they embarked on a sustained recovery and clearly, these --ertainties are proud uncertainties are bound to a complex as a whole. one hopes that there will be hopefully thatt will ultimately lead to a de-escalation. at the moment, it seems to be going the other way and thereby i can understand. tom: shift into the central bank debate we had last week. is there any change here with this staggering first of july week with the central banks? are they still coordinated? in their discussion of forward guidance? charles: you know, there have been one or two dissenters. the rba were neutral. adopted byish line the bank of canada. are thatly, the signs the inflation numbers over the next few months will be heading lower rather than higher. that is causing something of an issue for the central banks. wey are trying to say, well, look through any weakness. the economy is doing well and we continue to have a slow removal of the accommodation. a lot of this depends on the pace. are talking about fractional changes rather than anything dramatic. so probably, the price action we have seen in the bond markets over the last couple weeks have a lot more to do with the decision and the state of the sentiment and the market rather than a seismic shift from the central banks that they are about to get really aggressively hawkish. francine: thank you so much, that is charles deval, he stays with us. coming up, we speak with adam posen. we will talk about the yen and the boj. when you look back at interest rates, are we close to normalization? that is at 6:30 a.m. in new york. this is bloomberg. ♪ francine: this is "bloomberg surveillance." i don't know if that is a live picture of capitol hill, but that is beautiful there on the left. listeners, it is a rainbow. big g-20 meeting. between trump and putin. it is written "any meeting between the two will highlight their very different approaches to personal diplomacy. putin has shown himself to be a skillful, focused tactician who was carefully prepared and does not easily distracted from his goals. trump is known to shun preparation and go with his gut." this was my most enjoyable piece to read this morning. that he is anrget exercise master and he trained in the art of deflection. it could be very interesting. tom: what i would say is that this will be in theory different trip for the president and his entourage than what we saw the last time around. it is amazing, particularly with north korea overlaid on this. -- wee to remembering have to remember that this missile is based off russian technology's enough to wonder how the agenda will change when matt miller's there. francine: in the last six weeks recovered the saudi trip and when you think about what is missile,with the korea and -- tom: in the next hour to get you ready for the jobs data on friday, a look at the world economy and all of the central banks. david folk roots landau will join us. -- david folkerts-landau will join us. and john riding will join us from our dq economics. we will try to figure out where the fomc putting green is. cricket will talk about as well. i can't wait. this is bloomberg. ♪ these days families want to be connected 24/7. that's why at comcast we're continuing to make our services more reliable than ever. like technology that can update itself. an advanced fiber-network infrustructure. new, more reliable equipment for your home. and a new culture built around customer service. it all adds up to our most reliable network ever. one that keeps you connected to what matters most. tom: good morning. francine lacqua is in london. david folkerts-landau will join her in the next hour. here is taylor riggs. taylor: north korea's leader calls his country's first-ever launch of an intercontinental ballistic missile a north of july gift to america. the trump administration sees it differently calling it a new escalation of the threat to the u.s. the u.s. and south korean troops held missile defense drills today. leaders signed off on the exercise. areran american diplomats concerned about friday's meeting between trump and putin. they are worried that this could be a mismatch. the two are meeting in germany at the g-20 summit. a new suspect in the downing of a malaysian airliner will be prosecuted by the dutch government. the decision was made by the -- theretor for the are no suspects so far. and crude oil has dipped in the as russia saysur it wants to stick with the current opec deal and would oppose any proposal for more production cuts. one said that anymore cutbacks the the deal would send wrong message to the oil market. opec ministers meet later this month. global news, 24 hours a day. powered by our more than 2700 journalists and analysts, in more than 120 countries. i am taylor riggs. this is bloomberg. francine: monte dei paschi has five-year restructuring plan which includes cutting thousands of jobs. this announcement came after the eu said they could receive five point 4 billion euros in state aid but only after shareholders and jr. creditors contribute 4.3 euros -- contribute 4.3 billion euros. fore did entertain talks quite a long amount of time. i think the outcome is what the bank needs to move forward. morelli: that was marco , we will be speaking to him later on. joining us now is antonio garcia .ascual and still with us is charles d bell. -- charles diebel. i remember you coming on to talk , 10 yearse dei paschi . >> it wasn't 10 years, it was four years. francine: it has been an ongoing zika. >> it has. this is the largest amount, the biggest bank in the state nationalization. it is quite an eventful moment. i think what we are seeing is that clearly they will be getting rid of bad loans that have weighed on the capital. they will be addressing some of the inefficiencies that have burdened the bank. and going forward, the key will be to maintain when it comes to themeg practices and the that has weighed on in time is that their practices that should not have been getting into that situation in the first place. francine: are we jumping the gun? this step forward for monte dei a better placein for the banking system? is off the table and you can start to look ahead but clearly, there is more work that needs to be done. there is still hundreds of billions worth of euros with remaining lenders. and as for us saying that, more needs to be done in terms of making the lending industry more efficient. not put out ofey their misery? these banks will be put out of their misery. they would move on. why doesn't it happen in italy? consensus appears to be that a solution has to be found because these are extraordinary cases to underline the stability of italy. seenn't something that is as being taken lightly. francine: let's move this forward to antonio garcia pascual. what does this mean for the banking system as a whole? we had a guest yesterday who remind us that the primary focus to thes is to lend economy. italy has done that. but do we have a better system to help italy grow? : this has been dealt with in a way that is very positive. -- better sentiment as well. it will encourage investment. these are some key things. then there is the framework. how will they clean the balance sheet of the remaining outstanding -- to be able to foreclose. not just for the new ones, but the ones in the balance sheet. so i think these are couple of strongues that only a government can address. so that is why the politics come into play here. francine: we understand there is no early election, but -- elisa: that's right. and let's not forget that a lot of them had been allegedly misspending. it created a situation that was more sensitive because you had a lot of households exposed to securities that they should never have touched. a summary story on this, which i think is absolutely fascinating and informative, one about aources talks seat change here for systemic risk but i don't buy that for a minute. what has changed in the study of systemic risk in italy? what has changed? if you have the 14 billion euros worth of capital and you take these three regional lenders, you have addressed the bigger situations withhave the potential wider implications. tom: but do you see business practices changing in italy? elisa: there is a lot that has happened to make that possible. thewe will see that on regulatory front, we clearly have made this movement and shifting of assets much more possible for investors. there is demand for that. francine: are we crying victory too early? it has taken four years to get a resolution. are we no longer jumping at shadows? charles: it really is crisis management rather than -- -- but long-term crisis the level of debt within the economy remains imminence -- remains immense. these do present big risks. and if you are restructuring big thing.it is a good we have a sovereign that is heavily indebted. the vaguesten have that it comesat into play, it all aback rates. francine: basically being in charge of spending -- and if you don't see growth than this could get ugly? antonio: that is a core question. and reforms satisfy investors and create the demand for new lending. earlier, itpoint cannot make sense that there is a little bit of a relief through the summer. been banks now have addressed. there is no imminent risk of elections. these issues that were the most prominent over the next few weeks -- investors, how they look at this and that with september comes with exittalks about the ecb and i think the sentiment could unwind again. because problems do remain. load growth. and it would seem that after the summer you should those's -- being addressed. tom: are there too many banks in italy? or is it like canada with consolidation? antonio: consolidation seems to be happening now. there is a smaller and medium but it is not very efficient. and we would be better off with other institutions. the problem is that other institutions and have the capital to deal with that. but now you have credit with they of 13 billion euros, are in better place. and one of the questions is, do they want to expand? so the short answer is probably yes, you do need more institutions to be merged and eventually some of them might be. but my guess is that they disappear over time. --zene because thank you for francine: thank you all for this conversation. martinuzzi, antonio garcia pascual and charles diebel. coming up, we talked to david folkerts-landau. that interview -- he has talked about italian banks in the past so look for that at 6:00 a.m. in new york. this is bloomberg. ♪ tom: we give you a head start in the next hour. we have a terrific lineup in london and in new york. ,e have david folkerts-landau adam posen and john ryding. that is in the next hour. right now we have charles diebel . let's get to it. bring up the chart. is an american chart. and it shows the move from orthodoxy where the target rate so-calledre and the taylor rule is way up there. we have never seen this before. antonio, is this the same in europe? antonio: indeed. a little but of conflict here between inflation and in europe it is slightly different because if you take the larger economies , three out of the last four have unemployment. so you can still explain that were interest -- explain that interest rates should be low. mainly because the labor market is not clear to the u.s.. is labor market in germany printing every month, historical low and government rates which is more similar to the situation in the u.s.. tom: charles deval is with us. diebel is with us. charles: this is it. the risk -- we're hoping for more detail today from the fomc minutes. is reality is that inflation going to be weakening up over the next few months. so the case for the central banks to be aggressive isn't that obvious at this moment in time. and that is why it has been getting a lot of airtime from central bank officials, globally, trying to sit there and say they are looking through the short-term inflation. that noe, though, is one really knows what is what happened in the years to come at once they start producing their balance sheet, there have been great pains to tell everybody what they're going to do and to do it on a slow basis. would beonclusions that it isn't going to have a great impact when it starts but they will be nervous because it is an unprecedented experiment. they haven't tried a balance sheet unwind of this scale before. happen forgoing to the first time that they start the balance sheet? probably not. but at some point, it will. francine: at what point does the boe conundrum tell us about the need for central bankers to communicate properly and well? hike, this was repriced wasr research that -- this repriced after we heard from drug you -- after we heard from mario draghi in portugal. antonio: we should also mention there is a holiday coming next to mark carney, with a different feel that resets the idea of a rate hike before the year end. and that moves into the chart that you are showing there. chance of a rate increase before the end of the year. key, as many central bankers are pointing out is the data. the strength. data dependency. forecast isat the optimistic on the growth side. they have almost 2% growth. have a ton of growth. and you will get q2 and q3 growth before the november meeting. so a rate hike, that will probably happen before november. the 0.2,omes close to then they're probably will not be a rate hike. then mayberonger they do get enough support to basis points rate hike. i think that is the key. francine: charles, is it time to raise rates? 10 years ago was the last time hikes rates. and at the time it was 5.7%. 10 years ago means that half the people in the markets don't remember it. charles: i had hair back then. [laughter] milestone but a 10 years with the forward-looking risks with respect to brexit, because it is a long-term thing and as is pointed out, the risks and the growth of the next 3-6 months are going to be undershooting the bank of england targets. personally, i find it hard to find a justification for higher rates at this point in time. and i tend to think that the u.k. economy is going to need the support of low rates for quite some time to come, just as we go through this transition and the brexit process. francine: thank you both. both are staying with us. in the meantime, you can load up tv and use the cool screens that tom is putting up. this one is about interest rates. you can steal those and ask a question. in the meantime, we are looking at live pictures of angela merkel meeting with the chinese president, this is in berlin. in fullese president is focus because of what is going on in north korea. we will discuss that next. this is bloomberg. ♪ francine: in two days it is the g-20 and ahead of that you can see the president of china meeting with angela merkel, the chancellor of germany. aboutine they are talking north korea and the silk road. charles diebelto and antonio garcia pascual. you have worked at the imf. so you know a lot about these international g-20 meetings. what can actually be done? will it a behind closed doors? will they speak to each other on the phone? or is it important to have face to face time? there is a lot of technical work that happens in the weeks before. -- the final decision sometimes there are wrinkles that need personal meetings between the head of state. so things get done and are resolved in these meetings. and it is impressive. the chinese dedication. on onenally haven't been in this state but their presence there of the chinese are overwhelming. so this is very telling. and obviously, china is more willing to play the role of world leader. promote globalization, much like the german agenda. to knock down the rhetoric against globalization. and against trade. and i think china is trying to be on the right page. these are timely comments. i'm thunderstruck by these images. and the chinese flag with the gold stars and the same gold stars on the european union flag. just published a scathing note on the trump administration including the possibility of her tests within the trip at the g-20 meeting. how are the leaders from china and germany reacting to trump and trump protests over the coming days? antonio: well, i think they will try to be inclusive. i would expect no aggressive response but firm. we have heard already from angela merkel about issues related to the environment and the paris accord. so i think they will remain firm. far, however, to the credit of the trump administration there was no declaration of chinese currency manipulation. there was no trade wars being launched. these global issues were the threat is high, the delivery of the u.s. has not happened. no war in thebe way that was expected. was ane: there significant opinion piece that singles out germany as a global ally. what that means for foreign relationsand china's with trump, we have to wait and see. but it is extremely important. he says the strategic character of the chinese relations is gaining in importance. it harkens back to the german-chinese relationship with the united kingdom and america. this has been wonderful. gentlemen, thank you. antonio garcia pascual and charles diebel with us. coming up, john ryding, adam posen and david folkerts-landau. stay with us. this is bloomberg. ♪ tom: friday's jobs reports, will bring independence day for janet yellen? in this hour, david folkerts-landau. tweeting about it won't help. how does the president respond to a north korean missile that could hit alaska? this morning, the yen weakens. and 10 years on, where is the putting green? we consider monetary policy gulf. in this hour is at imposing. am tom keene. in london, looking towards berlin is francine lacqua. g-20ine: underpinning the is the political tension that you are alluding to. it is also clear that if there is one person who may be could get china on board, it could be angela merkel. i was struck that the chancellor an opinion -- in piece. whether that was domestic politics or whether it means something different. tom: absolutely extraordinary. he would have thought it would be quiet. but forget about that. let's get you up to speed with the first word news with taylor riggs. taylor: a pointed response to north korea's announcement it has used an intercontinental ballistic missile for the first time. china conducted -- the u.s. and south korea test today. missile the united nations security council will meet on this matter today. moving to the u.k., theresa may's disastrous performance in last month's election may have been a gift to business leaders. according to the is a dude of directors, it gave them greater leverage to negotiate for a softer brexit. they are now asking for ideas and solutions to concern the split. and minutes from the last meeting of federal preserve policy members may give a clue to what the runoff will start. the minutes will be released later today. global news, 24 hours a day. powered by our more than 2700 journalists and analysts, in more than 120 countries. i taylor riggs. this is bloomberg. tom: let's get through this quickly. i notice that oil is giving up a little bit. the yen is moving. onto the next screen. let's get right to that. no, don't show that. here's the euro-yen. dollar-yen is a 1.13. francine? francine: we see if it of fluctuation. so investors are more worried, according to asset classes. down. can see gold was tom: very good. let's go to kevin in washington. all of a sudden, this has gotten serious. how will secretary mattis and secretary tillerson brief the president? has gotten serious. north korea launching an intercontinental ballistic missile which they say would be willing -- it would be able to reach the united states. in 2009, north korea did the same thing but either way, it second visitthe for the g-20 and nikki haley has called an emergency united nations meeting this afternoon. i expected will smith to come over the horizon yesterday with a missile launch on independence day. this isn't a movie and it isn't hollywood and it isn't even a television show on nbc. advisor to the president on these matters? kevin: it is a two-pronged approach. last week, the administration announced tougher sanctions, trying to isolate, economically, north korea. in terms of putting sanctions on the chinese bank. but they have their hands tied in terms of how much further they can go. because more stringent economic sanctions will only further isolate. you have to remember that north korea's number one trading partner is china. and as the global leaders are headed to the g-20 meeting, they will be talking about more tough economic sanctions. then seen: i keep getting told -- francine: i keep getting told that trump is unpredictable. ?s that a good thing kevin: the u.s. administration although it back through the clinton has been toying with the idea of military action against north korea. bey decided that it wouldn't worth the risk and that it could destabilize the region too much but again, the chinese have not done what i think several folks have wanted them to do. and that is, of course, at more the g-20to china at meetings. francine: thank you very much to kevin cirilli. the leaders of china and germany are meeting now. we saw an opinion piece. this was our interview of the day. joining us now is david folkerts-landau, the deutsche bank chief economist. -- youra pickle because research group is massive. how do people do you have working on that? 700.: how you cannot divorce geopolitical events from underlying economics. so you need to stay on top of that. francine: if you look at geopolitics, can they filter through sentiment across the world? is that far-fetched? onwards, it is an important thing. of usually it is a question background noise, rather than moving fundamentally. and that is what we are seen now. with the korean events and the g-20 and macron and italy. .t is background noise in parts but it doesn't fundamentally change where the world is going, right now. tom: we see the president speaking here. boston miller moved from to hamburg for those meetings in the next few days. david folkerts-landau, wonderful to have you with us. 2009 -- after the court news action that we saw in portugal, do you need to write a new essay with julian garber about britain would three? tom.: coming up, coming up. i have not said we will see a coordinated monetary response to the government and the underlying economy. if anything, quite the contrary. and ecb is that the boe and boj might get together to do a coordinated approach to reflation. i think it is far-fetched. ,ou want to disperse the action rather than have them come on at the same time. this is what they should take -- should taket seriously. tom: do we use orthodox economics as we add standards to the end of the year? is the polarity so great because of our prices and fixed income systems that we have two economies in each nation? one is doing well and the have-nots are really falling behind? economics has taken a big hit in terms of the proceeds with things from the crisis. but there is still a body in motion that allows us to analyze and look at this carefully. fundamentally, the world has improved significantly over the last few years. we have seen europe going through a pivotal change with macron coming on and the italian bank bailout. that plus u.s. improvements, including in london as well. so there is an underlying change in the outlook which is being translated into monetary action. hopefully. structurally we identify what is going on and it is positive. is the biggest risk? is it a policy mistake? if it is, where put it come from? david: we have $15 trillion of central bank balance sheet that has to be worked out. that is the liquidity out there. and it has had an impact on asset prices around the world. they have gone up four times as much as the cumulative effect of the gdp has gone up. now it will start raising rates and there is a certain uneasiness about the systemic system. and we have never been able to predict the financial crisis. rates have to go up. francine: so this is a nice capture and do what is talking about. as to what percentage of gdp but we might see the -- not do anything. and what we've heard about, it has been at almost every meeting. so the world has been taken by surprise. think there is much less out of surprise. there will be assets running up the balance sheet in october with another hike in december. i think the question that is more interesting is, where will we be in 2018? that theree think will be as many as three increases. and then, what happens to the 10-year? if we see the 10-year from 2.4 going up to 3.5-4%, then it has to come out. go up.rices will it would be naive to not worry about this. francine: naive. there you go. only on bloomberg. david folkerts-landau is staying with us. will bee dei paschi cutting over 5000 jobs and we will be talking to the ceo, marco morelli, later on. this is bloomberg. ♪ taylor: this is "bloomberg surveillance." -- has smartphone maker acquired intellectual property is from nokia, the company that led to the world in mobile phone sales before the iphone came along. dropped and smartphone ranking since 2014. proving british banks will be left weaker in a downturn. the boe says the banks must show they are not underestimating the risk of credit cards and personal loans, given the current economic environment. that is your bloomberg business flash. francine: thank you. five-year restructuring plan. the announcement came after the troubled lender could receive 5.4 billion euros of state aid but only after jr. lenders and shareholders had contributed to the bank. will be talking to the monte dei paschi ceo, marco morelli, coming up. but now, we have david folkerts-landau. had a lothat we have of movement on this front in the last couple of months. is this satisfactory? david: it is probably three quarters done. the nonperforming loan problem within europe is a significant impediment to gross. nonperforming loans tend to make banks conservative. they keep recycling the same loans. there isn't enough credit for the innovative sectors. growth.tards and it has done that in italy. and this came at the wrong time. because it made the restructuring of these banks and the injection of state money for capital very difficult to do. it had to be done organically. it was difficult to do that. now, 2% of increases -- it is big. but no. i don't believe that is the end of it. i think more has to be done. with recapitalizing the system. but now, italians have found a boe,ole to get around the the model can be used again in italyg with the future of and elsewhere. francine: you believe this gets rid of the systemic risk for italian banks. the does that mean -- banking union is no longer there? david: that is the key point. that europe has improved. it is the italian banking system improvement through the d capitalization with a very positive impact on systemic risk. basically, systemic risk is out of the system now. more of a concern, spinning out of control. on the other hand, an important architectural feature of the european banking union is now impaired, shall we say? eu way ofereotypical doing it, you create exceptions. who still abides by 3% of gdp? so it is a very european way of doing things. and i think it does detract from credibility. it undermines credibility. tom: specifically said -- it is a very european way of doing things. 1940, 1950, 1960 -- can they clear markets in europe to allow for a sustained economic growth and a lower unemployment rate? the rate -- the jury is still out. david: desperately so. i believe that the recent french election was a pivotal point. reforms, labor market reforms in france, it would be beneficial. and then presumably that might spill over. i think there is a lot more momentum now than there was six months ago. we have yet to see how well macron can implement what he wants to do. benefit ofgiven the the doubt in moving ahead. so yes, i think europe looks different. unemployment does remain a are seeing we now the beginning of dealing with that. at the time has come to raise rates. tom: let's come back. we have a wonderful morning must-read for david folkerts-landau. don't forget, adam posen is coming up with the peterson institute and we are thrilled to bring you john ryding from our dq economics with an important research model. playing monetary gulf. look for the putting green with john ryding. this is bloomberg. ♪ tom: we like to history with david folkerts-landau from deutsche bank. let's get right to this. the morning must-read. a bloomberg view column. "we may be approaching a second minsky moment by keeping rates at record low levels, central banks have made it easier for inefficient firms to survive, as in a rising tide that lifts all boats. last week, yellen said a financial crisis is unlikely to happen in our lifetimes. if he were alive, minsky would be shaking his head." shaking his head in london is david folkerts-landau. this speaks to shock. is sovereign debt the growing debt, the size of the dead? is that a possibility, to be in instability? david: that, combined with the liquidity overhang in the system , no doubt. at this point today, we could not see a financial crisis during this lifetime strikes me as not having learned the lessons of the last 30 years. there has been a crisis every eight years, starting in 1982. and on and on and on. 2001, 2007. and none of those, did we ever anticipate. we can't quite see our way through the way crisis might happen. a 12 trillion central bank overhead liquidity. inhave a 45% increase government debt outstanding from major countries. so yes. theave become very used to that there is no hidden danger lurking in the system as rates go up is foolhardy. is the adult in the room who can get away from these dangers? david: it is the fed. i believe the fed will lead the right with a gradual rate increase and careful communication and with a good understanding of the risks of how the system works. and i think the current fed board with janet yellen and stanley fischer, there is little they do not understand. it is important to recognize that rates, including at the shorthand and also at the long end, are at historical lows. and they're completely out of work. if you look at the numbers in the u.k., the u.k. 10 years ago with the last increase, look at the consummation now of the unemployment rate, they must call for an increase in rate increases now but we are not doing it. it there.ve to leave david folkerts-landau, generous with your time today. we look for to seeing you in new york. up next is adam posen from the petersburg institute. this is bloomberg. ♪ ♪ what should i watch? show me sports. it's so fluffy! look at that fluffy unicorn! he's so fluffy i'm gonna die! your voice is awesome. the x1 voice remote. xfinity. the future of awesome. francine: mrs. bloomberg surveillance. francine and tom in london and new york. meeting in cairo today to discuss the situation after saturday's press agencies of the kingdom has received qatar's answer is to a list that includes cutting ties with iran and closing the al jazeera news channel. riyadh amadi. is what do we know about what's in the reply list? >> we don't know because they are keeping it under wraps. it is being reviewed by the saudi's. we are waiting for a foreign minister that happening today in egypt. time forn't given us a the end they believe after that they will give their verdict on what they think about what is in the letter. worst case scenario this escalates and what happens in that case and if 60 escalate can we go back to normal pretty quickly? i suppose three scenarios. hasthey say we think qatar moved enough towards what we want and we can start lifting these things. sanctions we have imposed. the second is if it's a good start we can talk some more which essentially extends the deadline. minister's said they won't be extending the deadline. here is the option of escalating. what that could be there's lots of speculation about that. there's no clear message on what they are going to do to escalate. you, riad hamade. here's taylor riggs. starting with north korea's leader king john then calling his countries launch of it enteralactic -- -- and inmissile threat to the u.s.. the un security council meets on the issue today. u.s. and south korean troops held missile defense drills today. crude oil has stepped in the last half-hour as russia says it once to stick to the current opec deal. that's according to russian government officials. one says that anymore cutbacks so soon after the existing deal was extended would send the wrong message to the oil market. american diplomats are concerned about friday's meeting between president trump and vladimir putin. they are worried it could be a mismatch. they argue to meet in hamburg at the g 20 summit. global news 24 hours a day powered by more than 2700 journalists and analysts in over 120 countries. i'm taylor riggs. this is bloomberg. tom: we are exceptionally lucky in the next half hour to have with us john writing over our dq economics. ridings -- john rydings. our experts on the relationship of germany to the united states. adam posen let me begin with you. how will president trump be greeted by the germany you have studied for decades. ? in terms of germany we saw the big signal already a couple days ago. inltenham merkel campaigned speech materials and officially stopped referring to the united states as a friend. for merkel and germany that is a big shift. there's going to be wariness. there isn't going to be confrontation. maybe we have a generational shift with the funeral for helmut kohl. do you assume there will be protests on his travels? speech -- the bill bill clinton's speech was wonderful and is falling on deaf ears. protests atways that g-20. tom: john writing, wonderful to have you here on the 10th anniversary of the financial crisis. you noticed coordinating chitchat last week. policy of europe and the united states in sync? >> i don't think there was any agreement to coordinate. the message is clear. guestk that your previous was right. large central-bank overhang. potential financial risks building. a lot of the central banks and leading the ecb the fed is on because there are risks building. you had a headline story today about problems in norway's housing market. yeartina issuing a hundred bond as if we haven't seen argentina defaults a few times in the last couple of decades. i think there's a feeling that central banks need to get on with the balance sheet and start reducing the size of debt health. francine: do you worry about central-bank policies and policy mistakes? everything you're just just said it is totally wrong. the fed is going to continue typing for a bit. the ecb and bank of england came out of the vis meeting talking tough but they are not going to do it. there's no reason for them to. and bank of england there is an argument prudential's side about balances in terms of savings. and real estate and credit in the u.k. specifically. that's what the financial policy is supposed to deal with some interest rates don't have to do it. given the inflation and other problems in the u.k. are think they will be reluctant to move. is supposed to deal with some interest rates don't have to do it. ecb even more so. he's talking because he's running for ecb president not because there is a need for change. the fed is probably going to wimp out starting next spring. let's get real. argentina may be a very foolish thing to buy a hundred year bond in. it's not going to affect anybody if anything happens in argentina. he says you're completely wrong. >> time will tell. fail to anticipate the next financial crisis and they come along every so often. we do have a habit of ignoring the lessons of the previous are coming upe we on the 10th anniversary of the worst financial crisis since the great depression. the wrong lesson. it's not about monetary policy tightness. it's about financial soup provision laxity and regulatory laxity. if you go to the imf status that there is autocorrelation of the financial prices. crisisu had a financial you usually don't have one for decades. look at the u.s. in the 30's. i think people are chasing ghosts. the problem with macro prudential is it's an unused tool. i remember being at atlanta fed reality ofand the macro prudential policy is that there is no reality. it's about monitoring. trying to pick up the vibrations. you have all of this liquidity in the system. tom: let's go to this. >> liquidity doesn't do anything. tom: we are dealing with wonderful economic theory for a wednesday. adam posen steals the show. garber and dflie versus a lot of people like you that really disagree with flow analysis. it has to do with folks who stock and flow. i'm not going to get into it. i want to say the overlay is an for market. you have confidence that central banks can find a stable trajectory from where interest rates are now both on a nominal and real basis. two things. i'm sorry to be overstepping. first thing is that in the short term forecast and that was where i was primarily distinguishing in that i just don't think they're going to do very much. in the second point if things prove unstable it will be because of real reasons like the collapse of productivity growth in the u.k. for the collapse of wage growth in the u.s. and many other countries. do you see wage growth occurring and will we observed that friday in the jobs report. interview after interview i don't see people talking about appropriate wage growth for politicians or central-bank heads. it is sort of stock and flow. on a rate asus there's a legitimate case to be made. i don't think it's open and shut. that wages are finally picking up a bit in the u.s. almost in line with a very flat curve. unemployment is going to stop falling. wages will go up a small amount. growth inis that wage the u.s. and a number of other countries with exceptions like germany has been very poor for over a decade. if you're going to catch up then it's a problem. >> productivity growth in the u.s. has been very poor for the last 10 years. our analysis suggests the primary reason is inadequate capital spending. which growth isn't out of line at all with what the economy is producing. you have wage increases ahead of productivity gains that's going to continue to squeeze profits and undermine the capital spending story. i concern isn't that wage growth is too low. my concern is productivity growth that is too low. except for two things. the profit rate has been going up for years so the idea that profit is being squeezed is wrong. in the u.s. has been less than productivity so we don't expect big wage growth. productivity has been lousy so we shouldn't expect big wage growth. additionalstill been profits going up. causality runs the other way. the reason people are not investing is they don't see the productivity growth. tom: thank you for the many responses. here's a partial score. francine: that's not fair. tom: this is what we love about bloomberg surveillance. coming back we will talk to adam posen. more about economics. we will talk to john ryding about cop douglas dynamics. this is bloomberg. court on the cob douglas. ♪ francine: bloomberg surveillance with tom and francine from london and new york. we had a spicy conversation with adam posen and john ryding. chief economist. one question. you believe that many guests on the show were wrong. because you don't see central banks normalizing interest rates. why go through the pain in portugal to talk the markets up? >> fair question. i don't like the word normalizing. it's a question of the right interest rate for the situation. happens in the ecb conference i actually am a bit confused. you'll notice a turnaround that governor carney from bank of england made one day saying not going to tighten to saying it might be a good case for tightening. clearly there is a buzz in the air. we have seen this before among central banks. they get in their heads that they have to talk one way and then reality hits so i'm not going to sweat it. francine: give me a sense of what the boe will do next. trying tois painful reprice the markets. we have a couple of npc mayors saying this is not dependent on brexit. the last time they hiked was 10 years ago. rates went up to 5.75%. is -- my country of origin. it is a small open economy. devaluation massive exchange rate shock post-brexit. inflation has taken off more than people expect. really looking at historical behavior that shouldn't be too much of a surprise. and the bank of england has an inflation target. it's a single mandate central-bank. it's not surprising that there is this move towards desiring to return -- return interest rates to a higher level than they currently are. all been expecting the post-brexit recession shock. and more than a year later we have had the inflation. we haven't had the recession and it's only natural that central bankers should be thinking about raising rates. if it turns out to be a mistake and there is a recession they can cut them again. if i look at orthodox economics it has to do with exceptionally low real rates. how do we get back to normal rates given the risk of instabilities? how is orthodox economics going that? >> i don't think orthodox economics is going to get you there very quickly that? because we've got a bunch of things that are not orthodox. we've got very low wage inflation. sustained drope in productivity in the u.s. let alone in other countries. got very little connection between either liquidity or monetary policy settings and inflation outcomes so this isn't that orthodox. buy lottery tickets on the supply side by supporting r&d and public infrastructure. you keep the economy close to full employment and you see what happens. adam posen, thank you so much. going to talk about particularly his illusion of a financial crisis. on tv , bonus round. tv can look at boring live or better yet you can go back and look at adam posen and john ryding terron to each other. look at thisck and battle over macro credentials. tv . this is bloomberg. ♪ tom: it is july. this is the single best chart to get us to august 10 years on from the financial crisis. we have never seen orthodox economics so far from where chair yellen is. this is the taylor rule. the dots are out here somewhere. economicsg of our dq have stopped surveillance traffic in 2007 with the illusion of a golf course. i believe it was chairman bernanke on the putting green. does chair yellen have a clue where the putting green is? and it was about the fed keeping rates too low at the time. the possibility of inflation. it turned out the very low which byrate policy then was 1% and very gradual rate increases laid the liquidity foundation for the financial crisis that people didn't see coming. the taylory that rule is the right number with the assumption of a 2% real rate. even if you take the assumption close to a 0% real rate interest rates are still too low. that chart doesn't take into account the $4.5 trillion balance sheet that it has. show 2004. to i believe president trump is going to be able to appoint someone like john ryding or john taylor or whoever to run the fed. do we need a new rules-based fed so we know the rules of the golf course? or is discretion still valid? >> i think central banks will always have and always have to have discretion. the question is whether the by someon is guided underlying principles the market can follow and understand or that the central bank simply keeps moving the goalposts. not go to the football analogy. the fed has laid out goalposts. there has been a tendency to move them. i think this time is different. the fed is very serious about starting to reduce its balance sheet. possibly as soon as the july meeting. we will find out more this afternoon. our call has been september for the longest time. i could see them starting a balance sheet wind down in july. that's going to be a five year or longer process and they will continue to nudge interest rates higher. francine: central banks haven't been helped by politics at all. they have been asking for structural reform for a long time. will they get it now? the feds very careful about not asking for anything outside of the realm of monetary policy. i think that's much less of an u.s..here in the we had been expecting when the president was elected u.s.. in november that there was going to be large fiscal programs particularly task of -- tax cuts and infrastructure spending. aen we will get them is question because everything is backed up behind health care and health care doesn't seem to be going anywhere at this point. europe is very different and europe does have a more rigid labor market and that structural reform i think is needed and i'm .ot an expert in the area the fed doesn't need the help from other policymakers at this point to get on with the job of reducing the balance sheet. tom: we will continue with this on bloomberg radio. foreign-exchange report. we have a weaker yen. stay with us. this is bloomberg. ♪ whoooo. you're searching for something. like the perfect deal... ...on the perfect hotel. so wouldn't it be perfect if there was a single site where you could find the right hotel for you at the best price? there is. because tripadvisor now compares prices from over 200 booking sites... ...to save you up to 30%... ...on the hotel you want. trust this bird's words. tripadvisor. the latest reviews. the lowest prices. jonathan: north korea shakes foreign relations, not markets. a response to the latest threat. the $4.5 trillion question for the fed. went to start shrinking its balance sheet. italy's bank model through eu officials approve a plan to salvage of another italian lender. , goodew york city morning. this is bloomberg daybreak. on jonathan ferro alongside david westin. alix steel will be joining us from boston. futures in the united states up by .1%. the dollar showing some strength. the euro weakness for a fourth straight session. treasuries unchanged. 235 is your yield on the 10 year. and thengela merkel chinese president

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