closing bell. . the s&p 500 advancing to a three-week high. joe: the question is, what'd you miss? emily: we have to charge you can't miss. joe: we dig into the long-term outlook for the yield. what is the consensus for 2016? clo's are a cause for concern with securities. why companies are looking like 2007. we begin with the markets. it looks like stocks recovering today pushing the s&p 500 into the green for 2015. nice edgell on a nic

as to whether we stay up or declined. oil is leading the way once again among commodities. the bloomberg commodities index of 1.5 percent today. we have slowly but surely made poor way to the highest level in the last 2.5 weeks. joe: that is pretty impressive getting the way it is selling -- giving the way it has been selling. really setting the tone for the day. as you pointed out, a really nice rally, and we are up on the year again. scarlet: that gets me to my deep dive, this correlation between oil and the s&p 500. we go back to the start of last week, which is really went they started to drop off a lot. it is not an exact match, but the yellow line is wti crude, and the blue line is the s&p 500. not an exact match, because on monday, december 21, stocks actually rose despite oil

edging lower. on christmas eve, which was a short and that should for stocks, equities give up gains in the last 10 minutes to finish down. that was a shortened session even as oil continue to move higher. in holiday trading, it looks like you to -- wti setting the tone. joe: it does look like that. but the s&p is not off that far from its all-time high. one ofnd has been divergence. i want to look at the euro and the spread between u.s. and german short-term rates. this is one of the key determiners of currencies in rate differential. people at the talking about it for a long time. the goal line here, that is the spread between two-year u.s. and german rates. as you can see, it is the widest that it has been. it jumped up a little bit

i now, when the ecb meeting did deliver as much as stimulus. but ever since then we have see id. margins were the spread has continued to widen. there has been the separation. isone of the questions while they or will there continue to be separation? scarlet: good thing we have a currency guest as our first guest. he joins us now with more. welcome back. mark: thank you. separatione seen a between the yield differential and the currency. eating those lines will be taken? nasa do you think those lines will meet again? euro is at about 115, and at the ecb meeting we dropped to about 105 and a quarter. we had about a $.10 move.

to get into the holiday mode, correcting that. and i to point out in that chart, the interest rate differential is still moving in the u.s.'s favor. that tells me that not everything is discounted. those who is agree with me -- those who disagree with me setting that this store has been around forever, but i say it has not all been discounted. comesk the first test when we try to get the strong jobs data. that comes around the same time as a march rate hike. they have a vision that the economic data will justify not as much as the fed seems to think. scarlet: there have been three notable rallies in the trade weighted dollar. you can see them right there on the chart. technically speaking, each time we are hitting lower highs.

fundamentally, what makes this strengthening cycle unique? >> the first rally to place in the early 1970's, late 1980's. ,e had a tight monetary policy that changed under ronald reagan. the dollar shot up. it went up by more than 50%. 1985, september, here in new york, they agreed to drive the dollar down. it went to a about a tenured bear market for the dollar -- a 10 year bear market for the dollar. then we had the clinton rally, fueled by the tech bubble. americans keeping their money at home. the bill clinton dollar rally, that is the next rally we might get -- for the next one might be

about 40%. the ecb cries quite picking on uit picking on our euro, and the g 17 intervened. yearsense of another 10 bear market for the dollar. the obama dollar rally is being driven by this differential. the federal, all got hit by this financial shock. it produces different economic outcomes a few years later. the u.s. acted aggressively, early. our turnaround come in 2009. the ecb just began theirs. joe: the hiking cycle, one of the topics we will be talking next year as the pace. where do you stand on this question? to herree that we get

three next year. i'm not sure about that fourth one they are penciling in. there are large investment makes saying four hikes. but what makes us different is they have a couple of tools they did not have before. one of them is the size of the fed's balance sheet. $4 trillion. about $220 billion of the u.s. treasury is in short next year. sured next year. maybe letting some of that expire and rolloff the battle in sheet, will create some tightening that could create a point rate hike. scarlet: and the fed has a target range as opposed to a fixed point. do you see a return to the fixed point target anytime soon? >> it is very important that the fed has arrange this time, because for the first time the

federal reserve pays interest on excess reserves. it is a key way they have created this excess reserve since the balance sheets exploded. they need to control that money in the system, and they need to pay banks on the extra reserves. they need to pay them more than the fed funds. the low end of that range will be protected by the federal reserve, and the top part of the range is kept in place by this interest on reserves. intricate handling of monetary policy. other countries don't do this. most have fixed targets. like the ecb. joe: speaking of the ecb, we have this question of how successful they are going to be. do you think they will succeed in getting the economy back to

the u.s.? mean fors that longer-term rates in the states of germany and france? >> a lot of people are not caught onto this yes. europe is growing at about what they typically grow. are growing at about 1.5%, maybe a little bit lower than last. that is not bad given the growth potential. i heard one guest say that growth is near 2.5% in the u.s., which is on trend in i would sure closer to 2% -- on trend. i would show it closer to 2%. growth used to be trend growth, and the u.s. used to be 3% or above right now i think it is 2%. there is a lot of new news to consider here. we talked about divergence being a widely telegraphed the man --

theme. what does the face of divergence look like in 2016? it will depend upon factors, but: look in a way we are not anticipating that how will it look in a way we are not ?nticipatin ada eased in the first part of the new year. many other eased as well. the ecb is still easy, they may have to ease more next year. is movingf the pane japan aggressively. des areh bla diverging, and then we will get to where other central banks will stop using, and start

typing. coming back together. get back toentually their old records of $.82. scarlet: eventually. you are staying with us, because coming up we're talking about inflation. we discuss what the current rates and what the fed may not be factoring in. ♪

scarlet: i am scarlet fu. what'd you miss? let's get to first word news. ramy: the u.s. says that islamic operatives with close ties

attacksarents terror has been killed. use army spokesman says he was one of 10 islamic state leaders to die in the past month. 69 journalists were killed around the world in the line of duty this year. those by terrorist groups. among those who died on the job for alison parker and adam ward dbjm virginia tv station w they were killed by a coworker during a line broadcast -- live broadcast. former president bill clinton is stumping for hillary next week. she has called him her not so secret weapon. anald trump may be going on spending spray-painted billionaire suggested in tweet today that he is ready to use some of his own personal fortune

to pay for campaign ads. my campaign for president is $35 million under budget. i have spent little and am in first place. i will spend big in iowa, new hampshire, and south carolina. that is your first word news. scarlet: thank you. we are back with mark chandler, head of currency. today's case-shiller price index show that they are rising due to and highply demand. ownhey want rent, and to

. the u.s. has a large role for homes and rent in the cpi. other countries do not. in europe, the measure of inflation does not include homeownership because they do not think it is consumption. it is not a consumer good, it is an investment good. like japan for example, because of the demographic issue, they have been having read all by about 2/10 of a percent or 3/10 of a percent every year. if we were to take rent out of their measure of cpi, and take rent out of our measure, our inflation would almost a identical. joe: i want to go into the terminal will quickly. this chart i have is multiple different ways of measuring inflation beyond just the headlines. you have the core services, housing. all of these are trending in the right direction. but when you hear people talk, there talking about the fed wildly missing inflation target and so forth. do these suggest that the fed is

closer to hitting at school that people think? >> not really. they do not have just a goal, corp.arget what they call personal expenditure deflation. it is a measure of deflation that they are targeting. fed does not know that we pay for energy, it does not know that we pay for food. it was to look at core inflation because they think that is where the signal is coming from. if you have a chart going back to the 1960's, you will find what moves inflation is core inflation. they are targeting this because it is the best match to the true signal. spent more money now for some good, we have less money for some goods. the models show these technology changes as well. joe: core measures of inflation

missing badly. historically, inflation tends to be, especially in recent years, well below the target. target ofhey have a 2%, but critics say it has a feeling of 2%, and it prefers to air on the downside versus the upside. do you think that is a fair criticism? i don't think so, because when was the last time we saw core inflation at 2%? what is the fed going to do a 2% inflation? i think this criticism comes because we have been in the financial crisis, and people do not feel comfortable with the power that the fed has, and they're trying to curtail it at the edges. scarlet: so it is political? >> it has. the fed has two targets. they have unemployment and inflation. janet yellen's are strong about

this she was a labor economist, that is her specialty. she buys into this thing called the current which says one unemployment is low, wages will go up sooner or later. she says the new goal is to be reasonably confident that wages will rise. the labor market continues to improve. they are trying to point out the significance of the next batch of employment data through february and march. it is not what the price of oil does. thekey for that, as long as labor market continues to improve, wages will go up at some point. let's go back to oil. even if the fed's it out as noise, it weighs on people's perception. they correlate pretty carefully. -- why can people not get away from this idea? >> the federal reserve is trying

to decide monetary policy. and we see less money, the price of gas is a low two dollars a gallon. it is incredible. i have a previous, 50 miles a gallon. now i look silly for buying an economic car. or gas prices, whichever is moving faster, that is what they see every day. we do not look at college because we only look at it a couple of times of year. that is the thing that catches popular psychology. it is not a good measure because we are talking about a relative change of crisis. i will spend more money on discretionary spending. a drop in oil acting like a qe4 qe for manyrs -- consumers. joe: thank you.

torlet: coming up we talked the most accurate forecaster in 2015. ♪

scarlet: i am scarlet fu. what'd you miss? most forecasters last year wouldted that treasuries remainedut they resilient. but now we talked to the most accurate forecaster of treasuries according to a survey we conducted at bloomberg. joe: you say that treasury rates

will remain where they are now, but you say avoid the seven-year bond. how come? number one, if you take a look at the trend in 2014 at 2015, everything in terms of long term yields was about racing in an effective the at funds rate once the that was finished with the tightening cycle. what we don't know is what the evolution of correlation inflation is going to look like over a three 46 or nine month horizon. that evolution is going to control the pace of fed tightening over the next several years. when we look at what bonds are most affected by the pace as opposed to the peak funds rate, that can come down to the three or seven euro the curve -- three-year or seven-year portion of the curve. you see inflation

rising only moderately. that is your base case. you also have a scenario where inflation normalizes. is there a link between this prospect and a weak demand we saw in today's 5-year note option? guy: i think the options -- we're looking at me intermezzo. , and it tends to be fairly volatile. you live the changes in the way the federal reserve is requiring liquidity on of the large banks, and what we are seeing is a little bit less sponsorship at these year at auctions from domestic banks, and that is not the same thing as unfavorable demand in that portion of the yield curve. joe: strategist are famously bearish on treasuries or overoptimistic about where rates will hit. once again going into next year, they see an increase in long-term rates. why is that? look fromermanent

treasury strategist about the treasuries going down? guy: i suppose many of my relleagues are mo optimistic about the economic world than i am. i used to sit next to one who was are optimistic so i would not be so downbeat here at the trading desk. many of my colleagues are looking for economic growth to restore this magical 3% level. but the factors that are giving rise to the slower level of growth are not likely to change. the federal reserve has admitted as much. in other words, structural rather than cyclical. if you look at the yield curve, it is flattening.

the spread is narrowing. it is no look at this reliable indicator that it used to be. what does it signal to you? guy: i think it is very simply the passage of time. as more and more fed rate hikes get priced into shorter-term bonds, for example a year ago a inear note could price one year of rate hikes, and knowledge can do to years of can do two-- now it years of rate hikes. and now we are relatively stable because of this idea that has been priced in. i am fond of one particular phrase when it comes to the shape of the yield curve, which is an inverted yield curve has predicted seven of the last 10 recessions. so it is a signal, but not a perfect symbol. scarlet: exactly. coming up, we will talk about clo's. ♪

scarlet: i am scarlet fu. what'd you miss? let's get to your first word news. new developments for the future of the syrian leader bashar al-assad. they are allowing him to compete in the elections in 2017. u.s. opposition as we getting to that. this would follow in 18 months transition that starts this january. russia has agreed that millions of syrians that fled the country that vote.rt in in brussels police arrested two people described as suspected terrorists. this was part of an effort to

prevent terror attacks during the new year's celebration. they seized training gear and islamic state propaganda. earthquaketude rattled parts of oklahoma city, oklahoma today. it is blamed for power outages affecting thousands of people. the police officer accused of killing a black teenager has pleaded not guilty. he has been arraigned on charges of murder and misconduct. a video service to showing him shooting the teenager 16 times. the global news 24 hours a day powered by our journalists around the world. to you. quick recap's get a of how markets closed on this tuesday. stocks did recover by gains of at least 1%. this bush the s&p 500 back into the green for the year to date.

oil is one of the drivers here for one of our overall indexes. joe: there was not that much news today. we got a little bit of housing data. what oil rallied, and you have to be pretty impressed by that. scarlet: fundtech, the bloomberg commodities index is at its highest in about 2.5 weeks, raising 1.5% today. joe: i want to go back into the terminal. everyone should know that the two year yield has been searching to multiyear highs. here is the five year yield, which has not been freaking out to the same extent there is a diagonal line that i drew on the peaks. scarlet: it shows a pretty clear pattern. joe: this goes back to the middle of 2013. you see a breakout in the very d, but still

tightly constrained. scarlet: and there was not that much demand for the five year note auction. for my part i and looking at the british pound. it reached 1.2 percentage points yesterday. you have to go all the way back to june to see the last time there was a premium. from one dollar 83 in 1.43 today. ae uk's vote could complicate rate increase. be a goodis going to

story. i do not know which way they could go. but i am excited to talk about that next year. scarlet: in the meantime, we can see a short rate differential. speaking of rate, back with this is a chief equity strategist gu y. what are you projecting when it comes to actual default in 2016? guy: i like to take a look at state -- highd yield the state looking to h cheaper. things to the advent of the etf's and the natural credit we will sees friends continue to deteriorate even though realistically most of the defaults will probably be isolated to the energy and commodity sensitive industries. that is our outlook for 2016. g sectorsinterestin

right now? guy: stick with higher-quality high-yield. it generally includes manufacturing industry type names. basically the areas that are not sensitive to oil prices, and not sensitive to things like copper prices or industrial metals prices scarlet:. we have seen the spread widening in other sectors as well. guy: absolutely. blame dts foran this phenomenon. -- etf's for this phenomenon. when investors sell, they have no choice but to sell the troubled ones as well is ones to pay off investors. the entire sector gets whacked by the uglies. joe: what is your take on credit standards in general?

year, there was a lot of talk about how some of the bad practices from before the crisis are starting to creep back into lending, some of the mortgage landings and commercial real estate. what is your take? do you see signs that people are dropping their guard? guy: it is pretty clear up until the middle of 2015 that lending standards had been listening. degree were near the experienced in 2006 and 2007, but for example high-yield standards were loosening. lending terms and will market energy companies has been listening -- middle market energy companies have been loosening. i suspect that that's a trend at the least has been on par and will reverse as we correct in 2016. scarlet: what about the ability

to do due diligence on what you want to buy? what has credit research been in 2015, and how will it change in 2016? pickers market has run a little cliché, but i would like to think of 2016 as the credit pickers market. a few moments ago, we said we believed that the default, the high-yield default will be isolated to companies that are commodities sensitive. extraction and production copies with the energy industry, for example. what that means is there will be cheap valuations in other sectors, particularly on one higher-quality names. it will take more legwork on the ground in order to make that theormance really sit into 2015 transition. joe: when you talk about the-yield surging into

energy space, there is also the fact that the fed has embarked on a tightening cycle. do you attribute to the fed excluding the oil affect? how much is monetary policy? guy: it is a subjective assessment, to be clear. out what theak credit indexes would have done without energy about a month ago. what we found is about 30% of the spread widening was driven slowly by energy and commodity companies until that point. that leaves the other two thirds in a nebulous other category. i think it is naïve to assume that the federal reserve raising interest rates is not going to affect the credit markets. it has that every cycle in the past. the magnitude of that effect is probably reasonably small because we have seen as an economy, society, and financial

market, we have seen it coming for a good three years now. scarlet: it has been well telegraphed. within your latest outlook can you talk about how there are measures to protect liquidity and how they may end up harming bondholders? what are you referring to, and what damage do you see? guy: i'm not sure what you're referring to, but what we are seeing pretty universally is less willing to provide liquidity to the credit market. that is not just because of regulation. the parte outlook on of dealers themselves for the credit market as well. media re: if you think the sector is going to diary ifate -- meeting her you think the sector is going to deteriorate?

sellers andose liquidation, there is less of a bid for the institution to sell into. joe: you have written that you have seen shades of 2007 in the collateralized loan obligations. what do you see? guy: clo's are really complex sectors. it is unfair to paint them with the same brush. it is the central portion of the 's.ns that went to the clo in one of those loans were made to middle market energy names. those comedies have been hit pretty hard, in addition because the problems there are sector wide. a lot of the recovery values are low. you package these loans into clo's, and there are fears about whether the clo will perform at the same rating standard to that they were originally underwritten to. that has resulted in some

of seven individuals and companies trying to sell clo's and receiving no bids or receiving heads that are very punitive, points behind what you think fair value would be. that smells a little bit like 2007. these are isolated instances in a very specific market, so it is not like it is through the economy. scarlet: thank you so much for joining us. central-bank divergence expected .o be a big theme for 2016 how that will affect the euro, dollar pair. ♪

scarlet: i am scarlet fu. what'd you miss? it is time for the bloomberg

business flash. thatompany is appealing the listing of their shares after their ceo was fired for securities fraud. returningital is money to client after almost 20 years. be capital will returned by today. the ceo says he will no love able to make the commitment to run outside capital. job cuts are on the way at dupont. they will cut 1700 jobs in delaware where it is headquartered. earlier this month they agreed to merge with dow chemical. that will be broken up into three publicly traded businesses.

that is your bloomberg business flash. monetary divergence will be the big driver a financial market next year, especially for the euro, dollar pair. but what is that euro, dollar exchange rate reflect? analyst joins us to help into that question. >> it mostly reflects expectations of the next two years. it does not do a good job of figure out what is going to happen in three years, four years, five years down the road. one is because we trade mechanically on the euro, dollar. most of what you see in the market is done by models. it is done by a solution that works, and it is always in perfect -- imperfect. some trade according to the 10 year rate, which made no sense. but this is how the markets operate. joe: there is no inherent reason why the two-year spread

should be so important, it is just something that people programmed in? >> there are good reasons behind it, but if you look at it, then it becomes a little self-fulfilling. the two-year rate makes sense, but it becomes customs, and that embeds in our habits, which since becomes programs. scarlet: should we be looking at other differentials? >> when it tells you is that the rate differential is always evolving through time. there is one part where this will matter a lot next year whether we will get to rate hikes or three rate hikes or none. the market will trade on the combination of what happens in the short term, and varying maturity all the time.

algorithms are doing it all the time, and a vast majority settle on severance --average solutions. to: that is what i was going ask. if all of this training is done via algorithm, what are the opportunities to take advantage of the fact that some of these movements are based on conventions that are arbitrary? >> the way you have to look at it is the solution in the market in the where we see trading in the market, is the result of a lot of failed options. we all converge toward something that seems to be correct. but what seems to be correct is stable.essarily what happens is as we get to that convergence, it reaches a rating point because there is no underlying relationships between the algorithms and reality. scarlet: we are going to talk about dollar canada

is there any other pair that is so devoted to the two years red the way euro, dollar is? they used to be highly correlated, but now they are very much confused. generally in the emerging market you see these very strong correlations between the emerging markets and moves in the two-year rate, not necessarily on the micro level, but it tends to be very strong. promised, we will discuss the currency the forecasters say will bounce back the next year from the commodities rout. the canadian loonie. ♪

scarlet: i am scarlet fu. what'd you miss? we are back with a currency

strategist at deutsche bank. the currency's most tied to oil, the canadian dollar is supposed to lead the way while the aussie posed foriwi are weakness. you say the liberty may not be as tight oil is some people think. be as tight toot oil as some people think. >> the long-term factor's certainly weakening. modernaper you get, the stable company with an industrial base like canada, that means the probability of you stabilizing and getting a little bit more expensive increases. there is a difference between being pure exposure, like china,

and a developed economy with profitability. joe: do you see similar phenomenons take place when we talk about these commodity currencies where it is tied to a specific commodity just might have it, and because it has always been that way, it persists when issue no longer be the case? >> yes. the bank of canada recognize there have been games in currency links to the commodities. i tried to weaken the currency to do the job. that correlation still exist because oil has collapsed since then. 80% of the canadian production. it is very important for canada but it has a lot of other things to offer.

as they weekend, we will see them benefits very strongly. joe: plenty of other things going on. like blackberry. scarlet: should canada the links to other commodities? >> copper is essentially empirically working quite well. oil and gas of the major exports, but it really tells you in a strong trend in trade. now we're moving to another state, where canada is no longer pure oil play. we are going to see that it starts to kick in. joe: how is canada's economy holding up? there have been anxieties about real estate and so forth, but you ignore the energy component for a second, and how is it looking? >> they have actually done quite

well. they are starting to see a little bit of worry, related to the fact that the housing market has been quite expensive. people are overleveraged. if you look at the survey published by bloomberg, it has been dropping over the last few weeks. the auto sector has been booming. the economy in canada is doing ok, not great. ck whichsector is a shot - will take a while to get through the system. scarlet: how much of this is filtering through to canada? >> not as much as you would expect. we're seeing it from mexico and other economies, which is if you weaken your currency, it will not have the effect it would have had many decades ago.

eventually, it will all work out. joe: mexico, that is one of those emerging market currencies ends, but has of not delivered. will this be the hero turns around? -- in the year into turns around? >> and do not think so. if you look at the fundamentals with inflation and different metrics it is not particularly encouraging. they might take a significant movet of time in mexico to through. but having said that, it is really cheap. joe: thank you very much. scarlet: coming, what you need to know to europe for tomorrow's trading day, next. ♪

scarlet: i am scarlet fu. what'd you miss? i'm focused on europe because tomorrow angela merkel will be giving her new year's address. she will set the tone for 2015. the following day francois hollande gives his address in france. and the cpi will be coming out tomorrow. it is expected to go positive, after registering a decline in november. it is not been above zero since may of 2014. joe: it would be big is it with positive. tomorrow, pending home sales, and at 10:00 a.m. eastern. we had that existing home sales number that was very weak. lots of people said it did not reflect fundamentals that much. get more data on housing

market that will show that that was a fluke or something wrong. scarlet: that is all for us, thank you for watching. joe: see you tomorrow. ♪ we live in a pick and choose world. choose, choose, choose. but at bedtime? ...why settle for this? enter sleep number, and the lowest prices of the season. sleepiq technology tells you how well you slept and what adjustments you can make. you like the bed soft. he's more hardcore. so your sleep goes from good to great to wow! only at a sleep number store, find the lowest prices of the season. save $600 on the #1 rated i8 bed, plus no interest until january 2018. know better sleep with sleep number.

john: i'm john heilemann. nicole: i'm nicole wallace. with all due respect to the president of colombia, we will get the president of the philippines ready just in case. we have a feature presentation for you tonight. viewer discretion is advised. it has violent acts, a vengeful cast and an overflow super pac. it is called the hateful eight. the characters are familiar. everyone attacking everyone but we are starting with the most hated and most loved on