happy friday. a warm welcome to "bloomberg daybreak." check out the market of the moment. futures marginally negative, down 67 points on the dow. down almost eight points on the s&p 500. the story in the fx market, the euro breaks down to a very tight trading range. david: here is what you need to know at this hour. a snapshot of the global economy. honeywell and general electric are both out with earnings this morning, ge cutting its 2016 forecast, honeywell reporting his first profit drop since 2011. and call it the draghi hangover, the euro falling to its lowest level since march. donald trump and hillary clinton trading in the boxing gloves for some humor at the al smith charity dinner in new york last night. they appeared on stage together just one night after facing off for the third and final debate

ahead of the november 8 elections. that is what you need to know at this hour. i want to get back to the all-important earnings question of gdp and honeywell. on the phone we have nick heymann, an analyst with william baer. where there surprises in the gdp numbers for you? there was not really a big surprise. they lowered organic growth, which was 2% to 4% for the year. they lowered that to 0% to 2%, which makes more sense. on the order front, it was a little bit better than less worse, but there was really not a lot of favorable news? david: how much of this is a read on the overall growth of the economy? karen: the top line is affected by the economy. in a lot ofonomy

ways because they are in so many different markets. it is definitely an impact. david: how did they do on energy? karen: energy orders were down 20%. revenue numbers are down 20% and that will continue for a while. not just ge, but you take the volvo trucks numbers, the diamond numbers, the export numbers -- truck numbers are down. we can put that on our screen. you can see how closely these things track each other. is there any reason to suggest a story this time around? industrialks reflect production, freight movement. it does not really look that great going forward for the economy.

david: nick, tell me about your reaction to gdp -- to ge. his or anything they can do despite the economy? net: -- nick: they will be able to drive forward to expand finance, to arrange a new form of financing for their base infrastructure with non-developed and emerging markets. that is something that the new ge capital is really focused on and is now really beginning to ramp up. that will allow their growth going forward next year to be more independent of the global gdp and their correlation with global growth is going to be less. jon: the basic story that we are seeing in everything economy and company is an unwillingness to invest and invest in future growth. byis reducing their buyback

$4 billion. what do you make of that theme at the moment, that they are using cash to buy back stock's? on a big have hit point. we have global industrial capital spending down to 2.5% after a 4% drop last year. it will probably be near flat bece -- it will probably near flat in 2017. companies will move away from investing in more capacity, so there will be a shifting in companies adopting information and standalone software to be able to create a better functionality for customers existing products without having have them spend as much for new products. karen: i also think they upped buyback because they put a little bit back on that as well. it gives them a little cushion

to buyback more credit. david: honeywell has given us a preview recently, so it did not surprise much of the third quarter. what about going forward in the fourth? gettinghey are just not the volume. with a lot of companies, they have already done a lot of restructuring, and they have to have some organic growth to gets a bottom-line growth. it is not happening with these companies, so that should not have really been a surprise. david: nick, let's bring you in on honeywell. billion to invest spirit is that something you look forward to? nick: these investments are not inexpensive. they are good but not inexpensive. you need organic growth to get the value in terms of your cost and fail synergies out. i think there has been a tremendous reliance on and 2016.ns in 2015 honeywell has created almost $9 billion. if you do not get that organic

growth, it will be tough to meet those expected contributions from your recent acquisitions. the real solution in this kind of global economy is honeywell is the leader in standalone software. ge and siemens are the preeminent front in creating valuation. that is the way of doing good business, to try to grow in this flat industrial economy. jon: help me understand something. you have the big industrial companies struggling for topline growth. you have company's elsewhere that refuse to invest. ge this morning is boosting its buyback. cycle? oncein this that rolls down the hill, it gathers speed and it gets bigger and bigger and it is incredibly difficult to break. what breaks it? can the fed do anything now? nick: i do not think this is a forversus a fiscal policy

public infrastructure that has been talked about widely. there are no shovel-ready feasibility studies done in europe, the u.s., or japan today. we look for the ability to create growth at the last frontier, the global economy, which is with project finance. this is a huge new market. it is like the new junk bond market, if you will, of creating the opportunity for one third of the population to join the 21st century. lot less risky because it has changed and it has oversight with financial institutions. it is a market that offers the adjustedo 6% inflation rate of returns. this is the future, and you have to tap that to be able to grow. jon: thank you very much for your time. nick heymann and karen ubelhart. let's get you up to speed on the

headlines. here is courtney collins. courtney: donald trump and hillary clinton appearing together in new york one night after their third and final presidential debate. the occasion was the al smith memorial foundation dinner. the remarks turned biting at points. mr. trump: everyone knows hillary's belief that it takes a village, which only makes sense after all in places like haiti, where she has taken a number of them. [boos] mrs. clinton: donald, after listening to your speech, i will also enjoy listening to mike pence deny that you ever gave it. [laughter] donald trump will make stops in pennsylvania, while clinton visits ohio.

an earthquake with a magnitude of 6.6 has hit the western part of japan. the meteorology agency in japan said it occurred along the sea of japan. 435 miles west of tokyo. no word on fatalities. in iraq, a major escalation in to retake mosul. the u.s. military has announced the first american combat death since the operation began. an american servicemember died after an explosion north of mosul. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries, i am courtney collins. this is bloomberg. are negative, so let's dig down deep and give you some of the movers.

microsoft was the big report after the close of trading yesterday on the strength of cloud. beatens estimates were at $.76 a share. the company's cloud revenue grew. it's cloud margins also grew by -- grew tofrom 42% 49% from 42%. you can see premarket, if it surpasses 59 point 97 in make cash trading today, that would be an all-time high for the microsoft shares. looking at a couple of german stocks we are watching -- you have daimler on the one hand going lower. you have sap going higher. sap is benefiting from the same phenomenon microsoft is, the cloud expansion. expansion into cloud business. third-quarter sales up 8%, above

what analysts have been estimating. we have daimler cutting its 2016 revenue forecast because of weakness in the north american truck market specifically. then there is the big deal to talk about, the tobacco business. british american tobacco is offering to buy the remaining .take you can see the shares rising on that. u.k. trading, they are also rising, interestingly enough. consolidation in tobacco. david: thanks so much, julie. call it the draghi hangover. the euro falling to its lower level -- to its lowest level since march. george goncalves on draghi's dilemma. that is next. this is bloomberg. ♪

jon: from new york city, this is "bloomberg daybreak." dow, downwn 67 on the eight points for the s&p 500. still stable for much of the session. the story in euro-dollar is a march low. a third of 1% for a fourth straight day of declines, this 24 hours after the ecb and investors tuning into the news conference had questioned yesterday. any discussion about extending the qe program. if they were looking for guidance from mario draghi, they were out of luck. mr. draghi: sometimes it is important to say what we did not discuss. tapering was never discussed.

discussedt really that at all. we have not discussed anything like that. there was no discussion. the second point was not discussed. we have not discussed that. we have not touched on the issue at all. jon: so i am left wondering what they did discuss. i want to bring in george goncalves. george: up until this point, there was thought to be some sort of coordination between the central banks, that the fed wanted a steeper curve as well. the bank of japan is trying to steepen the curve, and here we are thinking the ecb would also follow suit. was theon holiday smartest move with the markets coming down on the side that there are still some things to figure out. he will wait until december to see what the investment is. david: considering he did not

have much to say, the euro did move. . george: the market has this misconception of associating with tapering that may happen in europe and japan, analogous to what happened in the u.s. most likely what happened with these qe programs, considering that they need to keep the apparatus alive, for various reasons, in case we do get a downside shock, ramping qe back up again, and/or fiscal policies down the road, who is going to buy all these? jon: let's make this simple. we are talking about the university, the federal reserve going out there with all these confusing things. we talked about yesterday how the market is like a petulant five-year-old. yesterday,saged me saying that if the parent comes out and gives us some tough

is simplicity the best way i go you do not need these academic papers, the transparency, and you just say wait until december. we have not discussed it. george: it is hard to decipher, to discern what is noise and what is actually messaging. the markets appreciate the straightforward message that we got yesterday. , we couldre broadly question the efficacy of qe. there is inconsistency in a whole host of areas, where the euro should be doing more fiscal policy, to allow the central banks to be buying more debt. the comments overnight from kuroda say that we will expand the monetary base. being simple is the best way of doing it. david: are the markets reacting to these two very different ways

of doing things? you compare what mario draghi did yesterday with what is going on not just with janet yellen but with -- george: when you are pivoting and changing your policy -- and the fed has been trying to do that -- they are trying to build the case to maintain the narrative. there is value in that, but i do think there are times when the markets are confused by various speakers going in different directions. jon: let's talk about the market fallout. we went into the meeting with your program, and they said look at what is happening with the chinese currency. does it become a problem for the federal reserve? george: given that they have had huge leadtimes on this, it does not prevent them from hiking. thatforces this notion they are going to move very

slow, but the dollar will not be the recipient of these other qe's overseas, as well as other fed activity. in many ways, what the fed will do in december and what the ecb ll do in december -- as long as china is not retaliate in devalue, which we think they will not, maybe they are not defending the -- long gone are the days of these radical gap shifts where you have 2%, 3% moves. it is more a gradual movement in the fx market. david: is the market ready for a december rate hike? p -- in67.6% in w.a.r. wirp. george: it to the october minutes, and we were already into the -- the quarter priced it in quickly.

we started right at the september meeting, with the minutes being a little bit hawkish. a pretty vocal side of the community that wants to hike. i think the markets there, as long as it does not unravel, they will deliver. goncalves, thank you. coming up, theresa may wraps up her first e.u. leaders summit with a fairly chilly reception. what is her next move? we will talk about that next. this is bloomberg. ♪

david: this is bloomberg. i am david westin. theresa may is in brussels for her first meeting with the european council. it looks like the reception may have been on the cool side. the leaders of germany and france made it clear they were going to stick to the letter of the law, leaving the ball very

much in her court. first of all, she said as long as the u.k. has not completed the exit negotiations, the u.k. is a full member of the european union. that is a good message for us. second, she says she will file the notification, and that negotiations should be undertaken not only for the good of britain but also not to the disadvantage of the european union, so our interests are also recognized. that will be a difficult task. brexit, there is the need to wait for the british position, and there will not be any prior negotiations. wheniations will start article 50 will be launched at the demand of the british people. david: joining us now is a colleague reporting from brussels who has been there. what is theresa may's next move? it appears that all the leaders have said, it is up to you, ma'am. >> right now theresa may is

having lunch with the president of the european commission, jean-claude juncker. we will find out a little bit more in the next hour or so in brussels. it was a reality check for theresa may in brussels because she said i want to send a clear message. there is no turning back from brexit, and then the e.u. president said that might be -- that might not be as easy as you want it to be because a hard brexit means hard negotiations. that is where we stand at the moment. david: caroline, one of the him things that are one of the things that is required -- we have a negotiation between canada and the e.u. how is that going? caroline: this is the elephant in the room in brussels. there is a small region of belgium, a region that many

people -- and it is blocking the canadian trade is blocking the canadian trade deals with the e.u. at the moment. there has been a lot of meetings in the morning. thats set a half hour ago there are some difficulties that remain. prime minister michelle said earlier that she was not reassured about whether or not they would be an agreement today. i am not reassured at this point, but i do not want to say anything else that may add fuel to the fire and stop us from reaching an agreement. on the contrary, if the door is slightly ajar, we must do everything in our power to push through it and come out on top of this difficult situation. caroline: if this canadian trade

deal is not approved in brussels, that will create difficulties for future trade deals, including with the u.s., and of course any trade negotiation with britain. david: that is caroline, our colleague reporting from brussels. would it beficult to get a deal done with the u.k.? welcome to europe. coming up, we will continue the conversation, from e.u. politics to the politicization of central politics. we will look at the fed and see if it is lacking oversight. we will dig into that. from new york city, this is bloomberg. ♪

jonathan: this is "bloomberg daybreak." i am jonathan ferro.

down negative six points on the s&p 500. the s&p 500 poised for weaker games. one story and the fx market, below one dollar nine cents on euro-dollar. a have been stuck in this for couple of quarters. the yield on the list 10 year, down, 175 in new york. david: three stories we need to know about your it a snapshot of the global economy. honeywell and general electric out with earnings. general electric cutting is forecast and honeywell posting the first drop since 2011. call it the draghi hangover. the eruo falling to the lowest level since march. donald trump at hillary clinton trading in the boxing gloves for humor at the elves live memorial foundation dinner in new york. the presidential candidates

appeared on stage one night after facing off in the third and final debate before the november 8 election. david: a couple of morning must-read's, the economy is not the only thing central bankers worry about. increasing political headwinds. central bank independence coming under threat? caroline hyde from london. i want to start with you. inflation will become a problem in the eurozone. walk me through that. line: it goes back to the beginning of the 19th century. they worried about inflation. i will translate this for you. the german key practice saying the end of the inflation trust is with the key take away is. 1.6%tion is that arise to by 2018. you can corroborate that by going to the bloomberg.

our own function tells us that we will see what .6% by 2018. they say this is more pain that german savers who largely have investment in cash or insurance. the article says that mario draghi isn't paying enough attention to the german saver. article says to get into sp's. jonathan: the head of media relations at the ecb tweeting that the article shows inflation mandate.to fulfill the there's pushback from the ecb. guy, the politicalization of england, another u.k. politician in a national broadsheet coming out with the punchy article, almost attacking governor carney. guy: this is one of the leaders of the leave campaign surrounding brexit.

he does not like experts then or now. he doesn't like experts. work for goldman sachs. if you are an expert and work for goldman sachs come you are double that. -- double bad. taking he is not instructions from politicians. the central bank is independent. that we are having this debate may influence the relationship and have an effect on central-bank policy over the ecb . we might see that also at the bank of england. does it seep into wages? ?nto the ways we look at qe that is what we need to look at rather than defective changes in central bank independence. but, yeah, experts are apparently bad. jonathan: referencing china when they had the mandate of heaven

deciding the fate of millions. we have mark carney employing controls over interest rates to decide the fate of millions. or many people this is getting ridiculous. does it have a fundamental impact in shaping monetary policy in the ecb? caroline: at the moment he has hit back against critics. you heard from the press conference that he was angered by the leaks coming out of the ecb. it seems to be pointing the blame at the committees rather than the governing council, bringing up anticipation of papering good we saw that tantrum a couple of weeks ago. .lready thinking about the exit he is pushing back against those critics. you have been speaking to therts, speaking to economist group in germany,

saying that tapering in germany is a figment of your imagination. but germany wants an exit from the stimulus. it doesn't seem like arial draghi the italian, will give it to them. jonathan: governor carney has a decision if he will stay in london or go to canada here do you think this shapes his decision in any way? guy: i hope not. he should be trying to make the decision based on a clear thought about how he needs to deliver for the british economy, and can he be the right man in the right place at the right time? we have been discussing all morning, some of the post-brexit press conferences come he was annoyed by questions like this. he says actually i represent an independent bank, and if they can sway my thinking, they'll wrong. i will not be swayed.

as result of which, i will extend the mandate and see it through. i wonder. if you want to wait now, in some ways michael goat with have had his way. -- ifan: if he isa as he is as arrogant as he says, surely he will have his way. david: you could read it back in the united states. they be not as well written. not just in europe are politics working into monetary policy. we have discussions as part of the presidential election with donald trump accusing janet yellen. republicans more probably have been suggesting there should be more oversight of the fed. drew.g us is thank you for being with us. what extent is there a political dynamic in the united states in the fed as we look forward to the december meeting? drew: the fed doesn't care.

the fed has been independent since their formation. there have been times that the independence has been challenged. they have gotten through them. 1952, that is an interesting time in american policy. they have a long history of independence and are not worried about anything. there is pressure on central banks because they have led us to a place that is unusual, different, and for a everyone. where they led us doesn't seem to be working. that is causing people to question if the experts are as good at their job as the experts themselves believe. david: this is going around the world. the jonathan question -- jonathan: there we go. david:over 60% likelihood oa rate hike in december.

november, 17%. not because i do not think there will be a of economic data that is different between november and december, the difference is the election. don't the markets anticipate that we should hang out? could make the argument they would be more independent by going ahead of the election. you can take it either way. the reason no one is looking for november is despite the commentary, no one will go without a press conference. maybe if they hadn't waited a whole year, they would go without a press conference. since they have waited, they have to explain why now versus last quarter. last meeting, they had people scratching their heads by saying we should go, but we will wait. that is not enough to encourage people they have their hand firmly on the till. debate on the

overreliance on monetary policy is fine. then the debate on monetary independence. very much so in germany. the question is regardless if governor carney or mario draghi pay attention, does it calm the transmission mechanism? you undermine confidence. we will be here for longer, because people don't believe in what we are doing. is that a problem? will the average person tell you there's something wrong with rates at zero. they don't understand how they help. in their daily lives, they say i'm not getting return on my money. have to save more on retirement. these things seem to work against what you are trying to achieve. your models keep telling you i will behave a different way. experts rely on models. the models aren't working, but

they bring them up as the reason for at they are doing. david: a lot of people are frustrated. the cart feels ahead of the horse. the fed should be reacting to the true economy, the real world, instead of driving what is going on in the economy in the real world. what should the economy detailing the fed to do? drew: for anyone listening, look at the last time unemployment was here, the last time job growth not payroll the percentage and work force terms was as high, then look at the fed funds rate. things change over time, but there is a 500 basis point difference. i go back to sesame street, one of these things is not like the other. wheret the labor market, things are going, the fed forecast, they tell you they are underwear they should the. jonathan: central-bank

, or 0%dence, a lack of interest rates the problem if you want them to spend and get returns, is that the problem not the solution? drew: rates as low as they are tells you there's no value to time. if there's no value to time, you wait for perfect information. around the world, everyone is waiting for better information. the way you get people to stop waiting is place a charge on waiting, higher interest rates. david: always good to have you on the program. ubs chief economist, drew matus. donald trump and hillary clinton and fearing for charity at the owl smith dinner. could they put aside their differences and be funny? that is next. this is bloomberg. ♪

courtney: this is "bloomberg daybreak." aberdeen asset management on the outlook for small caps. david: this is bloomberg. i am david westin. donald trump and hillary clinton were expected to put aside their differences for charity giving humorous remarks at the al smith dinner in new york. they were funny at times, as when mr. trump talked about his wife's speech at the republican convention. mr. trump: michelle obama gives

a speech and everyone loves it. gives the exact same speech -- [laughter] and people get on her case. david: i think that was genuinely funny. donald. we have an embarrassment of riches. we're joined by our rushing to bureau chief and editor of government and politics. my favorite title. >> it is too long. david: you have earned it. what you make of this? they were supposed to be funny. this is an annual event. >> for me, it pointed to how strong of a speaker obama was, is, in this venue. they did not come close to his timing. it is difficult to pull off humor. hillary did a better job than donald, but they were both

pretty good at certain times not so good. donald trump was actually hillaryike when he said linton hated catholics. >> it ended up as an ill- tempered affair. there were 2 points. your dependent on your speechwriter. looking at the delivery, donald trump is reading and not as familia. hillary is more familiar with these. it is a nasty, brutish affair a a race that is the nastiest we have seen it is hard to put aside what has gone on for the past 18-months. there is a lot in the undercurrent. david: we want to play one joke that hillary had tied to the

ofs today when she made fun how long campaign managers last with mr. trump. says i don't he have any stamina. 4.5 hours. i've stood next to donald trump longer than any of his campaign managers. david: it is funny, but there is a little truth. operationsof field -- the head of field operations for donald trump says this is not a good time -- megan: he was close to paul manafort. when he left the campaign there was discussion that jim murphy was also expected to depart. i think with the issue is with murphy come at the operational strategy of the trump campaign, what is coming to the forefront looking at numbers like florida

and ohio and pennsylvania, they are looking to protect. they frankly do not have the machinery in place. when he was riding the momentum support of the populace , that was less of an issue. his campaign has always been what he describes as a movement for better or worse. and you don't have that movement and you don't have the ground operation, you will be in trouble in the states you need to get your supporters to the polls at. that, he iswith polling at 40%. his thought was all he needed to do was take some of the battleground states, but it is looking increasingly unlikely. david: ouust follow the media, which donald trump does not like, you would be asking is there a meltdown in the donald trump campaign?

is that a fair question or media having a bias? megan: that is a good way to phrase it. a meltdown?lways be it is either been melting down from the beginning, always rolling from one event to the other, questions about the message, where they will get support, about who the core base is. it is less of a meltdown then i -- that ijectory slowed trajectory of him missing the mark in the first debate. in the first debate polls showed him up. we cannot underestimate the impact of the leaked video from 2005. i was a game changer for better or worse. that is not 80 a created. .- not media-created people getting on the front foot putting a positive message first and being unable to corral the forces that have seen the campaign lead out. david: that video came out in

time to draw attention away from hillary clinton that would have been in the story is. megan: we get that question, if you know about wikileaks. david: after the election, it will come back. bloomberg's senior executive megan murphy the washington bureau chief. jonathan: let's get to the other headlines. , the business flash, courtney collins. courtney: general election cutting its forecast organic as theyes growth grapple with slow economic growth slowing demand for products. revenue will be flat or 2% this year of 4%. ge narrowed its earnings outlook to $1.52 a share. shaas previously $1.55 a

re. honeywell profits fell for the 11 behind asince 20 weakness in industrial combustion equipment. they expect burning growths of a forecasteaffirming for a gain in the double digits as it cuts costs and ramps sales of new products. from 48 shedding -- from party a 10% of its shedding air -- of its workforce after taking on billions in that developing the jetliner. it is the second major employment cut at the company in eight months. that is the bloomberg business flash. jonathan: thank you. coming up, a look at microsoft and the numbers coming out in the last 24-hours, the shift in the cloud.

our gets, futures, negative in the united states. equity is stable. from new york, this is bloomberg. ♪

.avid: this is bloomberg i am david westin. stock moving on earnings. julie hyman has more. microsoft stock surging as first-quarter sales topped growings driven a demand for cloud-based services. let's dig into microsoft. the numbers don't lie. microsoft has been growing the intelligent cloud segment, sales rose 8% beating estimates. revenue from the as you -- the azure cloud doubled. doldrums.s in the

commercial pc related growth versus commercial, performing better. consumer growth flat for the quarter. during the transition, you can see an overall return to revenue growth for microsoft. it might be a sign the .ransition is paying off microsoft made its largest deal when it announced a $26 billion acquisition of link then. -- linkedin. it is an expensive is. they have the highest multiple values of in the $5 billion this year. microsoft value is 85 terms earnings -- 85 times earnings. despite some opposition from salesforce, microsoft plans to close the acquisition of linkedin this year. we'll be following stocks throughout u.s. trading today. david: 2 stories, one is the cloud. not just microsoft but amazon

here the other is microsoft, a tech company that was counted out. if there was ever a turnaround for tech, this is a turnaround story. jonathan: and profit margins. they're spending it on tech and efficiencies. they're not spending it on industrial investment. we have seen that from a variety of companies globally. julie: looking at the long-term chart for microsoft, it was stuck in a range for some time. it broke out of the range. that continues. david: coming up, we will look at mcdonald's. this is bloomberg. ♪

jonathan: good morning. welcome to "bloomberg daybreak."

i am jonathan ferro with david westin. alix steel is getting a rest. earnings from mcdonald's of 1.3%, the delivery for u.s. comps sales. we were looking for 1.2%. this is a globally. 1.5%.the estimate, the stock higher 3.9%. you choose are negative throughout the session as we wrap up the week, the dow 60 s&p 500 down almost six points. a weaker euro for a fourth straight session, heading towards 1.09. david: the global economy, honeywell and general electric out with earnings. general electric cutting the 2016 forecast, honeywell hosting its first route since 2011.

you can call it the draghi hangover. the euro falling to the lowest level since march when investors were left filling in the blanks on the quantitative easing course. hillary clinton and donald trump trading in the boxing gloves for humor. they appeared on stage one night after facing off at the third and final debate ahead of the election. that is what you need to know. mcdonald's earnings, bloomberg's intelligence consumer analyst with us. there is a bead on revenue and earnings per share. good news for mcdonald's? >> yes. across the board. sales are going through re-franchising here that will affect revenue, event margins, and all in all, a good report. david: explain real franchising. it is critical to the path they are taking.

they will go from 83% franchised to 95%. they're getting their stores in the hands of restaurant owners allowing them to cut back. it will boost free cash flow in earnings visibility. .hey like that they like steady cash flow-generating businesses, which mcdonald's will become. jonathan: everyone is scratching here we go.saying introducing breakfast is a no-brainer. what you think of what the ceo is doing? michael: he is very aggressive. we like that. aggressive with value proposition, all day breakfast, and running better restaurants. getting operations right. you can have the best food in the world. if you don't serve it quickly, with a smile, customers

won't come back. he has done a nice job. hasn't done as well as people would expect coming from a strong last year. the concern is that the low hanging fruit has been picked. burger king went through the same thing, they got operations right,, went to the low hanging fruit, then aggressive with marketing, introducing new items. are -- and fires areas.re two jonathan: the managing director of restaurant research joins us on the phone. it is great to have you with us on the program. thest confusing you with ceo of mcdonald's. what do you think of what the ceo has done?

what do you see as objectives in the years to come? >> i agree with the conversation. he has been aggressive at the restaurant level. driving more innovation with the menu, which has been lacking over the past decade. a lot of innovation. efficiencies in the restaurant. in the releaseng is the u.s. outperforms lowered expectations with an acceleration on a two-year basis. considering what you are lacking from last quarter. the third point is in the international markets they outperform. that is where the refranchising will take place, outside the u.s. that is encouraging for the franchisees ready to take over new restaurants. david: the potential of said

overseas, russia and china are priorities, what are other priorities? will: the biggest market is france. they put up big volumes there double the u.s. u.k. is a big refranchising market. there is opportunity internationally. i would put china towards the top. david: how much of this is mcdonald's beating the sector and how much is it the are growing overall? michael: the sector had a tough year. mcdonald's is so large that when they do better everyone else hurts, and vice versa. chains like jack-in-the-box and sonic have gained shares because of mcdonald's' missteps. jonathan: one conversation that has emerged in the last couple of quarters is restaurant recession. these numbers do not spell restaurant recession to me. can you walk us through the narrative? will: i disagree with the rhetoric.

it is something that has been talked about based on the idea there has been a growth in restaurants, back to the highest before the previous recession tiered also the consumer looks somewhat ok when you look at macro data. restaurant sales have been slowing. we are grasping at ideas and why that happened. from my perspective, the consumer is fine. have discounted themselves into hurting the brand. we are seeing larger brand suffer. i don't think the issues brought-based. some brands are dragging down indexes, but the consumer is in a good spot. it is about giving them what they want. isterbrook and mcdonald's pushing to give more innovative products that attract customers, the name of the game. david: cost, they have $500 million goals to cut costs by

2018. are they on track for that? will: they are on track. is that we have never seen a refranchising process take place where they eclipsed their goals. sonic, it has become a theme. re-franchising because of the high roac attached. they are cutting more costs. they are probably outside of the estimate. david: thank you for joining us. that is the stevens managing director of restaurants research . and the bloomberg consumer analyst, michael, thank you for being with us. outside the business world, bloomberg's first word. courtney: donald trump and hillary clinton in new york one night after the third and final debate. the occasion was the house smith memorial foundation event, famous for its humorous

speeches. they took their shots at one another. :r. trop: last -- mr. trump last night i called hillary a nasty woman. this stuff is all relative. after listening to hillary radel don'td on, and on, i think so badly of rosie o'donnell anymore. startingi am actually to like rosie a lot. clinton: i have respect for kellyanne conway. she is working day and night for donald p or because she is a contractor, he probably won't even pay her. courtney: how smith was the first catholic u.s. candidate for president. the face-off between donald

reachand hillary clinton millions of viewers. the debate from las vegas exceeded the 66.5 million watching the second debate. the first time they that in september, 84 million set a record according to nielsen. making landfall in china after brushing hong kong. stock trading was canceled, schools are closed, airlines suspended flights. the storm is expected to remain in force today. global news 24 hours a day powered by more than 2600 journalists and analysts in more than 120 countries. i am courtney collins. this is bloomberg. jonathan: european equities unchanged across the board on the continent. in the u.s., futures negative. julie: paypal, their earnings matched analyst estimates.

the company affirmed the three-year forecast, there have been concerned because of the new deal with credit card companies. that that would somehow squelch its revenue. that did reassure investors. those shares of 4.6%. general electric its outlook for organic sales growth. there is a slow growth economy. it is expecting a 2% gain in organic sales growth. the prior range was 2% to 4%. honeywell had its first profit drop since 2011. it was a smaller drop than anticipated. it saw weakness and aerospace parts and industrial goods. estimates not off by much. is a biotechanged stock of 38%. the company said the depression drug met late stage goals and expects the fda to meet.

it is being upgraded by analysts, including jeffries and citigroup. up, a tell of 2 central banks. leaving investors guessing on qe . and the fed ready for the first rate hike since last year. katietie next and -- nixon, next from new york. this is bloomberg. ♪

jonathan: from new york city, this is "bloomberg daybreak." i'm jonathan ferro. 17 minutes from the open in new york, futures negative, off the lows. negative five points on the s&p 500. stable in europe. the euro at 1.09.

down for a fourth day and .4 on the day so far. 1.2186e is stable around . sterling weakness. the central banks, a look at the prospects of more stimulus from the ecb. the federal reserve the case for the first hike since last year. speaking last week about why he thinks the fed has been hesitant to speak. >> one reason the fed has been relatively patient in terms of raising interest rates is because we see that there is more slack in the labor market than suggested by the unemployment rate. david: we -- jonathan: we have more from the san francisco fed president, john williams, speaking today. xon.ing us is katie ni

follows.on is as follows we had a conversation about the ecb. telling journalists see you in december. who is doing it right? katie: the fed is trying to communicate clearly. they have done a good job here the market seems to be ready for a rate hike, finally. whether it happens in december is reliant on a few things. the macro factors have to cooperate. we cannot have global, economic instability throwing a monkey wrench into the plan. it looks like the fed has been good at communicating. the ecb wants to keep options open. option hourlyeep until december when they revise the forecast and decide what to do with the bond buying program. jonathan: the federal reserve, the right thing, is the market

ready for a rate hike. is the economy ready? how long has it and waiting? katie: our base case at northern trust is the fed shouldn't hike in december. we agree with the slack in the labor force on the that the economy has not been sustainably strong enough. we do not think it is necessary. we see the fed asymmetry argument. sometimes it does more damage than good. we have had low rates for a long time that can create distortions and pressure on tanks, insurance companies, and investors that have been punished or so long. david: why do we care so much? the fed has done everything it can to telegraph, almost a 70% likelihood of a raise in december. even then, it is 25-asus points. points.sis

is our economy that fragile? katie: look at the stock market. it is well behaved. investors have been patient with the fed, the fed has been patient with the economy. we just want to get this behind us. it has been hanging out when the fed was going to hike in 2016, when they were going to hike in 2016. we need this behind us to refocus on fundamentals. aboutan: let's talk equity markets. in the last 24-hours the floor and ceiling of the market, the floor is interest rates, the multiple. driven out of bonds. the ceiling is earnings growth. it is fundamental. if you take out the floor and there is no earnings growth, that is why the 25-basis points matter. katie: thinking about the market

as a discounting mechanism for long term earnings, it will not have a meaning will impact on today's value. a traditional hike of 400-500 points would have an impact. if they move, they will move once in the next year and will signal very strongly in december. it will be slow and shallow to support the floor. david: let's talk about the ceiling. general electric and honeywell seem to be linked by not much capital investment. truck area is not encouraging about companies having confidence the demand will be there. to that worry us question mark katie: a variation on a theme. we have not had cap x. lower in gdp estimates. the u.s. economy is relying on the consumer. we are not relying on

traditional spending. we see headwinds pressuring earnings of baiting -- abating. the dollar,en energy prices, and good numbers out of financials for the first time in quite a while. the earnings recovery, rather than the earnings recession, israel. jonathan: we can head to brussels where and ease some it has rough up. prime minister may is speaking. may: it willr require some give and take. i believe that if we approach this in a constructive spirit, we can deliver a smooth departure and build a powerful new relationship that works with the uk and the countries of the eu, looking for opportunities not problems. it is in the interest of all the

european partners, too. other issues, we discussed what we can do to respond to the migration crisis. the u.k. has called for a comprehensive approach addressing the root causes of migration. in brussels, i reiterated the case that i made at the u.n. for a global approach based on three principles. claiming asylum in the first country they reach, the way we distinguish between refugees and economic grants, recognizing countries have the right to control borders and must commit to accepting the return of their nationals when they have no right to remain elsewhere. it includes working closely with source and transit countries. here we have agreed to do more to help countries with migration and return migrants that have no . countries.y in e.u

you cable provide tactical .upport to european partners whether that is employing specialists to greece to help them process cases, or maintaining the naval presence in the mediterranean sea and the aegean sea. the hms echo will take over from enterprise in the central mediterranean next year. action in syria was on the agenda. i argued with chancellor merkel, president hollande and others calling for russia and syria to stop attacks on aleppo. the e.u. will consider all options is the atrocities continue. that is what we agreed. it is vital to keep pressure on russia to stop the assault on aleppo and keep the space for little transition in syria.

-- were political transition in syria. we will do what we can to alleviate the suffering for the syrian people. in geneva, the u.k. secured and asked ordinary counsel to press for a cease-fire to enable humanitarian access to aleppo. there are millions of innocent billions trapped there and in other locations in syria, in desperate need of food, shelter, and health care. . is the second largest bilateral donor to the humanitarian crisis. if we can secure access, we stand ready to accelerate 23 million pounds of aid on the ground to help the most vulnerable in the hardest to reach parts of syria. this morning, we discussed trade. a stronghas been advocate for free trade, and we will continue to be so. to be moreu.k.

active, not less, in making the case for free trade. that means, while we remain a the u.k. willeu back free trade negotiations. as we prepare to leave the e.u., the u.k. is discussing future trading relationships with countries. this will not undermine the e.u. trade agenda. it is not in competition. we will help with the e.u. reach these agreements. it is about seizing the opportunities of brexit and forging an optimistic role for britain and the world. work to that, we will make sure more benefit from free trade. through reforms we can build an economy and country that works not only for the privileged few, but everyone.

thank you. questions? tom? >> warships sailing unencumbered on the way to syr ia, they have achieved something at this summit. would you like to have achieved more in terms of increasing the pressure on russia? p.m. may: we had a very good discussion with the impact that we have seen from the indiscriminate bombing of civilians in aleppo and the atrocities elsewhere in syria. we were very clear about the role in russia and the need to

a pass and consider the atrocities as they continue all options. that is what we will be doing. around the table we all agreed. further questions? nora? >> thank you. do you expect all 27 countries and the european union to listen missing?n when we are are they entitled to ignore us? what would you say to the public that are alarmed by russian ships in the english channel? p.m. may: the question about the european union and relation to the european union, how they approach us, we will be leaving the european union. i have been clear with everyone i have to come individual leaders and sitting around the table in brussels, as long as we are members of the european union we will meet our rights

and obligations as members. that has been welcomed. that is the right spirit of approach. the 27 will have to take discussions among themselves. court ofe in the first next year voting article 50 and the 27 will discuss how to conduct negotiations. we will continue to play our role, as i have done today. i can assure you i have not been backwards incoming forwards on issues. we are clear of the role russia is playing in syria that is why it is important the e.u. has come up with the statement today. it is human nature? if you are leaving, you have your hand on the door handle, your voice will be heard less

and less. it has been signaled the negotiator wants to conduct negotiations in french. do you consider that good intent? arjun bowry we will conduct -- p.m. may: we will conduct negotiations to get the right deal for the united kingdom. as i have seen over the last days in brussels, i have played my full part. other members want the united kingdom to play our part as long as we are members of the european union. there are many issues that we agree about the challenges in europe and the need for us to work together in relation to those challenges. next question? -u.k.? non

you.ank free trade --ke you want free trade to work for everyone. ruleyou rethink less duty studental to protect jobs across europe? p.m. may: what we agreed around the table is it is important to look at that in a comprehensive way and modernize the europe trade defense instruments. we look at those in a balanced way. that is what is important. to balance the interest of users and consumers.

>> do you think the other e.u. leaders are getting the message? donald trump said it was in britain's hands is article 50 is reversible or not. trade freelys to in goods and services. p.m. may: p.m. may: i have not said anything that differs what we have said previously. we want to have the best withble deal for trading and within the single european market. i also said we need to look at this in a new way, which is saying what we will be doing is when the united kingdom leaves the europe union, it will be having a different relationship with the e.u. from the relationship it has as a member of the european union.

we will be negotiating that new relationship with the e.u. we want the best possible deal to maximize our ability to trade with and operate within the european market. that covers both goods and services. jonathan: dallas prime minister may of the united kingdom -- dallas prime minister may of the united kingdom. negotiations will be ongoing when she triggers article 50. this is the chief negotiator. the negotiations will be done in french. david: i had not heard that before. maybe the other side will speak in french and she will speak in english. in the markets, futures down by 53 points. market i in the fx want to foot too quickly. the euro has gone nowhere for months. now we break through this

trading range we have been in a couple of quarters. $1.09. we are testing a march low. yields stable around 175. david: here is what you need to know what this hour. a snapshot of the global economy. 2016 forecastts and honeywell posting its first profit drop since 2011. we can call it the draghi hangover fallen to the lowest level since march. linton trump and hillary trading in the boxing gloves for humor last night in new york. the u.s. presidential candidates appeared on stage together one night after facing off in the third and final debate ahead of the elections. that is what you need to know what this hour. we now want to turn back to the question of the e.c.b. and the uncertainty surrounding the

future of the qe program. mario draghi did not provide much clarity at yesterday's press conference. mario draghi: sometimes it is important to say what we did not discuss. we did not discuss tapering. that was never discussed. we have not yet discussed that at all. we have not discussed anything like that. there was no discussion. the second point we have not notussed is that we have touched on the issue at all. ,avid: joining us from london marshall out under which -- m alexandrovich. i'm thinking about you sitting with your colleagues watching this yesterday. did you get anything out of this other than they did not discuss a lot? >> think you have to read between the lines. weeks, thereew were quite a few stories about tapering.

draghi despite saying he did not discuss these things, maybe that was a clear signal to the markets that tapering for the time being is not on the agenda. despite the lack of clarity, the main takeaway is more likely than not in december he will announce a package which will be similar to what they do at the moment. carrying qe well into next year and tapering at the moment is not on the agenda. that is what markets wanted to hear. took that he was artfully confirming a story was not confirming. it was a bloomberg report there had been a consensus on tapering. he said we did not discuss it but i would not expect us to do it correctly. -- abruptly. >> i think that is obvious. in reality, these things are meaningless. qe, discussed increasing making it bigger or smaller.

everything is under consideration. there is uncertainty about how and when they are preparing to pull the plug on qe. when they do want to end qe, tapering will be part of it. they will go from 80 billion a month and gradually come out of that policy path. for the time being, it is not on the agenda. i think that is the point draghi is trying to make without preempting the big announcements they will make next time they meet in december. jonathan: i like to think market participants are more intelligent and do not need him to say it. the question you need to answer is whether it is needed. the conversation they did have was the issue around scarcity. can we assume when they get to december it is needed and they have solved the issue around scarcity? >> everything depends on a level

of yields. scarcity in the german markets first and foremost. the e.c.b. probably has another two months on current levels of yields. in december assuming we don't get much of a selloff, they will position where they have to change the rules of qe. maybe increase the issue limit size above 33%. they have a number of options they can pursue. regardless of whether they extend it beyond march, they will have to change the modalities of the program. if they extended by six months or 12 months, the changing of modalities will have to be a big part of the package they announce in december. markets will be looking for two things. one is the duration of qe and the other is the practicalities of it. david: take us into the changing modalities and what you expect. this is what the committees are reviewing and reporting in on.

as you look at these modalities, there are different political consequences. how does that affect their decision? >> the two sides we are looking at, one is to allow them to buy below the deposit rate. somebody can buy below the rate of -40 basis points which will lead to a steeper yield curve because the short end would sell off. the yields on the long end would rise. applications for bundesbank, i am not sure. they make it a steeper yield curve. maybe get a flatter yield curve. the markets it will be interesting. i am not sure the e.c.b. think about it the same way as the markets. for them, it is about implementation of the program. how do we make sure we have enough bonds to buy? level of interest do we

want to see? our high yields justified? markets want to see higher yields but i'm not sure the e.c.b. shares that view. politics comes into it. i'm not sure they will be listening to much. the decision will be made to europeans overall. jonathan: thank you for joining us. draghi is going to be daniel. mario draghi signaled quantitative easing and that it would not come to an abrupt end. dan, great to have you with us. is this how you get a weaker euro? >> it seems it is working out that way today. i don't think they can weaken it

too much. we think they are likely to extend and march when they meet in december. is that going to move front end rates? probably not. is it going to move inflation expectations? probably not. the net impact on the euro is small. jonathan: what are you trying to do? >> i think you are trying to convince the market you're going to stay accommodate of until you get inflation back up to target and hopefully grow the economy above trend. i think that is the game plans. david: when it was announced, it was quite striking they implemented it. i understand it takes a while to work in. in a sense whether that is causing banks to increase new lending? >> i don't think the data bears that out. we did have reasonable levels

over the last two quarters in the eurozone. we think we will get a slowdown in the future. there does seem to be some benefit from the overall package for the economy. hotou grow the economy enough, he might get inflation back to target. jonathan: the euro is not the focus but the dollar. can the dollar take much more? we don't like this. >> there is a big feedback mechanism for what the dollar is doing into the fed policy. if you look at the broad trade of the dollar, you're on your change is flat. that headwind has faded. year on year changes flat. the dollar is less of a restraint for them now. at the hike in december, the dollar will be higher. that should feedback into

slowing down the tightening process again. david: put yourself on the fomc. what numbers are you looking at as you go into decembers? issue, a labor inflation, cpi? what are you looking at? >> labor market has met the criteria. if you read the minutes, the main thing that has helped about concernrned cpi is -- cpi is too low. they will be increasingly comfortable. it does feel as if they want to pull the trigger in december and the burden of proof is on the data in market conditions to stop them. if everything is ok over the next eight weeks, it makes sense for them to go in december. jonathan: couple of years ago, we were getting excited about divergent monetary policy. are we closer to that developing again? >> i think we have discovered the feedback mechanisms on the dollar are much greater than we thought in a world where sinful banks are going in opposite directions, the dollar moves so

much that it stops the divergence. one side of the equation should move. the fed should move or if the fed cannot, others will. the getting both moving the opposite way at the same time is hard without the dollar stopping the process. david: where is the pound male and where is it headed? >> the pound is very cheap according to our models. us these models are telling now is the time when you're supposed to be thinking about recovery in the pound. positioning is stretched short. news flow is not great. this is crunch time. say we are going to get improvement in the headlines weekly -- quickly. we think risk/reward becomes increasingly toward the upside. johnson is worried

about cable because you don't get the spot price at the airport. he is told now he could get it at $1.19. david: arbitrage here. daniel, thanks for being here. he is the head of foreign exchange strategy in north america for b.n.p. paribas. coming up, why would at&t be interested in a deal with time warner? we will look at the possible strategy and difficulties. that is next. this is bloomberg. ♪

courtney in the hewlett-packard greenroom. outlook allhis caps. -- his outlook on all caps. -- small caps.

david: this is bloomberg. i am david westin. bloomberg reported yesterday executives at at&t and time warner have been talking about ways to get the companies together up to and including a merger. it would be a b media deal and comes on the heels of another company moving into content. to help us understand what is telco and content, we are joined by craig moffett. it is good to have you here. set the stage. we have a chart showing the relative size in terms of market cap of at&t and time warner. time warner is a media giant in the media world. it is not nearly as large as at&t. at&t is a much bigger company. >> much bigger by all dimensions. balance sheet, revenues. it is a huge enterprise. david: if they were to want to get together, why would they

want to do it? what does at&t need from time warner that it does not have? media inn is pursuing a different way as well. what both are struggling with is the core wireless business. the wireline business was already x growth. toward aned to move entertainment platform. directv is a distribution company, not a content company. david: you go back when comcast bought nbc. they were doing something like this coming from cable. >> absolutely, combining content and distribution. there is a big difference in that comcast bought at the bottom of the cycle. they were buying in 2009 at the bott of the trough. now at&t is buying after a long recovery. the valuations are quite different in the two situations. david: at&t might be interested

in content. it makes sense. how doable is this deal? >> count me as skeptical. it is very hard for at&t's balance sheet to expand to this size. if you glance at at&t's sheet on paper, the numbers are eye-popping with $120 billion of debt, that is quite understated. david: we have a bar chart of long-term debt we will show. there we go. at&t is on the right. verizon is the next one over. billion tohly $80 that number to get to the actual debt load. david: why doesn't it show up on the balance sheet? >> the biggest is the accounting organization is going to start counting operating leases as

debt starting in 2019. s&p and movies have already moved in that direction and started counting that as debt -- s&p and moody's have already started counting that as debt. costs.e unfunded pension there is another $80 billion. you have $200 of debt kicks their leverage up to about 3.5 times. david: let's assume this is a difficult deal to do. time warner has been paring down. people say it is more of a target now for possible acquisition. does this put time warner in play? >> absolutely. i don't think that is a mistake. we don't know who leaked the story yesterday. it is not crazy to think time warner is sort of getting the ball rolling with the process

that would smoke other bidders out. i think comcast would be unlikely to start this ball rolling for regulatory reasons, that they might find it hard to resist to step in. fox was there. the reason he did not want to settle last time was he wanted to wait until comcast and at&t were ready to be counterfeiters. bidders.er david: fascinating. time for other stories making headlines. courtney collins has bloomberg business flash. records. processes a number of currency trades during 50%flash crash the people's higher than the previous record volume. on october minutes 7, the pound plunged more than 6% against the dollar to the lowest level in 31 years only to

recover later on. a 50-year-old woman who died after a car accident last month in california is the 11th u.s. defectivetakata's airbag inflators. up to five people also may have been killed by the airbags in malaysia bringing the number of deaths globally to as many as 16. the airbags can inflate with too much force causing a metal canister to rupture and spray shrapnel. overheating property market study last month in the home rices rising. it rose in 63 cities, down from 64 in august. they are trying to avoid a damaging housing bubble without killing growth. i'm courtney collins. this is bloomberg. jonathan: coming up, we will look at e huge surge of

non-interest-bearing deposits at u.s. banks. counting down to the cash open about 40 minutes away. futures marginally negative. from new york, happy friday. this is bloomberg. ♪

jonathan: this is "bloomberg daybreak." speaking atrnor is columbia law school in new york at 10:15 eastern. then the san francisco fed president speaks as well. fed speak back on the agenda. david: cannot wait. now we will go to the battle of the charts. oliver renick is taking on laura keller. ladies first. >> i thought since u.s. banks ite wrapped up earnings would take us from trading into retail deposits and retail banks. the cht is showing us

non-interest-bearing deposits from 2010 up to the third quarter of this year. we are a little bit cut off on one side of the chart. it shows us the non-interest-bearing deposits, which is like your checking accounts that don't pay interest is a consumer, as have been rising over time. each bar represents four of the biggest banks in the u.s. the blue one is wells fargo. that bank has dealt with a lot openingals around unauthorized accounts for customers. it has been the fastest growing bank for deposits. they told us last month new accounts went down 30%. we may see change. as interest rates are on everyone's mind now, brian moynihan told us even when rise we probably will not be getting any more interest paid to us in those

accounts. that is a good thing for banks. david: thanks very much. oliver, what do you have? >> i immediately regret not being more topical since banks are the story. i know you like currencies. i am looking at a basket of seven different currency pairs to the u.s. dollar, their volatility over the next three months versus the s&p 500. the white line is the basket. pound/dollar. yen/dollar. this is the volatility expected in the next three months in the white line. the blue below it is the same term for the s&p. the bottom is the spread. you are looking at divergence where volatility in the currency market is still high. it has come off in the past couple of months but still relative high to history. the three-month fix on the s&p 500 has not gone anywhere. at about 1.4 times the volatility in the s&p50is

the lowest in a long time. something has got to give. currency volatility might be high, but i think we have seen the vix spike up and that is not a great thing for stocks. david: terrific chart. laura wins. jonathan: well done. coming up, industrial earnings. we look at the latest numbers out from g.e. and honeywell. p ex story we will dig into. features marginally -- futures marginally negative across the board. this is bloomberg. ♪

city,an: from new york

welcome to "bloomberg daybreak" on october 21. 30 minutes away from the opening bell in new york. we grind lower on futures down 94 on the dow. negative almost 10 points on the s&p 500. crude turning positive at $50 and $.40. we just you some losses from earlier in the session. euro/dollarr -- south of $1.09. david: here is what you need to know from other stories. a snapshot of the global economy. honeywell and general electric both out with earnings. g.e. cutting its forecast and honeywell posting is worst profit drop since 2011 -- first profit drop since 2011. poised toes hi hit a high thanks to the growing demand for cloud-based software. next week kicks off european

bank earnings as deutsche bank shares have recovered from the selloff. those are some top stories. jonathan: crude now trading at $50.45 erasing some of the gains early in the session. we will keep you up to speed on the market moves. the big story, inflation expectations have advanced to a high for 17 months. is theeves it central question. looking at crude, opec has underwritten the inflation story for central banks to a certain extent. >> we will find out whether central banks want inflation. i hate to talk about good and bad inflation. but inflation that goes up because we are paying more for helps.not inflation that

the reasons for banks think they need to generate a little bit of inflation, it is definitely bad inflation. $50 now, we were at $25 at the so intog of this year the start of 2017 we will see significant positive year-over-year oil impact. i asked him about the second round effects they worry about. they know crude is a stimulus. they worry about the second round effects. does this help them get out of that situation, the second round effects of low inflation? >> i am not that worried. i think we need to be honest about why a low inflation rate is such a bad thing. is it ise arguments

difficult to cut wages. his real wage gets cut because prices go up but in the end he gets paid less. that seems not a sound economic argument. david --ely underway's ts definitely underweigh david's worth. jonathan: let's listen to what he had to say. >> we are not in deep trouble on monetary policy at the moment. i would be reluctant to raise the interest rate target, the inflation target at this moment because i find t logic of you cannot get to 2% so you are raising the target to 3%. an ironicere is

and profound point. >> there have been discussions about central banks and criticisms. you were talking about the gulf peace. and even the e.c.b. are going to be facing the problem of having inflation above target if we have much of a run-up. what are central banks going to do? are they going to react and raise rates or will they give inflation were running room? i don't think it is such a theoretical discussion given what has happened in the oil markets and where the u.s. will be. core inflation in the u.s. is 2.25%. when oil starts. , october it should go to 1.7%. what happens when it gets to which is where we could be

by the spring of next year? jonathan: you mentioned the politician in the united kingdom. i wonder how much of a communities and problems central banks have with main street at the moment, how easy it is for a politician to go after them. she struggles with the concept of a central bank aiming to get her shopping bill higher. she does not understand the idea behind it. it is easy for a member of parliament to go after the central bank because they can voice that story. >> think your mother and my mother -- i think your mother and my mother understand higher inflation is not good for them. and yet we have the academics saying maybe we should have a 4% inflation target. david: you have to go back to good inflation/bad inflation. if it is 2.3% and gdp is growing

at 3%, i would take that. question is in a growing economy, are we just getting the price up? >> we will not get gdp at 3% anytime soon. david: that is why it is a problem. >> labor force has slowed 2.5% a year. we are used to more like 2% a year. toor force growth has slowed .5% a year. productivity has slowed. over the next five years, we will be lucky to get gdp growth at 1.5% in a fully employed economy. david: john ryding, you are staying with us. for an update on news outside the business world, we go to courtney collins with first world news. >> donald trump and hillary clinton together again in new york just one night after the third and final debate. charitysion was the event famous for its humorous speeches. both took shots at one another.

trump: you know, last night, i called hillary a nasty woman. but this stuff is all relative. after listening to hillary radel onand on and on -- rattle and on and on, i don't think so badly of rosie o'donnell anymore. [laughter] starting to like rosie a lot. hillary clinton: i have deep respect for people at kellyanne conway. she is working day and night for donald. because she is a contractor, he is probably not even going to pay her. [laughter] smith was new york's 30-second governor and the first catholic candidate for president. war fighting today after militants attacked targets before dawn taking hostages in

and around the city could result quickly claimed by islamic state was likely a bit converting attention from the battle to retake mosul. iraqi police say three militants stormed a power plant killing 11 workers before blowing themselves up. japan, a powerful earthquake with a preliminary magnitude of 6.6 has hit the western part of the country knocking out power to thousands of homes. but there is no risk of a tsunami. the japan meteorological agency says the quake occurred along the sea of japan about 430 files miles west of tokyo. news 24 hours a day. i'm courtney collins. this is bloomberg. jonathan: thank you. we are 21 minutes away from the cash open in new york. a negative tone coming into the market in the last couple of minutes. crude rolling over and futures down about 120.

let's go to julie hyman. julie: it does look like futures are following oil downward. the town has become more negative. the town has become more negative. the focus is also on individual companies. we have microsoft going higher after the cloud business letter to beat estimates. it may be trading at a record with the closing record in 1999. it may surpass that today. same-store sales were up 3.5%. that is better than the 1.5 cents estimated. helped by international sales and all-day breakfast in the u.s. general electric cut its forecast blaming slowing global economic growth. the company says it now expects

growth of 2%. that is what is responsible for the decline in those shares. david: thank you so much. g.e. is cutting its 2016 forecast as it struggles with a sluggish global economy. hedge funds having a tough time. the columbia business school professor joins us to discuss why managers are expecting to see pay cuts of up to 30%. this is bloomberg. ♪

jonathan: from new york city, this is "bloomberg daybreak." we are counting down to the open 17 minutes away. crude just rolling over to a session low. south down by about

.5%. we will keep you up to speed on the market moves. keeping you up to speed on the business news, honeywell posted its first profit drop since 2011. is this an indicator of a slowing global economy? still with us is john ryding and joining us is ralph bassett. choosing toals increase buyback instead of investing in cash. their outlook for the global economy is not pretty. does that tell us something? >> i think this has been the case for a while. we have seen most companies acquisitions and buybacks be the main use of capital because it is harder to invest in your business for five or 10 years when the payoff is more uncertain in this landscape. david: does it indicate something more profound about the economy? there's not a lot of capital investment.

the reason there is not capital investment is because companies do not believe in demand. is that what we should be reading into this? >> i think we can get into a wider discussion. on the policy front, there has been a lot of expansion. fiscal policy has been missing. that is one thing that might need to be had to see more expansion, especially in the industrial economy. >> i think ralph is right on the fiscal policy side. the reason we don't invest aggressively in the u.s. anymore is the corporate tax rates have stayed at 35%. the average tax rate in the developed world has fallen over the last 15 years down to around 25%. now there is a huge tax penalty for investing in the u.s., especially when you don't get taxed on your overseas profits you don't remit back. if you're faced with uncertainty and want to play cash -- deploy

cash, if you do a tax inversion deal this helps earnings-per-share. if you want to invest in collecting to invest in collecting solar power that might have a 10 or 15 your payoff, it becomes easier to play games with the capital structure than invest in stuff that makes a difference. john ryding reminds me of peter navarro who supports donald trump. he was here making that point. the reason there is not capital investment is the difference in tax rates. jonathan: betty the cash cannot come home and be deployed -- the idea of the cash cannot come home and be deployed, they still have access to the money. if that the only reason we are not seeing investment happening? >> there are a lot of reasons. leveraging balance sheets against cash is a risky game. the can only go on so long. it can only go on so long. we have been concerned about this dynamic and are seeing a lot of companies look for

acquisitions overseas. we have been engaging our companies and showing this longer-term thinking about the uses of capital. insight: we are getting .nto global economies coul truck demand in the united states is rolling over. we can bring up the chart and show you the tight correlation we have seen between gdp and fundamental truck demand. what will happen to the economy if these companies are saying the demand is not there, i'm going to pull back on investment? it snowballs quick. >> the economy goes into recession. ethe prophet investment dynamic is so important. you cannot stimulate demand by pushing interest rates lower or doing more qe.

profit margins in aggregate have started rolling over. we've had five quarters in wrote their profits for the whole economy have been down on a year-over-year basis. we don't have a sustainable dynamic. it is about wages, productivity growth, and pricing. the equation is out of balance. monetary policy cannot help. rvid: we've gotten to the word quickly -- recession. >> we think we will see tepid growth for the next few years. the fed is not forecasting recession. we brought up trucking. there are certain areas of the industry economy doing quite well. energy seems to have found a bottom. mining to the same extent. housing related companies are doing quite well. jonathan: the federal reserve

can look at the equity market and say the equity market is doing ok so things are primed for a rate hike. they will not say that the general consensus is they look at markets. they are putting the floor. market. these companies cannot find earnings growth and topline growth. they are not investing. the only thing they're doing is buying back their stock in boosting dividends. that?es the fed manage does it have anything to do with them? >> the fed is keeping interest rates so low it is cheap to play these capital structure games. apple to borrow to pay a dividend even though it has hundreds of billions of dollars of cash, because that is what the tax system distorts companies to do. i don't think this is a trial or hillary thing -- i don't think this is a trump or hillary thing. if you ask economists is our tax structure makes sense for

corporations, the answer would be no. it will be for the next administration. i don't forecast election outcomes like the fed does not forecast recessions. but this is the major impediment to getting productivity up an investment growth up in the u.s. jonathan: they caused them. david: trying to react to them. john ryding, thanks for being with us. assetbassett of aberdeen management will be staying with us as we talk about microsoft. microsoft shares poised to hit a record high after strong earnings and sales topped estimates. what is behind the boost? that is next. this is bloomberg. ♪

david: this is bloomberg. i am david westin. one stock moving is microsoft. julie hyman has more. julie: microsoft stock is

surging. earnings to talk estimates driven by growing demand for cloud-based services. let's dig into microsoft. the numbers don't lie. microsoft has been growing its intelligent cloud segment. sales rose over 8%. revenue from the cloud services more than doubled. the cloud is helping microsoft outperform even as demand for p.c.'s remains in the doldrums. the commercial p.c. related and consumer product growth. we have a tick up in commercial as consumer is flat to down. during this transition to more cloud-based services, you can see a return to revenue growth for microsoft. a rebound which may be an early side of transition -- early signing transition by the c.e.o. is paying off. microsoft made its largest ever deal when it announced the acquisition of linkedin. whichan expensive move

sets a high bar for microsoft prove it is worth it. the deal has the highest of at leasttiples $5 billion a year. microsoft valued it at more than 85 times earnings. despite opposition from salesforce, microsoft still expects to close the acquisition of linkedin this year. we will be following microsoft stock through trading today. it may rise to a record high. david: thanks so much. that was very helpful. to talk more about microsoft, we are joined again by ralph bassett. aberdeen believes in it because aberdeen owns some microsoft. what struck me was the shift. big believer was a in b2c. the new c.e.o. has said let's go to be to be -- b2b. is that working? >> microsoft is creating more

sustainable and recurring revenue which is exciting the market. there was concern previously about how relevant the windows platform would remain. the growth we are seeing, the fact they are able to pull customers through that were legacy microsoft operators is a good sign for the company. julie: i want to bring up something about the stock action. it has taken off. essentially, you had the post.com bubble bursting. a lot of people called it a value trap for years and years. after he took over, the stock has broken out. it may close any record today. it may close at a record today. what do you think the gains are given the new strategy he has brought to microsoft? therem our perspective, are a couple things we need to be balanced about. having more recurring revenue through the cloud platform is

going to increase the multiple of the company. it is also making it more capital intensive because they have to do a lot of capital spending to support the growth. that needs to be balanced against the cash flow generation of the business. that coincided with the refresh in refresh in windows and the office platform. you have a readmission of people upgrading. it has flipped positive and is growing nicely. coincided and have led to people getting excited about the company. jonathan: going back to david's point, it was a shift from b2c to b2b. companies are investing inefficiencies -- in efficiencies, tech efficiencies. will that continue? >> we have to be careful because it is not more efficient for every business. there are a lot of applications that want to be on premise.

when youutsource more of your functionality to microsoft, amazon, etc., it does a few things. it makes it easy to maintain that so there is cost you can pull people out of your business. is standardize is things which companies are looking for. jonathan: ralph bassett is sticking with us. julie hyman will get the markets open in a moment. we are counting you down. it is about four minutes away. we are down 106 on the dell, 11 points on the s&p 500. the ftse unchanged. the euro at $1.09 and crude rolling over. from new york, this is bloomberg. ♪

jonathan: from new york city, this is "bloomberg daybreak." i am jonathan ferro. moments away from the opening bell. futures negative. to the other asset classes,

crude bounces off the bottom as we approach $50 again. yields down two basis points. the euro is approaching a march $1.09 andouth of negative for a fourth straight session. we are about 10 seconds into the session. but crossover to julie hyman. julie: if you look at the major averages, you do have a pullback as we get underway this morning. the latest leg down in oil prices. a lot of the focus is micro as it tends to be during earnings season. the range on the s&p 500 has tightened up this week overall because people are looking at individual stocks. we are seeing much wider point swings because of what is going with earnings. it is interesting we look at

stocks overall declining because the movers i'm looking at happen to be going higher this morning. microsoftlking about shares higher. it looks like trading at a new record high. we will see if they hang onto that throughout the day. paypal one of the big gains today affirming the three-your forecast for profit and sales. there had been concern about that because of new partnerships with credit card companies. synchrony coming out with earnings of $.73. the net interest margin of this company 16.27% in the quarter, slightly above estimates. it is far above what you see for the larger banks. this company does more lower tier lending. that is one of the reasons why. mcdonald's coming out with numbers that beat estimates. particularly of note, global

same-store sales number up 3.5%. all-day breakfast part of that and also international markets performing well. jonathan: thank you very much. for more on these markets, let's go to ralph bassett. he focuses on small and mid-cap companies. you captured the story well. you talked about the margins the companies have to balance and the delicate balance between smaller margins and trying to invest in your own company. how does the small caps to recapture what is happening? companies, smaller spend much more than their larger peers so they are investing in a businesses which is more exciting. in this economy, they have to balance these things. we have seen a range of companies focused on margin expansion. there are areas of the market where the revenue opportunity is still there absent the economy. david: you are a believer in the

small and medium cap. you believe in the companies and believe they are undervalued. is that because of some dis-premium for recession? >> we cover all market caps. the smaller companies have underperformed which is unusual when you're going through an economy which is modestly accelerating. the valuation discount perhaps is the reason for concern. there has been a desire for many investors to have stability returns. if you look at larger companies, they have been more willing to give on the margin front to buy back shares. that gives you visible etf growth. small companies are volatile. you need to be prepared for the ups and downs. jonathan: let's talk about underlying volatility in the markets. the vix is a sign of

complacency. vol has been there. as a manager, you think there's opportunity. i want why and where. >> it has been more volatile all year. where the issues have been, energy which is certainly will know. there is the consumer discretionary sector where we have seen a lot of businesses struggle as they transition to whichommerce format pressures in store margins and they need to re-create their business models. david: talk about the risk involved with the small cap companies and why people are so reluctant to come into them. >> i cannot answer why they cannot come into them. there are various risk levels which dictate that. broadly speaking, the market has

come a long way. if you're going to participate, that is the riskier area. we don't see it that way. we see valuations are well supported at this point. david: ralph bassett of aberdeen, thanks for being with us today. european bank earnings begin next week. many investors will be watching. deutsche bank has been facing setbacks in the last month and is slated report next thursday. joining us now is german finance reporter. banke news today, deutsche shares are up because they are advising on the b.e.t. deal. is that correct? over the last couple of weeks, we have seen people have been less stressed out about the situation of the bank and worried about the finances. maybe realizing some of the carmageddon scenarios --

armageddon scenarios tossed around were not as likely. the bat deal is a bright spot. a lot of people will be happy about that. they will be able to show clients this is a big deal we have been working on an part of the business we can expand. whether it will be the motivating factor, i don't know today. jonathan: this is a bright spot. let's talk about the business. arm on massive trading this company. the earnings over the last week in the united states has been fixed revenue amazing across all wall street banks. the story is growth. has the pie gotten bigger or have they taken it off deutsche bank? what are investors saying? next week is the big one.

what are the deutsche numbers going to say? >> the analysts have become more willistic saying revenues not fall quite as far as people feared in the fixed income space. that is a very good point. some of thisest pie came from deutsche bank. deutsche bank would say we have been pulling out of businesses anyway. did a rising tide raise all ships which would be positive for deutsche bank or did they believe this quarter? people are further down on deutsche bank but not as bad as two weeks ago. david: in addition to finding out how deutsche bank has done, the we hope to find out where they are going? there have been reports of cutting back investment banking in the united states. do you think we will get guidance on that? >> we are still in the realm of

speculation. there was a note from citigroup today saying the c.f.o. and not the c.e.o. is doing the call next week. it suggests to them there will not be a major strategy revelation. know whatople want to is happening with the bank. are the steps they've taken enough? cutting 9000 jobs, is that enough? do they have to go further? david says he sees a 30-40% cut as the end state. people want more on where this is going and an update on whether the bank can do more. jonathan: you follow this as well as anyone at bluebird -- bloomberg. he went in and spoke german and the investor base loved it. they have endorsed john cryer on

what to do with the bank. have things changed? change investor pressure given what we have seen happen? what's that is a good question. them thatrnationally she does have a lot of support. some reports would say the opposite. know how he can do what he wants to do quicker. sayings is running out we know this is the right plan. we support you. you are the right guy. but we want to see results sooner. it is a tight spot for him. a lot of it is out of his hands. it is deals of regulators. the d.o.j. on mortgages is a huge millstone for them. when they move past that, maybe investors will be happier. he is in a tight spot.

there is not a lot he can say at this stage. david: what sort of timetable are we talking about? how long are investors willing to give him to start showing signs of tangible progress on the legal overhang? bank has said the this will be a peek restructuring year. investors say we get it we would like to see progress by the third quarter. see progresser we this next week or not is a matter of debate. the fourth quarter we will see the headcount come down of the bank. that could be a positive. we may see the risky assets come down this quarter. that could be a mark of success r them. lel stuff is out of their hands. they want to close the two biggest settlements on their plate this year. if they can pull it off, that will be a major success. again, it is out of their hands

to a large degree. jonathan: nicholas comfort, great to have you with us and looking forward to your coverage next week. david, a remarkable situation. look at what john is dealing with. he is dealing with the d.o.j. fine that will come through soon. not his problem, he walked into that one. the pressure is to go quicker because it might be $14 billion and they heavily set aside $5 billion or $6 billion. he inherited all of that. david: people have a lot of respect and affection for john cryan. they say he has the toughest job around in the banking industry. it is not his fault but it is still his job and he has to do something about it. jonathan: we will get the numbers from deutsche bank thursday. coming up, we will take you to the world of hedge funds. it has posted 2% annual average returns. can they regain their luster? we will discuss.

we are 11 minutes into the session. stocks down about .5% on the s&p 500 and dow. from new york, this is bloomberg. ♪

>> this is "bloomberg daybreak." i'm corny collins in the hewlett-packard --i'm courtney collins and hewlett-packard green room. the chairman and c.e.o. joins to recap his company's earnings. jonathan: from new york city,

this is "bloomberg daybreak." we are about 15 minutes into the session. we are down about .5% on the dow. nine points on the s&p 500 could the nasdaq lower as well. to wrap up the moves on the nasdaq, we can catch up with abigail doolittle for a couple of movers. good morning. >> we do have the nasdaq down slightly on the open. on the week, the nasdaq is on pace for its first weekly gain in three weeks. it will be interesting to see where the nasdaq does close today. as for one big winner, the biotech shares are soaring after the company did say it's depression drug met the primary endpoint in a phase three study after previous trials failed. we have investors relieved. the company is saying they will request a meeting for the fda on future steps. the street is bullish. there is at least one upgrade. several price target on this.

is on pace for its best day in more than 16 years. faring less well on the open, advanced micro devices lower after the company gave fourth-quarter revenue guidance that missed some estimates. 18%ill represent a roughly decline from the third quarter just reported. the bar was very high going into the quarter. several upgrades recently. the street very bullish on turnaround prospects. it is important to remember this stock down today but a big winner on the year. david: thanks. we turn now to hedge funds. low returns and rising fees push investors out. managers face an estimated 34% reduction in pay. for more on what these pay cuts mean for the industry, we are joined by the columbia business school professor. i want to take up on the headline. struggle toanagers

manage their measurable new world. why is it so miserable? >> you're seeing assets go out. to working at a hedge fund. you are seeing more want to leave for the dark side, mutual funds, or than anywhere else. people want to go to mutual funds because the high water mark. you're at 100, the next you're down to 80. you have to make 25% to get a performance bonus. the bases are lower at a hedge fund where it is less performance dependent year on year. . compensation scheme bite you on the backend. it is great on the upside but when it goes down, it can kill you. . >> a lot of these funds are built up as teams.

david, you are running half of the fund. i am running half of the fund. you have done great. you are up 20%. i am down 20%. you and your team expect to get paid. we are working in separate buildings. the fund has earned no performance. it is a wash so there's nothing to pay your team. that tears funds apart from the inside in a way that does not happen and a lot of other organizations where one side will pay for the other. that is called nesting risk. it is incredibly destructive and hedge funds. it becomes a miserable place to work. jonathan: where is the talent going to go if they do not like it? revenue out of banks, great. smaller assets, revenues up. thanks her ok. those guys will not go back to the banks. the banks are ok. where will the talent go? >> some of it will go -- with

they are looking to do is popular is family offices where you have less of the market to market presser -- pressure and can do more innovative things. that is the theory. and mutual funds. why not go to a mutual fund? for a lot of people leaving, they have not made money on the short side in years anyway. they have to walk away from that but i don't care because i am no good at it. that is what they will be thinking. david: does the compensation structure in a mutual fund mimic that of a hedge fund? >> not even remotely. much higher base. much lower bonus. it is generally paid out on the smarter funds. it is a combination of your three-year and five-year performance. it is a glacial movement. it is not eat what you kill. it is not feast or famine.

think what is happening is "this is the business we have chosen." that is the famous line. attracted when the market was going up are discovering how and -- unattractive that can be with the bases and market going down. jonathan: i visited a well-known hedge fund manager who threw a piece of paper to me and it was a printout of a newspaper. the headline was the death of hedge funds. he said check the date. it was the 1980's. we are this game so many times around hedge funds. isn't the bottom line returns? it has been great to track the index over the last decade or so. you go active when he returns start to come back. these there any reason to say returns will not come back and this is not an industry facing the end? >> this industry has seen the increase in assets over the last

quarter for all the death and destruction. for the 34% decline quoted by odyssey partners, they are some of the smartest people i know. we are talking about a decline from $400,000 down to the high $200,000. yes, it is a 34% decline. you are not getting that it bank of america. it is still lucrative. when we look at the city of new york complaining about the performance numbers, not everything is versus the s&p. the s&p is not going straight up forever. hedge funds are absolutely fine. jonathan: a bit of a reality check. thank you very much. hour, "bloomberg markets." that means vonnie quinn takes over. what is coming up? >> central bank divergence might be a greater catalyst for the euro than brexit. we are seeing a below those

levels today. we will be talking about currencies. it is strong equity wise and currency wise. what is driving that and what is to come. with us him in mcveigh -- henry mcvey to come on the program. g.e. and honeywell. he will parse out what it means for the u.s. economy and investors starting at 10:00. jonathan: looking forward to the program. thank you very much. we are about 22 minutes into the session. stocks down just over .4%. we will look ahead to next week, a big week for earnings. that is next. from new york, this is bloomberg. ♪

jonathan: this is "bloomberg daybreak" from new york. a big week for earnings. we will hear results from

european banks and big tech leaders as well, including apple and deutsche bank next thursday. weekend, sunday at 12:00 eastern, we start season five of "studio 1.0." emily chang sits down with the c.e.o. here is a look at the exclusive interview. >> we had a lot of people asking for sponsored filters at one point. there was a company that wanted a teeth whitening filter. that is a funny example. but it makes sense because we have filters, we should probably do sponsored versions. we focus on doing the right thing by the consumer which is to make them not so commercial and focus on what people love most about them. there are decisions like that every day. they are easy where you can make a few bucks but they add to the complexity of the product and does not add a lot your bottom

line either. david: you can catch the entire interview with the instagram c.e.o. on sunday at 12:00 eastern in the season five premiere. looking forward to next week, deutsche bank will be interesting. jonathan: deutsche bank is number one. we have had a slew of earnings and they reported growth. you wonder whether the pie got bigger or they stole some from deutsche bank. he does not know how much he has to reserve. jonathan: that is the big problem for them. 26 minutes into the session, a marginal move for the dow. negative six on the s&p. thank you for the whole team. this is bloomberg. ♪

from new york, i'm vonnie quinn. to "bloomberg markets."

vonnie: new york to london and cover stories in washington, brussels, and asia in the next hour. a potential tie out for big tobacco. billion to pay $47 the rest of reynolds american. mark: the greenback rising, the euro falls to the lowest level since march. we will bring you perspective as wehe global strategist close out the week of trading. jokes: donald trump's strike a sour tone. boos from the of crowd. about 30 minutes and the tradi