francine: a trump shaped shadow looms over the fed, minutes from the december meeting show policy uncertainties and the possible impact on growth. demonstrators descend on goldman's new york headquarters as the president-elect picks a wall street insider to be his top regulator. is this draining the swamp? the offshore yuan posts its biggest two-day gain on record. and, with the pound under pressure u.k. businesses see themselves having to up their prices. how bad will the consumer

squeeze be weston mark this is what we will try and find out. this is "bloomberg surveillance ." first thing's first. we need to check on the markets. this is what your data looks like today. the yuan extending gains. hong kong lifting asian stocks. the stoxx 600 in europe practically unchanged. euro and gold extending some of their gains. we're looking at offshore yuan recovering from an earlier loss. meanwhile, yen in line for the strongest levels in more than three weeks. 116.28. 20 more on the markets shortly. let's get to the bloomberg first word news. here's sebastian salek. sebastian: the fed minutes show donald trump's plans may force rate hikes at a faster pace. policymakers saw an increase in the upside risks in their growth forecast and many were worried they would have to quicken the pace. the fomc's next session is at

the end of the month, with its decision announced on february 1. donald trump has picked a wall street insider to be his top regulator despite railing against the industry on the campaign trail. he will nominate jay clayton to have the sec. clayton has represented financial firms throughout his career. trump has previously attacked his opponents for their ties to goldman and other wall street banks. the influence of goldman sachs on the incoming administration sparked demonstrations at the bank's headquarters. intesters unfurled banners the lobby before being ejected. vowed to demonstrate again on january 17. u.k. businesses will have no choice but to raise prices as the week pound continues to force up the cost of imports. that is according to the british chamber of commerce.

>> there a huge amount of diversity of views in the business community. that continues now. business and the u.k. as a whole would be better served inside the single market. there are also those who believe they would be better outside the single market. that hasn't changed simply because the referendum vote has happened. businesses are evaluating those possibilities. sebastian: china's efforts to choke capital outflows are beginning to pay off. the offshore yuan has experienced its biggest two-day bounce on record. chinese policymakers are encouraging state owned enterprises to sell foreign currency. it coin has hit a record high. in popularity grows

countries where traditional currencies are controlled. china and india have helped drive up its value. it coin beat every other currency as an investment last year. global news 24 hours a day powered by more than 2600 journalists and analysts in more than 120 countries. francine: thank you so much. it's a challenge fed officials haven't talked about in years, the prospect of the economy running faster than they anticipated, forcing them to raise rates at a quicker pace. the long shadow of trump and his tax reform and fiscal stimulus proposals were evident in minutes from the fomc december meeting. though he was never mentioned by name. almost all participants indicated the upside risks had increased. s&pchief rating officer at told us how trump is weighing on the fed. >> if you have a fiscal expansion in an environment where you might think you're getting close to balance in full employment, this of course is

something that puts the central bank on guard. that is not a surprise at all. francine: let's introduce our guest for the next hour, sarah hewin, chief economist for europe at standard chartered. patrick armstrong is cohead of investment management. thank you for joining us. patrick, we were on set last week, discussing trumponomics and the fed. what did we learn from fomc? patrick: not much. we got a good indication in december. yellen already alluded to some members talking about the increased potential for fiscal stimulus. the one thing i took out of the minutes, there's upside risk. they already raised the dots and all the members did say there's upside risk beyond that. i think they are in the same boat. they don't know how aggressive this expansion will be. but i think they are ready for it. they know there will be consequences and they will have

to react accordingly. they didn't really change their gdp outlook. they raised the dots without changing their gdp outlook. that is recognition that the higher interest rates and stronger dollar will come from that. francine: sara, you don't believe they will only hike once next year? sarah: there were some provisos in the minutes. we saw the mention of the strong dollar, the concerns potentially about tighter credit conditions, some fednk the fed, or members, are still reasonably cautious on inflation. our view is that the economy will not accelerate very much ,his year compared to last year that's underlying inflation pressures will stay muted. the fed will therefore, very much as we saw last year, stay ready to raise rates, but

actually want need to take that step until the end of the year. francine: patrick, i want to bring you to my inflation chart. you are expecting three hikes from the fed this year. i was going to say next year that we are in january. this is a picture for inflation. in white, you have core inflation in the states. in yellow, actually, pc core inflation. it is kind of a yellow orange. white is investor inflation expectations five to 10 years out. you can see the trend going higher a little bit. does it mean the markets have to reprice if they get disappointed by what the fed does? patrick: i'm not sure what you mean. francine: reprice in terms of how much is already priced in. patrick: the hikes aren't priced in. you're looking for one. i think the market is on the cusp of one or two. we think it is three. if you are sitting as a fed

member, you are looking at an economy with wage growth of a 3%, unemployment at 4.6%. the potential for that is much likely to fall with fiscal stimulus. we got inflationary pressures there. look at the manufacturing, the services, all of that consistent with 2.5% gdp growth. why do you need a stimulative monetary policy when everything is actually working? francine: do you think that donald trump will disappoint in terms of what he's promised in infrastructure spending? there's a lot that is already built into expectations in terms of what trump may deliver. i think that we are more cautious both on the scope of any fiscal stimulus and also the timing. we think that it will take time before tax cuts can be agreed,

and the impact starts to feedthrough to the economy. we are a little more cautious on how far infrastructure spending can take off. we think there could be constraints from congress in terms of what they are prepared to see on the deficit, allowing the deficit wide enough. if you don't have spending cuts, welfare spending cuts to offset some of the tax cuts that have been proposed. we think fiscal stimulus is really only going to make itself in 2018, rather than this year. francine: we will talk about currencies next. patrick has a bold call, parity in euro-dollar. stay with us. tomorrow, don't miss our interview with the dallas fed president, robert kaplan. the voting member of the federal reserve will join us from chicago. that is 5:00 p.m. u.k. time.

sunday coming up, including troublesome trump. the president-elect's picks are causing more concern stateside. plus, consumers set for a squeeze. u.k. business is worn they will have to put up prices. offshore strength. the yuan leaps. this is bloomberg. ♪

how does one know what donald is going to do as president given the many things he said? but certainly there is no good case for a major deregulation. the idea that america or any other economy is held back by too much regulation, i think this is a fantasy, a childish approach to the economy, which has no justification.

francine: that was the former head of the u.k. financial regulator with his take on donald trump's plans to womack wall street regulation. here are some pmi figures. we don't often get them at 9:10. they did come out at 9:10. eurozone retail pmi, 50.4. a little better for the eurozone as a whole. a little bit better than the month before. anything above 50 indicates not a contraction, so it increase. a look atve euro-dollar and the impact there. now, back to donald trump and the perceived influence of goldman sachs on his incoming administration. that sparks protest at the bank's new york headquarters. 40 demonstrators unfurled banners in the lobby before being ejected. they criticized goldman's role

in the u.s. housing crisis and the long history of former executives taking senior posts in government. that came after the president-elect picked wall street insider jay clayton to have the sec. senate democratic leader chuck schumer says his party views choices trump's cabinet as the most troublesome. let's get more with stephanie baker, who has been covering trump for us. several hewitt and patrick armstrong also with us. comingie, thank you for on. mr. schumer says he wants to take his time in giving the go-ahead. how unusual is this? i don't -- stephanie: i don't think it is unusual. the democrats don't have the votes to stop a lot of these employments, but they do have tactics that can delay the process. toy've targeted eight picks sort of target a dragged out

process on this. what you are looking at is potential that his administration could be delayed by months. it is partly because so many of his picks have complicated financial arrangements. they are saying, we need all the documentation to have time to review it in detail. it is a rushed process. there's a lot to do for these people. rex tillerson has a very complicated financial arrangement. how much he needs to divest, etc. francine: are there one or two candidates were people in the administration that are more controversial than others? jeff sessions is one they said they were going to target. rex tillerson is another. anyone with those complicated financial arrangements, conflicts of interest that face them, those will be very contentious appointments. francine: the head of the sec,

another goldman person. stephanie: i think that brings goldmanur now with connections if you include steve bannon, steven mnuchin, and gary cohn as his top economic advisor. i think it reflects that he is going to roll back regulation and views the sec's role as primarily a capital raising function rather than a regulatory function. francine: does rolling back necessarily mean less regulation? stephanie: he's talked about rolling back dodd-frank. oflayton was the chairman the bar association when it released a report very critical of the foreign corrupt practices act. to see aou are going rollback on some key regulatory initiatives that obama took on during office. francine: are you buying

industries that you believe will be deregulated? patrick: biotech is one. we don't have u.s. financials. they just ran away from us. i think you can still make the case. they are not that expensive. we prefer financials in europe because they are half the price. it is potentially a value trap, but much cheaper. francine: biotech, anything else? patrick: we don't own oil. you can make the case there, but the priceec is in now, historically, so i don't want to be chasing oil right now either. francine: now, sara, how diffics it to model? i was told that it is not the quantity, it is the quality of regulation. you can have good regulation that does the job better than more regulation, but how do you model less regulation and the impact on gdp or growth? sarah: it is very complicated.

again, it comes down to the if donaldw quickly does follow through on many of these promises, how quickly can they be implemented? regulation takes a long time to put in place. it takes a long time to extract as well. we need to be cautious about making too many assumptions too quickly about what any potential deregulation can achieve. francine: thank you so much for now. sarah hewin and patrick armstrong, stay with us. up next, could the perfect storm of monetary tightening and the structural return of inflation mean we are heading for the worst bond rout in history? this is bloomberg. ♪

francine: the president of toyota motor is speaking in tokyo. he has said he will consider trump decisions when deciding on the mexican plant. let's remind you what they said so far on mexico. back in april, toyota said they will spend $1.4 billion to build car factories in china and mexico. mr. toyota now saying he will rethink that after the president-elect put so much pressure on ford that they decided yesterday to stop opening a new plant in mexico and bring it back to the u.s. patrick armstrong, you invest in the markets. how do you stock pick when

donald trump could decide on a whim to tweet about a company in a bad way? patrick: it is difficult. i think he's achieving a lot with it. i think he's got the mindset almost of a toddler, which sounds like an insult, but it is a very effective strategy. children have a tantrum. he gets what he wants quite often. with his tweets on gm and ford, they are giving him small wins, trying to get onside with him, and you know you suffer consequences if you do things that are legal, legitimate, but may affect what donald trump is tying to deceive -- trying to achieve. trump is getting, without putting policies in place, companies to behave as if there are tariffs in place already. without him needing to change policy, he's getting some of the effects he wants. francine: let's get more on the markets. here's a view, that it will

cause bond investors some sleepless nights. if the debt bubble bursts, it will be worse than when government bonds suffered the biggest annual loss on record. that is the opinion of a harvard academic. he says the market is confronting the perfect storm of monetary tightening and a structural return of inflation. sarah hewin, are we overanalyzing? is there a real risk that 2016 is a make or break year? sarah: let's look at what is driving inflation. so far it has been oil prices. we no longer have oil prices dragging on inflation. now, since the opec meeting, we have higher oil prices. what does that mean for economies overall? the u.s. economy is doing reasonably well. elsewhere, we see some signs of slack, particularly across europe. underlying inflation, i think,

is going to stay week. we may see a temporary spike in inflation. ultimately, the outlook may not be as bad. francine: patrick, what are you expecting for bonds this year? patrick: i think there's still further to play out. equity investors are a bit overoptimistic on the economy. bond investors still aren't pricing in the reflation and expansion of the economy. i think it is the traditional mindset of those types of investors. francine: you expect both to level out? patrick: we are short u.s. equities net even though we are bullish on the economy and we are short duration as well. typically a 10-year bond yields its nominal rate of economic growth. that puts the u.s. treasury at 4%. you're going to get 2% inflation, 2% economic growth, and there's upside to that. anything below that is below a fair value, historically.

there have been measures put in place that have suppressed interest rates, but fair value, that is the long-standing rule of thumb. interest rate are still below fair value. francine: are you expecting more volatility in currencies? patrick: equity and bond volatility right now is the same on an implied basis. we've only got 12.5% implied on equities. on 20-year bonds, 14% implied. both of those, i would rather think equity volatility is going to go up more. francine: thank you so much. sarah hewin and patrick armstrong. pound under pressure. we talk brexit and u.k. business. this is bloomberg. ♪

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private wifi for your business. strong and secure. good for a door. and a network. comcast business. built for security. built for business. hey, drop a beat.flix? ♪ show me orange is the new black ♪ ♪ wait, no, bloodline ♪ how about bojack, luke cage ♪ oh, dj tanner maybe show me lilyhammer ♪ ♪ stranger things, marseille, the fall ♪ ♪ in the same place as my basketball? ♪ ♪ narcos, fearless, cooked ♪ the crown, marco polo, lost and found ♪ ♪ grace and frankie, hemlock grove, season one of...! ♪ show me house of cards. finally, you can now find all of netflix in the same place as all your other entertainment. on xfinity x1. francine: this is "bloomberg surveillance." let's get to the bloomberg first word news. sebastian: the latest fed minutes show donald trump's plan for tax cuts and spending may

force rate hikes at a faster pace. policymakers saw an increase in the upside risk to their growth forecast and many were wondering about whether they would have to quicken the pace to head off inflation. the fomc's next session is due to start the end of this month. a walltrump has picked street insider to be his top regulator, despite railing against the industry on the campaign trail. he was on the night -- he will nominate jay clayton to have the sec. attacked previously his opponents for their ties to goldman and other wall street banks. of perceived influence goldman sachs on the incoming trump administration sparked a demonstration at the new york headquarters. about 40 protesters unfurled banners in the lobby before being ejected. they criticized goldman's role in the housing crisis and former executive taking senior posts in government. they vowed to demonstrate again

on january 17. china's efforts to choke capital outflows are beginning to pay off. the offshore yuan has had its biggest two-day rise on record. chinese policymakers are encouraging state owned enterprises to sell foreign currency. ascoin has hit a record high its popularity grows in countries where traditional currencies are tightly controlled. adoption of a digital currency in china and india has helped drive of its value. bitcoin beat every other currency as investment last year. day i news 24 hours a would buy more than 2600 journalists and analysts in more than 120 countries. francine: thank you so much. this is what we are seeing in terms of u.k. december services pmi. this is for the u.k.. it is rising. we had estimated, or economists had estimated, 54.7.

this is a picture for pound. probably the one thing we need to look at versus the dollar, 123.14, a slight leg up, but overall we are not only seeing expansion, but some pretty strong data out of the u.k.. u.k. businesses will have no choice but to raise prices and the weak pound continues to force up the cost of imports. that is according to the british chambers of commerce. the pressure is greatest on manufacturers, with companies expecting to pass on price increases to consumers. there a huge amount of diversity of views in the business community. that continues now. there are those who believe that their own business and the u.k. would be better inside the single market. there are those who believe their business would be better outside the single market. that hasn't gone away.

it hasn't changed because the referendum vote has happened. businesses are evaluating those possibilities. francine: the u.k. prime minister has named career diplomat tim barrow as the next ambassador to the european union. the move came barely 24 hours after his predecessor resigned. in a message to his staff informing them of his resignation, rogers piled criticism on theresa may's government for not having a clear brexit plan. still with me, sarah hewin, chief economist for europe at standard chartered, and patrick armstrong. when you look at the u.k. and brexit, the sequels and the consequences of that referendum, we haven't had any. the economy is pretty strong. will we start feeling the pain next year? sarah: the economy has held up better than expected. investment,e saw

business investment, also remaining pretty stable. this year, it may be a different matter. we haven't had brexit yet. article 50 is likely to be triggered at the end of this quarter. we may see businesses at that point taking decisions they've delayed. anything also you will start to see an impact more broadly on consumers as a result of higher inflation coming through, higher oil prices, and also the impact of the weaker pound. that is going to be a multiyear impact. francine: what is your best case scenario? if you are the bank of england, how do you model what theresa may's negotiating tactic will do for the deal that we end up with? sarah: it is tough. if you are the bank of england, how do youthe government doesn'o have a plan at the moment. it does look likely that we are moving towards a hard brexit.

the question is whether we stay in the customs union or leave the customs union. this impact ultimately is not going to be felt for several years. the question is, more immediately, how do businesses and consumers respond? when you look at the bank of 's weaker forecast for the u.k. economy, that was premised on sentiment. this year, we will see consumers facing higher prices and not necessarily getting waging creases to match. francine: patrick, what does it mean for pound? a lot people are calling it lower. patrick: we talk off our short found in december, when the courts ruled that they may have to go to a parliamentary decision on brexit. we used that as the time to take off our short. we think the currency is reflecting brexit risk. you see the fall from 1.50 down

to 1.22 against the dollar. our worry is that equity markets aren't pricing in the risk. we are shorting the ftse 250, which is very cyclical. we think they benefited from a tailwind from the weaker sterling a bit, from the bank of england cutting interest rates, and they've had inventories that they are drawing down now. they are having to pay more to import goods now. francine: if you look at -- patrick: the ftse 100 is completely different. it is foreign revenues, international companies, a more global environment. francine: helped me understand, because you are acting in the markets, do you listen to theresa may's free speech? do you give yourself until article 50 to understand the idea better? to be such is going a long, drawnout process. i don't think anyone knows where

the endgame is for this one. is anything really going to happen until the german elections? that is when real negotiation can start to begin. does europe ever do anything in two years? it is very unlikely we get to anything. it would be good news for risk assets if we have a transitional period. sarah: i think that is a key point. is there going to be a transition period, and how soon do we know that is going to happen? for businesses, the sooner we know, the better. from our he you partners' point of view, that may be something they are only ready to agree at the last minute. francine: how important is the supreme court? if the supreme court says you need parliament to trigger article 50, what does that mean? she will be able to get it through, i think. there will have to be some discussion at least. she will have to open her hand a little bit.

she won't completely open that, but i think all that may soften brexit a little bit, but i don't think there's a risk that she can't trigger article 50. but that doesn't mean i'm 100% sure she will trigger it by the end of march either. francine: we also have to talk about turkey. the turkish lira hitting a new downd low versus dollar, 1%. we were talking about it yesterday on the show. the central bank of turkey refusing to address the inflation problem they have. we will get plenty more on turkish lira. stay with "surveillance." after the biggest ever to-day jump in the offshore yuan, we will focus on china, capital outflows, and where its currency could go. has deutsche bank found a way to give relief to subprime mortgage borrowers without using its balance sheet? and is european inflation

finally getting off the ground? this is bloomberg. for more, tune into radio "daybreak europe" on da be digital. this is bloomberg. ♪

francine: this is "bloomberg surveillance." let's check in on the markets. here's nejra cehic. nejra: i'm starting with gmm just to give you the big picture view. if we look at equities first, we are seeing a mixed picture. lower in greece and portugal. 0.1 percent.y seeking gains in luxembourg and some other markets. 1.2318., it was one of the few currencies down against the dollar.

most others have been rising. the euro up 0.2%. swiss franc higher as well. some yields ticking higher in europe. the 10-year gilt yield higher, for example. we've commodities space, got a bit of a move upward in a lot of commodities. brent crude off by 0.4%. 600, weok at the stoxx pretty much unchanged. we saw gains in asia and the u.s. yesterday. some of this could be down to the stronger euro. day,uro, up for a second extending its gains after the eurozone pmi and inflation data. this chart perhaps showing a bit of a link between the two. the big theme in fx markets today has been dollar weakness. it seems like investors have been interpreting those fed minutes, focusing on the

uncertainty rather than the comments that rate rises might be faster than currently anticipated. bloomberg dollar index in white. its biggest drop in almost four months after those fed minutes. the 10-year treasury yield is pretty much unchanged now. one the flipside, gold moving higher. seen gains in 2017 after its worst quarterly slump since 2013. guess what else has been gaining. the offshore yuan. this weekend to an all-time low in 2016, but it has changed course is the new year has gotten underway. today we've seen its biggest two-day advance on record. francine: thank you so much. let's get more on the yuan now and china's efforts to choke capital outflows. the offshore renminbi has experienced its biggest two-day

advance on record as traders scramble for a currency that is becoming scarce. chinese policymakers are encouraging state owned enterprises to sell foreign currency. still with me is sarah hewin and patrick armstrong. at -- wewhen you look talked about this last year, but when you look at china, it is probably one of the biggest risks. we can leave the trade wars to one side. and it isa trilemma difficult to stabilize all three at once, reserves, currencies, and outflows. patrick: definitely. we are short the renminbi. it has been working over the last few months. we think it moves to 7.5 this year. we've got some trump trades on. the risks are protectionism and tariffs. that could hurt china.

to offset some of the long trump trades, we've got the short renminbi as a nice hedge against that. francine: are you worried about china? 2017 abiggest risk of risk that we haven't talked about? sarah: certainly this time last year china was the big concern for a lot of market players. we're still more upbeat on the prospects. there's a strong commitment from beijing to maintain growth. we've got an important meeting at the end of this year. 6.5% to 7% growth rate, there is a letter of support for that. measures will be taken, perhaps more on the fiscal side, to ensure that growth continues. we shouldn't be too concerned, i think, about the prospects. the trade concerns, i think, are worth bearing in mind for the future. we expect that trump will follow

through on some of his threats on tariffs, though not to the extent of the 45% he was discussing during the campaign. that is one potential fly in the ointment. francine: patrick, is there anything that could go wrong outside of this trilemma? i've thinking -- i'm thinking of nonfarm loans and banks. patrick: they are at speculative levels now. gethat starts to cool, you that wealth effect in the opposite direction. that effects the consumption. when you have a managed currency, it doesn't seem to end in an orderly manner. they spent hundreds of billions of dollars trying to defend the value. at some point, they will have to allow some capital outflows. that will act as a boost. francine: if they did give in more to market forces, which way would it go? patrick: i think the renminbi

definitely goes lower. if it was a free market, it .5 percent is probably where it would go to. if everyone was allowed, there would be a lot of capital outflows. francine: this goes to almost all emerging markets. sarah: yes. i think they are trying to make sure that, first of all, it doesn't necessarily make sense to have a cheap renminbi policy. trade is not the driver of growth in china. seen, theirwe've efforts increasingly are being effective in terms of limiting capital outflows. most recently, tightening on retail and household capital allowances. i think there's a degree of success there. reallythe renminbi continuing to be determined against the basket of currencies. that broadened out to more

readily reflect trade relations between china and its major trading partners. francine: thank you so much. sarah hewin from standard chartered, patrick armstrong. up next, have germany's biggest banks found a way to give relief to subprime mortgage borrowers without using its balance sheet? we will bring you that story. this is bloomberg. ♪

francine: this is "bloomberg surveillance." i'm francine lacqua in london. let's get to the bloomberg business flash. sebastian: volkswagen has been told it must face claims it misled u.s. investors after installing d.c. devices. -- defeat devices. a judge rejected the request to dismiss claims against martin winterkorn, who said investors couldn't prove he knew the extent of the diesel issues. a spokesman didn't respond to request for comment. byy's plans to cut 6200 jobs 2017. holiday sales came in at the low

end of its forecast. the largest department store company in the u.s. will cut its annual forecast. fell inhares after-hours trading. apple is planning to invest $1 billion in softbank's new technology fund. this adds the iphone maker's name to a growing list of parties in the vision fund, due to launch in london this year. well, also said it will participate. according to a person familiar with the matter, foxconn and larry ellison also plan to contribute. francine: thank you. as part of its $7.2 billion settlement with u.s. authorities, deutsche bank is supposed to give relief to mortgage borrowers. according to people with knowledge of the matter, deutsche is considering lending money to equity firms so they can buy the loans. let's get the story with michael moore. sarah hewin from standard chartered and patrick armstrong are still with us.

michael, they basically have to buy subprime mortgages back to give some relief to the people that the doj say they cheated. there's a few ways you can do consumer relief. you can write down some of the mortgage you have. you can offer some relief that way. deutsche bank is saying, we lend to these companies, they do consumer relief, so we should get some credit for that. supposed tonts are produce additional consumer relief, and if you are doing this anyway, that is not additional. we will see if the doj allows this to be part of that $4.1 billion total. francine: what are the pitfalls? they are perceived as the ugly, hungry bank in doing things like this? would be athink it help to capital if you don't have to do additional loans, but the pitfall is that the doj says this is not additional consumer

relief, so we're not going to allow this to be part of your total. francine: they can just say no to it? michael: it is all part of negotiations. this falls under the category of, it can't hurt to ask. francine: when do we find out if this is allowed? michael: they are hashing out the details over the next few weeks. francine: we talked about deutsche bank in the past. do you have concerns about their business model? for deutsche7 mean bank and finance stocks in general? sarah: -- patrick: there's always got to be concerns. they are clearly articulated by everybody. we haven't bought deutsche bank outright. we've bought some debt in the summer. i don't think there is much question around the profitability. there are questions on the extent of fines and nonperforming loans. i think it is reflected in the stock price, trading at about half of tangible book value. and we forget

sometimes that when we have a monetary system, it is the banks that are the primary conduit of this. can they do their job properly in lending the cause of regulation and concerns over share prices? sarah: this is the big worry. encouragingly, we have seen bank lending picking up across the euro area after a long period of deleveraging. clearly it is a very slow process. bank lending to corporate's is still growing under 2% a year. you can argue that there's more scope that is required. the good news is that the cost of lending is still very low. companies across the region are able to borrow relatively cheaply. credit constraints are easing gradually. francine: michael, we are gearing up for davos. what is the crucial questions that bankers will want to talk about?

is it regulation or interest rates? patrick: i think it is going to be regulation. finally you are going to swing back and we will start to see some deregulation, or at least the end of new rules. i think that will be the big question. francine: michael moore there from bloomberg. sarah hewin for europe at standard chartered, and patrick armstrong. thank you all for joining us. here are some highlights for your day ahead. 1:30 p.m. u.k. time, u.s. initial jobless claims. later, more pmi numbers. tom keene joins me from new york, next. ♪

francine: not so hawkish. the dollar falls after the fed strikes and uncertain tone about

the future policies of president-elect donald trump. concerns over moving cash out of mainland china. the brexit backlash. the british chamber of commerce warns rising inflation. this is "bloomberg surveillance." i'm francine lacqua in london. tom keene in new york. we are getting a little bit of data. politics, finance, juvenile the banks. tom: the economic data is actually pretty good. macy's in new york with huge cost announcements and next, the fashion house in london, with the same idea.

macy's has to cut 6200 jobs. we have to try to figure it the winners were during the holiday season. tom: the grinch. francine: exactly. holiday grinch. tom: the grinch will be with us folks, next tuesday, when i'm in london. francine: there we go. breaking exclusive. ,aylor: as you were mentioning theresa may has moved to and criticism that she has no plan for brexit. she named the next u.k. ambassador to the european union. minister supports pardoning a soldier that was a woundedof killing

palestinian. a court convicted the soldier of manslaughter. the philippines president signaling he would like closer ties with russia. he said he is open to join military exercises with russian forces. visit apected to russian submarine ship docked in manila. pickednt-elect trump's to be the secretary of state has disclosed assets worth more than $400 million. he haslerson admitted holdings in more than a dozen countries. day,l news 24 hours per this is bloomberg. tom: let's get right to the data. equities, bonds, currencies, currencies, currencies, that is

the story today. stronger dollar finally. next screen, if you would. glorious 11.86. that is a big deal breaking down under 12. dollar mexico is my number one story. i will get to that in a moment. that is a weeak peso. francine: i like the fact that you are focusing on mexico and the peso. we had some news from donald trump -- or the president of toyota motors on donald trump. the all shorts recovered to head for a fourth straight game -- offshores recovered to head for

a fourth straight gain. tom: i'm glad you mentioned turkey. we are glossing over that. jade fully to give us wisdom in a moment. let me go to the bloomberg. this chart is a big deal. this is dollar peso from the beginning of the financial crisis. here is where we are right now. i did not want to put all of these fancy lines in here, but the bottom line is we are out three standard deviations from the trump election. the real news, if you can bring ,t out wider, folks, this chart you can pick it up now if you've got a terminal thanks to evan newman and all it bloomberg for making that happen. here is lehman brothers low weak peso. if you bring the air over here, we have another lehman low p in

the mexicaneso -- low in the since 2014. that is an extraordinary tory -- story. francine: we had the toyota motors president saying he will consider trump when deciding he will open a new mexican plant. tom: dead on. francine: this is a fewer inflation chart. see pc core inflation in the united states. this is an yellow. in white, this is a measure that kuroda wants to work on to get expectations, to get the real inflation up. the trend, we charted it in red coming u.s. price gains on the rise, as investors inflation expectations. .et's get more on the markets

we are joined by jane foley and the copresident at tenniel intelligence. jane, when you look at dollar dynamics, what did we actually learn from the fomc? it is quite difficult to know what trump will do next? jane: we learned something because of the market reaction. we had minutes which had the hawkish sentences, which we anticipated, but the reaction of the dollar was a much weaker dollar and that suggests that a lot of this is in the price. for the dollar now, we need some extra news. is it going to come from trump later in the month? or is it going to be some other surprise? it seems that a lot of this upside in inflation expectations appears to be in the dollar price already. francine: we understand that

ceos look at donald trump's tweets. do you look at his tweets and trade on the back of it? jane: i think you have to. certainly, he has been tweeting a lot. a lot of the messages we have had have been on the back of twitter. francine: had you deal with a commander-in-chief that actually communicates and gets things done, if you look at mexican peso on the back of what ford noted yesterday and also what we , again, he isota moving policy without actually doing anything. >> he is moving policy because there is a huge element of uncertainty. he is not in office. we have seen lots of statements. ceos, everything. he wants to basically shake the economy.

it is a huge question. uncertainty dominates. i suspect it will continue for the foreseeable future. tom: we are going to go philosophical here. and we can only do that with jane foley of rubble bank. she loves to go philosophical on thursdays. the butterfly effect. i'm sorry, that is the uncertainty we face right now. kelly about the correlations, are the butterfly wings flapping in kuala lumpur or ankara or beijing? do you perceive a butterfly effect or is that overemphasized? jane: i think we've already got it in a way. the mexican peso is related to what trump said. will he announce that he is ripping apart nafta or he is

not? if we look at mexico, 25% of the gdp is because of trade with the u.s.. it is quite clear that what he does or does not do, trade will have an enormous impact. if we look at the chinese ,enminbi, the massive movements there is a lot of speculation that this is because china wants to stabilize the renminbi against the dollar ahead of his inauguration because he does not want to be labeled as a currency manipulator. if you look at the bitcoin -- tom: exactly, thank you! jane: it is related to the move. the bits of news have an enormous effect. tom: i just got an email that says, lose the esoteric stuff and talk reality.

i'm sorry, i've got a massive pesociation in mexican that says the depreciation is not going to ease up. jane: it is not significantly lower. lower.lth is marked certainly, the likelihood is that donald trump holds in his hand the future of an awful lot of people in mexico right now. us. jane foley with we have so much to talk about. what a great start to the year it has been. thank you for your comments, folks come on your interview with secretary summers of a few days ago. a hugestill getting response to his comments on the president-elect. coming up in our next hour, we will go back to the equity markets. we did that yesterday. the linkages of washington to your portfolio. ♪

francine: this is "bloomberg surveillance." i'm francine lacqua in london. tom keene in new york. let's get to taylor riggs. taylor: another sign the british economy was growing strongly at the end of 2016. the services sector grew last month at the fastest pace than more than here. it is the largest part of the economy. shares of macy's are falling in premarket trading. the largest department store in the u.s. says it would eliminate 6200 jobs. that is about 4% of the workforce. comparable-store

sales fell more than 2% in november and december from a year ago. in new york, 40 demonstrators yelled and waved signs in the lobby of the goldman sachs headquarters, protesting the growing influence on president-elect donald trump's administration. the protest came on the day he would nominate lawyer jay ,layton as the head of the sec who has done work for goldman sachs. francine: thank you so much. squeeze a liquidity have pushed the yuan levels to the highest in the year. the offshore yuan eyes its biggest two-day gain on record. investors are worried that china is looking to tighten the rains. -- reins. robin, great to have you on the program, this has to do with how

they are trying to stabilize the one because about flows coming from china. ,obin: the main reason for this it is extremely out of the ordinary. china has stepped up a lot of capital controls over the last month or two months. they don't want capital flowing out of china. white similar to january 2016, when we did see banks offering offshore yuan, you don't see this happening. there are very little" and from

the mainland. tom: i want to bring up this chart again. you can take this exact chart from me. overnight offshore rate. there they are last year. they are way up in the high-yield. robin, what is different now is the recent volatility -- for those of you on london radio, it is the high interest rates in the overnight market. different this year versus last year? last year, we saw the pvc stepping and aggressively trying to buy up everything in the offshore market. you had overnight lending rates struggling up to immense purposes, impractical. great not seeing any evidence that they are buying up , there is very

little money coming in from the mainland. the crux of the problem is that this time it does not have so much control over what is happening with the yuan. that is a bit frightening come as far as we are concerned. over the past decade and beyond they send out a little bit of a signal, there is a massive market reaction. thattime, we are not sure they have that much control over the dollar or what donald trump will do when he becomes president. francine: thank you so much. robin in hong kong. let's bring back in jane foley. the problem is that you have a trinity, whatever you want to call it, of dwindling reserves. how do you stabilize it? jane: we saw at this week that the chinese authorities are putting up the punishments for

people who go up outside of their annual allowance of capital outflows. hard.re trying one of the changes relative to last year is that the market perceptions that u.s. rates will go higher. this naturally draws money out of china and other currencies back to the u.s. stock market. they are trying to deal with that. politically, the sensitivities are heightened again, too. saying thatld trump china is a currency manipulator months ago. china is intervening to keep the currency of. many people say, if china becomes very isolationist, protectionist -- maybe they would let the currency fall down and maybe hit that -- back that way. that is not necessarily a solution for them. they are trying to develop this perception to develop their wealth but also because companies are in performance denominated debt.

it is not an easy situation. i want to make it clear, the banner that we have up of the 80% level of the overnight rate, that is now 60. it is really moving around a lot. go, do politicians and experts on foreign affairs, do they care about currency markets? wolfango: especially what could .appen in emerging markets we certainly keep an eye on that. we should keep a closer eye giving all the certainty coming out from the u.s. and china. with china, there is a cycle going on here. the imperative is to keep stable as much as they can in an external environment which is becoming more and more uncertain because of trump. currency is a good indicator of

which direction politics is going. continue,row, we will francine and i begin a good 20 days plus on the road. we begin in boston with kenneth rogoff. my book of the year, "the curse of cash." we will speak about india and about davos. this is "bloomberg surveillance." ♪

"bloomberg surveillance." time for the morning must-read. "bloomberg view." the west's biggest problem is dwindling trust. ande back with jane foley wolfango piccoli. how is it that politicians can reconnect with electorates? wolfango: i don't think it is an inflection point? this has been going on for more than 10 years. trust is been declining for quite some time. it is not the only driver. there are other drivers. technology to new come out, technology, social

media, and so on. the mainstream is struggling. as the at the mainstream centerleft. in spain, in germany, and so on. the real challenges is to the centerleft, how they can come back in an environment where they are facing challenges from populist movements on the extreme left in the stream right -- and the extreme right. on the center-right, the challenge is, are we going to go more to the center to grab this infringes -- disenfranchised voters or are we going to play the game of the populists and go right? like we have seen with the tory party. francine: how does syriza play it? they voted in the referendum to stay in the euro. are we going to see fresh elections? wolfango: syriza has a straitjacket, the troika

straitjacket. a beggar cannot be a chooser, as they say. that room was minimal and they were forced to a doctor measures. depending on whether they can get the second review done. if nothing of this happens -- tom: well, let's come back. wolfango piccoli with us with jane foley, as well. later this morning, "daybreak." this is bloomberg. ♪ with the xfinity tv app,

anything with a screen is a tv. stream 130 live channels. plus 40,000 on demand tv shows and movies, all on the go. you can even download from your x1 dvr and watch it offline.

only xfinity gives you more to stream to any screen. download the xfinity tv app today. i've spent my life planting a size-six, non-slip shoe into that door. on this side, i want my customers to relax and enjoy themselves. but these days it's phones before forks. they want wifi out here. but behind that door, i need a private connection for my business. wifi pro from comcast business. public wifi for your customers. private wifi for your business. strong and secure. good for a door. and a network. comcast business. built for security. built for business. francine lacqua and london. now to our thursday first word news.

president elected donald trump's choice to become the director of national intelligence. in theuld put coates position of defending the agencies in their conclusions about russian hacking. plan to repeal obamacare has cleared its first hurdle in the senate. they planned to celebrate filibuster proof process for the legislation. republicans have made clear that a replacement health care plan is at least months away and maybe longer. the pentagon buyer has approved the navy top priority, a new advanced generation of submarines. the nuclear armed submarines are backed by president obama and president-elect trump seems to signal his support. a panel of british lawmakers is urging the country to adopt a canadian style immigration system that would allow local

administration to set quotas based on economic and cultural needs. they also said the migrants would have to learn english. immigration was the main reason why britain voted to leave the european union. i'm taylor riggs, this is bloomberg. francine: thanks so much, taylor. let's keep the focus on brexit. the british chamber of commerce says u.k. businesses will have to raise prices as the import prices are raised. we are back with jane foley and wolfango piccoli. you are a great pairing. it is almost like a huge play of chess, there is a lot at stake. also a pure economic story. a pound falls, inflation goes up

, but consumer prices increase significantly. jane: we are beginning to see that again. .e had the tesla story i think that is going to hit by the middle of next month. we are going to begin to see prices coming through. people are complaining about holidays. chocolate bars. various market commodities, as well. prices will go higher. sterling has a significant part to play in determining that. we have seen data, which has brought some relief. , theynly for exporters have been helped by the weakness of the pound. when you look at the exchange rate and the bank of england, this is a huge amount in recent months. at the moment, it is making hay in the sunshine, however, as we go through the year, brexit has not begun yet in some of those

uncertainties will begin to crystallize during the cost -- course of this year and the cost-inflation element will begin to be a drag on the economy. francine: talk to me about negotiations. the u.k. ambassador to the eu resides. he wrote a memo saying there is muddled thinking in london. theresa may was very quick to replace him. does that put her in a stronger position than she was shortly after he resigned? wolfango: i think she moved quickly to regain the initiative. a stronger position? i don't think so. i think it is becoming clearer but we don't know the position of the u.k.. now, we got a couple of months left. on the european side, the

position is hardening. if there is a miracle that the u.k. manages to unite with the rest of the european union, which is quite a miracle, that is where we are at this point. tom: jane, help me here. i'm not trying to be a wiseguy. the basic idea of the united kingdom as pending banana republic. i don't mean that now or in 2018, but if prime minister may, you know this chart, trade weighted pound sterling, there are two ideas here that are absolutely critical. the first idea is the united kingdom never recovered from the lehman brothers lows. the presumption is that trade weighted sterling works ever lower toward the red circle. is the united kingdom at risk of leaving g-7 and being a banana republic? ane: i think that is perhaps

little bit extreme, but the risks that you point out are very real indeed. you are quite right. tom: it never recovered. jane: it never recovered. what is also interesting about , they thought, we would have an enormous boost to exports, that was a real big concern because export markets were weaker, but again, this remains a constraint. .e see the pmi data the experienced of the post-lehman era suggests that we might get the export boost we are hoping for. tom: i want to draw this picture for london radio, as well. trade weighted sterling, 1992. that's what i've got. 2016, sterling has gone nowhere. it is just amazing to me that this is top -- not talked about more. francine: right. let's talk and explore this.

it is highly controversial, the possibility not being talked about, let me sure you, in whitehall, that the u.k. would leave the g7. my question is does france or italy leave the g7? we are basically comparing countries? wolfango: yes, we are. i think the most likely candidate would be italy rather than the u.k. or france to leave the g7. on the other way around, it is clear that the u.k. is going to face a very difficult period. this idea that the weaker pound will export is a myth. myth inroven to be a the short-term and it will depend on what is going to be the final deal with the europeans and we are not going to get any clarity to that over the next one month given the cycle in europe. if we are expecting clarity, if we are expecting certainty, a sense of direction, we are not

going to get it and that would leave the pound exposed, as it has been over the last couple months. overine: let me bring you to my bloomberg chart, this is probably my chart of 2016. this is the ftse 100, but we changed the currencies in each of them. the pound is the white line. that is the record. in blue, this is the ftse 100 in u.s. dollar terms. tom: very cool. francine: in purple, you have it in euro terms. jane, how low do you expect the pound to go? it can go weaker. a lot of it depends on what can happen in france and in the dutch elections. if marine le pen were to win the second round of the french presidential elections, certainly, sterling looks better. if the central assumption is that she won't, the euro could have a relief rally, that could place additional dampening pressure on sterling.

that aside, i do think that sterling remains honorable -- vulnerable. it is likely that europe will take a hard-line stance against u.k. positions of entry into the markets. francine: jane, thank you so much. jane foley and wolfango piccoli stay with us. tomorrow, don't miss michael mckee's exclusive conversation with the dallas fed president from the american economic association's annual meeting. this is bloomberg. ♪

francine: this is "bloomberg surveillance." i'm francine lacqua in london. tom keene in new york. let's talk about deutsche bank.

it has been eyeing private equity firms to deal with its settlement in the u.s. one option being considered is lending to firms which specialize in buying bad mortgages. let's bring in bloomberg's michael moore. still with us, jane foley and wolfango:. michael, run me through this. basically, they are saying, we can by private equity and get that relief for subprime mortgages that the doj is looking for? ishael: deutsche bank saying, these private equity firms do this on a regular basis , if we lend to them, we should be getting credit for that on the consumer relief total. francine: all right, what is the pitfall? we talked a little bit about this. the doj comes back and says, you can't do this. michael: it is part of the negotiations. it falls in the bucket of, it can't hurt to ask. the downside is the doj says the

point of the settlements is to provide additional consumer relief. this is something going on anyway, it is not additional, you can't count it. tom: let me bring up this chart. michael moore knows this chart. i could bring up any number of charts on deutsche bank. this is the trump move some of the moon shot jpmorgan in the american banks, now up 100% from the beginning of the crisis. unicredit have italy is the great underperformer. here is deutsche bank. i'm going to say that maybe mr. cryan has enjoyed stability at the end of 2016. what is the now what for deutsche bank if he finally stabilized the ship? michael: right, the now what is can he prove that the business model is profitable and produces a decent return on equity over the long haul?

they still have a lot of cost-cutting to do. the worst of the legal charges is behind them. they still have quite a few of those to go. it is all about facility. tom: when in doubt, have lunch at the plaza and merge, lunch at the four seasons or whatever. where are we at mergers in european banks this year? forget about italy, merger to me seems to be the way to do this. michael: most of the merger talk you are hearing is on the smaller domestic front. tom: yeah yeah. michael: i don't know if there is the appetite among regulators to make the big banks bigger. francine: this is the whole point, tom. the last says that thing they want to do, from the regulator perspective, is for the banks to become bigger. is that fair?

you have much smaller banks that are regional, but there is no appetite for big m&a in europe? wolfango: it is not just regional, it is actually local. we have more than 565 comparative banks. my folks are from my town of 100,000 people. there is a local bank with five subsidiaries. they have about 25 people working there. it could go down to the single neighborhood of a small town. several reforms have been stopped by the court. the appetite of some of the banks to move ahead is very limited. pressure from the regulators is dealing with issues like monte dei paschi. i don't think we are going to see significant consolidation of the banking sector in europe. politicians for the to put pressure on the bankers and germany, france, the

netherlands, italy is going to be limited. francine: what is the one thing that we forget about the banks, jane? we talk about them for investors and shareholders and what it means for the ceos and bonuses, but they also have to fulfill a crucial primary function of lending. they need healthy banks to work. jane: the economy certainly needs healthy banks. for that reason, there has been some relief. there has been the perception that that will help with the functionality, the profitability of the banking sector. the market is still concerned. it does not have to look very far in europe when it thinks there is contagion risk. that risk perhaps has been limited slightly. there has been a sign of that liability. that is another healthy sign. it does seem that this issue with the banks in europe is going to be number one.

tom: michael moore, you are crushing a six-hour workday, but you do attend the bars of the united kingdom. his london going to move to paris? we had the story a couple days ago. do you see anybody that really wants to give it up and take the euro start to paris? michael: i don't think that is their first choice, but they may not have a choice depending on how the brexit negotiations go and that is why all the banks want a transition deal. the give them for her five years to figure it out instead of the 2. judge based on how the negotiations are going, they may move sooner rather than later. tom: fascinating. michael moore, thank you so much. moore isi think mr. going to appear with us 200 days this year. he does a great job. let's go to what you are going to see today on bloomberg

markets. there is no such thing as a bad diller interview. barry diller is always fired up. ever more so from the consumer electronics show. this is bloomberg. ♪

in london.ne lacqua i'm tom keene in new york. we are watching mexican peso. right now to our bloomberg business flash. taylor riggs. taylor: apple plans to invest $1 billion in a new technology fund run by softbank. it will speed the development of technology which may be strategically important to apple. softbank plans to launch the $100 billion fund -- the $1 billion fund -- the $100 billion fund this year. toyota says it will take trump's decisions into account when planning for mexico operations. they also say they are thinking of boosting u.s. production of matter who is in office.

ford canceled a planned to build a factory in mexico after criticism from trump. british consumers should get ready for inflation. the weak pound is forcing up the cost of imports. that is according to the british chambers of commerce. the share manufacturers expecting to pass on cost increases to consumers is the highest since 1989. that is your bloomberg business flash. francine: thanks so much. let's focus on france. we are back with wolfango piccoli, who says that marine le pen is the biggest risk in europe. also with us is jane foley. if you look at france and the presidential elections, we are talking, you are probably expecting marine le pen, seen as aillon is reformer. how does he grabbed the socialists? how does he widen his base to appeal more? wolfango: reformer in a french

context. let's be careful about that. think it is going to be a second round with marine le pen and francois fillon. when we look at the past historical records, the opinion polls, and the difficulties marine le pen is facing and they will become clearer once we get closer to the vote and we can discuss about that, i think the to the of fillon to go center-right voters will increase significantly. historically, there is no precedent -- president that has managed to win just relying on his own core voters. marine le pen is even more difficult to grab votes from the centerleft than it is for field. .hat is -- francois fillon yes, marine le pen is a powerful figure, a formidable candidate, the election will be very noisy, but at the end of the day, francois fillon will win.

francine: i know he is tweeting at the moment that he wants to reform the welfare state and cut bureaucracy come are the french ready for that? wolfango: yes. we just saw an opinion poll where several servants -- civil servants are supporting fillon. fillonthe messaging that has been sending so far was targeted toward center-right voters because he had to win the primary. now that that is done, i suspect the message will shift gradually toward the center, depending also who is going to be the candidate from the socialist party. ls or someone va else, it will change a lot. go ahead, tom. i meancause of time, this is important, but we have

to take advantage of your expertise on turkey. your book "turkey at the crossroads" was profound, going back to the ottoman empire. i'm sorry, there is turkish lira, it is unraveling right now and it has unraveled further this morning. help me with turkey. what is your perspective on the president erdogan at the crossroads? wolfango: well, president erdogan is not at the crossroads. i think the economy of turkey is going to be at the crossroads in 2017. erdogan is strong, he will get the changes done, he will get the referendum approved, he will become a more powerful president. the question is what is going to be the price for the economy of turkey? has taken a huge hit already and this will continue for the foreseeable future. the central bank is in a difficult situation to do the right thing. isnwhile, the wider economy taking a huge hit, as well. the only thing that can stop

erdogan is a financial meltdown, i don't think we are there, depending on how politics go, we will move accordingly. tom: jane fully, help me with foreign exchange expertise. we began the hour with the butterfly effect. everybody is telling me turkey is a discrete thing, a discrete finance. i don't buy a for a minute. is this the butterfly effect for mr. trump? jane: i think the turkish lira nerable ande -- vul will continue to go down. poland, in turkey, it is a symptom of a wider movement. perhaps we could argue that the central bank should put up those interest rates to stabilize the currency, but there is political pressure not for them to do that.

it puts them in an awkward position. given the political tide in turkey, i think international investors are very wary of putting money into turkey right now and given the current account deficit, that means the lira remains extremely -- tom: for the you, thank you so much for coming on. youango, we've got to get on to do an entire hour on turkey. friend swap -- francine, maybe we need to go to istanbul. we will talk about the linkage into the u.s. equity markets. jason tranter. and on trump economics. this is bloomberg. ♪

♪ tom: this morning, the mexican peso collapses to record weakness against the dollar.

will trump rhetoric destabilize mexico? wingsl the butterfly flap to: poor -- or will the butterfly flap wings? in usa, auto sales are great. but caution trump's all. good morning. this is "bloomberg surveillance." us.cine lacqua is with francine, i do get sir timothy barrow, the new representative of united kingdom and the e.u. who was this guy? significant,t is theresa may was fast to move pitch he is in charge. she wants is to be dealt with very quickly. out, he is a point former advance that are of the guys he's a former ambassador of

united kingdom. we need to get to our bloomberg first word news on israel. minister's prime approves pardoning a killer bouldering -- wanting an attacker. president signaling he would like closer ties to rush up your day spokesperson militarys open to join exercises with russian forces. tomorrow, he is expected to visit a summer rain ship stuck in mozilla -- he's expected to visit a submarine ship stuck in manila. by rexal ethics filing tillerson revealed he has investments in more than a dozen nations. if the senate confirms tillerson, he well recused himself or a year from government decisions involving exxon parent global news 24

hours a day card by more than 2600 journalists and analysts in more than 120 countries. i am taylor riggs. tom: thanks so much. let's get to the data quickly. nothing going on. curve flattening. euro is 105. next screen. that is a remarkable number down from 12. dow, 20,000. mexican peso is a big deal. i will get back to that in a moment. it the renminbi making news. francine: i have that in my data check. the dollar falling the most in two months. it is all about the federal reserve minutes, right? gold extending gains. i want to show you turkish lira, tom. it is at a record low because

investors and traders believe the central bank of turkey will not address rapid inflation. tom: that is pretty recent. 3.62 on the lera. let's go to the bloomberg can look at butterflies. they are flapping. that is my own opinion. i don't like to do that usually, but i will make an exception. mexican peso, up we go. that is a brutal move. here is the top election. but the big deal is, here is the lehman low weakness and mexican peso. back-endican peso 2008. in 2008.ican peso back i am sorry, francine. this has to do with trump and washington rhetoric and what we have seen on capitol hill will have ramifications. tom: this is significant. francine: just an hour ago, the

tell yoda -- this is on the backs of the toyota motors. they are taking into account trump's thinking on mexico. he is having a second thought coming after four scrapped plans to build in mexico yesterday. you.is what i want to show a simple inflation chart out of the u.s. in yellow, you can see core inflation. inflation expectation. measure in u.s. price gains are on the rise at the same time as expectations. very good. we have a wonderful guest celebrating 10 years of his current at exiting hyman.

made bignnert has success. , and he didar 2017 it in 2010. the title of this tone is what is it all about? in the middle of this, the gathering storm of populism and protectionism 2010. jason trennert was way out front on what we were living last year and this year as well. what is the state of our populism right now? jason: what is happening ,argely, to quote nigel farage ordinary people without political influence, are questioning a lot of the things from the leftts side and the right side of the political aisle -- have been telling what is good for them for a long period of time, whether that was the iraq war or

affordable care act, or open you keep telling us this will be good for me, but is not turning out to be so good. francine'ss observation on ford and the butterflies. starting our year pushing on the record uncertainty. let's bring it over to this chart. mexico -- mexican peso, one indication of and certainty that is out there. givenoes an investor do the uncertainty of the mexican peso? jason: despite the very recent moves, i think the uncertainty is pushing people into u.s. financial assets, and likely to do so for a long period of time. tom: we go to the u.s. is it on an absolute gain, hedge fund guy? jason: likely, yes. parturrency will be a big

of the fed's decision-making process as it had to be last year. one of the things learned in early 2016 is it is rhetoric regarding interest rate moves that had a big impact on the dollar and commodity prices on the industrial economy. on a relative and absolute basis, u.s. financial assets should fare very well this year. francine: what did we learn from the fed? we have to bring it back to the markets. how do you assess how much inflation chung can bring to your economy your janet yellen? jason: from janet yellen's point of view, efficient is a lagging indicator. the fed has been trying to get inflation for a long period of time. out which -- average hourly earnings are important to watch. wouldt think janet yellen

describe herself as a labor economist, but she is very, very interested in the wage markets in the labor markets. from her point of view, i am not so sure that she will be all that worried. she was normalized rates, but she also wants to make sure that labor is getting its fair share of the inflation that is coming down the pipe. i am not particularly worried. toould take the under on tightening's -- on two tightening's. you still have negative interest rates or something approaching that in europe. very low interest rates in japan, as well. donald trumpl tweet after the jobs? report if you are the fed, how do you view that? i would not expect donald trump -- i don't know the man -- but i don't have any indication

that he is going to stop tweeting. this is just the way the administration is going to roll. they are going to have other discussions off-line, off tweeting. but this is part of the way donald is want to communicate with the american people. i think people just have to get used to it one way or the other. the brutal dollar. showed this chart -- we this chart. tv go, you can actually get my actual charts on tv go. you have to have an actual terminal. copyable tool.l is this a brutal move? a very good question, tom, because i do believe that the dollar is going to be the governor.

it is going to be the governor on the speed at which the fed can tighten as it found out last year. the mistake was not that the fed tightened, but it suggested that it would tighten four times in a very short period of time. to $26 oil prices down boring about a recession. in the old days, the fed could of what the dollar was doing that was really the treasury's job. tie.i love the polkadot fenway bowtie.he tonight, -- what a privilege, jason -- to be at fenway park with bentley college as a play army and ice hockey.

i get to hang out. francine: i need to translate for our global audience -- we are talking hockey, right? tom: we are talking baseball, francine. i will send you a memo, francine. withrow, we will speak alicia from boston college, the number one expert on retirement in america, and tomorrow, kenneth of harvard university. we will look at india, negative rates, and cash. this is bloomberg. ♪

♪ is "bloomberg surveillance." i'm in london with tom keene in new york. lansdowne partners lost 15%

and its main hedge fund last year. that is its first loss in five years. landau which is on equity markets failed to pay off against commodity trader. the hedge fund has $9 billion in assets. shares of macy's are falling in premarket trading. the largest apartments or company in the u.s. cut its forecast and said it would eliminate 5200 jobs. that is about 4% of macy's workforce. store sales fell in november and december from a year ago. that is your bloomberg business flash. tom: taylor, thank you so francine, and they had it states, that is a big deal to in the united states, that is a big deal to see macy's -- francine: we have a similar

you see the winners and losers depending on fashion pricing and accessibility. tom: let's get to the morning must reading go to our washington correspondent kevin's a really -- go to our washington correspondent, kevin. talking reagan republicanism and how you do it. the presidents and coming attorney general -- the president's incoming attorney theirl said they admired traditions and a professionalism. answer is often the one he does not want to hear. this is a fabulous essay. i read going to see a carter/reagan transfer on january 21? >> what is interesting is that

you are starting to see some members of trump's cabinet picks disagreeing with them. like the person who was against having torture tactics or waterboarding tactics used in told president-elect trump told that in meetings. that was a big reason that trump pointed to why he picked him to the in his cabinet. we are starting to see that already. tom: you have any indication in your reporting.

+++ observes the president-elect. do you see any observation that mr. a listen to these appointee? kevin: i have asked members of the team, in particular, those in charge with those betting the picks, and they said it is about how the picks communicate with him. they are able to disagree. they are able to have disagreements. it is how they are able to communicate those disagreements. trump announcing he is announced jay clayton as the head of the securities and exchange commission. he could disagree with more of the more nationalistic policies that you are seeing in terms of spending. withore in line deregulatory policies. if it is at the department of education or s.e.c., you are seeing a cabinet that is going to be able to disagree with him. francine: i want to talk to you about s.e.c.. what does it tell us about regulation? if you are a big bank, it was like you are going to win. kevin: correct. the business community in washington.

i put this to a lobbyist yesterday who said with this -- this of minutia in is looking like an administration that is clearly signaling they want to deregulate financial regulations. of course, in terms of the business community, that is a positive sign for them. tom: thank you so much. jason trennert is here with us. report onster clifton hunter henry 21st will go? -- how is the clifton report saying how january 21 will go? the trumpetl like administration will be better for small and regional banks than for larger banks. people in the cabinet may not suggest that. you look at what bannon has said

another people and said, about -- ing back tom: there is the rhetoric. jason: the focus will the on getting the velocity of money up getting banks to lend more. whether that translates into wholesale changes in the way large investment banks operate the way they were before the financial crisis, it is very much up in question. certainlymp, he is right of center, but he is not as conservative as ronald reagan. he is a populist. the interaction the president-elect trump in the house yesterday, with regard to the ethics commission, i think it is very significant. he will not necessarily be telling the line. there will be periods of

disagreement. tom: we will be back with jason trennert. it will touch on the equity market later in the hour. it from las vegas, the consumer electronics show -- there is never a bad time to speak. , i could go for an hour with diller. look for that this afternoon. this is bloomberg. ♪

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♪ francine: this is "bloomberg surveillance." francine and tom in london and new york. we talked about emerging markets and trump. you want to focus on the mexican peso since comps election. -- since trump's election. when you look at japanese equities performing -- they have outperformed the rest since trump got elected. let's get straight to jason trennert onset with you in new york. jason, when you look at japan equities and valuations, there is a bullish case you say that can be made. but we do not have structural reform, and there is so many -- and there are so many questions. jason: printing, it is funny. -- francine, it is funny.

i have been trying to get bullish on japanese equities for 27 years, usually my hopes are dashed at some point. the valuations are extremely compelling and earnings growth is good. dividends are a sleeper call for japan. ratios are about half of where they are in europe. the biggest problem i find with japan is the ability for the policymakers to snatch defeat from the jobs of victory -- from the jaws of victory. last year's negative interest rates were an example of that. tom: you link all of this babble over to the equity markets. it can you find international stocks -- can you find value

with international stocks? europe, i am more nervous because i think there will be a never end in europe. 41.apan, it is almost one the weaker the currency gets -- it is almost one for one. tom: we will dive into the equity markets and about 15 minutes. on daybreak, look for william mcnabb of vanguard group. york, this and new is bloomberg. ♪

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private wifi for your business. strong and secure. good for a door. and a network. comcast business. built for security. built for business. hey, drop a beat.flix? ♪ show me orange is the new black ♪ ♪ wait, no, bloodline ♪ how about bojack, luke cage ♪ oh, dj tanner maybe show me lilyhammer ♪ ♪ stranger things, marseille, the fall ♪ ♪ in the same place as my basketball? ♪ ♪ narcos, fearless, cooked ♪ the crown, marco polo, lost and found ♪ ♪ grace and frankie, hemlock grove, season one of...! ♪ show me house of cards. finally, you can now find all of netflix in the same place as all your other entertainment. on xfinity x1. ♪ francine: good morning. it tom: i'm tom keene in new york with francine and london. weekends.n peso >> former senator of indiana is

trump's choice to become national -- become the director of national intelligence. the republican plan to appeal -- repeal obamacare has cleared its first hurdle in the senate. republicans have made it clear that after the repeal, a replacement health care plan is months away, and maybe longer. weapons fires top has approved a top priority. development of a new generation of submarines. the new submarines could cost up to $126 billion. president obama back the program and president-elect signals his support. a panel of british lawmakers is urging the country to adopt a canadian-style immigration system that would allow local

administration to set quotas based on economic and cultural needs. the panel said migrants would have to learn english. immigration was a key reason that britain voted in june to leave the european union. .lobal news 24 hours a day i'm taylor riggs. tom: taylor, thank you. let's bring up a chart. copy the chart, steal it from me. this is g7 gdp back when things were good. there was this modest rollover here. we are in the middle, but not so hot in g7 gdp. it is time to talk central banks in the financial aspects with the financial risks of 2017. we continue to look at eurasia group's.

jason trennert, this is something for you to dive in in on. we know central banks are in trouble. rest,et yellen and the will they be overcome by events? jason: there is something interesting that is happening. you have a fiscal policy mix that has monetary policy consequences. some key voters in the trump coalition -- that is the idea of fiscal expansion, rate rises, strong dollar. but we are bringing jobs back? how does that work? tom: there are three fed meetings coming up. we will not have any fiscal policy done by those three fed meetings coming right? >> more than likely. you saw the minutes yesterday.

half of the members considered fiscal policy in their deliberations. diminish red hawkish to me. read hawkish to me. janet yellen does not think fiscal expansion is needed to bring the economy back to full employment. that suggests you are seeing a of a political confrontation on this front. whilene: let's go back thomas fixing his mouse. if you look at central banks, they have are ready been under pressure. it is nothing new. even theresa may says the bank of england sees inequality. do we mind? >> not especially. see not even so

much interference, but bank policy from the most senior members. levele not had it at the -- the prime minister and the u.k. or someone important to treasury. this moves to a different level potentially. that is the difference. francine: jason, do you feel there is more and more pressure on central banks. jason: i do. the fed and the central banks influence on the economy has never been as great as it is now. it is notys, surprising that the executive branch of these countries are more skeptical about the limits of what you can achieve with central banks.

there may be more of a focus on getting a balance between fiscal revelatory policy on the one hand and monetary policy of the other. tom: i look at what we have been through over the last five years , and it is like a new regime this year. what is your prediction of what the monetary theory is within the international relations we have? regime?in the >> the straightforward division that people think about is when we go back to fiscal expansion and monetary offset. fiscal policy does more. monetary policy needs to do less. tom: where is the fiscal policy? >> the expectation is that fiscal policy will ship. -- will shift. you had a change of fiscal policy in canada last year. the argument here is that fiscal policy is not necessary to do

more. wait a minute. what is the: gdp this year? >> we have it lower than where we should. tom: is that acceptable? --this is the argument the central bank cannot boost growth. you can get you back to cover up slack. i am hearing the fed say they have largely done that. what we need is fiscal policy to boost productivity. jason: it also begs the question, i think, has central-bank policy impeded productivity growth? is everything set lower rates have done more harm than good? in some ways, you can blame that

on the fact you have had low interest rates for the last seven years. >> there is something to that. this is something that is true in all the major economies. ofn you have had a lot marginal capacity that has been added over a long time, and that marginal capacity was funded by leverage, when the economy hits the wall, you have a choice -- do you allow the liquidation process to take place. lower rates and allow them marginal capacity to stay online? that is what we have done. but that impedes new endorsement -- but that impedes new investment. thank you so much. tomorrow, i will be in boston and francine will be in london. michael mccain will be in chicago.

the conversation with the dallas federal reserve resident, robert kaplan. this is bloomberg. ♪

♪ francine: this is "bloomberg surveillance." francine and tom in london and new york. coming up with bloomberg daybreak with david wesson and jonathan ferro. john: the hardest hit is a slow and gradual pace of potential timing. they will be that challenge within the fed.

looking forward to a conversation with steve englander. china makes another big attempt to flush out -- francine: with more on china, let's get to hong kong. thank you for joining us. we have been talking about the china epic short squeeze. how do they resolve it? >> we have seen this script before. this happened last year when china came in hard. this is different. isis hard to say if china into -- there is a liquidity shortage. they are really tightening controls. yuan going want the into hong kong.

it shows who is in control. chinese authorities are in control of the currency. francine: how much do they have longer-term? -- how much control do they have longer-term? >> they both came in to the market in hong kong and approved -- and improved communications. we are seeing something similar. they seem to be getting ahead of the curve. squeezing the short side of hong kong. break up the chart. -- bring up the chart. it is at 60%. the two spikes get your attention. ist really gets my attention

the noise we have seen recently in that one day overnight. why is this year different from last year? what is the distinctive feature now? last year, we know the chinese authorities were intervening. we do not know if that is the case, but we know there is a liquidity shortage of the yuan in hong kong. they are shutting down capital getting out of the mainland. is different -- the end result is the same. china wants to put a floor on the yuan weakness. it is not a one-way bet. tom: we appreciate that. from trennert with us strategic partners. you are a world traveler and go to china every year. what is wrong about the analysis on china? everyone is talking about it,

but it seems like a cacophony. jason: people understand very well that there are massive misallocations of capital. how do you make that investable? i am of the view that it will end poorly. i don't have any meaningful investments in china mainly for an i do nothing average investor, it is investable. the currency reserves they have, allow them to give them away with misallocation of capital longer than one would expect? at one point to the laws of physics and economics catch up to them? generally speaking, it has been a poor idea. it has been a bad idea to vet against china for too long, unless of course, there is

commodity price inflation. at that point, that is when china's growth will take a hit. francine: are you expecting volatility in the meantime? are you talking longer-term? what happens in the next 12 months in china? jason: and the shorter term, i would expect to see continued focus on volatility. i think the fed is not going to be making things worse as it was last year. that helps. again, my concerns are much more focused on what is going to happen on the longer-term. in the shorter term, the chinese authorities have the legal authority, political authority, and the cash frankly to smooth over the short-term concerns that we see their now. -- there now. francine: is it a bad idea for

the president-elect to pick a fight with china? jason: that is a little different. the end game is different because it is more focused on and political goals than financial goals. my opinion is that china needs the u.s. more than the u.s. needs china. it is a symbiotic relationship. it should be a symbiotic relationship. we are going to get a test. it is very quick that donald trump believes the u.s. is not a first among equals and that it is a primary superpower in the world. that will clearly have butterfly wings with regard to policy. tom: i like your comments on reserves earlier. here are china foreign exchange reserves. it is amazing how this chart is

developed over the years. here is $1 million of reserves. here is $2 million of reserves. remember when we went through $2 million, jason? the extrapolation of the glory days is out into my in dollars of reserves -- is out in $10 million of reserves. we don't know what portion of that is usable, do we? jason: that is true. you do not know where the reserves are and what they are made up of. my own particular feeling is that right now, that is sufficient to get china to their goals, but i also know they had been losing reserves over the past year in their efforts to dive into the economy. at a certain point, this will

not work. tom: and i am not picking on china, but every country in the nation, we don't know if a usable reserves are? jason: it is becoming a black box. and no one knows what is quite capital. tom: coming up on bloomberg radio, a good time to speak with marquis sold of pimco about yield and total return, financial repression. jason trennert coming up. this is bloomberg. ♪

♪ now.foreign exchange right i put the mexican peso on top. it is the biggest story out there this morning. we saw a record weakness. center. front and manipulatedn of the by the government. we had a weaker dollar seen and a stronger yet. this chart will get to jason

trennert's wheelhouse. this is a classic chart of the s&p. jason, you got the depression to the left. i got the low in 1942. you have the mother of all regressions. we are on trend. stocks are cheaper or which right now? jason: they are slightly rich. i would not bet against them are now. remarkably, market bottom 2009 -- there has been a recover dissipation in the markets. tom: in your note read worldwide, it is this -- a new lease on life. help me with that. what is the new lease on life? life'sgood due lease on we are getting away from financial regression. there is more of a focus on

financial enterprise. we will see how that is managed. the jury is still out, but i do think you are going to have, certainly for asset managers and think it will i be much better for active managers. thely because she will have potential -- mainly because you will have the potential for inflation. tom: financial engineering is a use of cash deploying back to shareholders. is there any end insight? you see corporations adapting to mr. trump for g.m.. will there be -- use of cash? jason: i hope so. ultimately, the only way you can create wealth is through productivity. it is the mother's milk profitability and you cannot financially engineer your way to affluence.

at a certain point, it is worked out because companies have accumulated a lot of cash. but at a certain point, you will have to have companies that use money to reinvest in their own businesses, not just buy back shares. i am hopeful that happens. francine: right. how the model a trade war on a lot of these equity prices? memo saying it be desolation is him. we're looking at a president who may be more isolationist. if we have a trade work with china, it may hurt. jason: that is true. i don't want to speak for the administration, but it is their view. most of the trade agreement set up taken place since the end of world war ii has been largely designed to help other countries in an effort to promote peace,

which is a very noble goal. i think there is a general sense among the populace in the united states that that has gone too far, and there is a sense in which american workers have to be look out for. sense that may be a we may be in ritchie other countries that don't have our best interests at heart. it is very difficult to model that. i think that is the reality of what is likely to come. francine: of course, but you can look after the american worker, but it your supply chain is significantly hurt because of a trade war, what does it mean for your valuations in u.s. equities? jason: francine, that is a very good question. it depends on the sector you are looking at. for retailers and consumer discretionary, it could have a very negative impact. border adjustability will be a big issue this year. for financials, it may be

somewhat different. financials may be in a situation where they can benefit policy in the new administration without many fears of the impact of a trade war. you are going to have to go sector by sector, but the concerns are valid. this is the new reality. tom: jason, thank you so much. jason trennert, chairman of strategic research partners. i will be in boston tomorrow. ofning us, kenneth rogoff harvard university -- of harvard university. kenneth rogoff on negative rates. this is bloomberg. ♪

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>> to our viewers worldwide, a warm welcome to "bloomberg daybreak." alix steel is off today. we begin 2016 to 2 -- 2017 with two gains -- two days of gains. market,ies in the fx the market tells me not so much hawkish. a weaker dollar story. david: here is what you need to know at this hour. the dollar takes a pause and it's the weakest it's been since donald trump was elected. this after fed minutes signal uncertainty as to whether the down.y is heading up or the chinese offshore yuan posted the biggest two-day gains on record as they moved to curtail outflows and the overnight lending rate soars. is there more to come? the grinch steals macy's christmas. disappointing holiday seal -- sales, they will cut an