>> 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 additional 6200 employees from

its payroll this year and confirms it will close 100 stores nationwide but online competitors continue to thrive. jonathan: let's begin with our policy correspondent, michael mckee, joining us at the table. the communication from the fed is that if they hike rates it will be slow and gradual. the loosest tightening in history. that concept is being challenged from within the federal reserve. how significant is that? michael: it could be very significant. suggests that it the economy is getting stronger but there is in or miss uncertainty about the forecast because of donald trump and the possibility of fiscal action. uncertainty regarding economic policies increased and participants agreed it was too early to know what changes in the policies would be implemented and how they might alter the economic outlook. one of their mandates they said had just about been achieved --

achieved, which was full employment, but they noted the rise in inflation expectations that came after the trump collection as people started to price in the possibility of fiscal action. the fed five-year outlook for inflation crossed 2%, which was the target, now it 2.9%. with oil prices also going up, they expressed concern over what they might see and at the money quote from this was that many participants emphasized that as the economic outlook devolved, timely adjustments could be required. in other words we might have to go sooner and steeper. clearly, upside risk has been fueled by this and to some extent it has influenced other the they know what's going to happen or not, the forecast. a matter oft was discussion as well, saying they might have to change the way that they communicate because they might have to go sooner and

get markets prepared for that. it will be a challenge as they base their decision on forecasts , forecasts that will be based on what they think policy will do, because obviously it will take time for any of the policies to be adopted and put into place. david: there were some signals that were more hawkish in here, things that they were worried about, like undershooting the employment rate. why is it that today the dollar is reacting the way that it is? isn't clear. what seems to be going on in the markets is that they have over shop before. there was too much in 20 and now they are not sure how that's going to affect the overall market. they say that the dollar could be a risk, but it is a two-sided risk. you could have a hit exports and growth slowdown, or you could have the dollar hold down the inflation danger that they are concerned about. >> let's talk about the vanishing.

typically things don't just roll off, they mature and they reinvest. there's a conversation happening in the federal reserve right now that if they have to hike quicker, that method is going to be challenged. can you walk us through that? michael: the plan was to eventually stop reinvestment and allow the balance sheet to roll off till you get to a certain point. they have agreed that they need a better balance sheet and they had going into the crisis. the question is, how quickly can they do it? how much can markets absorb it and what would be the impact on policy and on the economy? now they are beginning to move more quickly, if the economy gets stronger faster. david: did you expect them to raise the specter of that in these minutes? at some point we knew it had to stop rolling over, but did you think they would raise the possibility right now? michael: there was no reason to think one way or the other on it . in a newer year they made the

of the other on it, so it was certainly a possibility for discussion, but the election of trump and the possibility of fiscal policy seems to have given us more stimulus than the economy needs. that chair janet yellen headed up the place can -- subcommittee of this strategy. the operation is still struggling with how to manage it tightening. is that going to change? michael: they do not have a handle. they do know it has to change. it was set up to give forward guidance to get things lower for longer, as you suggested, which would have a downward impact that interest rates. now they have to possibly go the other way. they haven't done that yet, and they know that they need to. >> the fed speakers coming up for the rest of the week, they are not on the same page as they were a couple of months ago?

>> they are in the sense that they raise rates, but the question will be timing going forward. that is what people will be looking for from the various speaking participants. do we have a sense of when they might have to do this? the fed is raising rates and you have to wait to see what happens. , wep comes in, the market don't know yet exactly when we will face the choice. everything isvid: always on the table, but these meeting seems to reinforce that we won't see anything too precipitous, given the fact that they are uncertain. michael: i can't wait until they really knows what goes on, they can't wait to see the economy react because they have to work with long in variable lags, but we know that they want to wait to gauge the impact of this rate increase on the markets and on the economy, which probably puts them into march or the main meeting, which is going to take

them quite a while to get to. you would not consider the february 1 meeting with a live. but beyond that it's going to be up to the president-elect. jonathan: try to have you with us cap -- great to have you with us, michael. tomorrow at noon eastern join us with robert kaplan and the voting members of the federal for their annual meeting over in chicago. for now let's get you up to speed for some of the headlines and that's a good so -- good morning to alexandra. >> good morning. likely to be dominated today by claims that russia interfered in the u.s. presidential election. several of the top intelligence officials in the nation will testify. tomorrow donald trump will be briefed by the cia and fbi and he has already criticized the findings. the british prime minister has moved to end criticism that she has no plan for brexit. she has named a career diplomat as the next ambassador to the

you are -- european union a little more than a day after his predecessor resigned. benjamin netanyahu supports convictedthe soldier of wounding a palestinian attacker and he is edging israelis to act responsibly. powered by more than 2600 journalists and analysts in more than 120 countries, this is bloomberg. jonathan: we are kind of treading water, globally. the futures are flat, and yesterday on the ftse was about weak retail sales coming out of a company called next and what it would mean for the rest of the united kingdom. let's cross over and get you some movers. at weakness ing the retail sector. specifically macy's and kohl's are both plunging after these department stores yesterday

lowered the full year earnings view by 8% to 9%. they also said that they are cutting 6200 jobs, closing 68 stores, all of this in the middle of continue turnaround efforts that are not working according to deutsche bank, which has downgraded macy's to a hold. cutting kohl's also to basically where the market performs on the same failure for turnaround, expecting a volatile holiday season. it is also weighing on the it looks like there was big weakness in the accessories business, watches and handbags, so fossil is down sharply. turning to another sector, companies that supply industrial lower in the premarket after they raise the odds of a companyh a german-based to 50% but the reason that both of these stocks are trading lower today is the fact that the analysts there think there will be margin pressure and also believe that the $1 billion

synergies expected are unlikely to happen. coming up, signal of stability. the offshore yuan surging after china moves to choke capital flow. is the government strategy working? that's next. ♪

jonathan: for new york city, this is "bloomberg daybreak." daysng off 2017 with two of gains, but looking at equities there's not much of a signal coming from futures. thet's dead flat across board and likewise in europe as

well. an interesting session developing today for the dollar against a chinese currency, specifically, a real mixed session for the dollar, marginally stronger against the pound. >> returning to that big china store that you referred to, the yuan surging the most ever on record against the dollar. we're joined now by our chief asia economics correspondent today. i will be simple about this. why is the yuan up soldier medically against the u.s. dollar? do we know? >> look, it's a most killing season for the yuan bears and they didn't like how they started last year. the chinese stories are coming in in a big way. it's less clear if they are dumb -- directly intervening today, but they have engineered a andsic liquidity shortage the net result of that is much more sensitive to short the currency there.

they are really sending out the signal that it is not a one-way bet and you place your money at your will, we are coming after you. yesterday the big story was the chinese government encouraging state enterprises to go out and really by the yuan. do we have any sense as to whether that's taken effect? >> so, it's difficult to tell if we have had that kind of direct intervention today, because like i said, we do know that the liquidity crunch in hong kong has been engineered by the clampdown on the borders over recent days, bringing in new measures to make it harder. whether or not they have pulled the trigger on forcing them to sell a foreign currency, we just don't know, but we know that they previously picked it off the sleeve and started tour ticket like their strategy better, something that they did last year when we had a flurry of speeches on account of the market down.

either way, the pressure and sentiment is quite fragile. chinese authorities to have significant cards remaining up their sleeves. david: thank you so much for joining us. jonathan? the global head of fx strategy, steve, joins us now from new york. we have spoken with you a couple of times. you are flush out on the shorts and you squeeze the liquidity. you send short-term rates surging in hong kong. great, that's done. doesn't change anything, does it? so what's next? steve: you have to distinguish between the short-term and long-term. depreciating, they want to do it at their own pace. they don't want speculators to be making too much money, so they are punishing them now. there were a lot of expectations coming into the new year that the private capital outflows

would be a continuation of corporate l close. they have managed to sidetrack that. just as we are seeing in miniature with the dollar today, i think we're seeing it big time with the short squeeze that doesn't change the underlying fundamentals. to follow-up on the chinese currency more specifically, the move that we saw in january and february of last year, what are the signals and signs it to you we won't see a repeat of that? >> i think that the big difference is that the moves last year happened in this and wave ofrisk off, huge pessimism that overtook the market right at the beginning of the year and if anything, the chinese authorities looked as if they were scrambling, changing the regulatory framework almost in real time. i think that now they have this carefully planned and i think that this is coming off much, much better from their perspective.

chinese equity markets are doing pretty well. i think that overall this is working the way that they planned it. on the other side of the cross hairs, the u.s. dollar, you and others were waiting eagerly for those minutes. a lot of people thought that they were hawkish and the dollar weekend, not just against the yuan, but a lot of currencies. what happened? steve: the big picture story is fiscal, what trump is planning, and we haven't had any information on that in a couple of weeks. i think that we had a strong manufacturing pma -- pmi that the dollar came off of. there were pretty hawkish man -- hawkish minutes in the dollar came off. i think it tells you that the market is waiting for more news before they buy more dollars. david: short-term -- sorry. change theoesn't

immediate term perspective by calling the market offsides here. you don't see this as an a longer-term correction? >> i don't think so. unless they back away big-time from something that happens to derail that, i think that that's the big game that the market is changes -- the text text changes to personal corporate, indicating trade measures into it. that is what the market has its eye on. the short term in the absence of news, i think we're looking at positioning and data flow and it looks like the positioning is so bit that we are getting a of a squeeze. not a tremendous squeeze, but it is unexpected given that we have been buying dollars for the last two months. jonathan: talking about rape policy first, then shifting to other policies, quite

fascinating. the balance has been within the federal reserve, fueling up the upside risk with his goal stimulus. what does that mean for the outlook for rates? how do you make those forecasts now? think if you are at the fed, you will wait to see what guidance you get from the trump administration. it doesn't have to be a specific law that's passed, just an indication of what they are aiming for. start to build that into your forecast. the key thing that they were saying yesterday was the gradual means something different when fiscal policy is neutral or it does now,an when fiscal policy looks like it will be expansionary. the specific mentioning the gradual does not necessarily mean one or two per year, it could mean more. the other effort that was key was that they set the interpretation of financial conditions. the fact that the dollar is up, that rates are up, it's one thing to happen when fiscal is

neutral and there is no stimulus there. it does matter a lot and financial conditions are much threatening that. question, if the definition of gradual change is -- why is it so important to the current policy around the balance sheet? this was the first time ever were talking about the balance sheet was the third rail of the fed. i think it's telling you that not only might they act at a short end, but they might in court -- encourage the rates to back up at the long end. until now they said they were going to touch that end until tightening of the short end was well underway. but they've told you that it may be underway now. jonathan: great to have you with us teacher insight, steve. from city global, the head of g 10 fx strategy. up, major u.s. retailers with a rocky start to 2017. we will look into what two of

the largest department stores are doing to curb their losses. that's next. this is bloomberg. ♪

david: mrs. bloomberg. christmas brought cheer to some big retailers this december. macy's reports disappointing holiday sales and said that they would cut an additional 6000 jobs from its payroll. in addition to the 3900 jobs already announced, as they continue to close stores across the country. with us now from princeton, new is our bloomberg intelligence retail analyst on the phone. thank you for joining us. i think it's 6200 additional jobs. so, tell us what went wrong at macy's and how badly wrong did it go? >> it's just in stress -- interesting, the dynamics of the release that they recorded.

they saw weakness in the accessories, which is a big is this for macy's. there was weakness somewhere there that led to the sales shortfall. the real culprit has been falling traffic. that's a concern that's just not holiday to that holiday specific. before this, forgive the expression, there was blood on the water what it came to macy's. what does this do to the situation with them, with the people that they are really after? i think it just creates more urgency. they have been selling smaller properties, but the big property, herald square, is what people are rooting for and we have heard nothing on that except that they are working through it and looking at opportunities possibilities. jonathan: the stock is getting

battered in the premarket. the conversation is always that it's a challenge for the brick and mortar stores, should shifting towards e-commerce. foris this a problem department stores. ? poonam: i don't think it's something that is temporary. they are big stores, there are 150 to 200,000 square feet with multiple departments in there isn't much differentiating one from the other. to recoup that lost traffic drive interest, not only do they have to improve their lines of business, they also have to create excitement with the customer. macy's, with over 700 stores, it's not that easy. david: do the numbers from kohl's reinforce what you just said? poonam: i would think so, yes. they are also down. you have to know that while they

both target the department store customer, the business models are slightly different. kohl's has a lot more private label it exclusive brands than macy's. they could differentiate on that front and they are launching under armour this year, which could help them. it may be easier for them that macy's. david: thank you so much. jonathan: coming up on the program, election year for angela merkel. how will germany change? what is the impact on president-elect trump's administration? the u.s. ambassador to germany will join us next, from new york. this is bloomberg. ♪

jonathan: from new york, this is "number daybreak." let's get a check on the markets for you very quickly. kicking off 2017 there, today if you look at the futures we are pretty much flat, down 1/10 of

1%. down by about 0.2%, switching out the board with the treasury basis point one the 10 year yield. looking at europe, a softer session there, that's the supply weighingance and spain on the bond markets. isn't it fascinating, david, economists telling us that the hawkishness was exactly that, hawkish. the market didn't really communicate that. they: going the way that addicted, but a little bit of a surprise. here is what you need to know right now, the u.s. dollar takes a pause, the weakest it's been ,ince trump was elected signaling uncertainty over where the economy is heading. china chases the one bears, offshore posting its biggest two-day gains on record as the central bank moves to curtail outflows and the overnight lending rate soars.

is there more to come? malaise on 34th street. macy's reports disappointing holiday sales, cutting an additional 6200 employees from its payroll earlier this year. on role -- online rates continue to rise. jonathan: prime minister theresa may is wasting no time filling the vacuum by rogers and his .esignation pero is the next ambassador to the european union. but was this a power move to do it so quickly? or sign of weakness? take such as to crucial decision so quickly suggests weakness, the criticism to her approach to brexit must have stung. we have more live from london. she has reacted fast. it's a question of strength or weakness, which is it? simon: she opened up that letter

from ivan jurors and laid bare the feelings within the u.k. overnment civil service the lack of a strong negotiating team. so, she brings in a former ambassador to moscow and does it quickly. barely 24 hours after rodgers resigned. as a senior government official told tim ross, it does seem to be the suggestion there, that she acted quickly and was perhaps stung by the criticism, which is fairly unprecedented insight into the workings of government contained in that letter, talking about muddled thinking and the like, suggesting that there was a breakdown in communications in some parts of the government. she appoints barrow and does so quickly, perhaps suggesting that she is trying to draw the line. -- jonathan:n us this has taken is deep into the

thinking in the united kingdom. what does this tell us about rodgers or mr. barrow? it makes the point that she wasn't bowing to some cause. something to have that sensitive job. she went to the civil service, a career diplomat, someone who could be neutral. a lot of former diplomats hitting the airwaves and twitter yesterday on the announcement to warn her against going down the political route, arguing that the job of a civil servant or an furnishor is to ministers with the information that they need to make the decision but not make the decision for them. interestingly, barrow talking in his statement about how he intends to work in the best way of getting the u.k. outside the eu, a signal that he's perhaps more optimistic or a veto about the job at hand.

if you followed this carefully enough and look at the technical details coming out of the government and listen to those former diplomats, you would say it was a mess. if you look at the economic data, you would say it was ok. that's crucial for the u.k. economy. 2017 hadmy coming into some serious momentum. does that go into her favor? absolutely, it strengthens her hand before the referendum had weakened substantially, it certainly undermined her both in the country and in her brexit negotiations. now to some extent she can point to angela merkel and others and say that the economy is in pretty good shape and that perhaps we don't need europe as much as we thought we did. therefore it's going to be stronger than what we asked for. on the flip side, there is danger overnight from the british chamber of commerce that

could hit consumers. the fact that brexit has not yet been triggered, we don't know what that will look like and what plan she may have for brexit in the future. it could be that the economy is something like wiley coyote, having fallen and on the flipside it could be that there is momentum there, inner strength in the economy that would certainly be welcome by her. simon is of course being very diplomatic and arguing the best argument on the side, but you have to say that whether it has happened or not, there are a series of forecast that the economy would fall off the cliff after the vote. never mind it's happened, after the vote. looking at the pmi again this morning, data relief lies in the front of that. people remaining not brexit, it turns out they

may be wrong so far, but we will check in on wiley coyote, that was a good analogy. staying on the subject of europe, talking about germany and western europe generally. trump willlect become him from pungent 20th and he wants to rethink relationships throughout europe. joining us now is a man who has been on the frontline of those relationships, john emerson. for the last several years he has served as the u.s. ambassador to germany and he was the clintonin administration before moving to germany to help run the capital group companies in los angeles. he joins us now from berlin. thank you for being with us, mr. ambassador. simon: happy new year to both of you. david: there's a lot to talk about here. one of the things we underestimate is the extent to which ambassadors represent u.s. commercial and business interests. the interest in exporting and having trading relationships. let's start there. as we look at the job you have

done in the situation you are in and look forward to the job that will come under the trump administration, what do you anticipate the likely differences in trading and commerce might be? the economic relationship between germany and the united states in particular will remain very strong. one millioner americans and germans who work for companies that are headquartered in the other stateses and the united is now germany's largest customer for exports and germany is our largest trading partner in europe. i will say that there is some things.here about two number one, the focus on trade countriesthat other may have with the united states and whether that is owing to impact the policies coming out of the new administration. great concern is about the fact that he kept --

the transatlantic trade protection partnership's been pushed to the side. it would be hugely beneficial to germany and german businesses, as well as to america and american businesses, but trade, as in the united states, or big trade deals as in the united states are kind of radioactive here at the grassroots level, so that's a challenge. further liberalizing of trade is one thing. mr. trump and his staff seem to be suggesting that we might go the other way and specifically address one thing, this order tax adjustment, sort of a poor mightvalue added tax, you say, where we would taxi imports coming in and give subsidies to the exports going on. how might that affect relationships with germany or western europe? simon: i think it would be thinknging -- john: i would be challenging. my belief is that one of the strengths of our economic relationship is the fact that we

have such a low tariff even without a trade agreement. i think it's only around 3%. i think that there would be a lot of concern there. i tell you where there are other areas of concern, maybe you saw this in the ford motor decision in the united states, it is concerned with exit and what may happen to nafta. -- brexit and what may happen to nafta. selling cars either within europe or the united states, but auto parts are manufactured in the u.k. in the case of europe or in mexico in the case of the united states. what thatoncern about might mean in europe and america as a result of this. i think that in listening to your commentary on brexit on the one hand, this is an issue where one side might inform the other and i think in europe people will be paying close attention to that. --'s talk more broadly

david: let's talk more broadly about politics. specifically, the election coming up for angela merkel. what does that look like? how key issue to the stability of western europe? i think she is in or mislead key. clearly she is president obama's closest foreign leader in terms of a relationship. germany, with its role in nato and the eu is really indispensable to much of what we are trying to accomplish from both the foreign policy standpoint and the international economic policy standpoint in europe and other parts of the europe -- the world as well. there are two concerns. one is that she obviously took a hit, her popularity took a hit with the influx of refugees that came in in the summer and fall of 2015. so, our sense is that she probably wins reelection. but the concern is in the

election of 2017. the concern is whether you have a summer 2017 that looks like the summer of 2015, rather than last summer, which was much more restrained in terms of the influx of refugees and immigrants into germany. and of course, the second concern that people always have is multiple terrorist attacks on german soil they could also somehow impact the election. i think that short of those two things, she probably will get reelected and, candidly, given her importance and the stability of germany and what it represents to not just the european union but also to our bilateral relationship, that will be an important consideration. jonathan: no one would disagree that angela is key to european stability, but going forward will she and germany be at the center of a foreign policy

effort coming out of the new administration? the: you will have to ask new administration that. my belief is that for a whole host of reasons, the german american relationship is indispensable. there are some any things that we work on together. the question is going to be, what are the priorities of the new administration? will be the issues on which germany and the united states will want to engage? examples of the things that we have been engaged in, besides building and strengthening our economic ties, have been the iran nuclear deal. climate change, working on that, standing up to russian aggression, particularly in places like the ukraine and the situation in crimea. in terms of dealing with the middle east challenges. the answer to that question will depend on -- what are the issues that are going to be the priorities of the new administration and whether those are the kinds of things that

germany and the german government would feel comfortable working on. jonathan: ambassador, it's great to get your time. david? david: breaking news right now, an announcement just out that stanley black & decker will purchase craftsman brand from serious. this goes right to your point doesa few minutes ago, -- it work, conceptually, this large department store approach? i have purchased those tools over the year, they are great tools. jonathan: i haven't, i usually make the call to downstairs to get the drill out. that's how it works in my building. [laughter] david: coming up, the unusual approach of deutsche bank. that's next. this is bloomberg. ♪

emma: this is "bloomberg daybreak." coming up in the next hour, the vanguard chairman and ceo, and his outlook for 2017. david: this is bloomberg. i'm david weston. back, this time for a potential deal taking a different approach to how it will meet its obligations. they are at least considering turning to a private equity firm to handle some of their restructuring of bad mortgages that deutsche bank promised to take care of. joining us from london, michael moore, who heads the coverage of european banks. take us into this deal. this is not something that justice department anticipated

when they did their first deal. >> banks are finally -- constantly looking for ways to adjust that are the cheapest to them and in this case it might be lending to private equity firms that regularly do these kinds of loan modifications. as i understand the deal, the private equity firm would be the one calling you up to say -- let's talk about the deal we had. it won't be deutsche bank on the line. correct. they would be lending to those private equity firms and they want to get credit for that on the consumer relief front. the question is whether that is consumer -- additional consumer relief or something that would have happened anyway, with or without the settlement. if the doj thinks that this would have happened whether or not they have the settlement, they may not approve it. jonathan: i will take that question and ask it in a more pointed way.

in the u.k., these companies exist, they call you up and say -- you os money, we want to get your payments down, we are going to drop it by about five, but you must give us this money every single week or month and if you don't make the payments they will call you up and get even more aggressive. the tone in the spirit of consumer debt relief, is that challenge by what deutsche bank may attempt to do? michael: i think it varies widely on how these firms approach and how aggressive they are. but you know, there are some economic reasons to modify these loans that have a better chance of getting paid back. it does work out for both sides, but as you say, not being in control of it, if you are deutsche bank, raises the possibility that you are lending to someone more aggressive than you would be. david: what does it do for the talent sheet of deutsche bank?

what does it do for the reserves? >> from a capital perspective is much more beneficial to do alone to a private equity firm that you probably already have is a client rather than buying some of these distressed mortgages and having to write them down. certainly on the capital front it helps. you so much, michael. now it is time for other stories making headlines at the hour. this is your bloomberg business flash. emma question mark emma: -- emma? way: toyota has seen which the wind is blowing with president trump. they will keep them in mind when they make their next move to mexico. they had planned to build a factory there but have canceled it after criticism from trump. tesla has flipped the switch on its new factory, making battery cells to power their energy storage products and eventually

the model three electric car, making these is a business that china,n dominated by japan, and south korea. another sign of the british economy was growing strongly at the end of 2016, the services sector in the u.k. unexpectedly grew last month and at the fastest pace in more than a year according to the market purchasing management index, including retail and health care among other businesses, the largest part of the u.k. economy. this is bloomberg. john? up, it's alling about jobs. the key economic data points you need to watch for in today's trading environment. from new york, this is bloomberg. ♪

jonathan: from new york, this is

bloomberg. time now for the trading diary today in today's u.s. economic agenda, in 15 minutes we will get the adp employment report and soon after that, a: 30 a.m. eastern, we will get the initial jobless claims and then later on at 10:30 four the commodity traders out there, the weekly crude oil inventory report. joining us now to discuss the first two is our bloomberg chief u.s. economist. he joins us now with a look ahead to u.s. employment for payroll friday. starting with the pmi, if you went with the unemployment numbers, you would say that these numbers would be pretty solid? kyle: positive territory, that should tell us that eventually we will see the tide turned. not so sure it happens in tomorrow's job report, but that is something we can look for next year.

wage growth -- jonathan: wage growth going down to the 60's, unemployment down here, wages peak. he gets to announce as unemployment down here, where are wages. these are the things the unemployment rate will he tells you, where the labor market is currently at. carl: it is only one measure of slack in the labor market. if we look at things like long-term unemployed, we can see that there is still some degree of lingering slack, but nonetheless it is a good inometer and as low as it is the direction it's moving, that tells us that slack has been reduced and that wage pressure will be building up. if we take a look at those earlier examples in the those were times when you had less extreme moves in the unemployment rate and i think that because of the dramatic moves, there are other

issues this time around. >> who do we speak -- who did we speak to this week? he said to me that the difference between now and last year is that the unemployment rate now is lower. so, we will finally see those inflation and wage pressures. carl: don't forget that inflation is a lagging indicator and we have had very slow growth in the first half of 2016. i agree that employed -- inflation pressures are coming, but we have to be mindful of a lagging economic indicator, lagging real activity by about six quarters, it could be slow to materialize. what did you take away from the federal reserve minutes at this point? seems to me that slow and gradual, that was the guide a couple of years ago. but now? carl: when you are the only bank in town raising rates, you will be stuck with slow and gradual pacing.

normally in fed deliberations you have two handed economists. on the one hand there are these risks, on the other hand there of those risks, but it wasn't so balanced at the december meeting . it really looked like hawks were dominating the discussion. there were concerns about the degree to which labor slack had diminished and would continue to diminish and cause wage pressures. consensus180 k tomorrow, go. karl: the question will be if the hiring managers are putting their money where their mouth is jonathan:. there we go -- is. jonathan: there we go. coming up on this program, the world's largest mutual fund manager going just next. ♪ ♪

jonathan: from new york, to our

viewers worldwide, welcome to "bloomberg daybreak." in the markets, it looks a little something like this. the dow closes 58 points away from 20 k with futures on the margin. going up quickly on the bond markets yesterday, treasuries stabilizing on the u.s. 10 year and the cable rate settles. the services data coming in at a 17 month high in the united kingdom. david: here is what you need to know at this hour. the dollar takes a pause. the weakest it's been since donald trump was elected after fed minutes signaled uncertainty over where the economy is headed under the new administration. the chinese offshore yuan posted its biggest two-day gains on record as the central bank moved to curtail outflows and the overnight lending rate soared. is there more yet to come? the grinch steals macy's christmas. macy's reported disappointed holiday sales cutting an

additional 2200 employees from the payroll, confirming it will be closing 100 stores nationwide. but mine competitors continue to thrive. that is what you need to know at this hour, jonathan. china,n: beginning with we want to talk about that specifically with the offshore yuan. this is the offshore overnight deposit rates. there are two big spikes. one of them from last year and another overnight, flying high, squeezing the currency and pushing the overnight rate. is it going to change anything? >> i think that those authorities are trying to get a handle on what's going on, but as far as we're concerned it looks like everyone is very bearish. all of the analysts i'm speaking to our very bearish on the yuan. i don't think that the moves they are making in the short-term will necessarily be affected because, as i say, they say that his mother favored trades of the you we're -- of

the year. this an: effectively, is war on a stronger dollar? is that what they are at the mercy of? lanahn: the entire world is at the mercy of a stronger dollar. many of the emerging market currencies we have seen have moved to record lows. going into what is going to be a cycle, june or later this year, the fed is eventually going to raise rates again and that's going to put upward pressure on the dollar and downward pressure on these other currencies. january of 2016, this happened and the fed back to way. what has changed? lanahn: the fed is looking to raise rates in the market is much more confident about the prospect of rate hikes. january of 2016, a lot of people were very skeptical but now we have seen the fed in december

with a new administration coming in and many of the policies the market has speculated about suggests that there is going to be more growth in the u.s. that sols further inflation, and i think people are more confident about a stronger thear this year. jonathan: big difference seems to be capturing the conditions of risk off, but now yields are backing investors are seeing more growth. but that's the perception of what's happening. what is the magic thing? what's the thing they're looking at where they say that's it and we have to take it down. i wonder about that. some people may not have bought fed minutes yesterday, not thinking they would tell us much, but the foreign-exchange markets have certainly reacted. what did we learn from those minutes and what did it tell us about the economy and our investments and where they are headed? to take us through it, we are

joined now by the chief u.s. economist at rbc capital markets . coming to us right here from new york. welcome back to the program. that the you surprised minutes and at the reaction? tom: we were not really surprised by the minutes. they filled in the gaps left over from a few weeks back. we were not surprised. i think that there were a couple of things that were interesting in there, not the least of which was the fed worried about undershooting the employment rate, which we found to be a sharp turn for the fed that have been pounding the table on the idea of copious amounts of slacking existing on the labor backdrop. that was certainly a standout. i think that generally speaking it was more just filling in some of the blanks. of the blanks is that they are not sure about where the economy is going. they just can't tell yet what the administration will get done and the effect it will have. how does that affect your

investment strategy? tom: this is certainly a show me fed at this point. even the fact that they highlighted the fact that they could see a better economic profile on the back of the trump election, they didn't quite use those words, but to us that was in that they are now conceding a potentially better profile from an economic perspective. for us it is not something that you changer numbers on at this point. if you were looking for 2.5% growth in the coming year, you should still expect it, but i do think that there is obviously a number of catalysts that could propel growth much higher, something that we are acutely aware of. like the fed we are also in a show me mode. >> as you know, the federal reserve has wanted to hold the hands of the markets and they try to do that with forward guidance. the guidance from the fed for years has that hikes will be slow and gradual.

if that changes, how do they communicate that? already did, that was one of the things they highlighted yesterday, the fact that they may have to go faster because of the undershoot on the unemployment rate. it's not that they said that this was a foregone conclusion, but the mere fact that they are even addressing it is, for us, really key in understanding the state of funds. i think it's funny, if you were to ask most forecasters before the four present -- before the presidential election, most people would have conceded that this fed only had a few more hikes in them. now you can expect a few hikes this year. i do think that the trajectory has changed for sure. very hard to forecast 2017, we won't go there too much, but they haven't talked about the balance sheet, it's often the elephant in the room at any fed reserve news conference. we used to think it was just them being maturing and

reinvesting, but is that about to change? filling in the blanks, they basically said that if it starts to come in firmer than we expect, it's entirely possible we could use our balance sheets to basically restrict policy, to some extent. sales, which is something that no one had seriously considered, not for quite some time, and all of a sudden it's something that they are considering, if you do get more of an inflationary impulse, thatit certainly seems selling assets is absolutely a possibility for this fed. would havetake, you to see that materialize, but the fact that the fed was even talking about it is compelling. david: moving from the fed to the trump administration, where could they store some of these programs for us? taking regulatory reform and infrastructure spending, how do you score those in the effects they might have? from our perspective, tax

policy is where you get the most bang for your buck in the immediate term. if we are able to see some of it coming into fruition in the back half of 2017, it could add 3/10 of a percentage point to our forline estimate of 2.5% 2017. for 18 you are looking at some thing closer to four tents, even 5/10. on the infrastructure side of the equation, i don't want to beat up on the idea of infrastructure and what i'm about to say might make it seem like i am, but it's a great idea broadly speaking and you don't generate a ton of economic output from infrastructure spending. at least not in the immediate term. the reality is that we are not talking about big enough numbers. it seems that if they do settle on an infrastructure program it might be about $500 billion spread over 10 years, it doesn't move the needle in a material way, but we certainly need it. david: tom, thank you so much

for joining us today from rbc. let's get an update on what's making headlines outside the business world. emma is here with first world news. -- first word the news. republicans and democrats to replace obamacare together, according to trump. he accused democrats of playing politics. tosaid that he has moved develop a smarter health care plan that is less expensive. jack lew has a laundry list in an exit memo. he says the u.s. should keep moving sanctions to maintain the pressure on countries to take stabilizing actions like russia and north korea, saying that global economic integration leads to better outcomes than protectionism. the president of the philippines is signaling that he would like closer ties with russia. he says he is open to joint military exercises with russian forces and tomorrow he is expected to visit a russian

submarine. global news, 20 four hours per day, powered by 2600 journalists and analysts in 120 countries. this is bloomberg. david: -- jonathan: futures, marginally negative, getting it across with abigail doolittle. of searswe have shares trading higher on the news that stanley black & decker is purchasing their craftsman tool brand line for about $900 million. the stock is down about 90% from its peak in 2007, some investors may see this as a first step in a potential restructuring to help the company turnaround. we do have the shares of an i.t. consulting firm trading higher on the premarket news that gartner is purchasing them for $2.6 billion in cash and shares.

blackrock owns 23% of cdb, so you have to met -- have to imagine those managers are pretty happy. retail,at riskiness in macy's and kohl's are both trading lower as they lowered their full-year earnings guidance for 2017 by about 8%. cutting 6200o jobs, closing 68 stores. just inness is not accessories, but also there is a declining traffic problem, while the ceo of kohl's said that it was a volatile holiday season. david: every go. thank you, abigail. coming up, vanguard had a big year, taking in 300 billion dollars in new investments. more than one third of that went into exchange traded funds. what does that experience tell us about the balance between active and passive management? up next is bill mcnabb. this is bloomberg. ♪

i want tojonathan: bring you to the market move in the fx markets. the pay, yesterday, all-time low against the dollar, rolling over by about 8/10 of 1% with a stronger mexican peso story, with direct discretionary dollar sales, boosting the mexican peso and strength on the screen right now. that's the report coming out that the mexican central bank is intervening in the fx market strengthen the peso by selling the dollar. let's get to another story at this hour, vanguard group said that they attracted a record $325 billion last year, with an annual total meaning that some firms need a decade to reach

another high performer, blackrock. what do those companies have in common? one is passive investing, the other is low-cost. joining me now is the vanguard chief executive officer, bill mcnabb. great to have you with us on the play -- program. where do we begin? let's start with low costs. feels like a price war in merging. can that continue? focus on fees is something that is going to continue. if you think about what is driving it, there are two factors. one, we believe and we have expressed this for the last couple of years, for the last decade or so we will see lower .eturns in bonds i think that's pretty safe to say. if you look at the cost as a percentage of return, it becomes a lot more relevant. the second element that is going on is that there has really been an embracing of the concept that

asset allocations are the most important things that you think it right from a portfolio standpoint. you are seeing advisers to retail and institutional investors and so forth focus really heavily on asset allocation. getting the right mix of other classes, as opposed to trying to pick the single best fund or security. what we know is that from the academic research, that is 90% of your portfolio return. what you see is investors expressing that asset allocation in lower-cost vehicles that are simple and broadly diversified. jonathan: the amount of times we talk about passive on this program, you would think there wasn't much oxygen left in the business to grow anymore. what is the push back against that? come today in the u.s. indexing represents 15% of the overall market. on the equity side, 5% on the

fixed income side, there is still an awful lot of room to grow. i think that part of the debate here though is that, in a sense, it's the focus on active passive . i think the better debate is on high cost versus low cost and i do think that you will continue to see, to your first question, a secular change where investors and professionals who are advising those nationals are very focused on cost. we manage $1 trillion of active equities and fixed income, but they are very low-cost. we think that's actually an important part of the equation as well. now, what is the limit, do you think? i don't know there is a limit, but you could see it double over the next decade.

broader ands you go more global. when you go outside the u.s., indexing is a foreign concept in most markets. david: that money has to come from somewhere. what doeswer-cost, that due to the employment situation in terms of active management. they will have to redefine their value proposition. the best active managers are incredibly talented and have a real focused on cost structure. making sure that they can deliver and call it a lower price point. industry,ns in every you know? if you look at active management historically, look at the publicly traded firms. they have operated with very high operating margins. typically that gets computed away in other sectors and we are seeing that happen in our sector now. does the president

elect donald trump, change that? certainly the last couple of months would suggest so. if you look at where valuations are in the developed world in in the restthe u.s. of the developed world, they are at a pretty high level. over the nexties decade of returns being somewhat than long-term historical averages is pretty high. it's by no means certain, but it's pretty high. on the fixed income side you can take a 10 year bond yield to maturity and that's her best predictor of annual returns for the next decade, significantly lower than what we have seen over the last 20 years. that is how our map is constructed. david: another development is the online phenomenon. i know that vanguard is working with that as well. to what extent will that replace active managers?

what we are seeing is two things. one, you are seeing continued evolution, but traditional active managers using quantitative techniques to, in a sense, make themselves more efficient in covering the universe. a classic example is you will take somebody who used to read, you know, 1000 annual reports and they will be using some pretty sophisticated algorithms to try to narrow down the scope of companies that they are really going to go deep on. again, i think that this is all around productivity and making yourself more efficient as an investor. david: bill mcnabb will be staying with us, we will come back to him shortly. coming up later in the program, looking towards the trump administration, what will the new president mean for trade and american ceos? a man who to ask than has been in charge of u.s. trade policy and a ceo?

we will be joined by carlos gutierrez. this is bloomberg. ♪

this is bloomberg. bill mcnabb, the ceo of the vanguard group, bill, we just started to talk with you a bit about what it means to invest under a trump administration. we don't know what it will look like, but we have some indications. for someone who is where -- worried about the pension or 401(k), as the world changed since the election? bill: i think that when it comes to thinking about retirement, you have to think long term and the historical data that we have looked at over 150 years suggests that who is sitting in the president's seat really doesn't matter. i know it sounds harsh, but these policies have an impact on the margin, but you have to look at much more long-term fundamentals. we think that as a retirement investor, you got to tune out

the noise in a sense and accept whatever volatility may be engendered by changes in policy and have a long-term perspective. is that what largely drives what you said earlier in the segment, looking at the last 10 years? what other factor is it? demographics? >> it's really based on valuation. we have run some pretty sophisticated models, but if you look at valuation as a predictor of future return, we think it's longtty good, you know, run, best predictor of future returns, we are at a pretty high point. it's not bubble territory, but we are at a high level on the equity side. again, when you sort of do distribution of future returns, the central tendencies come in a couple of percentage points lower. by the way, that doesn't mean that that's what's going to happen, but if you were betting, that's what you would bet.

it was howier said you allocate within the portfolio. given that, for example, does that mean not so much and equities because we are already look,valued their? bill: i think the equity premium is still pretty attractive and you'd have to have a highly diversified portfolio of stocks, bonds, and cash reserves as well , and you would have to be willing to accept that returns may be lower over the next decade. what that tells you is something that no one is very comfortable with but it is a reality, you need to save more. if you are in a retirement plan and you have the opportunity to increase your savings rate to that plan, now is a great time to do that. do you have any indication that that is happening among the american people? just came out with a study in the last couple of days

showing that rates had kicked up a bit. we would say that there is still a couple of percentage points below ideal. the average 401(k) participant saves about a 10% rate and you include the company match. the number probably needs to be closer to 12. ok.d: thank you so much, bill mcnabb. jonathan: save it all and put it in an etf. that's the message here. david: like my mother. jonathan: still to come, carlos gutierrez joins us next. we are six minutes away from the open in new york. moving down on the margin by 1/10 of 1%. this is bloomberg. ♪

♪ jon: this is "bloomberg daybreak." futures down .1%.

if you switch up the board, couple of moments ago, we had adt employment change my downside surprise. -- downside surprise. the dollar rolls over just a touch on the back of those numbers. we get initial jobless claims crossing as well. 235,000.at falling 28,000 from the previous number. the previous number was revised down as well. that number keeps rolling doesn't it? david: a bit of an appetizer for tomorrow. on: full coverage right here bloomberg. david: as we look forward to people we are

focusing on what a trump administration will mean for trade and how everyone will respond. .oining us, carlos gutierrez he was the chairman and chief executive officer of the kellogg corporation. today, he is chair of the stonebridge group in washington. thank you for joining us. let's start with trade and i want to talk about the sea suite as well. -- c-suite as well. you were the secretary of commerce under george w. bush. what would you hope to see in terms of their trade policies? aslos: if you take nafta next sample, i would hope that anything that is going to happen any renegotiation or any chapters that will be revisited that we do so as quickly as possible. in the meantime, things are

being held up come investment is not moving back and forth with trade could be stronger. ,he cloud of uncertainty companies that have long-established businesses in mexico, u.s. companies, is there. nafta will be a renegotiation of a couple of chapters. it is 25 years old, so it can be updated. question is china. administration's policy will be with china trade. we don't have a free trade agreement we can renegotiate. that, i think, is the big uncertainty. the sooner we get on with it, the better. trade is at the top of this president elect's list. he will move forward with many of his promises. david: if you were going to

guess right now on nafta, you think there will be a renegotiation. but it will not be that cataclysmic. carlos: that's what i'm hoping. a couple of things that could happen -- that probably need to happen -- reopen the environmental chapter, reopen labor and take a look at that, bring it up to date. it is 25 years old. it could be brought up to modern-day standards. that needs to happen quickly. in china, it is a lot more complex. we don't have the foundation of a free trade agreement with china and we can work off. -- that we can work up. the u.s. is barely renegotiating a bilateral treaty that leads to a free trade agreement. it is a lot more scattered, it is less defined. so, therefore, the outcomes are

less sure. quicker we get this going and the quicker the president-elect and his administration meets with china and starts negotiating an understanding of what each side wants, the better off or everyone because that is something at one is looking to. what is going to happen with trade with china? is this negotiation with china a zero-sum game? we want to get the imports from china down. that will hurt the chinese economy. trade usually is not a zero-sum game and it shouldn't .e the more trade to do, the more the pie expands. we've seen that worldwide. us in a bit of a zero-sume looked for a

game type of negotiation. as the chinese like to say, we should look for a win-win, which would be good for both sides. i'm sure there are specific industries where we may be paying tariffs did ministration believes we shouldn't be paying chinese are allowing imports to come in duty free. without acan do that very costly trade war. that will be the president-elect's balancing act. how do you get what you want from china, how do you get their attention? how do you get their attention and get what you want without having to go into a trade war? david: take your secretary had off and put your ceo had gone.

-- hat back on. what are the biggest things that make a difference in your business? extremelyey could be helpful for the u.s. economy -- one is tax reform. we have the highest corporate tax rate in the world. it is hard to continue to tell here.ies to invest year regulatory reform. there is a sense in the business community that we have gone overboard. epaher it is dodd-frank or regulations, there is a sense that businesses are being held back. the best thing that could happen for this economy is to have a

surge in business activity. the private sector is good for this economy. we also need to focus on startups. startups are not growing. our pipeline for future businesses. policiesdent-elect's of regulatory reform will spark more startups. are all very hopeful. if you were advising the president-elect, what would you warn him about? these are the things you need to be most concerned about in terms of u.s. economy and u.s. businesses. carlos: all of it comes down to sequencing. i'm sure there will be connecting the dots. wendy do you do tax reform and how do you pay for some of the other programs you want? that's when do you do tax reform? don't get too deep and recommendations.

the president-elect has plenty of people around him. let's remember the history of 2009 and 2010. when the whole administration was absorbed by the affordable care act. my concern would be that this administration gets totally absorbed with the affordable care act and we don't move forward on tax reform, we don't move forward on regulatory reform. those are things that will spark the economy and will help us hit that 3.5-4 percent number the president-elect talked about. david: that is carlos gutierrez. chair of albright stonebridge. jon: initial jobless claims at the lowest in eight weeks. yesterday's fed minutes involved a couple of surprises.

i want to talk about them with jeffrey rosenberg. one of the surprises was the discussion over the elephant in the room, the balance sheet and the idea that may be the current method of reinvesting maturing securities and treasuries on that balance sheet might stop. you are focused on a piece we were looking at as well. i don't think the market is completely focused on this yet, but it is natural in the evolution of the narrative. what we are talking about in the last couple of years, this very much slow pace of normalization. one hike a year. 2017 is about moving from one hike a year towards an eventual normalization that looks more like one hike per quarter. as you move away from this very a morermalization to normal pace of normalization,

what comes along with that is also reintroducing the conversation around what does it mean to normalize the balance sheet. alongl emerge as we get the way towards a more normal level of normalization. david: you have rate policy and balance sheet policy. can those two things act independent of each other or do they have to act together? jeff: there is a feedback mechanism between them. they act together because the balance sheet mechanism has been the manner in which the fed has controlled or influenced longer maturity interest rates. interest rate policy is the very front end of the curve. , the power of monetary policy accommodation is how they work in concert. on its it of easing the balance sheet and low interest rates, zero interest rate policy work

together powerfully to influence long-term interest rates. the feedback mechanism is you are going to normalize interest rates. that is not normalizing the short end of the curve, it is normalizing all levels of interest rates. as you move the short end of the curve, the long end of the curve reacts to that. it also reacts to your expectations of the market around the balance sheet policies. that becomes very impactful. come even. economy more impactful because of the dependency on the housing market and the importance of housing in our economy. jon: you cannot just let some of the longer and roll off because you are hanging around waiting for that stuff to roll off because some of it is naturally longer duration debt. if you get into the business of outright sales, how difficult

will that be? jeff: incredibly difficult. qe int sure you can run reverse. qe works in one direction. you can tell people that you will build up the balance sheet and people will get in front of that and buy bonds. it is hard to run it in reverse because signaling sales come bonds onsales of the the balance sheet to the degree to which we have built up significant size implies markets get gout in front of that. does getting out in front of that. and a bitake-up call of a lesson around how do you run next policy. -- exit policy. those principles changed from the beginning sense when we were just getting into this that we in reverse into an acknowledgment that running qe in reverse explicitly by signaling sales is a very

controlve, very hard to and therefore very unlikely to be our policy rather, it will be moving slowly away from her investments and moving towards a natural roll down. much more of a debate about the makeup of that policy between mortgage holdings and treasury holdings rather than outright sales. given how difficult it would be to conduct reverse qe and then excepting that that's accepting that the rate policy needs to be met with balance sheet policy as well, is that fed a whole lot more behind the curve than it was a couple months ago? that is certainly the sentiment that went through the markets in december. what the minutes were highlighting was the text around what the market reacted to in december, the movement upward in the dots. going from this one hike per one hike of pace to

per quarter. one is that transition from to four. to two to three, that is the transition the market is going through right now. qe. reverse who would have thought we would be discussing that? david: shares of sears moving higher in the premarket after agreeing to sell its cressman brand -- craftsman brand. this is bloomberg. ♪

emma: this is "bloomberg

daybreak." coming up, joseph grundfest on president-elect trump nomination to head the sec. we are keeping an eye on sears this morning, shares up in the premarket as the retail chain agrees to sell its craftsman line to black & decker for $900 million. take us through what this means for the retailer. the stock market seems to like it. and has become a rite of passage every six months or so, they have to go through these exercisesity fusion to navigate the next six months in drum. what we've seen between monetizing part of the cressman -- craftsman brand today and the

loans over the last couple of days should give them enough liquidity to navigate through the first part of the year. it doesn't do enough to fix the long-term issues the company faces. needs to dopany more to navigate 2017. what else can they do? >> you have a number of ip that you can see them pushing hard after like kenmore. you've also got the auto parts business they tried to move in the past. one of the things to keep in mind with this deal, it is not clear how much of that money actually goes to sears. there's a lot of debt that is collateralized by that intellectual property. deal for sears, looking at the numbers from is

not obvious whether this is good or bad for the bottom line. is this a good deal? >> it's good in the sense that it gives them cash today. you are trying to manage that short-term liquidity dynamic. the first quarter is a big liquidity used for the company. is one ofm, craftsman the reasons people shop at sears. you will be eliminating that benefit to getting people into sears. i think it is consistent -- probably not so great for the actual store base. sears is up over 9% in today's trading. time for the other stories making headlines this hour. shares of macy's falling in premarket trading.

the cut their forecasts and said they would eliminate 6200 jobs. that's about 4% of macy's workforce. comparable same-store sales fell in december from a year ago. toyota has seen which way the wind is blowing when it comes to president-elect donald trump. the japanese automaker said it would take trump's decisions into account when planning for its mexican operation. ford canceled a planned to build a factory in mexico after criticism from trump. dhabi development may invest in softbank -- softbank wants to raise $100 billion. saudi arabia may come up with half of that. apple will invest $1 billion. this is bloomberg. , the mexican up

peso may be up against the dollar today, but it has fallen to a record low earlier. what some government officials south of the border are doing to keep trade flowing. that is next in battle of the charts. this is bloomberg. ♪

david: this is bloomberg. time for battle of the charts. today, taylor riggs will take on sonali basak. you go first, taylor. taylor: i'm taking a look at record dollar strength, mexican peso weakness. go back 10 years, we are breaking through three standard deviations since the election november 8, up to standard deviations. -- two standard deviations.

i talked to mayors on the southern border of the u.s. what does it mean? this is not good for them if they are exporting to mexico. arizonar of phoenix, said here is the good news -- cities can take a long-term view. bootworking on creating a camp program to help companies in be next learn how to export effectively. companies can look past the dollar strength, mexican peso weakness and survive and learn to work through it. this is something i'm looking at, even after the election. david: the peso jumped up today. term, the local government can overcome -- --etimes local can do this is one of my

favorite charts. they were working through christmas and the new year -- working on renewables and issuing catastrophe bonds. we can see it is a straight line up. they been hitting a record issuance. billion atis $26.8 the end of last year. which was the largest ever. you should see a huge dip here with hurricane matthew. --ended up recovering david: these bonds bet against catastrophes? sonali: they go up if there's no contest are prepared pensions love it, hedge funds love it. -- they go up if there's no catastrophe. you are betting on bad weather. david: two great charts.

withfraid i'm going to go taylor because the peso thing is so important. coming up, trump's pick to head the sec. joins us onfest this program. 34 minutes and of the open. features down on the margin. minutes from the open. down on the margin. the dollar weaker against the euro. this is bloomberg. ♪

jon: good morning and welcome to "bloomberg daybreak."

open ines away from the new york. .0 points away from dow 20k a marginal move to the downside for the futures. the dollar weaker against most of the currencies in the g 10 it the cable rate at 123. yields down those go basis points. this two basis points. david: you must dollars the weakest it has been since donald trump was elected. this after fed minutes signal uncertainty over where the economy is headed. china chases yuan bears. the central bank moves to curtail outflows and the overnight lending rate sores. that's soars. macy's is reporting

disappointing holiday sales. they will cut 6200 employees this year. online sales continue to rise. abigail: we are looking at widespread carnage within retail on the miss or the guide down by macy's and kohl's. we have a number of other retail names plunging including jcpenney, nordstrom, ross and target. applya mistake to department store weakness to all of retail. the off-price retailers like ross stores, tj maxx and burlington stores are at less risk. the first data saying target is right on track thisis may suggest there's weakness, there could be buying opportunities for the retailers.

deserve tolers may be down on the kohl's and macy's weakness. lower. course and coach the weakness was in the accessories business. sees a lack of compelling catalysts for coach. actually beat same-store sales for the month of december, up 3.3%. upversus the estimates of 2.7%. this was driven by rising gas and the fact that this company is executing well. they had a good holiday quarter. david: besides retail, the big news of the day is the drop in the u.s. dollar coming as the fed minutes indicated uncertainty over the future of the u.s. economy. by binkyined now chadha, chief global strategist for deutsche bank.

let's start with the dollar and what happened overnight. is this an indication of something to come, that the dollar will start weakening again or will it keep rising? binky: the way you want to think about it is, whether you are talking about u.s. dollar were u.s. rates or commodities, the higherus trade, dollar and commodities higher has run pretty far. if you take a look at how the market is positioned, we have perhaps gone a little too far too fast. where youet a period will get middle of the night sudden moves without a real catalyst. i would not make too much of what's going on. heavilyet is positioned in all three of those places. david: the longs have gotten long in the tooth.

what about for the medium-term on the dollar? we are very constructive on the u.s. dollar. the medium-term up cycle has gone another 8-10%. it will happen and a gradual pace of 5% a year. -- at a gradual pace. 2015, janet yellen came out and used that smashed the dollar. another 8% for the dollar -- what does that mean for policymakers? if i present move up means almost nothing. -- if i percent move up means almost nothing. move up means almost

nothing. the underlying growth rate we would still-- be where most people think underlying earnings are. it's not a big deal. the points to keep in mind, 1983, the dollar has done cycles every six or seven years. the dollar market got ahead of itself a little bit. let's talk about equities, bonds. what are you looking at in 2017? binky: i don't think u.s. equities are ahead of themselves. they will probably take a breather over the next 3-4 weeks. mindimportant to keep in

-- we look at the s&p 500 last year. a less than 10% return. people use the price action to judge that therefore the market is long. we had close to $90 billion in outflows from u.s. equities. hardly an indicator that the market is getting long. why some ofson for up,. equity markets were -- anothera buyback reason for pause. jon: the balance sheet at the federal reserve, the conversation is happening. it's about the balance sheet and whether it will be pared down. what does that mean for your world? binky: the question is whether they do this actively.

that is something coming up in conversation. it is definitely on the table. i'm not a great big believer actual quantitative easing or the actual buying of government bonds that kept yields down. when you pair back the balance sheet, that is not a great big reason for yields to go up in a big way because the market is forward-looking, it will price that in quickly. when it is priced in, yields will go up. premium at the risk the longer and that will start to rise. jon: incredibly difficult to price and the potential paring down of a fortune in dollar balance sheet when you did not even think he would mention the sell." -- a $4

trillion balance sheet. binky: the probability of it happening, the pace at which it happens -- it is hard to imagine a case where any of those will be devastating. jon: many of us would agree that the potential is quite low for now. if you take the taper tantrum as an example and take the reverse some of the idea that ben bernanke he came out one day and said we may pared down our purchases from $80 million and bring them down to zero, let's reverse engineer that. can you imagine the sale tantrum? binky: it could be quite large. no question about it. that theyok a vow will never do such a thing again. from a communication point of view, i don't think that is how it turns out. if you knew it was going

to happen sooner or later, you time to pricead it in more. binky: this is clearly advisers to the new administration in favor of doing this quickly. primarily where they are because of what the market expects the fed to do. about policy rates and the speed of which the fed is expect it to move. jon: you would argue that high rates would be a good thing. binky: gradually higher rates. we don't want to that discontinuity. that creates volatility. we got a rather quick one percentage point and over the next three months, about 150 basis points was equities went down by 5.5%.

-- u.s. equities went down by 5.5%. it is that move that caused the market to go down. as long as rates are going up gradually, i would argue that is positive or household income. it is good for asset allocation and confidence and the list goes on. david: let's go into various sectors and things. the trump administration is informing a lot of people's decision-making right now. what are the sectors you like? administrationp and their policies are an additional upside risks to already rebounding growth. jonathan just talked about higher rates and the fed normalizing. that is also positive for growth come in my view. policies third. that's why i use the language of additional upside risk.

you want to be in the cyclical sectors. it's a question of where we are today and what is priced in. longld argue, number one, and financials, careful about industrials. -- long in financials. long technology. underweight those safety trades. in lowillion overhang volatility dividends. -- every timekly we wake up, it is the trump optimism on one side and pessimism about china on the other. binky: i'm not really in a hurry to be negative about china. you think about u.s. growth come a lot of people ask, why is growth suddenly turning around?

,ook back to q1 of last year u.s. growth has been turning around for one year. growth andlay u.s. chinese growth, you will see that chinese growth is coming right back. the route driver of both is the extreme u.s. dollar shock that we had. dollar,ve in the u.s. the fastest rise ever. at that time, china had a fixed exchange rate for the u.s. withdon't have experience things that have happen one or two times in the last 40 years. such a large exchange rate move , it takes time to work itself out. jon: happy new year to you. .inky chadha

let's go to taylor riggs. taylor: the senate committee is holding a hearing today that is likely to be dominated by claims that russia interfered in the u.s. presidential election. several of the nation's top intelligence officials will testify. it tomorrow, president-elect donald trump will be briefed by the cia and fbi on the probe into russia's alleged hacking. want anemocrats investigation into the finances of president-elect trump's choice to head the department of health and human services. price traded more than $300,000 -- aares of health spokesman says price has complied with the law regarding his finances. turkey says authorities are close to capturing the gunman who killed 39 people at an instant bull nightclub. they believe he is still inside turkey. police have conducted more ra

ids in and around istanbul. they have detained several more people. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. i'm taylor riggs. this is bloomberg. , oil is up onup signs of declining crude inventories. traderslook at what are keeping their eye on. coming up come our interview with barry diller. this is bloomberg. ♪

jon: from new york, this is bloomberg. andbti up 20%, brent

$56.94. -- wti up 20%. is thatus from the cme of i i trader. it pushed through 55 and then rolled over again. the trend is sideways. why? will looking at the february contract, we've been trading at a $12 range since the beginning of april. not expect us to see a breakout or breakdown until we get another fundamental catalyst. one of those could potentially be production cut followthrough by opec. we know they talked about implementing cuts. historically money tends to fail. that's why we often times called in the cartel that cried wolf.

if they follow through with these cuts, we will see another push higher and a breakout about that 55 level, maybe $60. that will be the top end in 2017. there will be more downside potential as we get into the year. jon: it seemed as and as we get in -- the hedge comes is that a theme throughout 2017? >> that is exactly right. you are seeing producers take advantage of these higher prices at the top end of the range. that will continue as we go through the first quarter of 2017. demand has been good. at the end of the day come the supply has outweighed the demand. not only production cuts but a big boost in demand to get this market moving. the most read story on the bloomberg today is the barclays howat to commodities --

will that affect the commodity market through this year? >> the black swan event is something that cannot be predicted. there will be a lot more volatility not only in the commodities sector but across the broad market. we have a new administration taking office. it will weigh a lot on what they put into play and how that affects different exports and imports and what have you. crude pushes a little higher. coming up, a focus on the u.s. retail. macy's holiday sales not great. 10 fullown, battered by percentage points after the store reported a disappointing november and december. we also see the fallout for its suppliers. that is next from new york. this is bloomberg. ♪

jon: a focus on u.s. retailers at of the open, christmas not giving to some retailers this year. macy's reported this appointing holiday sales, saying it will cut an additional 6200 jobs from its payroll in addition to the 3900 cuts already announced. it is continuing to close stores across the country. shares down this morning, down 10.85%. we saw sears agreed to sell its craftsman tools brand to black & decker. joining us to discuss is lindsay from bloomberg intelligence and -- not a surprise, is it? >> they were hoping for better results. they've already announced that they are going to close stores. we got a clear picture of which stores. they also gave us the job cuts figure.

it isn't surprising that handbags did not perform. that is a big gifting item. what can macy's due to bring people back into their stores -- bring people back into their stores? jon: not a surprise that they have to close in stores and cut more jobs. >> when you were looking at price as your main lever to pull and you are selling a lot of things that a consumer can get anywhere -- they can look online and see it is cheaper at this other place. somebody else is offering me free shipping. there are so many more ways to shop now. if all you can do is cut prices, you will never win holiday. the companies that will win holiday are the people who don't

need to rely on discounting. maybe they already are discounters like t.j. maxx or they offer a great experience sephora orr a -- ulta. david: sears will close an additional 150 stores -- let's ask you about sears and how they will pull themselves out of this type. -- this dive. >> they've been in a guide for a lot longer than anyone else. it is navigating the direction of the dissent. for them, it is a liquidity management game. your to keep closing stores and figure out what the right size of retailers. it's figuring out what the right size of the business is. david: does it end up being a

retailer at all? >> that seems to be what he's doing now -- if you look at the loans he's made over the last 12 or 18 months, they've all been collateralized by real estate or different assets. now.monetizing the ip they made attempts to spin out the auto businesses. they are trying to move the pieces away from the center so they can do a more holistic restructuring. he's always and said that he wanted to be an asset light model. we are starting to see exhilaration down that path. , an sears holdings additional 150 stores. macy's stores. that conversation, brick-and-mortar is that, go online. dead, go online. >> it's about having the right

number of stores. for a long time, you were rewarded for opening stores. no, you are rewarded for saying i have too many stores. maybe i'm in places that are not super profitable. what can i put on my website instead? it's about finding that sweet spot. macy's is hoping they will find it. jon: hope. not much of a strategy. great to have you with us. as we count you down to the catch of them, u.s. retail under pressure. futures down marginally. we roll over just a touch on the dax as well. 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. i'm jonathan. moments away from the cash open. this is "bloomberg daybreak."

negative on the s&p. the opening bell begins to rain. -- ring. the stage is set. the dollar kissed a december 2002 high earlier this week. it is down. crude, getting through $55 earlier this week for the first time in six months. focusetail very much and as we get to the open. let's say good morning to abigail doolittle. abigail: we are looking at a basically flat, unchanged open for u.s. stocks. in retail.he carnage we do have the major averages on pace for weekly gains. the nasdaq is on pace for its best again in about a month. as for the retail carnage, we have macy's and kohl's plunging.

both department stores lowered the full-year earnings view by about 8%. , they also cut 6200 jobs are closing 68 stores. both department stores are in the midst of restructuring. it does not appear to be going so well. the turnaround, i should say, not restructuring. tradingve sears holding higher. stanley black & decker agreed to by the craftsman tool brand. stores. closing 105 this could be the start of what investors are hoping is a restructuring on a stock that is down about 90% from its peak in 2007. co also trading higher .fter they beat december costs a little bit of strength in the retail sector. jonathan: thank you very much. we are down about 0.1%.

earlier on the program, we spoke to bill mcnabb, the ceo of vanguard. i asked about how he don't trump presidency could change expectations of low returns. >> i think the market has gotten a little ahead of itself. if you look at where valuations are, they are at a pretty high level. so the probabilities over the next decade of returns being somewhat lower than their long-term historical averages is pretty high. -- by no means certain, but it is pretty high. jonathan: the u.s. head of equity trading joins us now. low returns for longer, does a trump presidency challenge that concept? >> i think it partially challenges that. i don't think it will be a full-blown game changer because you are changing some headwinds that have created a weaker cycle

compared to a decade or two decades ago. , it is still too early get political returns -- reforms, it could move the needle. i don't think it is going to be a full-blown game changer, but could we get a list -- lift? i do think so. jonathan: a couple of months ago, you would have had some high conviction trades. a couple of months later, do you still have that high conviction? dubravko: look, we thought about equities from a technical point of view. the day after the u.s. election, we put out a tax call, a short-term price call of 2300. we thought there would be some animal spirits kicking in on the back of expectations.

given more longer-term, you look out a year, i still think there is some upside because i would say, aside from developments with regard to the u.s. administration, you are seeing a normalization in the business cycle and the profit cycle. if you look at the last two months, if you look at the earnings backdrop, the numbers for 2017, consensus, it is holding up surprisingly well. revisions are flat to slightly up. oil price has gone up. if you look historically, the last two or three months of the year, you typically see numbers coming down. we are seeing positive developments, plus macro economic data has been healthy. positive indicators, job numbers, and so forth. david: you made a very powerful point. it is important about deciding where we go from here. how much was baked in before

donald trump was elected president? there were signs gathering that we were headed for a better time. dubravko: so, yes, there is an earnings growth component and then there is a multiple re-rating component. the earnings growth is more linked to the underlying fundamentals that i was just referring to, which has been some form of interest cycle recovery from the depression like levels that we hit in 2016 earlier. in our opinion, that would have carried the eps to a 1.2 a target as a base case and then we would need to see what happened with the new administration. if the fed turns to hawkish. we have to be very cautious of the dollar. jonathan: the multiple has to be accelerated by the earnings growth we are expecting. the downside risk coming you mentioned the rate story. was theple said 2.50

line in the sand for a risk off move in equities. how do you look at the bond market meets equity market situation? dubravko: bond yields are very important. they have been one of the most important factors for the equity cycle in the past eight years. going forward, clearly, if you look at yields moving higher and higher, while it does give that initial positive view that growth inflation is firming, it could give headwinds for the multiple. if you look at what history suggests in a 2%-3% gdp environment, growth environment, assuming we get there this year, historically, the multiples start getting pressurized once the 10 year yield hits about 4%. you have to keep in mind that this cycle is structurally weaker than somewhat what we

have had historically. maybe you have to trim down the 4%. some pressure points could kick in. david: what is the best bargain in terms of not having priced in all the upside in the valuation? dubravko: 2016 has been a huge rotation year, huge. momentum has significantly sold off. this has been one of our key calls going into 2017. value has been a big play. energy has been a huge beneficiary. financials have caught up as a value play. the way i see it is a continuation of that trend. i continue to like financials. i think there is more upside. i continue to like the commodity linked plays. i think the commodity cycle really has -- still has room to run. the other sector is health care. yes, there has been a lot of negative elements in the health care last year. a lot of headline risk.

you are looking at pretty attractive valuations and superior growth. david: thank you so much for being with us today. jpmorgan's head of u.s. equity strategy. coming up, donald trumps sec pick, j clayton, is a deal lawyer who has represented financial firms including goldman sachs, barclays. how tough will he be as wall street's potential next top regulator? that is next. this is bloomberg. ♪

up, the former ftc commissioner on president-elect's nomination of jay clayton to have the sec.

from new york, this is bloomberg. that's get you some movers. let's get across to abigail doolittle. abigail: everybody knows about the big retail fallout. one interesting sector being hit by this is the malls. we have them all trading lower. investors are thinking that the weakness in department stores could hit these malls. piece of this could be weakness in the 10 year yield. we see that the mall index last year in orange traded lower as the 10 year yield in blue traded higher. the rising yields pressure investor around reefs. we see that the rising yields

help at the bank index in white. another chart at in the bloomberg. what could be next for yields? this is the long-term chart of the 10 year yield. this is the big bull market in bonds. price trades in verse two yields. we see that it is a very reliable channel. on the big move up and yields, the channel was touched right at the top, suggesting we could see and move right back down to the bottom. this is supported by the relative strength index that recently hit 60. over the past five times, the quantitative analysis says that this has signaled a big move back down, suggesting there could be weakness ahead for the banks. jonathan: let's move on. despite running against wall street on the campaign trail, the u.s. president-elect has chosen an insider to be wall

street stopped regulator. he will nominate sullivan and cromwell lawyer jay clayton to head the sec. his law career has been woodrow -- riddled with ties to the street, including representing goldman sachs during the financial crisis and representing oaktree capital as clients. , welcome.bell i love this quote. i don't endorse it because i'm not in a position to do so. how about this? how about this? however effective laws on wall street instead of "tough" laws. maybe an insider knows a little bit more about that? dakin: i think that is a good point. i think president-elect trump tells you the laws that came after the crisis were not effective and tamped down u.s. growth. that is what a lot of people think you are going to get from

this head of the sec, assuming he gets confirmed, this idea of he will put in place regulations that help u.s. growth, that help or capital formation and he will focus less on regulating or going hard against the big banks. david: i cannot of a big law firm. the world is divided into a big camp. there is the litigators and the corporate guys. the corporate guys get the deals done. this guy is a corporate guy. as opposed to his predecessor, who is a litigator, a prosecutor. how much does that tell us? dakin: i think it tells is a huge amount. from what we know about jay clayton, he has not said a lot about his policy positions or how he feels on these things, so that leads us to look at what his background is. his background is as a corporate guy. i think we can expect him to be

a friend to corporations and a friend to some of the big banks. david: whether a friend, somebody who will understand how deals work and how financial markets have to function, rather than cleaning up after they failed. dakin: yes, that is true. good point. jonathan: there is going to be a concern about regulatory catch up. should there be a concern about that? dakin: i think there will always be a concern about that, especially when you have somebody coming from a law firm like sullivan and cromwell, which has been representing goldman for over 100 years and other law firms -- wall street firms as well. i don't annoy ton about jay clayton. there is not a ton out there. from everybody i've talked to and comments i've seen, he does not come across as an ideologue. i think we could probably give him the benefit of the doubt at this point that he will be fair. but you are right. david: that is a good rule in

general, giving benefit of the doubt. dakin campbell reporting. with us now is professor joseph grundfest. kkr.ns the committee for he was an sec commissioner appointed by president ronald reagan. professor, think you for being here. >> good morning, it is a pleasure to be with you. david: a lot of what we hear about the president-elect is deregulation. he is carl icahn in there to force that. what does it mean for the sec to deregulate? questions a darn good and the short answer is we don't know yet. it can occur through a variety of different mechanisms. one path is to have congress change the laws pertinent to which the sec operates. changing thebe laws by which the commission has adopted. david: how much authority does the chair of the sec have?

it is a five-member board when it is fully staffed, which is not right now. how much influence does the chair have? dakin: well, you can answer that question two ways. --joe: welcome you can it's that question two ways. amountir as an enormous of influence. the chair sets the agenda, controls the heads of the sec. on the other hand, you could say the chair is one vote out of five. you are going to need a majority of three when the commission is fully staffed to its five-member complement. david: let's assume that the new chair, that mr. clayton is the new chair and has the authority to do what he wants and is in line with what the president-elect wants. how many regulations would you look at the top of the list would you think they would go after the top of the list? joe: my guess is that the regulations related to dodd-frank would be close to the top of that list. there you are talking about

things like the pay ratio ,isclosures, conflict minerals extractive industries, those sorts of regulatory matters. then they would have an interesting question with how to the trump administration seeks to undo those various regulatory reforms. if the trumpet administration quickly,nts to do it the smart thing would be to move through capitol hill and get legislation passed that would withdraw the sec's authority to adopt these regulatory measures. jonathan: if it is going to be this simplistic political pushback, the argument that jay clayton is going to regulate less since he worked for banks, elizabeth warren is making that argument. is that too simplistic? joe: i think it is far too simplistic. i think the situation is much more complicated than that. in many ways, it will be similar to the situation that we see with obamacare.

are going to we repeal it turns out to be a much more difficult thing to do and i think the new administration is going to discover that unraveling dodd-frank raises many of the same questions that unraveling obamacare brings to the table. david: what about the enforcement side? how much discretion does the chair in the commission have over backing off on some enforcement? joe: well, there, the chair has a lot more authority. going to be very influential in determining who is going to be the new head of the enforcement division and setting enforcement policy. the battle is going to be fairly predictable and it is a battle that falls along party lines, but also falls along intellectual lines. the question is how much of a penalty should be imposed on the corporation? as a practical matter, the penalty winds up being paid by stockholders, who are often

victims by the fraud the sec is attempting to prosecute, as opposed to responsibility being placed upon those who caused the corporation to engage in wrongdoing. david: if mr. clayton called you up today for a good piece of advice, would you tell him? joe: keep it honest. simple, direct, keep it honest. you've got to keep it honest. david: you do have a center out there for corporate governance, don't you? joe: yes, we do. we try to keep it honest. david: good answer. thank you to joseph. jonathan: keep it short, as well. coming up at the top of the hour "bloomberg markets" with vonnie quinn and mark barton. mark: recently boosting cash holdings. the market is lacking buying opportunities. we can't wait to check to him. cory johnson will be chatting to

the a a well ceo on yahoo!, the verizon deal, hacking and integration. big interview. as is the standard chartered head of asia. nking number one in the latest bloomberg poll for asian currency forecasters. china puts a squeeze on the yuan short-sellers. what a show in nine minutes. jonathan: looking forward to it. you've got to say that, mark, it is your program. i say it too. coming up, our biggest take away. if you are looking for exciting price action, you are not going to get it. in europe, not much different. the dax down by almost 0.1%. this is bloomberg. ♪

jonathan: from new york, this is bloomberg. time to look at some of the highlights from the program. we heard from john anderson, the u.s. ambassador to germany. he discussed trade under trump. and what the relationship might look like. hereere is some anxiety about two things. number one, the focus on trade surpluses that other countries may have with the united states and whether that is going to impact the policies coming out of the new administration. secondly, there is great disappointment or concern about the fact that ttip looks like it is being pushed to the side. jonathan: i found this really interesting. we talk so much about china and this race with the united states and what is going to happen, but not so much about germany. it is simplistic to look at the trade surplus and leave it

there. take something like bmw. it is right here. south carolina. david: the investment. how much of a lifeblood of germany comes from exports? how critical is that? job state is tomorrow. we look forward to that. -- jobs day is tomorrow. we look forward to that. we spoke with carlos gutierrez earlier. his take on what the business community is looking forward to under the trump administration. >> the best thing that can happen for this economy is to have a surge in business activity. the private sector is good for this economy. we also need to focus on startups. startups are not growing. startups are essentially our pipeline for future businesses. i think the president-elect's policies of tax and regulatory reform will spark more startups. david: jonathan, i find it interesting that he emphasized

startups. small businesses generate most of the new jobs in the country. it is too early to siena that showing up -- see any of that showing up. it will be interesting to see what happens. jonathan: the question for tomorrow, payrolls friday. full coverage on bloomberg. $175,000, the current median estimate. a little bit lower -- 175,000, the current median estimate. a little bit lower than previously estimated. the markets look like this. about ftse, we are up 0.2%. in the bond market, treasuries stabilized. for myself, jonathan ferro, and david westin, and the whole of the team, this is bloomberg. ♪

vonnie: it is 10:00 a.m. in new york. i'm vonnie quinn. mark: live from london, i'm mark barton. welcome to "bloomberg markets."

vonnie: we are going to take you from san francisco to london and cover stories out of washington, moscow, and dubai in the next hour. first, u.s. economic data crossing the bloomberg. julie hyman is here. julie: we have the isn nonmanufacturing composite. the largest portion of the u.s. economy coming in at 57.2. 56.8% was the estimate. coming in ahead of estimates. more positive economic data has come as a late. service industries coming in faster than forecasted. sincethe highest level october 2015. seeing a mixed picture in stocks as we get these numbers. this was the picture and what it looked like going into it. the dow and the