♪ >> your turn, yellen. markets with the speech from the federal reserve chair with expect nations for a march rate hike at 90%. the french republican abandoned the presidential one of the. does that strength the fed's position? is a company yet to make a profit really worth $28 billion? good morning, this is bloomberg: surveillance. i am francine lacqua in london. with me on the program, catherine hughes, a managing director at goldman sachs and

the global head of fx strategy at bmp. the brexit show is at 9:30 u.k. time. we talked to the former u.k. chancellor and the former justice secretary charles faulkner. before we get to the markets, we are getting a little data out of the eurozone. this is what we are seeing in terms of pmi data. expected.etter than let me pull it up for you. .t is rising to 55.5 just short of estimates but it is still an increase from the month earlier. that is the impact it has had on euro-dollar. well, not any impact. 105.17. this is your data, everything has to do with repositioning. we had a pullback in u.k. and u.s. equities yesterday. european stocks falling lower a touch. -- it is all about janet

onlen and her weighing in the path for interest rates, that german two year yield, minus point 84. let's get to the first word news. attorney general jeff sessions has removed himself from investigations into russian influence. it comes amid calls from democrats for him to resign over conversations last year with the russian ambassador. president trump says he has total confidence in his attorney general, while sessions said discussions were not related to the election campaign. >> i never had meetings with russian operatives or russian intermediaries about the trump campaign. and the idea that i was part of a "continuing exchange of information" during the campaign between trump and surrogates and intermediaries for the russian government is totally false. used: mike pence regularly

personal email to conduct public business while serving as governor of indiana. his account was compromised last year by hackers. that is according to the indianapolis star, which said he communicated with state advisors through a private aol to count -- account. pens criticized hillary clinton for her use of personal email to do official business and secretary of state. president trump says his defense secretary james mattis will lead a great rebuilding of the u.s. military. comments came as he visited did gerald -- carrier uss gerald ford which is delayed and over budget. >> we will have the finest equipment in the world. planes, ships and everything else. we are going to have very soon the finest equipment in the world. nejra: the french presidential candidate woes deepened after an

elected official from his party disowned his campaign and police searched his paris home. or than 60 politicians said they can no longer support a candidate facing charges for the embezzlement of public funds. in britain, theresa may has accused the scot's prime minister of sacrificing living standards in scotland in her pursuit of a breakaway from a u.k.. she told bbc she didn't think the people wanted a referendum and the s&p does -- has tunnel vision. this comes as the prime minister addresses the scottish conservative party today. -- $1.6 billion to their 44% aboveclosed above listing price. benchmark capital and lightspeed venture partners, million.se $19 global news 24 hours a day,

powered by more than 2600 journalists and analysts in more , i am nejrantries cehic, this is bloomberg. week, a: this time last 40% chance of a rate hike. but after a wave of comments from officials, investors now pricing and 88 percent chance of the move. later today, we hear from the head honcho, janet yeah -- janet. she delivers her outlook. hawkish consolidate the sentiments or dial back expectations? we bring you catherine hughes. always great to see you both. is the fed going to hike in march? the markets are dictating that they have to. >> we agree with markets. hike, ifor a three rate think that is what is expected.

we saw fed speakers try to telegraph this through the week. everyone was using language like sooner rather than later or the word soon. that is what markets are expecting. data hasn'te changed, just fed speakers have ratcheted up the rhetoric. >> i would argue it has been strong enough for some time. the pivotal point has been deadly. -- dudley. he is the one who has changed market perception about the hike. the bottom line is the fed has ,he opportunity to price it in the markets are except -- expecting it and it is unlikely the fed will pass up the opportunity. francine: it would lose credibility and dudley was the first, but you also had brain hard -- she was actually skeptical of a rate hike in march, but she was focused more

on international situations. she was pricing concerns with the economic situation in china and also political risk in europe. it has you said, this week she has changed and now international situations have improved. has it improved? there are fundamentals in the u.s. economy, but a lot of people have said they have been strong for sometime. kathleen: i think one of the things our clients are focused on is the geopolitical backdrop, looking at u.s. growth, we are positive. our clients are positive on u.s. growth. we had improving growth stories in the u.s. and on top of that, throw in the current administrations progrowth policies, whether tax cuts, infrastructure spending, deregulation, military spend, markets are pricing that in. valuations in u.s. equity markets are high. the enthusiasm is priced in, the risk may not be. we could be on the outlook for more volatility in markets.

francine: what does it mean for treasuries? i have a yield charting the two-year, in white, the blue, the bloomberg dollar index. kathleen: you haven't seen much movement in the longer end. it was more in the short end of treasuries. that is helpful when i think about our u.s. clients when i think about balance sheet investors, corporate have wanted to see higher rates in the short end. it helps when we are talking about balancing managing cash. francine: and for you? is there a danger that dollar goes quicker, much higher, that the pace of it strengthening is too high? steven: i think what you initially said there, is there a danger. -- dollar goes hire fast, yes. that chart you put up is excellent. line, u.s.e white two-year yield, we think going much higher.

we agree, three rate hikes this year. we think that pushes to 1.9%. by then: -- francine: summer? steven: by the end of the year. but this blue line is the dollar. usually there is a strong link between dollar and two-year yields. there is one, and undervaluation here and the dollar closes that gap. we are constructive on the dollar from here. , somee seen a big pickup of the traits we like it the moment are the dollar against the commodity bloc. short u.s. come along dollar versus canadian dollar. these are starting to trade nicely. particularly with that change of tone from dudley. francine: and versus again? -- vs. yen. we feel policy

detergents will be greatest between the united states and japan. we think there will be little policy response in japan, but three rate hikes in the u.s., much higher two-year yields, that big gap with the bank of japan will push dollar-yen higher, we think 128. francine: the dow has pulled back a touch. why are we seeing such record highs for a lot of these indexes? you could argue fundamentals have been strong, but it is the pace of movement. it is unjustified because we didn't get details from president trump. optimism,it is the the enthusiasm, the good news priced into against a backdrop of strong earnings. a pickup in earnings in europe, a pickup in earnings in the u.s.. employment where it needs to be in the u.s.. a lot of good reasons why stocks have run up. thethe enthusiasm around

progrowth policies of the administration are priced in. we would argue there could be some disappointments if they don't happen at the pace, if these distractions mean things can't get past -- passed quickly. if there are more protectionist measures to come out, that could have a negative impact on the growth story in the u.s.. francine: we will talk more about whether tax cuts are coming or not and when in the u.s.. both stay with us. we also hear from the host of fed speak -- a host of fed speakers. annual u.s. monetary policy. the keynote speech will be given by the fed vice chair and dallas fed president returns and chicago's charles evans. at 3:15 p.m.ts u.k. time. if you pull up your bloomberg screen and type tv , you can and you of our charts

us directly.- ib we have two great guests today. let's get straight to the business flash. ceo sees china as the big holy grail for wealth managers and asia. speaking exclusively with bloomberg in switzerland. know, the goal is to understand and deploy a successful strategy. we are continuing to work through joint venture, through partnerships and alliances until such time we find -- wealth management will be more broadly accepted and recognized in the form of frexit. -- bothhe group is

topanies are planning continue intense negotiations through the weekend with the aim of announcing a deal on monday. the deal would create europe's second-largest automaker. nintendo shares have raced after its next-generation gaming console went on sale in tokyo. touteds for $300 and is as combining home and mobile usability. that is the bloomberg business flash. francine: think you so much. the french presidential candidate fillon's troubles have deepened. his paris oned yesterday. more than 60 politicians said they can no longer support a candidate facing charges for the legend embezzlement of public funds. in a while, marine le pen has attacked what she terms naive localism, -- globalism.

>> this is a moment to put an end to the borderless economy. look at the world. everywhere from donald trump's america to india, from china to patriotisme economic is winning. stephen, when you look at the political risk and the election, when do markets start pricing in a possible line with the pen -- marine le pen? do you play currencies? steven: the answer to your first question is what the polls are saying in france. we focus on the second round polls, the playoff. if you look at these at the moment, marine le pen is substantially behind macron and

fillon. the market is not pricing in a marine le pen victory from that perspective. orould argue not true euro euro-dollar. in stark contrast to 2011 when the euro was undervalued, versus economic fundamentals, we don't see that in euro-dollar. we think the dollar is slightly overvalued. inurrency where it is priced his the swiss franc. we back to the scenario where this is frank -- swiss franc is a safe haven. trade. that could be the if we see a relief rally or increase in european stress, i think euro swiss with the swiss being a factor that moves, the best way to play this in the currency markets. francine: do you think markets

are right to ignore this political risk? onad your former colleagues the program and he was clear in saying that consequences of a marine le pen cannot be ignored. even if it is not your scenario, you should probably tell your clients you have some kind of hedge? last year, we had unexpected outcomes. instead market expected or priced in. clients don't forget that. we had four maintains we were talking with clients. switchinge rise of from globalism to populism. that continues to be the topic for clients when you sitdown to talk to them. how are they thinking about it? our base case that we have a shock outcome in europe, it could happen. keep a close eye on it. clients are tending to be diversified. we like european equities for the fact we do think risk is priced in, that from a valuation

perspective, not as u.s. equities. we are positive on the european equities story. francine: we also caught up with the former prime minister. this is what he said about a marine le pen win. >> if marine le pen wins, it is gain over. -- game over. it is possible for europe to have a leader of one of the most countries of the eu, someone who is against the eu. are we underestimating the fact that europe could break up this year? steven: big question. francine: in 20 seconds. is, thethe bottom line pulse is that marine le pen would not win. even if she did win, the way french law is, it is hard to call a referendum. there are lots of steps that need to go through before some kind of catastrophe would happen. francine: kathleen and stephen

both stay with us. gather, 3000 lawmakers for china's national people's congress, we update you on what is live in beijing. this is bloomberg. ♪

♪ this is "bloomberg: surveillance." 3000 chinese lawmakers are headed to beijing for the national people's congress which gets started on sunday. the latest update on china's economic targets.

tom, what is on top of the agenda? much of the focus will be the economic priorities, the premier is expected to outline on sunday. among those will be the target -- gdp target for 2017, likely to be decreased. 6.5%y be afraid at about this year. them a bit of buffer when it comes down to slowing growth. 10% target may be increased marginally to allow a more fiscal state of the pboc taking steps towards monetary policy. we expect to hear from the foreign minister on trump. he will be questioned about u.s.-china trade relations. he has handled it deftly up until this point.

get trump to do away on the one china policy. then there is the domestic politics. fora is a hub of stability the political anxiety in europe we talked about earlier. and in the u.s.. but underneath the surface, there are political tensions leading up to this party conference. withe end of this year, president xi jinping expected to unfold his leadership lineup for the coming years. those exist beneath the service -- surface. something to watch for the next two weeks. a kicks off on sunday. francine: tom mackenzie with a great update from beijing. kathleen, i imagine when you look at the credit expansion in

china, should we worry more about the impact of a trade war with the u.s. but also political instability having an impact on their finances and credit? kathleen: i think china is a worry and we would say a worry to the global growth story. we don't see it as a buried this year i'm on but we are keeping an ionic. particularly if there is any foreign policy response to any policies coming out of the u.s. administration. are positive on emerging market, we like emerging markets overdeveloped markets, we have seen that in close is here. we have seen it in client activity. 14 billion in inflows to emerging markets. debt, 6 -- in institutional clients in fundsularly, your pension have been underweight emerging markets, it is a positive story. i would point out we like on the domestic

side, which favors a more active approach rather than passive. if you look at indexes in china, very exposed to state owned enterprise. we would say you need to be active in these. as -- on your take china is steady as she goes? the congress this year, the president wants stability or could things go sour? steven: from kathleen's point, what the market is focusing on is the potential for some kind of spat between president trump and the chinese. will china be labeled a currency manipulator or protectionist policies coming through? argue that is holding back the dollar. that is why the dollar is weaker relative to u.s. rates. our view is to downplay that risk. we think we won't come through to fruition. we are fairly relaxed about

these situations. to the comment on emerging markets and we spoke about flows into emerging markets. what is interesting in the current environment is when the fed starts to hike, people were nervous about flows to the emerging world growing up. but we have policy in the japan and the eurozone. potential outflows from those countries could be boosting those close to emerging markets. francine: thank you so much. i have a good chart showing em high yields. thank you both. theresa may is handed to defeat. brexit next.

.

francine: welcome to our weekly brexit show from our headquarters in london, i'm francine laqua. >> a new referendum may be

inevitable. it could be the only way to protect the country's interests unless the u.k. off thens plans. teresa may hit back accusing sturgeon a break away from the u.k. she told scotland she didn't think the people wanted a referendum and that they have a tunnel vision for independence and comes as the prime minister is about to address the party later. john major attacked teresa may's brexit strategy warning she's making undeliverable promises and should prepare for compromises out of her negotiations. she accused them of treating them with disregard to mall content, saying the british people are expecting a future unreal and overoptimistic.

obstacles brushed aside and opportunities are inflated beyond any reasonable expectation of delivery. nissan said its profits could take a 500 million pound hit following brexit and is the first time the carmaker put a number on the u.k. leaving the union. lawmakers in london were told 10% tariff of cars built in england and levees would be disastrous. powered in more than 120 countries this is bloomberg. francine? francine: we're just getting breaking news. this is u.k. services p.m.i. both a bit below expectations and retail sales holding strong but a little bit of the worry that we're seeing in the markets. othing huge but pound at 122 and 53.about p.m.i. a little bit below the previous

month and lower than what the economists were expecting. this was the week u.k. prime minister teresa may suffered her first defeat over brexit. the house of lord voted to save rights of internationals living in britain and wanted to drop the brexit law against may's government. we have senior members of the ords but different views, lord lamont is 2 1/2 years of the u.k.'s chancellor. during the referendum he was a vocal supporter for the campaign for britain to leave the european union and was also on the show. lord charles faulkner was one of labor prime minister tony blair's closest friends and allies and entered the lords in 1997 and served in cabinet as lord chancellor. last summer joined others in a mass resignation from the shadow cabinet and campaigned from the u.k. to remain in the e.u. thank you so much, both of you, for joining us on the program

today. lord lemont, what was the mood like in the house of lords when there was the vote to try and keep nationals or giving guarantees to nationals they could stay in this country. lord lemont: it was unruly. i never seen the house of lords so disorderly, a lot of choice. charlie will forgive me and i felt the mood was sanction moanous to be honest because i don't think the issue of e.u. nationals is in danger and quite inappropriate remarks about ugandans, asians and protestants. the government made it clear they see it as a priority to safeguard the rights of e.u. nationals but can't be separated from the rights of british nationals in other e.u. countries. though the prime minister has made overtures to the e.u. to try and get this issue sorted out in advance of the negotiations, mrs. merkel very firmly said no, this issue

cannot be tackled until the negotiations have actually started, until article 50 has been triggered. francine: was this unruly or was the house of lords getting control? lord faulkner: it was very fool house of lords for the debate because brexit issues really engaged the house of loshedes. there was a strong preponderance of opinion in favor of the the amendment, the oddity of the government's position appears to be we're doing it because we want to preserve our negotiating position and that's what they say with one breath to why they will not guarantee e.u. national's position but in the next breath say don't worry we guarantee an effect we will precure their position in the negotiations. it seemed a very odd position for the government to be taking up because they weren't really having a negotiating position because they're telegraphing to the people they're going to negotiate and give up on e.u. nationals in any event.

i couldn't really work out what it was. i was worried. i was worried that it showed a degree of obstinancey on the part of the british government which might be a poor way in which to conduct the negotiations. francine: has the house of lords changed because of brexit? so the bill went through house of commons no problem and then the house of lords now seems to be where all the debate is taking place. lord lamont: i don't think it's changed because of brexit. bear in mind the conservatives are quite in a small minority in the house of lords contrary to what people understand or the perception. you have a large cross bench element. you have a labor party element which is not far short of the conservatives and you have a hundred liberal democrats. if i wanted to use the term the liberal elite, they're well represented in the house of lords and they reflect that opinion. that's all that happened really. it crystalized the fact the

conservatives are in the small minority. lord falconer: that's a slightly inaccurate way of putting it. the conservatives are the single largest minority in the house of lords, something like 250 members. i think the next largest minority is the labor party with 200 and then the liberal democrats a hundred and something and the cross benches are a hundred and something. the government, the conservative government gets defeated if there is a coalition right across the house of every other grouping against them and that's what happened in relation to the e.u. nationals. and norman is very wrong to describe them as, quote, the liberal elite, i think norman himself a leading member of the liberal elite is inaccurate in trying to doing in a way the government is trying to do which is try to characterize parliament in relation to the brexit issues as sort of against the people and the

i don't think that is right. francine: the house of lords is trying to safeguard to make sure its country comes out of it in the best possible way? lord lamont: i think a lot of people in the house of lord's opinion for the reasons i've given is massively in favor of remain and are deeply frustrated because they know they can't actually do very much to stop it. but that frustration, i think, boiled out in the debate. francine: they can't actually do anything, right? haven't they moved on from trying to block brexit and try to preserve the outcome? lord lamont: i'm trying to explain why there's so much emotion vested in this particular issue, which despite what charlie has said i think is a bit of a nonissue. i think the government is very keen to resolve this problem, but became conscious that there was also the position of the

800,000 british people overseas and didn't want just unilaterally to make a gesture and leave itself exposed to the position of british nationals overseas. charlie made it sound very complicated but actually, i think people listening to this program will find it a simple issue. lord falconer: i think you're right when you say what the lords are trying to do is ensure we get the best brexit deal. of course we're leaving the european union. one has to accept that. the role of the lord is to try to do their best to try to procure for the national the best deal. the e.u. national thing is important because, for example, good people are leaving and being treated badly because of our inability to get a guarantee from the government. francine: lord lamont, i spoke to a member of the house of lords and he voted for the guarantee of nationals. he was saying on tuesday he is expecting the house of lords to either put more amendments or put something in the span for

teresa may's, i guess, time line of when she triggers article 15. lord lamont: yes, there's a distinct possibility the amendment to alter the nature of the vote at the end of the negotiating process will be carried in the house of lords. now, the government is saying there will be a vote but the vote will essentially be on a choice between whatever has been negotiated and the option of w.t.o. membership but one will not be able to vote for the option of remaining within the e.u. for the simple and good reason that issue has been decided in the referendum. but some people are attempting to characterize that vote, it's not about how we leave the e.u. but how we leave the e.u. and that's not accurate. there are people trying to scuffle the whole deal by carrying an amendment of this kind before francine: we'll get more on

that, both stay with us. stay with "surveillance." we check in on the markets as the rally ahead of the big speech tonight and a special relationship on hold. we had reports trump's u.k. trip is delayed until october. we'll break town that and get the latest update out of d.c. as attorney general jeff sessions recuses himself from the campaign probe on russia. this is bloomberg.

francine: our watching our weekly brexit show. i'm francine laqua. marc barton has been watching the action. marc: for the second day the only interest group rising is

utilities by .20%. the index is down and up for a third week on wednesday with those for short memories, it rose to the highest. 2015, all the attention turns to janet yellen, with the fed chair who addresses chicago later on the economic how the look and then stanley fisher will speak in new york. it's been a heavy week for fed speakers. yesterday we had the fed governor saying the case for a rate increase at the march meeting has, quote, come together. joining the corps the fed officials signal a hike is coming soon and the feds saying roughly a rate hike roughly 9% and others telling us 80%. now west markets is forecasting four rate hikes, march, june, september and december. previously the markets were forecasting two rate hikes and the euro on track for a fourth weekly drop against the dollar and worst since may of last

year since reaching the three-month high in january of 107.98 and the euro dropped on expectations the feds will raise rates this month and as political risk rises ahead of the big key elections in march in april and forecast 1.04 in the sec and third quarter, six analysts see the euro below parity. a.b. amro forecasting 95 cents and japan has positive inflation and the preferred measure which is consumer prices excluding fresh food as you can see here, rose .1% in january from a year earlier. that's the first increase since december of 2015. it offers, francine, some hope inflation will begin inching towards that bank of japan target of 2% or does it? because consumer spending in japan remains tepid and wage growth is slow and the c.p.i. in january is largely down because of the increase in oil

but the prospect of price gains is shifting the debate over monetary policy from the question of further stimulus to the timing of interest rate increases. the b.o.j. meets in two weeks. francine? francine: inequality in britain is expected to worsen as earnings growth slows and plan for cuts start to bite, according to reports from the institute for fiscal studies out this week. it heaps more pressure on the chancellor, so ahead of his spring budget next week as he attempts to tackle the effects of the weak pound in the aftermath of the brexit vote which driven up forecasts for the consumers. we'll get to the economy in a second but we have lord lamont and lord charles falconer with us. in the last month we had tony blair, john major, nick clad and john osborne making for strange bedfellows and spent years fighting and have a common ground which is to temper brexit. when you read this and heard

tony blair's september 11 and john major, what was your thought? lord lamont: i don't think it was surprising because they took those positions in the referendum and don't think it's helpful to anything because a decision is made. and i thought there was something about a whining tone to it, really. it's a free country and they're entitled to put their views. lord falconer: there's a distinction on the one hand by saying let's try and stop brexit, which i think is not the right approach. i think the british public has made it clear in the referendum that brexit has got to take place. and indeed i think the result in the referendum means it's a much wider change that is required. i thought what you just referred us to, the institute of fiscal studies is saying what the effect of people will be the next five years, continuing wage stagnation, increases in poverty, if those issues are not dealt with and they need to be dealt with in a way that brexit itself cannot deal with it, might make worse, unless it's a particular sort of brexit, then the sense of

alienation which led to the vote in brexit will get worse. there will be a failure to deliver in relation to that. francine: lord falconer, do you think these prime ministers need to speak up because corbyn is nowhere to be seen on this? lord falconer: i don't know. tony blair said it was one of the reasons. i don't think john major was motivated by that but i wasn't sure about that. i think they're motivated because they have particular views about the way that they think the british economy and the british politics and the negotiation of brexit should go. i think they're all taking different positions, all of them. i think tony blair was saying rides up against brexit. john major's thinks i think was the government is not being honest what the risks are. they were saying different things. lord lamont: charlie has made the point, but i think tony blair's position was quite different and he was saying there's a possibility people may change their minds and what he actually meant was i'm going to try and change your mind for you which i think is the wrong

approach but he definitely is still of the opinion that public opinion may change and there will be an opportunity actually to derail the referendum result. francine: is there anything about brexit that concerns you about some of the inflation forecasts for the consumer and what would you do as former chancellor to mitigate those? lord falconer: you'd make me think the forecasts have proven wrong. i think the bank of england was wrong to go out on a limb making forecasts which were not so much forecasts about economic variables but forecasts of how people would behave. lord lamont: and i thought it was extremely silly of them to try to anticipate how consumers would behave. and rather, as some people expected, the economy has proven surprisingly resilient. francine: do you believe that will be the case longer term? lord lamont: it's the situation

because of the fall in sterling we'll see some rise in inflation though it is interesting that the rate of inflation is high, also. now, in -- relatively high, i should say, in the euro zone. the german rate is actually higher than here and they haven't had the same depreciation of the currency. i would expect it is quite possible that we will see some slowdown in consumer spending. the growth in the economy has been fueled by consumer spending. i think it's also possible. i've always said this, that in the run-up to the actual point of ex-ity, you may see some slowdown in the economy because you may see some investment deferred, just people waiting to see how it turns out. that's not a disaster. but you can't exclude it. lord falconer: the economy and political sentiment is quite linked here. norman is right to identify the economy has held up incredibly

well since the vote was taken. if the economy begins to falter, and i don't know whether it will or whether it won't, for example, because people become concerned about the way the negotiations are going, then it might be that people would then take a different view publicly about the way that the negotiations are going. the way that the commons voted very much reflected the way the public had voted in the referendum. so these figures might be slightly off, 70% of constituencies were in favor of leave and 30% in favor of remaining and that broadly reflected the majority. i think it's wrong to do anything other than try to help the government get the best deal possible. but what happens to the commons if the sentiment in the constituencies change? lord lamont: it's important to recognize we're going through a period of increase volatility. these negotiations will not be in secret. we're negotiating with

obviously mr. barney but you're negotiating effectively with 27 other countries. there will be endless leaks. there will be endless comments and endless dramas and apparent breakdowns in the talks. there will be newspaper headlines that the whole thing is going wrong. and at the end of the day, i believe there's a good chance of an agreement. but there will be tremendous red herrings, scare stories, so we must expect sentiment to go up and down. now, this may well have an effect on economic confidence. it may well slow down things a little but it's not a disaster. it's not to be surprising. it's something that is absolutely inevitable. lord falconer: i make a slightly different point which is that what people are expect out of the negotiations will be influenced by how the economy does. so if the economy looks like it's going down, which i hope it doesn't, that will have an effect on the extent to which

people want a closer trade deal with the european union, for example, and the politics of all of this is going to affect economic sentiment. francine: do you think the government has priorities in place, the right priorities in place? jim o'neill yesterday was saying the problem is they're trying to sign trade deals with new zealand when really they should go after china because that would bring a huger revenue when you sign something with china than when you do it with new zealand, great country but much smaller. lord falconer: i don't know what the government's priorities are except that they recognize, and i agree with this, there needs to be a different relationship on immigration with the european union. therefore, we're leaving -- we're not the insider inside the single market. that broadly is all i know. as far as trying to do deals with other countries is concerned, by all means do that. i'm not sure jim is necessarily being fair. the fact that you might well want to deal with china doesn't mean you shouldn't also fly and get a deal with new zealand. i have no idea how advanced, if

at all, these discussions are. lord lamont: i don't think these discussions are advanced and you can't actually get very far with trade deals because until you know the terms at which you sell into europe, you can't really have a trade agreement with a third country who will be selling into the u.k. whose goods may be forwarded on to the e.u. you can only discuss principles. obviously it is important to have the maximum free trade agreement with a large country like china rather than a small country like new zealand. but, you know, i don't think you should choose between them and probably a trade deal with new zealand could be done very, very quickly. i think we'll be able to do trade deals a lot more quickly outside the e.u. than the e.u. has been able to do itself. i mean, it failed with the transatlantic negotiation. and one of the things i think is very striking is we look at small countries, like chile and

switzerland and singapore, when you look at the aggregate value of the trade deals that they've signed, the g.d.p. all added up together of the countries with whom they've done trade deals, they vastly exceed those achieved by the e.u. so actually, i think the prospect of getting -- i mean -- francine: there's a bit of a currency problem in switzerland at the moment because it's considered a haven. lord lamont: when you say a problem, a problem of a hard currency. francine: give me the sense whether you see the two year period realistic given we have elections in france and we have elections in germany and we have elections in the nether land. lord lamont: the two-year period is stated in the treaty units. and e.u. requirements, not britain saying we've got to do this in two years but the e.u. saying it. francine: is it feasible? lord lamont: i think it is feasible, the e.u. said it's

feasible. there will be a transition or implementation phase, not a transition or further negotiation but a transition, o'implementation phase. lord falconer: it's not feasible in two years' time to do a detailed deal for example, on the provision of services into the european union. you might get a framework the end of that two years but you couldn't have possibly negotiated, for example, how you're going to deal with patents, how you're going to deal with financial services or how you'll deal with those sorts of issues. all you can expect in the two years is some framework to be agreed and you've got to avoid falling off a cliff where there's a gap between -- let me finish. that is supposed to be agreed in the future and what the position is during that particular period and it's utter nonsense to say you will the regulatory issues will be resolved the end of the two years. that's not to say it's not possible for the government to get some sort of transitional deal which says, for example, we continue on the existing arrangements until a certain date. lord lamont: well, it's

obviously true, is it not, all issues could be in every detail can be sorted out, but i do believe that we have a emendous advantage because british law and regulations completely complied with the e.u. and in many areas we can just replicate them and carry on. what's essential is to have a mechanism for changing them in the future. francine: thanks so much, lord lamont and lord falconer. the service sector expanded in february and we had that data 30 minutes ago that may indicate economic growth will slow this quarter and you may see pound 12230. this is bloomberg. ♪ francine: your turn, janet

yellen. markets are expecting a speech

and a margin rate hike. abandon, doescans that ask man the french position? snap charges on its trading debut. will they make a profit. good morning, everyone. tom keene is in new york. we have quite a bit today. we are looking to a lot of french speakers. we are looking at the markets. i am extremely interested in brexit. the we've got sterling on move. as the prime minister speaking yet. sterling is already on the move. they are on the back of a dominant service sector. of thekes a huge chunk economy expanding the least. investors are worried that growth may slow and theresa may will speak any moment. tom: i can't understand the language.

karen is telling me she is not speaking. snap is remarkable. adam will join us from london. brian will join us on radio with his $10 a share call on snap. francine: we will tell you when theresa may speaks in english in just a couple -- in scotland. here is taylor riggs. taylor: we are going to start with u.s. politics. jeff sessions has eased some pressure building around his meetings with the russian ambassador. he said he would recuse himself from investigations involving russia in the presidential election. >> i never had meetings with russian operatives or russian intermediaries about the trump campaign. the idea that i was part of a continuing exchange of information during the campaign between trump surrogates and intermediaries of the russian

government is totally false. taylor: two trump campaign officials spoke to the ambassador during the republican convention. it's not unusual for them to interact with diplomats. they are split on the paris agreement on a climate change. moderates in the administration believe president trump should stick with the agreement, even though he is pledged to withdraw. stephen bannon once out of the deal. rex tillersontate and the president's daughter of our want to stay in. theresa may has launched an attack against nicola sturgeon and the independence movement. she accused him of sacrificing standards in a breakaway from the u.k. she is trying to avert another independence referendum. scotland supports remaining in the eu. china's president wants

something from the national people's conference. looming is the commonest party meeting that takes twice a decade. --f of china's senior legals leaders may be replaced. they are looking at overhauling china's economy. global news 24 hours a day powered by more than 2600 journalists and analysts in more than 120 countries, this is bloomberg. i am taylor riggs. francine? data check right now. i've got a wonderful mixture of markets and economics. the euro, 105.19. it hasn't broken down. the euro hasn't really collapsed yet. that will be something to look for into next week having the fed dynamic and on to the next screen, futures are up. so stronger euro weaker yen.

i put sterling in their, francine, to keep you entertained. francine: thank you. if you look at tom, the pound is seeing a little bit. is in the manufacturing region and it is below estimates. these of the headmans the doe was talking about. was talking the boe about. the dollar is steady after the rally we saw. you can feel a little bit of pullback from european stocks. we adjusted the yield for good measure. tom: that should be a red color on that. the german yield is lower. let's go to the bloomberg. this is to get ready for our next hour. wageman talked about growth being the referee for chair yellen. this is wage growth minus the

inflation that americans think they feel. isvice sector inflation above 3%. we have had negative wage growth based on high service sector inflation way back to 2011. you can go back to the financial crisis with these two rare lips which are an inflation dynamic off oil. wage growth has been down and this is really the key component for chair yellen. she's got to get wage growth going again. francine: i like that a lot. i did something more simple. i am looking at high-yield and emerging markets. it looks like there are riskier bets out there. bondite, this is the index. in blue, it's just the investment grade index. you can see the spread is actually changing little bit. it's a little bit wider and that

seems to be people are still taking more risk because of the fed's view we heard over the last couple of days. onto jeff sessions. he has removed himself from investigations into the russian influence in american politics. there are calls from democrats for him to resign over his conversation with the russian ambassador. markets are shifting as you can see. of focus of the fed a pair -- ahead of chair yellen speaking later today. business, thank you so much for joining us. we needed a trump fix. we need to know what is the latest with the trump administration. jeffs from mike pence and sessions saying he won't be involved in the investigation on himself in russia. on sessions it was inevitable

given all the democrats calling for him to resign. at the least he would recuse himself from any investigation into trump and his russia connections. i think some people say this should go even further. there should be a bipartisan select committee to look into trump's russia connections during the campaign or even a special prosecutor at this point. we will watch this space and see what happens next. i think it's unusually he did not disclose that he had any contact with the russian ambassador given how hot this issue was. are republicans taking issue with this? opponents,it's the the rhetoric is they are just against us. it's very easy to make. >> this is why him recusing himself takes the sting out of it for republicans and shores up his support there. tom: look where we are into the weekend.

bit calm ine washington i would suggest. what is the perception of the trump administration abroad? what is the perception of a new stability? is it legitimate? >> i think his address to congress reassured many people. he sounded much more presidential, much more measured. he stuck to the script. these russia allegations keep dogging him. that is being played up quite a bit here. it's going to be hard for him to play that down. francine: how much do you look at what the political noise at the moment is an how it impacts the market? how much are you looking at technical levels? >> you have to be aware of the politics. if you look at the u.s. administration, there are two major factors at play. one is the fiscal policy and the potential stimulus and the other

is the geopolitics. byk assets of been dominated one side of the story. you can't ignore the other side of the story. francine: we can't nor theresa may. she just started to speak. she is talking about scotland. we are expecting her to try and talk out scotland from a second referendum. let's get back to the markets. i made you a chart. in what you have the two year treasury yield. i had someone calling that the fp to treasury yield by the end of the year. seems bold. our forecast is been to rate hikes for the year. in 43.ket has priced four three. we thought the markets have kind of gone to where we would have

expected them to go. we don't expect a big spike up in the two year for the next few months. tom: it's hard data versus soft data this week in. we go to the parsing of good soft data which shows the fed is behind on hard data. does the fed have to wait for hard data? >> i think that's why we're comfortable with our fed a forecast. as you point out, in reality if you've got nominal wage growth and cpi is closing in on exactly that level, unless you can get real wages up it's hard to see how you can see significant acceleration in the rate hike. for us, we agree that wage growth in the u.s. is key to the outlook. it's been the key for quite a long time. is goingee the fed faster than they did want a year, which was certainly gradual. tom: when i find amazing is the

reading of the history of the fed. mike, if you look at ben bernanke, if you look at allan meltzer at carnegie mellon or if you look at modern fed literature, they have to wait don't they? they've got to wait for the hard data. mike: any central banker has a challenge in it will flag things up before the hard data. we see post crisis that the soft data can be more volatile than the hard data. the hard data has been more sluggish. i think the fed's right to be relatively cautious on the speed of rate hikes even if things look pretty good read many of us what -- good. many of us would've said wage growth would've been the sluggish this long. you need to see the hard data before you pull the trigger. francine: thank you so much.

up later today, we hear from janet yellen as she delivers her economic outlook speech and look for that at 1:00 in new york. that is 6:00 in london. we will go to european markets next. this is bloomberg. ♪

taylor: let's get to the business flash. the maker is buying general motors open unit. there could be an agreement early next week and acquisition could create europe's second-largest automaker. among the points are cost cuts and will cover unfunded pension liability. caterpillar has gone from a presidential favor to the target of a federal raid in the course

of the week. agents of rated the headquarters into your -- p doria illinois. -- peoria, illinois. last week, president trump praised the maker of farm equipment saying i love caterpillar. companyest advertising has a slow start this year and does not expect things to get at her. shares are falling in london by the most in your. low inflation,ys technological disruption, and a focus on costs are have an impact on ad spending. to grow 2% revenue in 2017. that is your bloomberg is this flash. tom? francine? haveine: the troubles deepened after a stream of elected officials from his own party disowned his campaign. more than 60 politicians said the could no longer support a

candidate facing charges for the embezzlement public funds. managings is pimco's editor. if you look at europe, it's difficult. we have a political uncertainty in france and germany. there has been a big rally. what has been a big rally in german bonds in the recent time. a lot of that is because people are focused on the french election. why are people focused on it now relative to three months ago? part of it is as you get closer to the event, the markets focus more deeply on it i think that's what europe is focused on. francine: let me bring you over to my terminal. we see the spread between the french and german tenure, will you see more volatility? it was up and then it came down a touch.

if you believe the polls, a le pen victory in the second round is highly unlikely. >> the other thing you need to remember is its relatively low probability. rent --igh impact of event if she were to win. is 40 less or minus in the second round. you can see the france german spread at 62 basis points. it does not really reflect a significant risk that you get a nomination. a lot of things have to happen. you would see some volatility. you would see some volatility in any event anyway. tom: in the blur we go through every week, there is a statistic . that was earlier this week. i reminded myself that we were near 10% unemployment in europe.

what a better eu economy, two people just assume you will get lower unemployment rates? >> we were talking about this yesterday. att we've got in europe is the european level you have some decent momentum on domestic demand. the europeant employment growth, it's 2% year on year. it would be very surprised if you don't see that rate coming down. the staggering thing is europe has an unemployment rate which is twice the anglo-saxon. that's why you don't see any pickup in inflation. .ore inflation is still stuck we think there is plenty of room to run. it's going pretty well. tom: that call is wrong. it out to be a red color. have a greater negative yield. we have a lower yield this morning in germany.

we are going to come up with mike from pink -- pimco. your getting lucky with the book. rulell really look at the based central-bank idea known as the taylor rule. this is where janet yellen has to get to. this is bloomberg. ♪

>> the case has never been stronger. francine: the triumph -- prime

minister accusing the scottish inme minister of sacrificing pursuit of a break away from the u.k. the scottish national party is edging toward a demand of a second independent referendum. this brings us to our morning message. with a former u.k. chancellor about brings it. >> of course we're leaving the european union. we've got to accept that. the role of the lords is to try to do their best to procure for the nation the best deal. there are people who are definitely trying to scuttle the whole field by caring and amendment of this kind. i don't know what the government's priorities are except they recognize and i agree with this a different relationship on immigration with

the european union. >> british law and british regulations are compliant with the eu. we can just replicate them and carry on. what's essential is changing them in the future. francine: let's bring back in mike from pimco. we had a conversation with these two lords. they were there for the debate. how do you see brexit playing out? there are so many unknowns. pmi was worse than expected. ise: i think the first angle we are aware of the view that it's going to be hard for them to do any kind of deal which involves staying in parts of the union. the single market, you have tradeand you have negotiations with the eu. in best cases we leave both. people would call that a hard brexit.

the economy has done better than expected. some would agree with that. we don't think we're going to get a recession. i think that will be interesting next week going forward is the use of fiscal policy. i think we are getting to the stage now where the deficit is at a point were you can use that if you need to. tom: what are the ramifications if we get sterling to break down where it was. bring the chart up right now. he looks at this chart all week and sings come by. we are here in january. we just rolled over. this is brexit over here. we come out of this tight little trading range right here. if i come over here and i use function, youoom can see it plunged out this week. what are the ramifications to the prime minister if we get new weak sterling? : i think you've seen very

little response from the government that sterling has gone down. i think that's delivered. they will take the stimulus implied by a weaker sterling. i don't think they are uncomfortable with that. you are not going to find a lot of pushback from the government. they know that weaker sterling offset some of the trade tariffs if we go down. francine: thank you so much. he stays with us for another half hour. beginning today, we launch a new show. it's called bloomberg real yield. it's hosted by jonathan ferro. this is bloomberg. ♪

francine: live pictures of the prime minister theresa may talking about the scottish prime minister who is very much against brexit.

he is accusing her of sacrificing living standards in scotland in support of the breakaway. she is trying to do damage attacking the scottish national party as they demand a second independence referendum. we will talk about that. let's get to the first word news. here is taylor riggs. reportedlye pence used his personal email to conduct state business while he was governor of indiana. according to the indianapolis star, the account was compromised last year by hackers. comparison to hillary clinton's use of private email. u.s. public pension fund is going to lower its investment return goal again. that's according to governor jerry brown who said state and local governments will have to contribute more to make up the difference.

cut the rate of return from 7.5% to 7% over three years. in europe, more trouble for the embattled prince presidential candidate. his spokesman has resigned and -- politicians are disowning him. they say they cannot support him because of embezzlement. the probe centers around fictitious jobs held his wife and children. in the middle east, there are attempts to drive the oil glut are in -- glut. lowered oil supplies. it was the second month in a row the largest oil exporters, they are still 70% of the way toward the target of reduction level. global news 24 hours a day powered by more than 2600 journalists and analysts in more than 120 countries, this is bloomberg.

i am taylor riggs. tom? francine? francine: this week most emerging currencies are headed for a weekly decline after fed officials signaled tightening it could be on the table as early as this month. the tone from the trump administration has been more reassuring, authorities are concerned about a trade war. for more on emerging markets, let's welcome simon. welcome to the program. let's -- what's driving emerging markets? is it the trump administration and the softening of the tone? simon: when i was last here in december, we were very worried that trump coming in with transition and there would be high u.s. treasury rates. that dissipated at the end of

december. exportsame time, you had numbers improve and the pmi has improved. that's been driving the rally with staple treasuries. the fears the fed will tighten has come back. weakerinitely seeing re-am as a does it -- result. seems the prospect of rising u.s. interest rates is pushing investors to take on more risk as they seek to make returns. bullies continue? simon: if treasuries are going past that 260 level they got two, e.m. investors are in the -- going to stop and think and you will see some repricing. to remain around this

level, i don't see why we can't rush ahead. tom: i look at the evaluations and with the pop we have had, the double-digit pop based in u.s. dollars, are em equities of value right now? do you acquire shares of monday morning? simon: that's a difficult question for me because i am a fixed income guy. tom: they are linked together. what do you think about the equity market? macro in terms of the backdrop and if growth really is sustainable and that's a big if because there are some commentators who say growth has just come back because of all of the physical spending in the last year. it's the highest we've seen since the financial crisis. exports sustainable and are picking up because of the crisis and volume, i think

equities should do well. tom: how much coupon do i pick up? give me the greed function here on a friday. how much coupon do i pick up in a given country in local currency or dollar-based coupon versus the u.s. treasury? simon: if you look at something like the mv index, you will get paid around 300 basis points if you use treasuries. that is a low currency risk. the average yield goes to about 6.75%. it increases about 15 basis points because argentina has been put into the index. that's a rough preview. francine: beautiful. what is your take on emerging markets? we also tend to lump them into -- in his one. some are much more vulnerable to

a trade war retaliation. some are stronger in terms of structural reform. say you look emerging markets now and think about the cap's appreciation and get that 6.5% yield. when you look at the individual companies -- countries, some are the bellwether of trump. the peso seems to be relatively stable. we think there are something things you can do it high yields. been onerally, risk has the back burner for stimulus. don't get to carried away. you can it have part of a portfolio. that's the way we think about it certainly. francine: are we underestimating the risk of a full-blown trade war?

market willnk the get over that. my feeling is we won't see anything full-blown. i do think somewhere like mexico you could see pressure there. wasainly the peso which 18.30 or something like that and then went up to 22. it has taken out that sort of real sort of big bang against mexico. it's been depreciating since mid-2013 by 12% year. i think it's on track. i don't see much value. francine: does this also carried to japan? mike: we would say you need to lookat those, the ones we get have more correlation to a stable commodity price. that put you in some parts of latin america and things like the ruble.

there is liquidity. liquidity is relatively good. when we think about emerging markets and other riskier assets, doing it in a way that can maximize your liquidity is a good idea. that's why we tend to think about them in currency as much as bonds. asians, the low yield are's do have china with them. we are more cautious on the asians. tom: i'm going to bring up my index of greed. bloomberg barclays emerging index total return fund? couponrows in that 6% simon was talking about. simon, i think it's cool to see this move from the 90's up to the crisis. there is the crisis. this is a moneymaker. that by definition it moves from the lower left of the upper right and it's just a

sure way to make money? simon: it may be a sure way to make money, it's always difficult to save. when we think about fixed income, we think about it as a coupon play. if you decompose the total return on the index, 80% to 90% comes from buy-and-hold. you do get all of these headline stories. they confuse us and get a solid emotional at times. i think you are right. tom: we are going to be showing a lot of this. you will see it on our j screen. all you need to know is it's the bloomberg are clays emerging-market total return index and -- index. this looks like apple computer, except it's a boring on fun. this is the bloomberg barclays total return emerging-market index. this is very cool. francine: you can follow all of

these charts. we will be back with mike and simon later. we will also hear from the fed chairman as she delivers her economic outlet -- outlook speech. we will be talking about treasuries and yields. this is bloomberg. ♪

francine: this is bloomberg surveillance with francine and tom. onto sunday and some lawmakers are heading to beijing this weekend for the national people's congress with sketch -- which gets started sunday. they will talk about growth targets.

simon is with us and so is mike from pimco. mike, i want to come to you. my concern would be that the markets aren't looking at the whole picture. we have a huge credit expansion in china. when we talk about a possible trade war and political turmoil in europe, good that adversely affect that credit expansion to a point where we have a debt problem? simon: there is a credit issue which the chinese are going to have to deal with at some point. the key phrase is "at some point." we have the party congress at the end of this year. our sense is that for the time being, it's a relatively closed economy. if you control the credit creation channel which the chinese can it, then they can decide how they want to deal with it. we don't think that's a story for this year. it is a story. francine: do you agree?

would it be because of political confusion? he wants to keep everything under control and smooth sailing. simon: it's not a story for this year. there was a time when the market was obsessed with potential he china having some sort of accident. that is completely dissipated. what we would be looking for is to see what their target is. it has not been announced. if it's higher than the market -- of 6.5%. by of it could mean less reform and more leverage. what we have seen is the pmi improved. that is a good sign that some of has actually been working and you are seeing results. tom: it's great to have both of you here. this is china real rates. this is one approximation of their rate structure, less

chinese inflation. the bad news is these rates at 3% and 4% a number of years ago, the good news is they have come down. they haven't come down enough. the ultimate constraint to normality away from the politics is the idea that they have high real rates unlike so many other places. mike: be careful what you wish for. real rates should be relative to gdp. they may have high real rates relative to the u.s. or europe or the you kate they don't have rates relative to their real gdp numbers. that's one of the reasons why credit creation is quite strong. on that great observation, let's come back to the chart here in this is 6% gdp. it may be 5%. it may be 4%. you can see the real rate even

though it's a big story and elevated. it's not where the economy is. hunches gdp -- my lower in slows motion. gdp will be converging. francine: this china see itself as a champion of globalization? was that all for show? we are bringing jobs back to america. saying itesident she was a role reversal. to be part of the plan is a much bigger player on all aspects of the global stage. i agree they do see themselves in a global player. what does that mean? what will they do with the economy in loosening some of the handle they have on it? simon: one of the gauges is still they have this credit

bubble which they have to deflate slowly. stability is still the main aspect. even when you think about reform that means the big one taking over the small one. that's not really reform. mike: they are mercantile accounted. globalization is good for them. francine: simply put an effective. thank you so much. we will be back with mike from pimco and talk about some of the other yields we are seeing. we haven't touched on. german politics. if you have a terminal, you can follow, and i on there. we have cool charts. we have some of the analysis tom has been showing us. ask questions directly through us to our guests. this is bloomberg. ♪

taylor: let's get to the business flash are in the radioshack brand is bracing for

another low. the joint venture is preparing to file for bankruptcy. people firmly with the matter say general wireless operation it may file in the coming days. they operate radio shack outlets. they also franchise the name to other stores. member wants to restart a program in california. this time they want to do it legally. hadright hailing company cars pulled off the street in san francisco for not eating properly registered. now they want back and they are filling up the paperwork and it's a milestone for spotify. the have surpassed 50 million subscribers. that's more than twice as many as the number two player apple music they are still losing money. companys are seeing the filed for an ipo. that is your business flash. tom: just to make you aware of

the dance card, we will do one on snap chance. brian will join us on radio later this morning. he put out a scathing note yesterday. adam will also join us as well with some reality on snapchat. in our next hour, marvin good friend will join us from carnegie mellon university. we're looking forward to that. he is a good friend. right now, mike is on the global challenges. you know this. this is the balance sheet compared to gdp. this is the least. these are all elevated. let me go to the blue line here. u.s.,lt like the you -- are we going to taper? will we taper? mike: we think the ecb has gone up for the first round of tapering already in december. they are going to reduce the

amount to 60 million euros. we would argue they have. the question is when the fed changes its balance sheet. we think it's a little bit out. they want to get rates up a bit higher than they are now. we think tapering is happening. tom: if it does capitulate whether it's morgan stanley, does mario draghi to pitch a late to a more hawkish chair yellen it? mike: i'm not sure he does. if i were married drug he, i would look at the exchange rate. , iif i were mario draghi would look at the exchange rate. the dollar hasn't really moved the last two or three months. if i were married of draghi or chair yellen -- mariota or chair yellen, the response from the

dollar appears to be much more muted than it has in previous shifts. francine: how should we look at politics in europe? i'm thinking about france. also possible germany. not only the yields, but currency. mike: there are two big elections, the dutch one and france and germany. pence, the risk is a le victory. the german one is a bit more interesting. you can argue that either candidate could be relatively good news for europe. , merkel ismerkel pro-european. then you think about what happened to the euro. i think the reason the euro we could quite easily argue either way on the euro. that could be quite deflationary.

that could be pro-real yield. lefthe would be much more than we see at the moment. if you have the re-introduction of the unions, would not be seen as germany looking more inward and embracing globalization? mike: the way the markets would look at schultz, this is a guy who has had the european parliament. they would regard him as being more of a pro-european candidate and one in which some of the wouldle issues we've seen take that quite well. tom: thank you so much. francine, let's talk about what we are going to do through the morning. brian will be with us later on with bloomberg radio. before that, what a great day to talk to alberto hello. there is so much going on. francine: it's not just about central banks. it's about policy.

they are trying to get the blame. he said he is resigning. all of that press conference we saw in the last few days. tom: it's going to be fascinating. i think they are going to do article 50 for the end of surveillance today. this is a cold new york city. it is frigid. frigid i say in new york. you're not going to miss this. we are talking about the taylor rule. from london and new york, stay with us this friday. this is bloomberg. ♪

♪ tom: a regime change word chair yellen. the fed is behind the reality of

a good economy. help wanted signs. too many to count. marvin good friend from carnegie federal banks working rules. politics is not again. may and sturgeon face-off. 23 to a cell from 17 to 26. ryan weezer says it will go all the -- brian weezer says it will go all the way to $10. good morning everyone. this is bloomberg surveillance, live from our headquarters in new york. i am tom keene live in new york with francine lacqua. it is about everyone's link to central bank. francine this is a theme that francine: this is

a theme that has been going on for quite some time. permeating through every single market. tom: the first opening since november 8 when we did not mention the president. let us change that right now with our first word news. here is taylor riggs. taylor: some political pressure twoing around sessions meetings with the russian ambassador. he denied any wrongdoing. >> i never had meetings with russianoperatives or intermediaries about the trump campaign. and the idea that i was part of a "continuing exchange of information during the campaign between trump surrogates and intermediaries for the russian government" is totally false. taylor: usa today reports that two trump campaign officials

spoke with russian -- the russian ambassador. advisers said to be slid on the paris agreement on climate change. according to the new york times, moderates in the administration believe the president should stick with the agreement even though he has pledged to withdraw. on one side is steve bannon who wants out of the deal and on the other side rex tillerson and the president's daughter. no china's president wants drama in the national people's congress that kicks off this weekend. looming over the congress is a communist party meeting that takes place twice a decade. half of the chinese leaders may be replaced. he wants to win backing for his efforts to overhaul china's economy. global news 24 hours a day powered by our 2600 journalists and analysts in more than 120 countries. riggs.ylor this is bloomberg. tom: let us go to washington

right now with kevin. questions on the derby known as russia in washington. a data check. i am dashing to kevin. remarkablylding up well. now, over to kevin. so we can get to our esteemed guest. falloutelp me with the of the recusal of mr. sessions. who will lead the investigation and who will represent the department of justice? kevin: all eyes on capitol hill when there will be federal hearings underway for the lower-level positions at the justice department who will now be in charge of leading the investigation. they are looking to remove some of the political pressure. yesterday, the attorney general jeff sessions recusing and self any potential investigation surrounding the communications with russia. tom: help me with what moderate republicans do and the republican leadership -- i get the idea that the democrats want

to scalp. where is the middle ground if there is one? jason shave it's has been one of the emerging republicans in the house of representatives pressuring the white house. leading therge with investigations in congress having oversight over ethics issue within the government. he was one of the early members of the republican party to come out and say that the attorney general should recuse himself. late last night, the president taking to twitter saying this is little more than a witchhunt by democrats led by senator al franken who is potentially rumored to be on the 2020 list to seek reelection against president trump. francine: give me a sense of how serious we should take the latest news on mike pence and a

male's. -- on mike night pence and emails. kevin: news from indiana -- a report in the indianapolis star that he utilized private emails while he was governor of indiana. that -- critics are saying that is a double standard because then governor mike pence criticized hillary clinton for her use of a private server. she asked he says that is absurd -- he says that is absurd. kevin, i hope you work the entire weekend. kevin is our chief washington correspondent. this is what surveillance is about. onwas to get to bright guys the set to talk about economics and the markets. marvin good friend is a carnegie

-- is at carnegie mellon university. he is a voice of reason within the economics community. his paper at jackson hole this year was hugely controversial. alberto balogh is one of the leading experts on the dynamics of european debt and on the linkages. i have to get the newsmaking out of the way. you are a prime candidate to be a governor in the federal reserve system. have you spoken to the trump administration about public service? >> no. tom: if you do this we, let us know by monday. alberto, are you being considered for anything in the italian government? >> i am happy to stay in the private sector. tom: over to the regime change. we have a regime change underway. if there is aow regime change underway but there

is no question that the federal reserve is in a different phase of the business cycle. i was teaching my class this week. last week, the odds of a fed move in march were very low, about 20%. and then, it it was up to 80%. it is changing its own mind and the mind of the public to get the markets to go from a low chance to a high chance of a march move. an incredible week. tom: i have cited this week, anna schwartz, and bernanke -- i have cited timberlake of georgia. all of the summary is a fed must wait for the data. are we breaking the rules now and are we actually going to have dudley coming yellen, and fisher get out front? >> the fed in the past has almost always waited for the inflation to become a serious problem before moving. this time, it looks like they are going to move preemptively

this time. statewide inflation at 2%. francine: why are things different? because the economy and its composition is different and they see a narrow window of opportunity or is it because the markets are fully pricing it in? >> it is all of those things but in particular, the fed has been behind the curve. the economy has been strengthening steadily for years. the fed knows the lessons from the past. currente people in the regime of the fed have lived through the past decade and researched history from the last few decades of the fed. they want to get out in front of things this time around. youcine: alberto, over to -- i have a bloomberg terminal chart. it basically charts the two-year treasury yield in white and the

bloomberg dollars spot index. bnp is expecting the two-year yield to go up 1.9%. is there any truth to that? >> today, the most important thing to understand is the path of fed hikes. we know they will start in march. we do not know if they will take a regular path through hikes, for example, a hike every quarter. they are behind the curve consistently. there is also political pressure. and thirdly, there is an overwhelming effort towards stimulus to growth. we do not know the impact of all of the policies of the trump administration. but they are at risk of falling even more behind the curve. path of one hike every number of months rather than being data dependent. tom: are you making up the script here, alberto? help me out here marvin.

do we need a one and done attitude? there is enough pressure in the pipeline to put in place a campaign, a small campaign of raising rates. tom: i like that "small campaign." marvin: so that we get above 2% on the short rates. that is where we need to be. arecine: thank you so much, in good friend will stay with us and so does alberto gallo. fedr today, we hear from chair janet yellen as she delivers her economic outlook speech. look for that at 1:00 p.m. new york time and sixth -- and six at 5 p.m. london time. -- and 6:00 p.m. london time. this is bloomberg. ♪

francine: this is bloomberg surveillance. taylor: the maker of peugeot cars is closing in on a deal to buy general motors opal unit. there could be an agreement early next week. and acquisition by this group would create europe's second-largest automaker. among the negotiating points, potential cost cuts and who will cover unfunded pension on -- pension liabilities. caterpillar is the target of a federal raid. government agents have rated the company's headquarters in pure yet, illinois. seeking evidence related to imports and a swiss city right as part of a criminal investigation. last week, the president praised the maker of forming acquitted. the world's largest advertising company had a slow start this year and does not expect things to get any better. shares are following in london by the most in year.

the chairman says load inflation, technological disruption and a greater focus on costs are having an impact on ad spending. to grow 2% revenue in 2017. that is your bloomberg business flash. tom: bad news. your day does not end when surveillance is over at around 10:00 a.m. this morning. you will have to wait for chair yellen. she gives an exceptionally important speech. and annual meeting on the economic outlook in chicago. look for that at 1:00 p.m. new york time. this is an important speech where the chair may speak about hard data. alberto gallo is will -- is with us. and marvin goodfriend from carnegie mellon. soft data from pmi confidence and hard data. chair and sat in your earlier this week and made it very clear that wage growth is the hard data that needs to be there.

from where you sit in pittsburgh, are we beginning to see wage growth? marvin: we have seen wage growth strengthening. but not the kind that is explosive yet. but the economy is getting strong, operating on all cylinders. the key point is that interest rates are too low. the short-term interest rates. tom: do you agree with that, alberto? alberto: they are too low especially if the trump administration measures go in as expected. corporate tax reform and infrastructure spending. the key question is whether the fed will look at the data as an excuse to not hike versus looking at the data as an excuse to hike. vector every two or three months like former chairmen had done in the past. i think what we will see is that

logic will say that if the data is strong enough, we will hike. rather than needing the data to be above a certain amount of strength. which was the mentality until now. francine: talk to me about what we have seen in the market. andconviction in the market we see that in the fed fund rates, that we will see a hike in about two weeks. indices are at a record high and we have not talked about tax cuts anymore. and we are lacking details from donald trump. alberto: the market is clearly euphoric place right now. it is pricing the uplift, the inflation uplift from the trump measures. but the implementation of these measures is not straightforward. it needs to go to congress. these are all things that are not 100% certain that the market has priced them in altogether.

there are also some measures that could be negative like order text. it is bad for per -- for port people. it hits the same people who voted for trumpet in the middle of the u.s. because they will see all of these goods imported from mexico and china go up. we still do not know what is going to happen. is getting aarket bit optimistic and we see that the president has almost identified himself in the s&p. we see the reference to the stock market in many of his speeches. we are getting into a loop where the announcements are positive but we need delivery as well. francine: marvin, do you agree with that assessment and what will happen next? can we assume that the world will feel quite happy? marvin: the case for raising interest rates in the u.s. does not depend entirely on the euphoria in the markets. it depends on where we have gotten to already with

inflation. the inflation rate is up near the target of the fed. employment is doing well. the case is already baked in and that is why i mentioned the word "campaign" earlier. japan andis bank of this is the great remorse. , inflation is here, they raised rates and then they had to capitulate and come back down. that is the ghost in the closet. marvin: central banks hate to make a mistake in reverse field anytime soon. they are trying to manage the longer-term interest rates by handling the short-term rate. the only way they can do that is to have a convention and they move the short break, target reversals are seldom. the markets know that if the rate moves, the fed or the central bank is likely to move in that direction for a number of years and expected future

short rates carry the long rates. tom: i want to come back and talk about the yield curve. albertooodfriend and golomb will continue to stay with us. he is front and center once again. pivotal has done it again. he was right on facebook. in march, 2017, he says "sell snapchat." that is where all of the shares are. ♪

francine: the picture of london. it is a little bit dark. we did have some pmi figures that were disappointing having a huge impact on the pound. the u.k. economy a beheading heading for a slowdown people are saying, and services may be weakening. and it is rainy. the u.k. prime minister is in scotland speaking at the scott lish -- the scottish referendum. >> there is no economic case for breaking up the united kingdom or loosening the ties that bind us together. the economics are only part of the story. thenational security of union in a changing world has never been more important. ,rancine: the prime minister theresa may, accusing the scottish first minutes -- the scottish prime minister of sacrificing living standards in

scotland regarding his desire to break away from the u.k. marvinhere with goodfriend from carnegie mellon and alberto gallo. alberto, give me a sense of what will happen if we see a second referendum for scottish independence -- the argument the prime minister is trying to make is difficult for the scots to understand. she herself was in favor of brexit and maybe jeopardizing the u.k. forrto: if there is no case the ok to break with the european union. they are both lose, lose situation. in terms of security, what she was talking about was the military bases in scotland. a breakup between scotland and the rest of the u.k. would be a big security question mark. i think this is not at all about economics but rather about

politics. scotland is being pushed to go out of the eu even though they have voted to stay altogether, same with northern ireland. they have very little benefits from going out of the eu together with the u.k. it is completely about politics. the u.k. is in stagflation. there is very little plan to manage the exit rather than a weaker pound and tax cuts for companies investing in the u.k. tom: i am gasping over this chart. bring up this chart. weight with the united kingdom. down we go. this is the interpolation down to something on the order of 110 sterling. marvin: what has happened in the brexit, and this is potentially, not the -- that completely in the cake get -- the trade move may move against the u.k.

this is such an open question because britain has options they can utilize. i am not an expert on britain i would say this is in flux. tom: can you predict a weaker sterling? potentially, we are going to go below fair value. market fair value is where we are now. tom: give me a number. 110.to: 115, francine: we speak with the commissioner who went after google and may she -- and she may do so after apple. this is bloomberg. ♪ margrethe vestage

♪ tom: extraordinary news this morning. let us get to our first word news. taylor: we are starting in the u.s., vice president mike pence

reportedly used his personal to conduct's nest being governor of indiana. the account was compromised i hackers last year. aid rejects comparisons with hillary clinton. british prime minister theresa may says it is a personal priority to keep scotland in the u.k. nicola, she accused sturgeon of a sacrificing the region's living standards in his pursuit of the break away from the u.k. more trouble from french presidential candidate, fred -- francois fillon. his supporters can no longer support him. there is a report that police searched his home. -- ading alleged fixed

fictitious jobs held by his wife and children. global news 24 hours a day powered by our 2600 journalists and analysts in more than 120 countries. i am taylor riggs. this is bloomberg. francine: thank you so much. let us keep the focus on france. macron in places front of fillon. what is significant about this new poll? mark: polls are just pulls but marine le pen has held the lead in first round of voting for over a year now. the poll just came out saying macron would be her in the first round of voting. it has always been clear that the polls show she would lose in the second round but this underlines the momentum that in thehas at this stage

race. an independent who a year ago did not have a party who in december was at about 15% in the polls and now he is really entrenching himself as front-runner. was a saga ine the last few days regarding francois fillon. he is still under investigation. is there any talk. the french papers are saying there is talk about replacing him. is this a real possibility? mark: it is becoming a real possibility. fillon came out on wednesday denying that he had quit the race. he is maintaining his bid. in the days following, 60 deputies, senators and mayors have said they are no longer supporting him. big names. -- fillon for now has said he is hanging on and he is

the candidate and no one can change that. i think we have to wait and see. there is a big rally planned in france -- a protest planned in paris actually. on sunday. we have to wait for the other shoe to drop. francine: give me a sense -- first of all, i want to get to marine le pen talking yesterday attacking the naive globalization. have a listen. >> this is a moment to put the end to the faceless and borderless economy. look at the world. everywhere from donald trump's india, to moody's china and theresa may's britain. rhetoric,does this this kind of rhetoric which it seems to mirror donald trump and brexit, does it play out well in france? think it does play out well and for the same reasons. those that feel they have been

left behind by globalization. how much cover the election of donald trump has given to marine le pen and her core supporters. the complaints are very similar. the economic and geopolitical situations of france is different from that of the u.s. articlep me with our out on this poll and the structure of french politics. we mentioned that the de gaulle history and political assassination -- are the parties as we know it still active in the minds of the fran -- of the french? playat calculus still at or is it an all new france? mark: that is a good question. the fact is that people do not give up their partisan loyalty overnight. francois fillon has not fallen below 18 percent of the vote in

the polls. 1/5 of the voters. the socialist candidate is still pulling 50%. pulling 15%. the parties have become unhinged. but they are still there. those that voted for donald trump in november -- they may have had their reservations but at the end of the day, they were republicans and they could not stomach hillary clinton. a similar dynamic here. tom: into the tight -- into the weekend, what will the french papers write about? mark: tomorrow morning and sunday, there will be a lot of focus on this protest being held in paris. essentially organized by fillon supporters. there is a lot of controversy about this. it goes back to the rhetoric he is using about political assassination and quasi-civil war he called it.

the rest of the mainstream political actors in this country are saying this is getting out of hand. no one has been assassinated. you are attacking the justice system. tom: thank you so much for your work this week. you are appreciated from france. how do you make money in this alberto? is there an opportunity for investors? alberto: everyone thinks europe is on investable -- uninvest able? . no matter how much stress you put into a elections. the other scenario is extremely positive for europe as you have merkeland potentially winning together with scholz. in germany would become the third person in government.

pro-investment in france, a country that needs reform. and scholz is pro-european. ,ermany could actually spend after many years of surplus. and the ecb could get more hawkish. this is underpriced. alberto, why take a risk? a lot of people are saying look at the polls. it is the same fear that could propel her win that we saw with the brexit and donald trump. if you are on the wrong train, you could lose a lot of money. alberto: already, there is a lot of risk priced. european banks should be 10%-15% higher but they are lower because of political risks. same with credit spreads. election system is different in france.

it is about the first and second round. the probability of winning the second round is very low. third, france has a very different social issue, record high inequality. a welfare state in france. less people are disenfranchised compared to the ok and the u.s. in europe, you have lower growth. you also have fewer people left behind and that matters when it comes to votes. we aree: what if completely wrong and people go to vote on security? always theere is chance of a last-minute issue. fake news. leaks. another scandal like field. you're looking -- like macron. buying up money pit upside risk on europe is very cheap. look at this.e tom: looking at rules versus

discretion. with marvin goodfriend. we will come back and talk about the incredible valuation and mystery of snapchat valuation. tv . we love this. you can see our whole features. click on the right side and up comes the old the old video and you can see marvin goodfriend talk about remorse in central banks in real-time plus you can steal the chart from me and bring it right to your bloomberg. there he is. he is talking pittsburgh pirates baseball. we will be back. snapchat is outrageously valued. ♪

francine: this is bloomberg surveillance. taylor: let us get to the bloomberg business flash. the radioshack electronics brand

is bracing for another blow. the owner is preparing to file for bankruptcy. the general wireless operations may file within coming days. the company operates radioshack outlets within sprint locations and franchises the name to other stores. once to restart a pilot program in california for self driving cars. it plans to do it this time legally. the company was pulled off the streets of san francisco in december for not being properly registered. it wants back in its home state and is filling out the paperwork. a milestone for spotify. world largest streaming service. more than this as many as the number two player, apple music that spotify is still losing money. investors are expecting the company to file for an ipo. that is your bloomberg business flash. francine: another -- in other

atporate news, snap closed $24 48 cents, 44% above the ipo price giving it a market value of more than $28 billion. adam is with us. he was with us on set yesterday before the ipo. it is crazy that it has topped 44%. facebook was trying to buy snap for $3 billion. adam: in this instance, waiting was the right call for the founders of that company but now, moving past the ipo, the question becomes proving this valuation. it is very lofty. the company right now, for every dollar in revenue that it makes, it is losing more than that. itseeds to show that advertising model and other things it is trying to develop will be worth the kind of money that investors are paying. francine: what does the company need to do to prove in the first

six months or a year that it means business? adam: it will be facing more scrutiny than it has. it has been a private company keeping things very secretive and now it will be exposed to the investor community in a more robust way. it will also have to show that it's advertising model that it wants to build out, it is taking its cue from television. orering different shows different content. selling advertising on top of that. absolutelyports are scathing. there is no other way to put this. brian weezer for them to shred s yesterday while everyone else was doing champagne on the floor of the stock exchange. he was right about facebook taking until francine correctly states that they proved themselves to be optimistic on facebook's underlying business opportunity.

being priceds as for perfection. here is yesterday -- 10:00 a.m. and brian weezer out on snapchat. i will try to break it down. our model feels stretching getting to $10 per share. snap is unlikely to have scale like facebook or google. we think the margins should be lower than twitter, talk of dogs -- dog of dogs. with the stock going public at $17. up to $26. they have be scared out of their minds. what do they do in the next two or three conference call to prove that he is wrong? tom: they will have demonstrate some growth. in the last quarter, they showed it was slowing down. i am not saying they can get to this is what is in

front of them and the challenges there for them. this puppylution on is record level, isn't it? management structure in which the investors who are biting and will have very little say, none really, about the direction of the company. this is really a leap of faith for the founders of the company who are in their 20's. tom: this is a real treat. we have marvin goodfriend from carnegie mellon and alberto gallo. we will go under the theory behind the regime change that we have seen this week at the fed. brian weezer with us on surveillance. we will dive into his call on snapchat. but stay with us, marvin goodfriend on rules and discretion. ♪

tom: foreign exchange, alberto gallo looking for a week or sterling overtime. fromster's --

the prime minister's speech. the euro has been resilient this morning. francine: coming up, it will be bloomberg daybreak. david joins us now. i know you will be all over snap. david: as the market was yesterday. fair to say. we have a pretty well covered. have a prominent venture capitalist. we also have a very well-known analyst. and the man who wrote the book on facebook. all to talk about what numbers does the company have to pull -- to put up to justify this optimism. we tried to get a call and then an hour later, he came out. tom: you were out front with that. he could not put out that report at the time. scathing. is a hat trick of smart theory on snapchat. through all the media today, i think the coverage has been great about the valuation. there we are. thank you david westin.

we are looking forward to that. onwill have bloomberg wieser surveillance and radio as well. here is an important chart. we have done it in stanford red and white. we were going to do it in carnegie mellon around. that we did not. here is a taylor rule or one interpretation of it. all you need to know if the white line, the fed fund rate is above the red line up to the yellow circle. this shows how behind janet yellen and vice chair fisher are in bringing up this rate something like that. you have never seen this in your career. marvin: i have seen it all too often in my career. hope springs eternal. the people who run the federal reserve will learn from their own mistakes in the past. there is over 100 years of federal reserve history and almost every time, the reserve gets behind the curve. it is hard to pull the trigger. tom: why is it so hard to

migrate away from rigid rules -- why can't we get a little more ' "rulesy? manage the fed wants to the long-term interest rates with their short rates. in order to make that work, they have to be pretty sure they will not reverse field. moving the short rate up will affect the long great if the short rate action is transmitted to the future short right so the expectant -- so the expectations the area is they can manage things. a want to make sure that they will not reverse field. that means they always wait to long. that is the mistake. it is the inclination that is understandable but given the history, they should be able to overcome that. francine: it almost looks like a done deal.

they do not want to disappoint the market since they put themselves almost in a corner. march, i would be amazed if they march increase did not happen. i am talking about a small campaign for interest rates that i think ought to be put in place which i doet's mind not think it is quite there yet. francine: alberto, what does this do to the 10 year yields in the u.s.? year yield in0 the u.s. is also affected by global demand for bonds. off -- it increases the amount where the 10 year yields can go. fed's past, the dovishness was trying to make up for stimulus. it finds itself very much behind the curve now. low interest rates can distort the economy. they do not fix the problems we have which are due to structural

employment. the economy needs to reach will itself. itself. to retool yield curve or where can the yield curve can a central banker affect the target rate? ken janet yellen affect the 10 year -- can janet yellen affect the 10 year yield curve? alberto: they can change guidelines or expectations or they can talk about investment of the proceeds in the qa program. everyone is long odds. the imf has been warning about long-- everyone is duration and long passive strategy. that has been increasing in the last months even though the fed has signaled a hike. ofn though everyone knows

the rate. of the rate -- of the rate hike. tom: this is about the first and second derivative. it is not only about a media observation. but the rate of change of what could people do to disagree. alberto: that is why it -- marvin: that is why it is important for the fed to get into the mind of the public about a campaign. is what the fed has been reluctant to do. tom: this is what this is all about. marvin goodfriend, thank you so much. alberto gallo, wonderful to have you here in new york as well. janet yellen speaking today in chicago. at the economic club in chicago. an important speech. we will all be glued to that. atlantic equities just took

snapchat to $14 a share. $14 a share. that is a big deal. stay with us worldwide. bloomberg radio. brian wieser will be with us on surveillance. francine, have a great weekend. what an amazing week, particularly in france. ♪

♪ jon: the final word belongs to chair yellen.

a rate hike is on the table. after a pullrope shows macron taking over for le pen. more controversy in d.c. more questions raid regarding the attorney general's conversations with the russian ambassador. this is bloomberg daybreak. i am jonathan ferro alongside david westin. snapchat. if you like a company that loses money, you will like it. david: a lot of people liked it yesterday. >> follow-through buying as well. it is ranked just a load travelers. initiating. youd: if you are the ceo, are feeling a fair amount of responsibility to justify those numbers. trick --d kerr cap hat david kirkpatrick is coming up.