jonathan: the german chancellor heads to the white house. some reassuring words for leaders at the g-20. steve mnuchin says he does not want the u.s. to engage in trade wars. after another reserve rate hike, how long before the ecb makes a move. one official says it could come before qe ends. good morning. this is bloomberg daybreak. it's all about the white house and it mean between these two. david: it all has to do with germany. this is the most important meeting donald trump has had. >> resident donald trump and angela merkel meet today. we will have special coverage of that event. you do not want to miss that. david: we will talk to steve ratner about cars. jonathan: happy friday.

futures at the moment are treading water. they are dead flat. euro, it is nowhere to be seen. we do head toward toward a third straight week of gains. alix: look at what is not moving. i have to point out the dollar index finally happened yesterday. i was watching for it. it is moving above the moving average. that could mean more downside. david: finance ministers the largest economies have gathered in germany. steve mnuchin is going to make his debut on the world stage. joining us is mike mckee. he is our international economics and policy editor. tell us what the agenda is. mike: we are hearing that the u.s. may have scored its first victory here.

the latest draft of the g-20 communicated drops all reference to climate change. that is something that is different from their last communique. they want but the paris climate accord in play as fast as possible. it,u.s. fought against including it this year. it has been dropped. the french are upset i this. the finance minister suggests not writing about it doesn't mean not talking about it. it will be a topic. it's a win for the united states as it goes on. david: what might be coming back the other way? where does he start reassuring our allies that we won't the rabble-rousers? mike: that's an adjusting question. in light of how this negotiation behind-the-scenes

we are being very aggressive in demanding changes to the communique on trade, currency, on climate change. mnuchin is trying to play the role of the person you can talk person the other ministers can get along with as opposed to donald trump. he talked about cooperation, negotiation. they are very tough so far. david: we will be talking in with you. is the: joining us now head of global rates. what do you expect to come out of the conversation that will impact your world. >> i think there is a lot of concern going to g-20. think that's unlikely. i think the egg success will be

if this is a nonevent for the market. jonathan: we had a conversation about who is running foreign policy. who is in charge in this administration? >> it should be mr. mnuchin. he has made it clear he is short-term a different prospect issue than the dollar. he still wants to see a long dollar long-term. his job is to finance the budget deficit. he wants to borrow as cheaply as possible. it allows him to do that. he needs to do whatever it takes to reaffirm the dollar remains the world's reserve currency. i'm trying to understand who runs the fx policy. president trump is saying things, steve mnuchin is hands-off at the moment. what's the strategy? >> we don't know what the strategy is.

i think this is where we are talking about reform. depending on which way this goes, it will have a huge impact on the dollar. there is more talk about the dollar right now than i can remember in the last 20 years. it's all in the context. david: president truman had a thing of his desk said the buck stops here. to what extent should we focus on the fact that president trump was a real estate developer. he tends to like the weaker dollar. he comes from a very different place. might that drive our policy? >> there is no question if you want to bring jobs back to the u.s., you want the give the exporters a shot. this is why i think with the issue of fair the trade within the context. as you probably know, the u.s.

today is the only country that does not he a value adjust tax. 160 have them. this puts us at a disadvantage. when bmw exports a car to the u.s., even before his cross the ocean, they get a tax rebate of 20% from the government. -- this is white cops less here than there. gm when it exports a car to germany on top of plane import duty pays 20% when it gets there. we need to fix this issue. david: you sound just like paul ryan. that's why we need a border adjustment tax the president has not come down it. >> i think it's complicated. there is some confusion. it is also a border adjusted. -- it hasis proposing

some problems. thing, i don't think these guys are following through with the unintended consequences. are sitting on over $20 trillion worth of foreign assets. for's a $5 trillion hit balance sheets. made $400mpanies billion overseas. that is a 100 billion dollars it for corporate profits. i think there are a lot of problems. it doesn't really matter what i like. the point is the debate continues and this is the most important debate in washington right now. alix: as you just said, that's a potential 25 depreciation. it is settled in the currency

market. he can't before it. >> i think that's a fair statement. you can have the cake and eat it too. alix: how do you position around the dollar like that? the dollar can't break? >> the problem right now is the yield dollar. be bullish for the dollar for the most part. the problem is because of obamacare, it's unlikely they have one right now. we don't know what they have right now. mr. mcconnellis said he wants to put the aca will on the president desk by easter. that means there is no chance you will get any clarity on tax reform. they are trying to cut complicated deals in the house and senate. they are not going to roll up

another controversial reform and have parallel negotiations. you've got to stick around and wait and you've got to wait this out. this will be the second half of april, more like may before we can be energized. what you do until then? >> when you wait, you want to get paid for waiting. this is why emerging markets right now are the flavor of the day. jonathan: we will get to emerging markets in a moment. bank africa's reserve governor joins us. that's an important conversation coming up on a bloomberg daybreak. c-suite, you are watching bloomberg. ♪

emma: fourth-quarter earnings beat estimates at tiffany. flat, they'rere forecasting earnings will be up in high single digit percentage. apple will spend half $1 billion to settle. it's the single largest overseas market and the one in which the iphone has lost ground to local rivals. foreign companies have built research bases in china as a way to curry favor with the government. corrupt --oining a corruption investigation. this is related to third-party consultants. it's not a new issue and the company has dropped the questionable middleman. that is your bloomberg is this flash. market,e move in the fx

it is now rolling over. here's the potential we are looking at. he is the head of the austrian central bank and he made his case saying the ecb could tighten on terry policy differently than the fed. they could hike rates and could also raise the deposit rate earlier than the prime rate. also with us is david wu. to be fair, the market is pricing in a hike. is this a reality? >> i think certainly the odds are growing that they may end up normalizing rates earlier than expected. the fact is the euro is very low. that is a big boost to the economy. the data are getting better. from that point of view, there are reasons to believe the basis for normalizing is in place. i would argue there is no

question the dutch election had concerns about it. the italy election looks like it's not going to happen at all. steve mnuchin is having any conversation with the germans, you have to do something about the euro. that is going to help the germans pressure the ecb to raise rates more quickly. combinations,e it's understandable why the euro is here. like assets are cheaper than u.s. assets. this will continue to see interest in europe. alix: you have so much more to make up at the end of the day, when you look at the euro in terms of volatility, a lot of people say complacency is in the market area you've got to start hedging because there is too much complacency. is that a risk?

>> i don't know. inx: you called donald trump august. >> if you look at the israeli election in 2015, if you look at the brexit vote, the trump vote, the embarrassment factor. i think from that point of view, le pen is still running at 38. 3% is not going to make a difference. i think the odds are lower than 50-50 for sure. i think the point here is i still think the is going lower. there is no question. before tax reform starts to come they are going to go where the money is cheap.

i think europe right now represents the value. all of thesead of risk events, the ecb trimmed qe. they are not as concerned as other people actually are. they have gone down from 60. they believed the deflation risk have diminished. they took the deposit rate down to -40. they were worried about deflation. fromu're going to mu qe 8260, doesn't it make sense to move it back toward -20? >> it makes sense on some level. i think the point here is i don't think three months ago they saw the economy being literally on fire right now. i don't think three month's ago they thought we were going to go into a synchronized global recovery. that is giving them reassurances.

about the g-20. i think there is a bigger impact on the euro than anything else. i suspect if there is anything steve mnuchin can agree on with his german counterpart, the euro can be higher. that will strengthen the case for the germans to make the case to the ecb. jonathan: i'm not talking about steve mnuchin. we are talking about rate differential. we had a front end of the curve in a negative rate and it could be a change in a significant way. >> i think it's possible. that's what the market is telling you. in the last month, european has beenthe market underpricing the ecb. there's no question about that. david: to say the european economy is on fire is a stretch. compared to what?

the u.s. economy is ahead of where the european economy is right now. we just heard from janet yellen. she says we have to stay accommodative. about growthanger in europe? >> very little. they are going to go very slow. qe will continue until september and we are not sure if they are stopped. they might taper s'more. they are putting options on the table. from that point of view, there is the german election coming up. i don't think they will want to get too aggressive. i think these guys are very happy right now with where they are. everything is working for them. draghi cannot sit back and enjoy it. jonathan: there is less accommodation. david is sticking with us. we have an important conversation with south africans

governor. that conversation is next. from new york, you are watching bloomberg. ♪

jonathan: these conversations take center stage at this week's g-20. joining us now is the governor of the reserve bank of south africa. governor, it's great to have you with us on the program. i want to start with the g-20 and the agreement to not manipulate currency. do you worry that it's never carried out in practice? i think this is something policymakers should have read i don't know how many policymakers are in control of currency. for countries like ours that

have a small open economy, we have to ask act the currency is determined by demand and supply in foreign-exchange market. we do not have the power to manipulate our currency. countriesow which have the power to manipulate currency. jonathan: i could list off a few like china, japan, the eurozone. to the federalon reserve. it's the middle of december, the best performing emerging market currency is the south african the. have you been surprised by that? i think we to put this in the. currencyrmance of our

was nothing to be excited about. it came from a low rate and the result. movement of the currency had nothing to do with fundamentals. it had to do with the course of last year, you saw the effort in ay the minister cross-section across south africa from business to labor and the presidency. together andg let's deal with the challenges that are facing us. minister embark on a process of consolidation. that was a time of the budget. reactionome of the from the fed moves during this week is a function of how much you want to price into the market.

when you talk about market players, i don't know what the hike is. about doves and hawks. we analyze the situation and based on the data, we make decisions. jonathan: i'm just a journalist. if you put together declining inflation expectations on the back of what's happened with the currency, are you in a position to say the tightening cycle is now finished? >> no. we can't say that. the currency helps. the rise in oil price doesn't help. the fed is -- prices remain

high. that doesn't help. we are going to analyze a combination of this over the next two weeks as we go to our policy-setting meeting. we will make the call in terms ofwhere we are and in terms the rate cycle. at the time of the previous meeting, we feel the risk for inflation is on the upside. have to reassess whether we see the risk outlook on the outside. what we can take away is the threat. there are so many moving parts and we will have to do an during theof that policy-setting meeting. try to get want to your opinion right now and put you on the spot. the upside risk to inflation is diminished. >> i said mpc.

jonathan: your him pinion is important and i want to ask you if you think the outside risks to inflation have diminished. think it has been mitigated compared to the policy meeting from the fed. risk that we had identified with respect to the we prices, that is something thought would be rising like it has risen in recent weeks. what we are seeing with respect to price increases in south africa which will be below the inflation rate. we're going to have to make that. i just want to

understand your framework as you go in. the classic dilemma is the upside risk to inflation and the downside risk to growth. which is more pronounced right now? >> we still have a significant downside to growth. although growth this year will be better than last year for a country like ours. we are below the population growth rates for this year. it will only be in the next year that growth will be higher than population growth rates. over the past two or three gdp and it'se had only in the next year that the economy growth will be up with the growth rate.

we would like growth to be higher than what it is. the risk to the growth on the downside. jonathan: i will try to put you on the spot again. does it make sense to end the cycle? inflation is still outside our target rate. jonathan: i think that messages is strong enough. it's great to see you. it's always good to catch up with you. it's a classic central-bank dilemma. you've got downside risk to growth in the upside. you still look at it outside of your mandate, outside of target. >> he talked about oil prices. they have been coming down. they have had the best

performing currency. models, theytheir are going to start forecasting lower inflation. core inflation is only at 5% are in bond yields are 8%. real interest rates are 3% and that's very attractive. owning south african bonds makes a lot of sense and this environment. we are in the waiting game on tax reform. in south africa, this is one of the most effective carriers in the business. they don't have any of the risks associated with turkey or brazil for that matter. there is no question. it is my favorite play. we like south african bonds. alix: what is your strongest conviction? that sounds like it. >> i like mexico. i think x ago is doing very well

lately as well. longer theent, the tax reform is postponed, the less the market has to think about policy that would be and 10 mexico. jonathan: david woo sticking with us. let's get to emma chandra for an update on headlines. emma: rex tillerson got a look at north korea today and had a warning for the regime. he visited the so-called demilitarized zone between north and south korea and says the u.s. are considering alternatives to counter the the north korean military nuclear threat. exploring a new range of diplomatic security and economic measures. all options are on the table. emma: north korea said they are

working on a miss so capable of striking the u.s. theresa may will issue a rebuke to scottish leader into a cause for another vote on independence. in a speech, she pledged to have closer ties within the u.k. and stressed the commitment between the u.k., england and northern ireland and she said now is not another time for the scottish post. angela merkel will meet with president trump today. hours before angela merkel left for washington, she spoke with china's president on trade, both bound to defend global markets. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. i am emma chandra. david: thank you. you just heard, germany looms and the the g-20 meets german chancellor leads for the first time with president trump in washington.

we are joined by the former deputy secretary of the treasury, bob. he joins us from washington, or he is part of the national law firm. americao from bank of is still with us. bob, thank you. bob: happy st. patrick's day. david: happy st. patrick's day. you have been in and around more than one of these summits, take us forward 24 hours. what is the most in the best of can expect out of this? bob: the summit meeting between angela merkel and president trump is a chance for them to know each other. the most important ink is to develop the relationship between the two leaders. i think both are pragmatic, result oriented, and i think this will lay the foundation for addressing the issues of difference but also pursuing areas of common concern. getting that relationship established at the leader level is a crucial part of today's summit meeting. david: that is a good cold, but

they are starting from behind because they have taken positions opposed to each other. for example, president trump said about chancellor merkel that she made one catastrophic mistake that was taking all the people, wherever they come from, and nobody knows where they come from, what president trump said about chancellor merkel. she said that "the chancellor regrets the u.s. anti-immigration been and she is convinced that even the resolute fight against terrorism doesn't justify people -- putting people up particular origin or of particular faith under general suspicion."you're not starting in a very good place. not surprisingly, you put your finger on one of the areas of difference that is immigration. i would say there are an equal number of quotes on both sides are president trump talked about the high regard he had for mrs.

merkel as a leader and mrs. merkel sent congratulatory messages to president trump and had a good conversation with him , but there is a difference on immigration. america is an immigration nation, more than 20% of americans claim german heritage, our largest ethnic group today. germany isn't an immigration nation. it is a country the size of montana, which has 8000 people and germany has over 80 million residents. having said that, when i was ambassador to germany, -- germany, when i was ambassador, took more than the balkans combined and when she made the decision to allow refugees from syria and elsewhere into germany, she was mindful of germany's horrific past, forcible deportations during world war ii, and the three decades she lived under the -- the calming nests

in east germany. it was a noble decision on her part. i think the problem was germany wasn't ready at the time to accept those numbers. one million people coming into a nation of 80 million people in a country the size of the state of montana. i think mrs. merkel recognizes that and she will discuss it with president trump. president trump, who made immigration a centerpiece of his campaign, and discuss his views. the key thing is they are i to i talking about that -- they are that, eye talking about and they will find an agreement on jobs in the united states. david: it may have been a noble decision but not politically popular for the chancellor in germany. as you look at it, you having been ambassador to germany and lived there, does chancellor merkel made this summit to go well more than president trump needs it to go well for the constituencies? b i think each of the leadersob: needs this --

bob: i think each of the leaders needs it to go well because a strong u.s.-german relationship is the key to a strong europe relationship. as goes europe, there goes u.s. foreign-policy bradley. i think it is important to angela merkel and president trump to strengthen the bond between the united states and germany, one of our closest allies. mrs. merkel is chairing the g-20 this year.r -- g-20 there is an upside of opportunity for both. david: you suggested there might be something to come to terms on. head world leaders meet with president trump they have come with something to give him. prime minister abe, for example, said investment. is there anything the chancellor can give the president weaken camorra and say we got something? and -- give the president

can say, we got something? bob: i don't have any inside information but i think there is an opportunity to discuss jobs, manufacturing jobs in the united states. over 700,000 americans work in the united states for companies headquartered in germany and a lot of rain manufacturing, u.s.s 30% of the overall economy. she will be accompanied by the ceo of the fw and the company -- and two other companies. those companies employing almost 150,000 americans and manufacturing. the trump administration asked there be a roundtable to get german views on apprenticeship programs echo back to the middle ages in the guild system in germany as a way of trying to find good opportunities for american workers to be trained, particularly in high tech and

high precision manufacturing jobs. i think that is a place where there could be opportunity and that is why the discussions of trade and investment are important. at the end of the day, we want to bring those manufacturing jobs to the united states from germany and elsewhere. is that where they should put their focus? we know germany manufacturing is u.s., over there than the but services means better domestic demand. the reason germany has to rely on exports is because they don't have that strong domestic demand. is there an argument to be made that this thing to focus on is out of place at this point? david w.: i agree with that. we have had leniency from trump ,ith justin trudeau, shinzo abe and each meeting one feather than the other -- went better than the other. i think merkel has huge

incentive to want to make this a success. the question is, will there be discussion of subsidies? , myink if there is anything view is that merkel should bring up the current proposal going to tax reform to border adjustment tax and it is potentially highly discriminating against imports. germany has to say that if you go down this path, we will team up with other trading partners of the united states. i think this is important because there is no question that the border adjustment tax is not -- is going to be heavy this committee against trading partners. , you you could say, look bring jobs here or else we will bring the border adjustment tax down on you hard and is that fair to move the dial? bob: i think your point about service is right for germany. germany needs to do better in increasing their service sector,

of encouraging entrepreneurship, helping companies start up easier. germany needs to increase their demand-based economy. right now, it is growing well but they need to do more on the demand side. on manufacturing in the united states and on the border adjustment tax, i think there will be good conversations, including bmw, who have to import into the united states parts of the products that are then finished, assembled, manufactured in the united states and then exported throughout the world. the plant in spartanburg, south exports around the world, including germany but they rely on parts that come into the united states. as you look at the border adjustment tax, and david may have seen details but i have not, we need to be mindful of global supply cycles that benefit u.s. manufacturing

workers. at the end of the day, if you measure it on the jobs affect, we will come to the right point. i have not yet seen good analysis on the jobs effects of the border adjustment tax. i think it needs to be discussed in more detail later. david: you have been in the room for some meetings. to what extent the personal relationships matter? as you look at these individuals and what we know, their personalities could not be more different. chance merkel, this is her third president, what importance is better to how to get along? they have not met each other before. bob: actually, this is her fifth president. i was with her in the first when shen 1991, with met president george h.w. bush. as she rose to leadership, she got to know bill clinton and she

has worked directly with two presidents, president george w. bush and barack obama and now she will meet donald trump. first, i would say she is an engaging and friendly person. at the same time, she is a physicist by training, direct, results-oriented. i don't know the president as well as a no chance the merkel but it seems he places a premium on results rather than rhetoric. if he is talking to angela merkel about results, it will be a good conversation. talking about the transatlantic economic council, something established under chancellor merkel and george w. bush in 2007, would be a good place to start to focus not on broad trade agreements but going after nontariff barriers in transatlantic trade. that is where manufacturers tell us they need to get more rationality between european union and u.s. rules. that offers a practical and

tactical opening set of results that i think will lay a good foundation for the bilateral relationships going forward. alix: nevertheless, i want to be a fly on that wall. bob and david, you are both sticking with us. later, we will have coverage of the angela merkel event at 1:20 pm eastern. later, steve ratner is here, as well as the calendar -- as well officer.er budget we will break down that skinny budget. this is bloomberg. ♪

emma: this is "bloomberg daybreak." us comingdorf joins

up in the next hour. david: this is bloomberg. i am david westin. they are talking about trade. steven mnuchin yesterday said he did not want to trade war but his colleague had a different view. take a look. >> our focus is creating economic growth that is good for the united states and the rest of the world. it is not our desire to get to trade wars, it is our desire to deal with where there is in balance in certain trading relationships that we have the means to address that. >> we are in a trade war. we have been in a trade work for decades. that is why we have a deficit. the difference is our troops are coming to the ramparts. that is the change. david: bob kimmitt is still with

secretary. ofo at this is david woo bank of america. steve mnuchin says we don't want a trade war and william says we can't one, which is it? war i do not use the term lightly. we have been in the trade competition since the start of the country. competitions can be productive or personalized or destructive. let's have a global competition based on free and fair trade, flexible rates and open investment policies. in that competition, i think the u.s. comes out pretty well but it is to our advantage that other countries do well so we can raise all at the same time. david: you cannot have a competition without rules and a question is is that the multilateral setting or

bilateral? which will prevail and to the need to resolve that in the meetings? bob: we will see tomorrow when the communique comes up on how they struck balance. bottom line is there are a set of multilateral rules to which the u.s. and over 150 countries or parties and we believe in the world of law and we will live up to the rules. the president has made clear that it is more likely we will be able to make progress during bilateral agreements the multilateral agreements and it should not surprise anyone that secretary mnuchin is stressing of leaning forward on bilateral agreements. an example, when europe tried to close its multilateral deal with canada, that is canada and the 27 countries in the european union, it got hung up for months because the province of polonia in belgium was not prepared to go forward. that was decided and moved

forward but at the end of the day, it shows multilateral agreements, whether going back to the round or the bigger agreement with the eu are tough to get. ideal? yes but tough to get. i would look for bilateral agreements as we have been going back to the u.s.-israel agreement in 1987 and moving forward. that is a weight to live under the multilateral rules that produce bilateral results. more -- jonathan: more about the european union. , who runs trade policy in this administration? david w.: i think there is good cop, bad cop. i think it is a strategy. i think it is a strategy. in the end, the real test is going to be to communicate. the communique will be fairly neutral in my views and the market will be reassured. bob, i want to come back

to you on the trade question. the goal of steve mnuchin now? bob: i think steve mnuchin's goal is to provide reassurance that the u.s. is going to be an engaged member of the global, economic and financial community. i thought it was smart he had a bilateral meeting with german finance minister. chair ince minister is the meetings and the most important finance minister in europe, some might say in the world, and certainly the most experienced. i think the press conference showed they began to develop a relationship of mutual assurance that is important. steve mnuchin will also meet over 15 of the world's most important finance ministers, home he is not met before and some he has never spoken to before, so that opportunity in

the larger and then in the bilateral meetings to discuss those elements of a successful global economy of free, fair trade, open investment, as well thatobal imbalances preceded the crisis and are still with us. deficits in the united states, low demand late growth in europe and japan, and the misaligned chinese currency. this is the room to have those discussions, and i am, too, looking forward to the communique. i think it will provide assurances to the markets because at the end of the day, the u.s. succeeds only as part of a successful global economy. david: many thanks to bob kimmitt and david woo. alix: thank you. to watch us online and interact daily. david woo talks fast.

if you need to repeat it, go to tv . this is bloomberg. ♪

jonathan: from new york city, this is "bloomberg daybreak." up to speed on the markets, after a week of losses, the week of gains. the dow dead flat across the board. the price action in europe. the dax up by three points or four points. a week for treasuries. we started at 257 and end up to 52 potentially. yield up three basis points, it is your yield after the federal reserve failed to some extent with hawkish expectations into the market. the europe floating toward a third week of gains. we are down .25 from the dollar. alix: fed hikes and yields go down. you have yields, s&p

and i want to break them down. sachs, a guydman we catch up with in london quite often, was calling for heart yields. he said the u.s. 10 year heading for 3% and should reach 2.7% by midyear. the fair value is the percent to 3.25% early in 2018. that is set to increase to that in 2018. david: looking at the real rate is 1%, that indicates we would have the quarter percent growth in gdp. alix: that is the tax reform. interestingly enough, jpmorgan said you should sell equities in the short-term and you can buy any kind of depth, thinking markets are under price when it risk.to what is interesting about this to me is we have heard a lot of calls from big banks saying we

want to sell and we are worried. goldman sachs in particular. ubs says the clients go but equities. i don't get it. you have a lot of it calls. market.: it is the some people say the risk premium is too big in europe. alix: nonetheless, an interesting fact. jonathan: coming up, steve rattner coming up. bloomberg real yield starts at 11:30 new york time today, 30 minutes on the fixed income market as we head toward a potentially record quarter issuance. from new york city as you can you down to the market open. you are watching bloomberg. ♪ live-stream your favorite sport

at the airport. binge dvr'd shows while painting your toes. on demand laughs during long bubble baths. tv everywhere is awesome. the all-new xfinity stream app. xfinity. the future of awesome. jonathan: the german chancellor heads to the white house with

concerns that united states might shift toward protectionism. steve mnuchin says the u.s. is not want to engage in trade wars. after another federal reserve rate hike, how long before the move?kes this a one official says it should come before the quarter ends. welcome to "bloomberg daybreak" on this friday. i am jonathan ferro alongside alix steel and david westin. this friday morning, futures at the moment trending -- treading water. same for european equities with a slight decline of the euro by .25. heading straight toward a third straight week again. alix: taking a look at this longer moving term averages about shorter-term moving averages that signals more weakness. gold futures go nowhere, crude recovering from a slide earlier but it feels like home in the

commodity -- calm in the commodity market. meeting isg-20 underway in germany as we speak and michael mckee is on the scene. you made a fair amount of news already but what do we think was on the agenda going into the meeting? hosts,: the germans, the included an agenda that covered things from aid to africa and climate change. it is coming down, as it does, for investors to what they say trade, thiscies and go matters and those seem to be the issues today. they will talk about trade this afternoon when they meet because they have not been able to come to an agreement on how the g-20 should frame their policy on trade worldwide. david: the meetings have gotten underway but there is already news been made. we have been discussing about his sets the policy in the

united states of america and the strengths and weaknesses of the dollar. did you talk to the secretary? michael: i talked to secretary mnuchin and asked that, who should the markets listen to because there are so many people in the white house talking about trade and the dollar? he said the city of the president. he said the policy. that is worrisome for the people the case because donald trump talked about currency and trade wars, the last thing ministers here want. a short time ago, the german finance minister told us that things are difficult and negotiations are tough and they have not come to an agreement on trade or on climate change. they may leave out of the final communique, although they say they will come up with a final statement. david: on the trade issue, it was protectionism. if that was left out, without

the win for secretary mnuchin? michael: -- would that be a win for secretary mnuchin? .ichael: that would at the moment, climate change has been left out of the recent draft bloomberg news has seen. it looks like donald trump in the u.s. delegation having an impact on the first days on the world stage. david: as you suggest, germany -20, who is be g more aggressive in the talks, germany, the united states or someone else? michael: the u.s. is being aggressive we are told. the chinese do not want references to fair trade, which is the u.s. position in the communique. they leave most of the language out to compromise. other europeans cut in the middle. we do not know yet who will prevail as negotiations continue . at the same time, you have angela merkel going to

washington. this is a prelude to the leaders meeting in july. if they don't like what happens here, we may have a more contentious meeting when they get together. david: we will be keeping our eyes on you, thank you. now, to jonathan ferro. jonathan: steve rattner joins us for more. steve, great to have you with us. , or is it of the g-20 with president trump? steve: the president is not being a multilateral organization. jonathan: you think? steve: i say. the president like 18 other leaders of state -- 19 other leaders of state going through that ritual, it is hard to imagine how many times he will do that. jonathan: if the future is uncertain for the g-20, what are the benefits? steve: there will be a g-20 and

having communication" a nation is a good thing. -- communication is a good thing. i think you see the administration walking back contentious things they have said, at least on visiting foreign leaders. the president was in detroit on the other hand, he was back to being a populist, anti-globalization thing. it will not be a straight line to really get to. are trying to grapple with two runs each individual policy. their trade, the treasury secretary says we don't want a trade war, so the fx situation, peter navarro is making noise about countries and steve mnuchin says to listen to the president and myself. how do you know who is running what policy and how do you know strategy?mess and good cop, bad cop situation. to a: it is cleverness they send out conflicting signals at different times.

the president has made clear that wilbur ross and peter andrro and public kaiser -- bob like hauser are the people who speak on trade. see themhin, you will trying to inject balance into what is a hostile trade agenda coming from that side of the house. it is a feature of this administration that there are no straight lines of authority. you would not want to try to drop a chart of how the white house works. david: in your experience, is it feasible to do bilateral rather than multilateral agreements? says it is hard to come up with the deal because it is hard to hold up. basically, bob says, it is a 12 country deal and every country takes a bite out of us and we end up with the

worst deal of all. i'm not a trade guy but it doesn't seem you can run a world of 160 countries with every country having 159 iran drug deals. doesn't seem practical. 159 countries with bilateral deals. doesn't seem practical. david: what do we have if we have interference with global trade commissions? steve: so far, the administration has all talk that an anti-free trade agenda would eventually be a drag on markets, investor sentiment, how we think of growth, but he hasn't done anything yet. alix: part of the issue is germany's low domestic demand. if demand is better, they could rely more on imports. why isn't that on the table for ceos and the president? steve: it is in chatter. everybody realizes the german

with thei think chinese surplus in the same magnitude, it is a country of savers. they don't believe in deficits or spending. they do it essentially by the rules, so i don't know how you tell a sovereign nation you have to do x. alix: if you implemented a border adjustment tax, which countries to produce in the u.s. like bmw, that will hurt the mastic demand more and it makes the program -- the problem worse and the confuses me. steve: yes, it would hurt bmw because the export suvs from south carolina that i'm not sure how that hurts domestic demand in germany. alix: because the companies that wind up with not enough money and triples. steve: shareholders are global and it is relatively minor. the major issue is the germans are enjoying the benefit of a low euro. basically, they are using the

weakness of the southern tier to become or remain so unbelievably competitive in global markets. fdi, one thirdn comes to their did states. they could up a conversation about the facts and they should be happy. steve: when you see those companies coming to the u.s., their leading the country that is high wage to a low-wage country and that is part of the strategy. we have become the wage in some areas. jonathan: we talk about the relationship with the united states and other countries and find them under this administration by whether it is a trade deficit or trade surplus. the bmw boss coming over with the biggest plant in south carolina and not germany and one third comes into the united states. when do they come around the table and look at the relationship by the bigger picture and not this narrow channel of whether there was a trade deficit or surplus?

steve: the question matters in the economic world and there are people who think it doesn't matter and it just represents investment coming here. david: let's assume they matter. tradehart shows our deficit with germany is worse than 1995 the better than 2015. the blue lines going down is deficit. it is coming up. as donald trump, perhaps once again, has he found an issue that has turned and he says let's do more of that? steve: i don't think there are 1000 people in america who know what the trade deficit with germany is. i don't think it was an issue until donald trump and other people started talking about it. it is an issue to the europeans more for us because germany surplus is coming out of there side. as i said earlier, of all the

things i worry about when i wake up in the morning, it takes me until 2:00 in the afternoon before i think about the german surplus. jonathan: i give it 10 minutes. alix: what is the first thing? steve: peter navarro. [laughter] alix: good to see you. steve rattner is sticking with us. a look at netflix movie. it was up by 1.4% and now it is higher. i do not have the why. they recently got an upgrade yesterday but watch this momentum stock into the open. elmendorf will be joining us for a talk about the skinny budget released earlier this week. this is bloomberg. ♪

emma: this is "bloomberg daybreak." private equity firm kkr and canadian investors has agreed to buy usi insurance at $4.3 billion. it is canada's largest buyout firm, it is run by -- it was bought by a firm of goldman sachs. tiffany has comparable store sales that are flat but they rose because of new openings. there forecast is it will be a high single-digit percentage. to morell set up research centers in china, the single largest oversee market for them and one in which the iphone lost ground to rival's locally. that is your bloomberg business flash. this is bloomberg. david? david: thanks.

yesterday, washington was consumed as they poured over president trump's new budget outline. criticism came from both aisles. peter, and he did not really have very much up for this one. peter: this budget is pretty much a reflection of budgets we have seen over the last few years that do not go anywhere. they are usually blocked in the senate,revised in the and the bottom line is that we are probably looking at continuing resolution come october 1 and a budget that probably will be represented by another continuing resolution. i don't see this budget having much life on capitol hill. david: joining us is doug elmendorf, dean of the harvard

kennedy school and former director of the congressional budget office, steve with this is steve ratner -- rattner. good to have both of you with us. welcome. happy to be here. you scored these things in the congressional budget office. are these things going anywhere? doug: these are not going anywhere because of what you have seen. david: a great points because a lot of our audience is concerned about tax reform. a lot of the market reaction has been to possible tax reform. what does this proposal to a budget due to the timeline on tax reform? doug: this close down the timeline. -- this slows down the timeline. i think it was a tactical mistake not to start with tax reform because it takes a long time to move a comprehensive

piece of legislation through congress and their burning up time on issues less important to the country and advantageous to them politically. david: if they wanted to change obamacare, didn't they have to do that first to figure out how much money they have to spend? doug: they could've taken a different strategy and they did not. david: steve, what did you make of this budget? and i i agree with doug would make two other points and he would correct me if i get it wrong, first of all, it is a 60 vote matter. it doesn't matter what republicans think, the democrats could stop this. second, if we don't do a budget, we are operating under sequestration caps put in place several years ago and i believe the deal done between mary and ryan expires, so we go back to the deeper sequestration cuts. we are in the second worst place, the worst would be the trump budget passing in the

second is a bunch of sequestration caps across the board with no thought to which prevents you get more or less. david: that is a problem for the president himself. if you put sequestration back in, you take a step backward. doug: absolutely. david: what is the way out? doug: i think the administration needs to move quickly about goals from their budget in an abstract sense to a realistic appropriation we need to move the government and country forward. alix: if that doesn't happen, when do we ship your investment strategy for the next four years? steve: we have operated this sequestration as a mindless way of approaching the budget. alix: we have had no opportunity yet of potential growth. steve: we don't have the potential growth now. alix: if we get the tax reform -- steve: let's back up, growth cannot be greater than the sum of the increase in the labor supply and people coming to the

labor force and productivity. productivity is not growing fast. if you cut immigration, there will be less people in the immigration -- in the labor force. unless the president proposes something that gets productivity on a brighter trajectory and people back in the labor force, you won't have more than 2% growth. jonathan: karen you get it done -- can you get it done quick enough? doug: for cutting back on investments by the federal government in education and research, this would push productivity growth down rather than boosting it so we are in the wrong direction. tax reform can help but even if you focus on it, everybody believes in it by principal but there are strong disagreements. i don't think you can get it done in a conference of way, even if focused. recognizing they can do it with just republicans,

but they can agree on what it should look like, particularly because of the border adjustment tax and many other issues. alix: if we see manufacturing picking up, that might change the dial and consumer spending is so much of gdp that you do get mental tax -- middle-class tax cuts, that could boost growth and it could be a reality. doug: os x 10% work in manufacturing, so making that less than 10% productive would help and not move the needle much on productivity growth, which depends on the service sector given how dominant that is. david: how share i read that more people won't come in the work force? we have seen 200,000 plus month after month and some people come out of the wood works. steve: lots of people can come out of the work force. jobs have been created as great as 200,000 a month. unless you get the fundamental policy change, but i don't think we will.

you could create a short term growth, put a lot of money in people's pocket and you might get the percent to a quarter or two. jonathan: there was a lot of optimism and assets. let's say budgets are a disaster we want that much of when it all, what happens to financial markets? market heavily revolves around two things now, one, significant corporate tax cuts, and two, significant business relations. you can go sector by sector in the stock market and you can see how they would benefit under what trump wants to do. if he gets the tax reform and the and pushes to regulation he talks about, the market will do well. if he fails, i think it could hurt the market. the market much expects him to accomplish that

if he falls short, that would be about it. alix: word of the day. nice. thanksdoug elmendorf, for being with us. steverattner's -- thanks for being with us. steve is staying with us. ♪

david: this is bloomberg. david westin. with us now is the man at the center at the obama administration in the car industry. steve rattner is with us. the coworkers really love this, the president said he would make america the car capital of the world again. does he have a shot? steve: no. .here are large forces at work countries like mexico develop the capability to make cars as effectively and efficiently as we do at where wages and they

continue to gain market share. that is reality. the reality is our share has gone down consistently 30 years to 50 years and it is part of how global development works. david: the president, if you are here, would say, there are two things i would do, one is he was explicit in detroit saying i will give you tax breaks, regulatory relief if you keep jobs here. if you don't, i will come after you. one.is number number two, fuel efficiency to make big suvs and trucks here and you don't have to go to mexico for small cars. this that make sense? steve: the relief on the cafe standards may make sense, both are aggressive. remember, they don't force people to buy certain types of cars, they force carmakers to make certain types. your point is right that if you don't force them to make small cars, then they don't have to go to mexico, which is the only

place to make them cheaply. the general shift of this outside of the u.s. will continue and it will be done quietly. the announcement of new jobs he will be loud and in mexico, quietly. these are large forces. he is not continue. david: we will leave it there. thank you. jonathan: one hour away from the market open. futures firming up a little bit, not1 on the dow, and s&p changed. the market open from new york city, you are watching "bloomberg daybreak." ♪

jonathan: from new york city, this is "bloomberg daybreak." let's get a check of the markets, futures a little bit .1 on the dow, and

just in positive territory for the s&p. yields at 2.57 on the 10 year, and we grind it down. the federal reserve did not meet hawkish expectations. one central bank surprised with hawkish tones, the bank of england. heading for one of the biggest weeks of gains, the biggest since january. 1.2359 is how the pound trades against the dollar. let's get you an update outside the business world. is in asiaillerson with a look at north korea and had a warning to their regime. so-called the demilitarized zone between north and south korea and says the u.s. is considering all options to counter north korea's nuclear threat, not really not a preemptive strike. in europe, finance ministers have dropped a reference to climate change in a draft of their statement. germany pushed the climate

language to be included at the meeting but the u.s., china, india and saudi arabia are said to be opposed. in the u.s., a new twist that president trump plenty was wiretapped during the campaign. the white house spokesman cited fox news report saying that produce it -- president obama looked at support. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. i am emma chandra. this is bloomberg. david: thank you. foreign policy is front and center today as the g-20 meets in germany and the german chancellor meets for the first time at president trump in washington. one harman is an expert foreign policy, former congressman from california, and had a variety of positions and serves as the head of the woodrow wilson center in washington. welcome. we have chance,

for merkel in washington, which one will you follow more closely? jane: i'm looking at tillerson in korea because i think the most immediate threat to u.s. and world security is a possible irrational act by north korea, and it is important that rex tillerson is there, missing another state visit to washington but he has met with the foreign minister of south korea, who is very capable. we're putting in place defensive measures to help against the of more reckless launch missiles, possibly topped with nuclear warheads in north korea. david: the defensive message in theh korea is one chinese don't like very much. this is not a new problem. it has been around and we have not had much progress. jane: this is a really old problem and we are not solving it. iran,k the model is

coercive diplomacy taste on a robust set of tools against north korea. they seem impervious to sanctions that have starved of people, which means they would be prepared to kill their people in the military exchange, that scholars at the wilson center, especially a guy who cannot with the book cited everywhere this is atsay that diplomacy best option. i think china would join us. they are coming to the united states soon and hopefully we can prepare the boo-boo trump made. back to mark, imported visit for merkel and trump, bringing this is leaders with her, bmw, and they cannot bring vw because of legal trouble, but the are huge employers in the united states. bmw is in south carolina,,

lindsey graham, so this is a twofer, perhaps. as for the g-20, important alliance of ours, i think they will end up keeping paris. jonathan: before we get to the g-20, how do apply the iran , a countryrth korea that doesn't seem to care about access to global markets? jane: i think the common respect. is the u.s. is an existential threat, that is what scholars at the wilson center say, us, more than japan or their neighbors. family is akim difficult group to deal with and they have been in power all these years but the alternative is what? another land war involving the united states in asia or someplace else?

i think that is a worse alternative and the status quo is destabilizing. jonathan: looking at the president on the campaign trail, that does not strike me as a person not showing north korea a significant amount of perspective. jane: no, but remember candidate trump said he would want to talk to him and make a deal. i am not trying to be -ish.anna our policies have failed since we started it in the clinton administration but if we are thoughtful -- and tillerson made wise comments to another talented person, the foreign minister south korea -- some hoping to keep our eye on that and not just talk about walls, budgets and health care. alix: in the hard power world, you do need an alliance. if we put back sessions on iran, we would need europe to get on board. you could make the same

arguments in north korea. why is that the tactic in the geopolitics beer, but in the economic one, it is about conflict? how can you do that when you do with countries? jane: [laughter] i think we would have been better off if we kept tpp. i think it was a good set of economic alliances in asia that were a buffer against china and north korea, a good buffer. china would have been welcome overtime. that was in u.s. interest. we didn't keep that. how do we walk and chew gum at the same time? we have to. david: how critical is the u.s.-german relationship? chancellor merkel is dominant in europe. that alliance important? jane: it is more important after brexit. the other leader trump has met with this theresa may. she is trying to manage a difficult divorce but it is

important for the u.s. that the rest of the eu thing together and merkel is the glue of the eu. i was in munich last month at the security conference. 75 ministers of defense, michael pence was there, and he said trump supports nato that the audience did not buy it because trump did not say it and he didn't mention the eu. they thought, he was not in favor of the eu. i hope he is. it is part of the way our economic and strategic relationship with europe works. if it disintegrates and we just see these one knobs -- one-off's that would be terrible. the far right did not win in the dutch elections. david: to go back to what is happening in washington today, this will be an opportunity for president trump to deliver a message that was not delivered in munich. jane: yes. and shes to hear that

will have a fraud election. everyone is under challenge and france has one, too. we have not talked about russian disinformation across elections. it is not just hacking of political parties. it is the disinformation campaign by our team in every media market in europe, maybe bigger than bloomberg. david: bigger than bloomberg? no, no, a mistake. [laughter] you raise russia and russia is looking at washington with a lot of interest. you have a lot of scholars at the woodrow wilson center, what are you saying and what are they telling you about where russia is now with respect to the united states and europe because of the election of donald trump? jane: we don't know if this movie ends, and there are investigations into what ties there were between anyone who worked in a trump campaign and russia, but are scholars say that it is a complicated

relationship. we have to work with russia, we should be talking to putin, but russian aggression and europe should not stand. arebalkans -- baltics enormously worried and countries of europe had kept sanctions in place. if the eu falls apart, that could be a harbinger of a resurgent russia in race that will not be helpful to the united states. david: many thanks to jane and ceo ofsident woodrow wilson center. coming up, president trump and chancellor merkel are meeting today. we will have special coverage as deniers conference starts at 1:20 pm eastern time today. this is bloomberg. ♪

emma: this is "bloomberg daybreak." i'm emma chandra. coming up, president donald trump and chancellor angela merkel will meet today. we have coverage starting at 1:20 pm eastern. i am alix steel. big banks calling for caution in the market. goldman downgrading their equity forecast to neutral. jpmorgan saying complacency is too high after the neverland elections. and they say valuations are stretched, allianz global says. i should point out that jpmorgan sees potential downsides, 5% pullback to buy that did but nonetheless, do feel this is warranted short-term? up here&p is almost

today after 12% total returns last year, so it is natural to get nervous when you see the run we have seen. i would bring things back to underlying fundamentals. we are in the midst of a global secret just recovery, a while since we have seen all cylinders fire at the same time and they are. global growth will be between 3% to 3.5%. u.s. growth, real growth in the u.s. at 2.5% and nominal 4.5%, driving a positive profit story. we think s&p 500 profits could come in $132 this year. the markets are fairly valued at 18 times that we think there is a strong underpinning in the market goes higher. alix: how high? keith: we think the central tendency, given the 18 times in the 132 is 2450 to 2500 but

there could be a momentum that drives it to 2600 before you get this anticipated pullback. alix: that is the reality in underlying data that you have geopolitical risk not only in the u.s. put french elections coming up. hedging has been the pain trade over the last year. if banks are saying that they're not prepped for the pain, what do you do? keith: like always, there are things to worry about. we worry about the complacency point. the vix was down below 10 at one point and it has only done that nine times since the 1990's. the other thing we look at is oficator of complacency credit spreads. geopolitical, your last guest touched on everything out there, and that will be a fact of life. we look at other issues, elections in europe, although most people think they will go the way we anticipate, which would be the powers that are there, miss merkel, etc., stay

in power, that you have to watch that. there are things to worry about. people have talked themselves out of the market for five years and have missed returns. we think the underlying fundamentals are positive. could you get a pullback? sure. we would be buying into it but we think the markets would go higher before it transpires. jonathan: we are stumped -- we are seeing cracks in terms of credit and blowback out "is there a message in that? keith: the message to me now is in the consensus view, we will see the rate hikes this year, next year, and that assumes inflation is the head. to watch is wage inflation. hourly average earnings index is up 2% and we don't think approaches 3% until next year. if we have a negative surprise, we see pastor rates. the surprise that we would say

is with rates moving up, although albeit at the levels, short rates still below 1%, that more money is not flowing out of fixed income and equities, which is another positive case to be made for equities that the big shift we talked about and have written about the 10 years hasn't happened. jonathan: a lot of people trying to make a positive case and they talk about the politics in europe to make a negative one. there are two low probability outcomes and they say to buy stocks, when was brexit and the presidents when several months ago, why do i need to care about the french election when la penne is ahead in the polls and the fallout from europe never follows through to the united states, why would it be different in several months time? it may not be. when we look at where we put money, even though we are overweight on international atelopment, we are looking

japan. we're more neutral weight in europe because even if elections go the right way, some of the angst around it could hold down price action. europe is -- there is positive surprises out of europe in terms of economic activity and profits and valuation is attractive. we would not be surprised to see europe do well but there could be a pause as people process realities of the election irrespective of the outcome. david: you are looking for to provide -- looking at 2.5% real growth in the u.s., do you have tax reform big ten, infrastructure baked in? what are your assumptions? keith: irrespective of what may be coming out of the trump administration, that is an 18 and beyond phenomena and will not impact 2017. we will see double-digit earnings throughout the u.s.

this year based upon the underlying dynamics of the u.s. economy and the global economy. we see the consumer continuing to power forward. job creation is really strong. look at the last month's job number. i hate this expression, but it is almost a goldilocks thing. [laughter] jonathan: you are not the first. keith: by that, i mean you have great job creation but you are not having the negative of the wage acceleration yet, which means the fed can raise rates naturally. if consumers stay strong, you will see a pickup in cap, you have business confidence at a 20 year high, small business confidence at a 40 year high, and small business creates jobs. there is an underlying dynamic. housing is ok and we think that adds up. alix: let's talk about rotation. take a look at the bloomberg, it is the blue line versus white

line, which is cyclical defenses. you pointed out that the vix is low but we have seen volatility pick up as rotation picks up. how do you played the trend? keith: we are more favorable on cyclical versus defensive, especially the bond proxies, where a lot of fans ran to get yield -- alix: they have performed well. keith: there are different things driving utilities, a lot of conjecture around infrastructure spending and how it may play. we think we're heading into the late phase of the economic cycle trade an interesting factoid is this month -- cycle to read an interesting factoid is this month is the anniversary of eight years to the beginning of the bottom of the market to the beginning of the bull market and the 93rd month of the economic expansion, so we are eclipsed the 92 month expansion in the 1980's but the all-time record

is in the 1990's with 10 years. there is a lot going on but we think the late phase in the cycle tends to favor cyclicals, value overgrowth. we think it is early days in the late cycle that we think it will play out. on the growth side, we like technology, the leader so far, the winner you today. we like health care, in particular powered by biotech. you can do a doll you growth barbell and do well. growth barbell and duo. we are underweight fixed income and not out of fixed income. in a balanced portfolio is a good diverse a fire with cash flow. we do a barbell on fixed income with the short end and long end and you keep wanting that higher rates to get the benefit of the steep yield curve and we would be underweight then. alix: thank you for joining us, keep thanks merle -- keith

thanks. you can watch us online and interactive this daily. if you missed the goldilocks word, go back and find it. this is bloomberg. ♪

david: bloomberg is putting together a group of titans from business and finance to take their shot at filling out the perfect march madness bracket. winners will not only get bragging rights that they can donate hundreds of thousands of dollars to a charity. he with more details and early indicators of who leads is jason kelly. jason, i think you are the manager of the brackets. jason: i am, an important position and exciting. alix: it is all anyone talks about. david: how does it work? jason: you mentioned rehab almost 40 of the biggest names, 38 to be exact, so talking about

thousands of dollars. they pick a charity, pledge $10,000 and the top three, when he goes to their charities. david: give us an example. jason: we're talking about the lachman, like bloomberg -- mike bloomberg, peter -- alix: peter is number nine. jason: household names in our world. they are taking this, i can say from a a mailbox, seriously. david: we are one day in. jason: bob is number one with 30 points, so that means he only got one wrong. no one has a perfect bracket at this point. he has 30 points. and tillman for cheetah -- also missed one game. missed one.l david: i think i had tennessee

making it through, too. jason: tennessee has been a giant killer the last years. david: who do the heavy hitters have as the two finalists? jason: people are long duke. they are a number two seed. people griped about that and thought they should have been number one, soap 16 of the 38 cap duke winning, 10 have unc winning. part of that is it is a great rivalry. alix: i'll go for the cats. jason: big win last night. alix: someone that we work with has a son that goes to duke, so scoop?he jason: steve in the private equity and nba world, one of the owners of the boston celtics, his son plays for duke, so he has duke winning and invested interest in this. david: duke has been there so many times. they have done this before. knows yes, and coach k

what he is doing. he appeared recently on peer-to-peer conversations. the cinderella team? jason: hedge fund guys, you look at chris with butler and smu in the final four. jonathan: i love that for most of the segment, the director had the cast to the side. [laughter] i will have to make up for this. thank you very much. and you show a little later, rio fields, 30 minutes dedicated to fixed income at 11:30 eastern time. counting you down to the open, you are watching bloomberg. ♪

jon: calls for caution in the

market. jpmorgan sounds the alarm. the german chancellor heads for the white house to address concerns the united states might be shifting toward protectionism. those concerns met with reassuring words from leaders of the g-20. steve mnuchin says the u.s. does not want to engage in trade wars. it morning, and welcome to "bloomberg daybreak." i am jonathan ferro, alongside david westin and alix steel. upures firmer and firmer, dow, and we stay there, yields low by two basis point speared the euro down on the session. still heading toward a third straight week of gains. 1.0736., about 29 minutes away from the cash open. here is alix steel.

alix: we have some individual movers calling the equity market. ,ome sales coming in flat estimates -1.1%. it beat fourth-quarter earnings revenue. been about 3%.d i want to highlight some fun data point. salesrk flagship store were flat. a loss of security around the trump building was the reason. .dobe up by about 5% they switched to the cloud faster than others and it is really paying off. .8%.ix is up by earlier in the morning, it was down 1.4%, some recouped losses. the ceo admits some stars will not work with his studio.

they will work if they pay enough. he had planned to make a lot more original films, and that has been that with an uneven reaction. negotiating for a scorsese-de niro film. jon: goldman sachs's downgrading its equities to neutral. jpmorgan says complacency is too high after the netherlands elections. this,g us now to discuss stewart warther, and gemma: on -- and jim mug often -- and jim too high after the netherlands elections. where is the complacency? jim: i do not really think there is complacency but quite a lot of cash on the sidelines. this continues to be the bull market nobody believes in, and i think that valuations are not yet stretched. i think it is still in the u.s.

equity market a buy on setback market. i would disagree with jpmorgan. stewart: above 2300 is something we are not used to looking at -- to thinking about. our economics forecast, our fx forecast, thinking about next year we get tax reform and infrastructure spending, on a forward earnings thes at the year and -- at year-end, these numbers make sense. i think it is being in a zone where we have never been before, especially when the vix is so low. it gives people a sense of uneasiness. said they do not want to be a buyer for the longer term, so that was a short term call. to your point, complacency and hedging with the geopolitical risk has been betrayed, right? but if you do not go with that -- has been the trade, right?

but if you do not go with that come if you do not get taxed and if you do not get the stimulus, what is the kind of fallout? jim: that is the fear because it looks as if cons -- as if congress is going to be bogged down with of care reform. it is important that they get the tax agenda brought front and center at some point in the next few months. if they do not, the market will be quite disappointed. if you look at forward earnings, 2600 on the s&p will be 20 times. that feels to me beginning to be stretched. and saye with stewart that quite a bit of runway before valuations are really stretched. the main thing to watch for is if the tax agenda gets seriously delayed. the trade for the next six months, and what happens if we do not reevaluate for april and may?

stewart kill if you look at yesterday, we got the outline of the 2018 -- stewart co. if you look at yesterday, -- stewart: if you look at yesterday, we got the outline of the 2018 budget. we got the resolution of the 2018 budget that will pass through congress. it will include a reconciliation, instructions for reconciliation, including tax reform, which will probably happen in august. the key point is that tax reform , the probability of it happening is not changed getsding on if the eca repealed in the next -- if the aca gets repealed in the next few months. david: there is another thing the president has talked about a lot, that he has much more with his power, and that is regulatory reform. that is not regulated as much. hire people to fill

the job so there will not be as many regulators. what is your estimate of what that will do to growth on its own, even if there is not tax reform? jim: the real growth story is the classic keynesian stimulus. a --atory change may help or may -- regulatory change or regulatory rollback may help, but in the near-term it is something we will have to scramble to adjust to. i think therefore the payback of any regulatory rollback is actually quite long-term. david: with that assumption, that it is not so much regulation, it is tax reform that we need, how much is the current valuation based on some probability -- less than 100% of ? probability of tax reform jim: the disappointment is if it is pushed back to 2018.

the idea that there will not be tax reform will make the market vulnerable from here. it is a fairly simple equation. bring down the corporate tax rate, you raise earnings so you can raise the equity market. if it is delayed, that will be uncertainty in the equity market. jon: so many guests go on the program and say that it is not all about the trump administration, it is about earnings recovery and synchronize global recovery. do you buy any of that? phrase "trump rally" is a misnomer. the reflation trade started in the month of july. in september, yellen said we will run a high-pressure economy. that is the just of her statement. all of the sudden, we look at wednesday us fomc meeting and the word "symmetric cloak -- the ind "symmetric" comes out

the explicit sense, and the idea that the fed will be more dovish. on that basis, there is a factor that is reform. there is a factor that is global synchronized reflation. when i think of what could derail this, oil prices are starting to come down. weaken, things start to the impact of reform and deregulation is stronger as far as kind of looking at earnings on a forward acis. jon: you said the biggest threat is what is happening with commodities? stewart: i think so. alix: but that is supplied based, not demand based. suppliedi think the based story in commodities was underappreciated in 2014 when commodity prices were going to collapse. really, there are so many financial assets linked to the commodity complex, the fact that demand could the strong, despite that, the --

supply access in commodities is not really supply and demand or technologically driven, it is about technological change and the advances made in metal extraction. commodity oversupply is going to be an issue and an overhang. but i think the real story here about the risk to the trade is the international one. europe has seen alleged synchronized strength, but with the weakness of the pound, of the dollar in the last year, it would have been a sorry story if it happened. emerging markets are going to suffer from tightening financial conditions on the dollar. i do not think you can look at international impact still listed. it is a combination of two things -- the strength of the private sector, very efficient and competitive. that is the big central story. as a secondary story, the

changes in washington. what ise word each -- the strongest conviction trade you have over the next six months. jim: u.s. earnings can, stick to small and mid-cap. stewart: u.s. banks. we have this tightening in the second half of the year, it will be large and this shifting momentum from u.s. to europe. jon: good to have you with us. are sticking with us. coming up on this program, johnson control's ceo. about 20 minutes away. futures are a little bit further, up almost .2% on the dow. we switch up the board. little bit low, by two basis points. from new york, you are watching bloomberg. ♪

alix: this is "bloomberg daybreak." my question is always where is the volatility. the blue line is the vix. it is trading under 12 pretty white line is the cost of protecting against the swings, and that is spiking. that is called the skew. that is averaging 135 this year. highest quarterly level since 2015. joining us, stewart walther -- stewart warther and jim mcca ughan. stewart, are we looking in the wrong place?

stewart: that is a good question. people are always confused when the vix becomes low. the vixhe reasons why is so low at this point is because correlation with the index has declined. if you look at the dispersion of components, one stock up and one sector level is elevated. particularly if you look at the point of dispersion coming from is the highest since 20,009. part of this, to go back to your point earlier, of the global synchronized momentum -- people are looking at the portfolios, which were defensive toward the end of last year, and then reallocating into cyclicals in a way that is causing this massive sector rotation. as far as the skews are concerned, the actual level of volatility is so low on a really basis,, -- on a relative

the upside volatility, if you look at the calls, are expensive. this is part of the function of a local call. in the next few months you have the french election, which gives you two events, one in april, one in may. that could be a reason why investors want to hedge. industrial production for the month of february is coming on the downside of 0%. the previous month, they were -0.1 comparedr, to new -- compared to -0.3. this one is line with estimates here at bloomberg. jim, what do you make of the data in the united states? jim: the job data obviously was good. the numbers you just indicated are pretty reasonable.

i think you are going to have to watch this month's data. i think that will shut down some activity particularly in the construction sector. goodata has looked very ever since the middle of last year. you have seen the u.s. economy -- it is not what people call escape velocity, but it is a very healthy growth rate, which i think with all the structural change going on in the economy, is a good result. they data is when we have been talking for a long time, stewart. and themism in markets optimism for this growth with a three handle, 3.5% gdp, etc. -- do you see it becoming reality? stewart marco: that is the million-dollar question. stewart:ve it until -- that is the million-dollar question. if that does not materialize, we

could have an environment where we could get some week this in the second half of the year, especially if opec does not extend its production cuts. that is one aspect the market is really hoping for, especially when it comes to s&p earnings and dividends. jon: do you share that, jim? not entirely. i think there will be the oversupply and you have to kind of adjust to that and the way you think about the market. i think the market can ride through. there has been some pretty material weakness in oil. i do not think oil going down is fundamentally good or bad for the market. it is a redistributive thing. if i can just for a minute go back to the chart that you showed, the vix, i think that tells you something very important, which is expected volatility has not moved much. i do not think that is complacency, i think that is a generally benign outlook.

the skewing going up is a heightened risk of negative events. thinkingelate that by of the french election, the possibility of a european bank failure, the geopolitical risks, north korea. those are all things that make the skewness of the market go higher. even if marine le pen wins the presidential election, she will not carry parliament, so you should not panic. , thehe low probability answer is thoughtful diversification. alix: when we see those spikes, it was around the u.s. election and brexit. what is the thoughtful diversification? what is diversification for you? jim: i think there are some good diversification in homes. -- yields are too

low to pay. the old story on the yield curve does not really work. i would go to moderate duration, well priced credit. i would still go with real estate debt and high-yield bonds. that is a very important diversification. ,nd then our sort of strength non-correlated, of diversified portfolios, i believe has to be realistic. aving that array let to have bi-on setback approach to u.s. equities. that is the way to do it. david: thank you so much. stewart warther will be staying with us. coming up, donald trump and angela merkel our meeting today in washington. we will have special coverage of the news conference, which will happen today at 1:20 p.m. eastern time. it will be here on bloomberg. ♪

david: this is bloomberg. tiffany's shares are up premarket as the company reported fourth-quarter profit that topped analyst estimates because sales gained because they had new stores they opened over there. joining us now is randy connick, jeffries retail analyst. he had a buy rating. welcome back. good to have you here. tell us about tiffany's good story today. randy: i think this is a company that has better products, better people, and better processes underway. this is a company that had difficulty particularly in the united states with tourism issues. now tourism is staying alive in the united states market. the company is picking up business in the asian-pacific region, particularly japan as well as mainland china. areas that have been struggling,

like hong kong and macau, have seen stabilization. david: what about same-store sales? randy: same-store sales were up about 10% in japan. excluding japan in the asia pac region, they got better. looking ahead, what is compelling about tiffany is you have a global economy that is growing from a gdp perspective, rising equity markets all over, which is good for luxury spending going forward across the world, and we think columns have been negative -- we think coms have been negative but will turn higher in the next quarters. david: you have been looking at the gross margin. what do we know about their gross margin in this quarter? randy: they were up 50 basis points from a year ago. two things -- three things, actually, are happening with tiffany's. moving up, ands

the company has seen a shift toward the higher-margin fashion jewelry category, the category of jewelry before the -- below the $1000 price point. they have the ability to make a high-margin category that other luxury players do not have. that is what held the gross margins this quarter. -- that is what help the growth margins this quarter. did all this without a ceo. they are looking for one right now. does this suggest it is not important who they get? randy: the ceo on the interim basis is the company chairman and former chairman -- and former ceo, michael all ski. while that is happening -- mike cobol ski -- have the job of moving operational efficiencies into a better place. we think a new ceo will have the

skill set of managing the global bland -- the global brand and managing processes in a better way. tiffany is a great brand that can be a better run business. alix: take a look at this chart here. this is retail stocks. the retail index is the white line, and the blue line is the forward pe valuations are near a 15-year high. where is there still value in the retail space? randy: where do you see companies that have improving traffic trends? where are their companies that do not get killed by amazon? obviously tiffany participates in luxury jewelry. you are not buying that on the internet. numbers are getting better for tiffany. check the numbers there. the other area is the footwear area, athletic footwear. nike is our top pick, followed by tiffany.

we like the footwear athletic retailers. as well as foot locker. the footwear category is strong, and it is a carrot you are a -- it is a category where you're seeing traffic trends rising. remember theot last time that we had a section on retail without mentioning amazon. jon: that is quite impressive. congratulations, david westin and alix steel. the stage is set. currently futures are a little bit firmer. you switch on the board. treasuries are stable. welfare you -- from new york, you are watching bloomberg. ♪

♪ jon: from new york city, this is "bloomberg daybreak." i'm jonathan ferro. moments away from opening bell. futures firmer up 40 points.

-- 0.06% soy zero far. we head toward a week of gains in the united states and europe. as we switch up the board, a dollar index creeping towards a second straight week of losses against the euro. expectations matter. we did get a rate hike from the federal reserve, but we deny could the hawkish tale many expected. down by two basis points. that is the situation across assets. alix: not much happening across the board inequities. the dow is up by 24 points. the nasdaq and s&p are relatively flat. the nasdaq has had asked weeks were to close he positive, that would be the six-week mark. upgradeple getting an

to $175. there will be a lot of action right around the close. tiffany's is on the upswing. boost.s getting a goose has another 3%. it added 1.72 billion u.s. dollars in market cap yesterday. and seeing a little followthrough. there seems to be something interesting happening in markets. the diversions between what investors are seeing and what analysts are seeing. thee lines represent potential return that analysts wind up seeing. it is the ratio of the target price to the last price. energy is this blue line. ratio, andulate the

18% return this year. utilities is a purple line saying 3% return as well as consumer staples that yellow line seen 3% return. the interesting part is, the market is not been behaving that way. the energy sector is down 7% while utilities is up by 5%, and staples up 5%. duke analyst have to bring their targets and change it? or will we have catch up? jon: stewart, the big question --are they favorable enough to justify revalidate some of the issues? whyart: one of the reason people are blown up on energy is the expectation from a price perspective of crude that you will rebound in 2017, not just from base effect from an actual crude price. weakness atat the

the beginning of q1 and that crude has rolled over, it gets tougher to get there. were i think the spills over to the market is if you look at s&p earnings expectations this year, roughly over 10% on a consensus basis, 5% to 6% is from energy alone and most of that is some base affects. if you get a weakness in crude, then all of a sudden your estimates for s&p need to come down. jon: what is more vulnerable? the credit market is being the vulnerable asset class, especially in high-yield. part of that has to come from the fact that levels are trading so tight. high-yield,at ctx we have seen weakness there. when energy is a concern, credit tends to lead equity. jon: we are going to get the followthrough you think into equity? stewart: i think it will be more muted. what is the reason?

one of which is the dollar weakness. on that basis, a lot of the energy companies within the s&p are large exporters and they do their business overseas. that will be beneficial. if you look at 2014, that is the year the dollar started to rally. herre seeing two affects energy producers, but this time around, we have one of those. alix: there is so much capital that wants to come into energy. even if you get into a distressed kind of scenario, so what. bp has thousands of money waiting. capital markets have been opening as well. that't buy the fact that sector will come under pressure because there's so much capital waiting to support it. stewart: that is another good point. people have been bullish on that and the point capital in that sector. etf,u look at the energy there were significant inflows into production etfs. people are taking advantage of the lower prices to get back

into the sector. alix: let's talk about our performance and price targets. we will move to the dow's top performers -- apple. headed for its biggest quarterly gain in five years. a new note says shares have room to run thanks to president trump. joining us from portland is a tech analyst at pacific crest. what is behind this? >> we did not raise our price target. scenario.bold case basin the potential for repatriation, when you look at the cash flow the company has offshore, and compare that to what they could do if they brought it back, it highlights the upside. alix: do you want to see them using that money for buybacks are dividends? there is capacity to do both.

that is one of the things we point out in the note is that when you bring in the cash back, you have to be careful based on what the ongoing tax reform is. you can double the dividend and still make a sizable acquisition likely in the services space to improve the growth story around sustainable revenue and get the benefit of both. bull case or a bear case? what is your level of condition -- conviction in the bowl case? trumps a gamble on donald rather than apple? >> my conviction is about the same as anybody's else's -- anybody else's. sides seem toth be supportive of repatriation and tax reform. there may be a higher likelihood of getting something done. 140, your price target is

but you see a potential bowl case for 175? is there a potential downside for apple do not get the bull case? >> yes. if we do not get the 140, we are close to go fully valued. you are going to have a very good cycle coming up in the next year. fore frankly, the scope growth is fairly limited unless you do something radical. is strongwart, this with apple, but not unique to apple. you have to take into account what is going to happen in washington. how do you make decisions at the marketplace? stewart: it is more difficult now, certainly. a lot of investors have been looking at his custom fanatic baskets. david: custom fanatic baskets? stewart: looking at a factor

driving a specific stock. through aly capture custom basket. have been themes we looking at recently is a high proportion of overseas cash relative to market cap. theme,look at the obviously tech is the largest sector with the most amount of cash overseas, but if you do it on a sector constrained basis taking away the sector buyers and looking at that one factor, those stocks outperformed s&p by 500 basis points. that is quite dramatic. of this tech kind outperformance that is really interesting is when you look at the positioning of s&p futures and nasdaq futures, and you look at the buy side of those positions, the first thing after the election was people went long. more recently, the positioning has moved back into the s&ps. there is still an underweight

and nasdaq despite the fact that the factor --sector has rallied back so much. the reap -- the repatriation theme is clear within markets. david: why? stewart: the lingering thought that the dollar can continue to rally on reflation and the expectation that other sectors have a energy might better value proposition is keeping people underweight. alix: netflix is getting hit. hit a 52-weekt high. upside do you see? >> we see a different -- a decent amount. this is the best business model and media for sort of the next 50 years. that is a massive market. coreou are going to have fluctuations. no one has a good handle on what those will be. but nothing has changed my longer-term view. david: i has been a longtime at

abc, disney -- one of the lessons we learned is that the money goes to the talent. netflix can is -- get a lot of subscribers, but how much do they have to pay the talent? the that make it a good business model? >> that is one of the big changes we are seeing. that used to be the case, but when you move to internet distribution, all of the money goes to the person who owns the consumer experience and netflix is on its way to leading the world in that case. what happens is when you own the customer, you get control over your suppliers. you can certainly reward the talent if you want, but you have more pricing power than what you would have had in the legacy environment. alix: you should always reward the talent, andy. [laughter] up, the new program at 11:30 eastern time dedicated to

fixed income. setting up for a big will -- setting up for a big week of high-yield. the new york city, you are watching bloomberg. . ♪

♪ >> this is "bloomberg daybreak." i'm emma chandra. coming up, president donald trump and german chancellor angela merkel me today. we will have live coverage starting at 1:20 east and. -- 1:20 eastern. fed president is discussing why he dissented in

the last decision. he said the fed chief is getting its inflation forecast just too high. and inflation is slowly building, but that is not happening quickly. but it isery dovish, rare to get a dissent. rare to go and post a blog about it. but it is quiet take interesting. -- but it is quiet interesting. look,lation, he is saying look at the jobs coming through. what is interesting as the he thinks we have achieved the goals at the federal reserve, he says the f1 see should come out with a detailed plan on how to normalize the balance sheet. it is also pushing for that. maybe we will get more detail as a month progresses. david: and it is akin to what

republicans on the hill are saying. alix: he also says the fed ought to begin balancing normalization soon. yeah, dove, but relatively balanced. david: not unusual for him. [laughter] maybe this is a thing that has developed. [laughter] david: celebrity federal reserve. [laughter] ok, industrials -- across the boards, companies have gained nearly all percent since the election. we are joined by alex molinari. he is chairman and ceo of johnson controls, the company that produces automotive parts. welcome to the program. we got a skinny budget outline ,ut of the trump white house

but did not make any mention of infrastructure. where you disappointed? alex: i see this whole thing is a process, but not a process i quantitate understand -- a process that i quite understand. everything is a negotiation, which we are probably getting to a place where everyone is going to weigh in. i don't believe that everybody's going to get everything they want. a big you are a ceo of company. when you sit down with your team, how do you budget for this? how do you make projections going out a quarter, year? there ison't think anything happening in washington that will matter for my next quarter or my next year. what matters is how he planned for the long term. as he make investments, capital investments, i do think it matters. but for this year, i think our

plans are set. alix: in the last 10 minutes, some of the governors noted that some people said they had money they wanted to invest, but they wanted to wait until washington. are you on that fence? if they pull the trigger on this, i am putting money into that? alex: i don't know if i cut myself in that category. but where do you put your money? whether it is border tax adjustment, infrastructure spending, whether it is regulatory changes that may make it more beneficial to put plants equipment in one region and another, those are the kind of choices we would be way? wex: how does that change if get what we want at a president trump? alex: everything changed out of related tow months optimism.

unless something really strange happens as it relates to some of the interest rates, i think we are earlier than what we would have thought six months ago. alix: what inning? third or fourth? alex: third. alix: wow. david: he was very explicit saying we will give you regulatory relief and tax reform if you keep your job inside the united states. your company is based in ireland. how much of an issue is that for you? is it changing your decision-making about where you produce things? inx: we are domiciled ireland. our manufacturing footprint -- we have 145 manufacturing facilities around the world. 59 are in the united states. 45 thousands of our employees are in the united states. employees areur in the united states.

it is a north american company from its roots. david: you are a perfect example for the president of somebody he wished had not left the united states? it is because of tax laws. everyone admits that. --there are resistant revisions to the tax law, would you be open to moving back to the united states? alex: i think moving back is a different question the not moving at all. i don't know how that would work. i don't how you would move from one country to another and that the tax laws were changed to make it advantageous. i wish the tax laws were not what they were. and you are not seeing the other companies doing what we did. alix: border adjusted tax. produce some of your batteries in mexico before you finish them in the u.s. if he did a border adjustment tax and you see a dollar rise 20%? alex: you have to remember that if you assume the plan is a

holistic planned, so the u.s. tax rate would come down, the border adjustment fee would be what the based off house blueprint looks like, it doesn't change our tax situation. alix: the dollar appreciation and attacks reform will balance each other? alex: it is the fact that the actual tax rate comes down and then you get the border adjustment. every company is going to be a little different. it depends on how their supply chain looks. alix: alex, thank you for joining us. if you have a bloomberg terminal, check out bloomberg go. this is bloomberg. ♪

♪ this is bloomberg. i'm david westin. still with us as alex molinari, chairman and ceo of johnson controls. he just had a big $2 billion safety for scott 3m. greatscott's safety is a is this, firefighter equipment. you have probably seen it in movies, but hopefully not in your home. it is a respiratory quick that firefighters used for protection. it is a great business and fits well with 3m's portfolio.

as a new company, tyco and johnson controls merged. twore focused between sectors -- buildings in our power solutions business. , wehink about this business are not the right people to own this business. david: how was tyco going? alex: i could not be more pleased. there is a lot of hard work, but the one thing we found out, our customers and employees think it is a good idea. alix: some of the rhetoric yesterday is that the deal with tyco is progressing slower when it comes to cost savings. is that true? alex: i think people have too much time on her hands. [laughter] that has nothing to do with the deal itself. we borrowed money or tyco borrowed money in order for the merger. we need to pay back some debt.

that is not core to our mission going forward. it tolet's flip additional m&a. you want to be one of those big multi-industrial -- you don't have the same kind of end market. where you need to buy to scale that up? alex: i don't think what we need to do in the next 12 months. we need to bulk up with our power solutions industry. as a franchised business. -- it is a franchised business. technologies are converging so fast. to get yourgreat perspective. thank you very, very much. coming up monday on the program, we will hear from cost car he -- we will hear from kash kari. he is the outlier. jon: he doesn't like to talk about monetary policy very

often, but now the us to vote and talk about monetary policy. it will be interesting to get his thoughts. he is given as a sign of what may be coming. the session looks like this -- futures with former stocks with a marginal move. on the s&p 500, as we move toward another week of gains both in the u.s. and in europe. treasuries bit throughout the morning and yields lower by three basis points. 1%.euro softer by 2/10 of york, "bloomberg markets" up next. you are watching bloomberg. ♪

♪ >> it is 10:00 p.m. in hong kong. from new york, i'm julie hyman. mark: and this from london, i'm mark barton. welcome to "bloomberg markets." ♪

mark: we are going to take you from new york to germany and cover stories that of saudi arabia. we have breaking economic data. julie: it has to do with confidence in the u.s. it is the u.s. sentiment index. the figure coming in at 97.697 even. -- 97.6. 97 even was the estimate. break it down between current conditions and expectations, the sentiment around current conditions is better than it is for expectations. we will see if this filters through the session. it is in line with other recent strong sentiment indicators we have gotten. we got the index of leading economic figures coming in with a gain of 6/10 of 1%.