since 1989.wngrade the finance ministry says the move is absolutely groundless. president trump budget meets resistance in d.c. and skepticism on wall street. the pathway to a balanced budget it paves with an accounting gimmick. investors look to debate for insight on the $4.5 trillion question. it is the same. a trillion here and a trillion there and then real money. it wasyou said that and like everett dirksen, billionaire. jonathan: you are watching bloomberg daybreak. i am jonathan ferro alongside david westin and alix steel. futures pretty much dead flat on the s&p. the euro marginally firmer. a retreat from 112 in the last 48 hours. 2.28 your yield on the 10 year. alix: it is a busy day. 10:00 a.m. eastern we get home sales. half an hour later, the dod --

the deal he this number pivotal ahead of tomorrow's opec meeting. p.m., the two-year had a did to cover ratios yesterday, the highest in a year so watch the option. , whent the fomc minutes it decides to leave rates on home. how does the balance sheet pay into that? robert kaplan and neel kashkari will be speaking. david: it turns out china has a lot of debt. we may have known that before, but it is official overnight. they downgraded chinese debt for the first time in 30 years. the senior vice president had this to say about the decision. be a gradualto erosion of credit metrics. we are looking at the policies the government isn't lamenting. the authorities have recognized the risks with high leverage and have a very broad structural

reform. we think that counts to the point where leverage will increase more slowly than it has in the past. still, these measures will not be enough to reverse the increasing leverage. david: joining us now is chief economics correspondent for bloomberg. it seems to be a mixed message. we will downgrade return you to stable from negative and actually, as she said, although the increasing is tapering down a bit. is this a good measure or that measure? >> one might say it is a wake-up call. it is a reminder of the challenges china faces. the authorities are preaching the need to rein in leverage. they are preaching the need to rein in the risk of the financial system. but we are going at a slow pace. are saying that even if, overall, there is an erosion of credit metrics going slowly, right now, china is on a stable outlook.

it heads in the wrong direction and it has already enough to not chip around. there are try harder methods. david: so how important is this downgrade for the chinese government? this came up quickly. are they likely to change anything they are doing? >> there is two ways of looking at it. it is not unusual for a government to contest a rating when they get downgraded. is no exception. look at it in terms of the metric, china doesn't necessarily need it. less than put percent of its funding comes from outside its borders. this downgrade won't necessarily impact them the same way it might develop western economies except for those companies that borrow outside of china. but it is still a blow for president xi jinping. he wants stability and he wants

-- we know that sentiment towards china is quite fragile and they are doing their best to make sure they stay on track. jonathan: talk to me about the symbolism of this and the push back this comes from the chinese government. it is not the first time we have seen a government push back against the credit rating company. i was in a conference once when the finance minister of one particular country was chasing around the head of the credit agency, lobbying him, trying to get an upgrade. these are the conversations these guys have. is there any convincing the likes of s&p, who are little bit higher than s&p, about what they are trying to do? isi would say, broadly, that an acute issue for emerging markets. they are keen to have the highest ratings. nothing like being aggressive

towards ratings. but in the case of china i think in one paradoxical way this would strengthen the hand of the performers. there is a split inside the economic policymaking. on the one hand, there are those who are pushing for deeper on the debt and leverage and there are those we are saying "we need growth." in some ways, it is an external warning on movies. moody's. once they get past in congress later this year. jonathan: bloomberg enda curran, chief economics correspondent. we want to talk with vincent reinhart, economics correspondent from box -- from boston. in terms of financial spillover, very little given the fact that they don't rely on foreign funding in the way the united states or european countries do. talk to me about the symbolism

of it. first, this is essentially a report card that says needs improvement. second point to recognize is we talk about the chinese government and chinese officials and -- as if it was one team under complete control. there are a lot of competing factions. moody's is aligning with the performer. it goes faster in terms of dealing with leverage and lamenting market based reforms. , back tong we remember 2011, the s&p downgraded the u.s. from aaa. remember all of the squealing out of the treasury department at that time? not at all sizing that a sovereign debt surprising that a sovereign government would push back. nobody likes to get criticized.

jonathan: we sit here time and time again. wondering how far behind the curve the likes of moody's are the at this point. looking at the disruptor in china, it is not like we learn anything new from this report, is it? again, you see, in academic research, that sovereign credit decisions basically lead market defense. there is a whole lot of people with sharp pencils, actually betting with their clients assets on different sovereigns and they've got a lot more moody's or s&p so it is not surprising they are behind. alix: moody's has the same downgrade in china and japan. what should china's credit rating actually be? >> isn't it remarkably opaque?

it is hard to understand it inside. the key issue is how fast are you growing? suspicion ie is a that the party conference is so important to president xi that he wants to deliver six a half percent gdp growth because that is in the five-year plan. and if he is going slower on the reform, worsening the national balance sheet, he is willing to do that because come november, it is his opportunity to consolidate power. the real message for moody's is the question, what are you going to do after you consolidate power? next spring, does the president have a platform for making significant market based reforms? or will they do more of the same? if it is more of the same than participants are going to get worried. david: it is clear the chinese capacity is really partly in the at what pointbut

does it become counterproductive because you are not investing the money you borrowed? how will we know that? >> it is a scale issue that becomes problematic. model for chinese growth over the last three decades is bring workers from rural areas to urban areas, give them capital, make them so productive, tell them half of that income is actually savings, and then allocate that saving across the base continent. in doing that, you make a lot of mistakes and you facilitate corruption. the problem is over time, you create a middle class that are wanting to control their own balance sheets. so the chinese governments have to figure out how to give their in their own say balance sheets and at the same time, get that capital allocated as efficiently as they can across the continent. and what happens is when you

save so much and the scale of the economy is increasing so much, you make a lot of mistakes. david: is a key metric in the efficiency really the difference between the growth and gdp and the growth and credit? don't they have to narrow that? if they are borrowing at a faster rate than they are growing that doesn't sound sustainable. >> here is an interesting fact. how long did it take the north american economy to quadruple their gdp per capita by 2010? 70 years. in 1940, gdp was one quarter what it was in 2010. how long did it take western europe economies to do that? 60 years. how long did it take china? 19. ask yourself how many financial crises did those economies in north america and western europe have over those 70 or 60 years that quadrupled the scale of their economy? don't we think there are

excesses that accumulated in china? don't you think leverage is a serious issue? they can't continue to grow based entirely on leverage. they will have to do market-based reform. they will have to do some cleaning up of balance sheets. the good news is the president already noted they are not relying on strangers. they don't have a lot of external. so they have the ability to rearrange their own accounts in order to deal with this problem. what moody's is saying is, don't think you've got a lot of time to do it. you should start soon. alix: great to get your perspective, vincent reinhart. us.are sticking with leaders gathering in vienna ahead of thursday's opec meeting with central bankers of oil. bank of america merrill lynch and global commodities research is here with his call. later, phil verleger, very

bearish on oil. kind of an upside as you would expect. we are live in rome with the latest on president trump's overseas trip. this is bloomberg. ♪

david: this is bloomberg. donald trump continues his first trip as president, traveling abroad to rome where he met with pope francis in brussels. to our chief washington reporter kevin cirilli who is traveling with the president and is in rome. has our washington

political reporter. how is roman looking forward to brussels? >> the present just concluded the religious portion of the trip with a meeting with pope francis. the global leaders exchanged gifts. the president exchanged notes written by barton -- luther king -- martin luther king and the pope gave him a book on environmental issues. there weren't many political overtures beyond that. the president just spoke to the pool reporters traveling with him ahead of this meeting with italy's prime minister. he said the meeting with the pope was "great." he received a private tour of the sistine chapel with the first lady. all talk turns to brussels. the president will head to the nato summit. he has been quite critical of our allies, saying they need to pay their fair share in the nato alliance. all of that said, this trip is

turning from a poor and -- a foreign policy religious standpoint to simply foreign policy with the shadow of the manchester bombing. the president said those terrorists need to be "obliterated." those meetings are scheduled to begin tomorrow. it is unknown if the president will take any additional meetings later tonight upon his landing. we are still awaiting the final schedule. he will return to italy at the leader and this week for the g-7 meeting. david: let's go back from rome to washington. please take us through what is going on with the budget. it came out yesterday. what do you expect to happen next? >> the president is about 6000 miles away while washington put his budget forward. it was largely decried by both democrats and republicans. we won't expect it to move forward as is but it is up to

the house and the senate to take some portions of this budget, look over it and decide which parts they like. it is likely they are only going to take a few pieces of it and then go about writing their own spending plan over the next few months. there is a lot of things on their plate but it doesn't look like they are going to take up the president's budget. they are going to dissect it and decide what to keep. over the next few months there are going to be negotiations where you will likely see a good portion of the budget thrown out and a few parts kept in. david: there is a timing question here. we also talked about the score in the cbo. explain to us what the relationship is between the budget on one hand and health care on the other? >> congress is trying to juggle a few different things, including this health care repeal and replace effort that moved from the house over to the senate but when the house passed it they did not get a budget score to know how many people would be covered, how much the

bill is going to cost. that score is coming out today and it is going to potentially blow up the congressional calendar because if the score does not meet a certain target the bill could go back to the house where it faced such a contentious process trying to get through the first time on such a slim margin. if it doesn't hit the right target they would have to go back to the house and make changes so that could delay the whole budget process and the congressional calendar. that is one reason the number we are waiting for is so important. david: kevin cirilli is about to hop on a plane to brussels. jonathan: he wants some souvenirs, doesn't he? alix: it is the little figurines that i like. i do like those. you know what i mean. the little leaning tower. geography lesson in during the commercial break.

but now, standish mellon is still with us. the fed has to make sense of the monetary policy. what will you learn today? a they are going to speak as group in a minute and you've got to look for three things. for are their intentions the fomc? last time they had a non-press conference meeting before the press conference meeting. they signaled they were going to tighten in march. do they do that again about their june meeting? how much enthusiasm do they have for the macroeconomy? are they worried about the low unemployment rate or are they surprised inflation hasn't come up more? that is where we will be counting the adjectives, just to get a sense of how much tightening the have to do. the third thing, balance sheets, you told -- you know they told the staff, go study issues more. we know it is contentious.

they also have told us they are going to do something this year. alix: fair enough, but the real question has been around inflation and the timing of everything else after that. i want to point to something in the energy industry. yesterday we had a power auction and prices were at a four-year low. top out on that and you have the oil prices being capped. how confident are you that you will be in a sustained reflationary-inflationary environment. >> i am almost never confident about forecasts. in some sense, the more important meeting is the opec meeting. 'ambition to saudis transform their economy makes them pretty tough on in forcing a quota. enforcing ag -- quota.

shale producers set the upper bound and oil prices stay at a $10 range, centered around 50 or so. that should be enough to show cost pressures rising as wages in the u.s. increase and that weight of the unemployment rate .ushes costs upward if the saudi's can't maintain ,he quotas, if oil prices fall then we are back to the older script which is central banks have a hard time generating inflation. alix: another part of the puzzle is productivity. some industries, like energy, have been productive. are we going to be in a bifurcated productivity market where others are left by the wayside? ahead of the fed managing that -- and how does the fed manage that? >> here is a biased technical progress. alix: that is the jargon. >> as you said bifurcated, i figured i had to at least play

it at your level. basically, we are good at making innovations in some areas less good in others. there are services where we don't increase output for our -- output per hour all that fast. for now, we seem to be particularly innovative in things that don't use much capital to put in place, don't employ that many people, and we almost give away for free. apps and the like. it isn't like in the old days where you develop the new cold steel process. they were talking a lot of jobs in capital and people. it is different now. david: vincent reinhart is going to be staying with us. talkingp, we will be with the chairman of the house budget committee with -- on the eve of the hearing on the house budget. she is representative diane

black, a republican from washington, d.c. this is bloomberg. ♪

jonathan:jonathan: you are looking at live pictures of the city of london. the cathedral and the millennium bridge in focus. in an unprecedented security military british will stand guard at key sites like sporting events following monday's events in manchester where a suicide bomber killed 22 people. the government has raised the terrorism threat from severe to critical for the first time in a decade. prime minister theresa may announced the increased measures nationwide at a statement at number 10 downing street. secretary clarified an attack is inspected imminently. please have arrested three men in south manchester in connection with the attack. that is the story in london currently. the story for global markets is

as follows. we are two hours away from the cash open in new york city. futures are unchanged. the price action really muted across assets, not just in u.s. equities. in the treasury market as well. yields on the 10-year, 111 -- how flat, and often do you get to say that for euro-dollar at the same time? ,oming up, francisco blanch head of commodities research for bank of america. the opec meeting just 24 hours away. from new york city, you are watching bloomberg tv. ♪ these days families want to be connected 24/7.

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it all adds up to our most reliable network ever. one that keeps you connected to what matters most. jonathan: from new york city to our viewers worldwide, you are watching bloomberg daybreak. let's walk you through the market action. futures go nowhere on the dow. dead flat on the s&p 500.

yesterday the s&p 500 closed on a four-day winning streak and it was about seven points south of an all-time high. switch up the board. lots of action on the treasury market. $34 billion of five-year notes today. $28 billion on the seven-year notes coming tomorrow. 2.28 your yield on the 10 year. in the fx market, we go nowhere. 111.79 on the dollar-yen and 1.1189 on the euro-dollar. headlines outside of venice world -- the business world. presidentancis and trump met at the vatican and the pope gave the president a copy of his book on the importance of protecting the environment. president trump is heading to a meeting of world leaders who will urge him to on of u.s.'s commitments on climate change. opec and its allies are extending oil production cuts for another nine months. the gathering in vienna will

discuss the revision of the economies. the most influential participants, russia, saudi arabia, and iraq have backed the idea of extending the agreement to next march. 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: the european central bank supporting markets with an accommodated monetary policy for years but the question is when that may change. a short time ago, the vice spokeent vitor constancio with bloomberg about when and how the central bank may make a turn. a certaincommitted to policy stance until the end of these years which, by definition, means that we have to communicate something to the markets before the end of the year. closer to the end of the year. markets understand that well. any problems or

turbulence resulting from our monetary policies going forward. david: still with us is vincent reinhart of standish mellon. you heard what vitor constancio had to say. we will stay the course but before the end of year air we have to communicate where we go next. what do you expect? >> this was right out of the central bank playbook. he always emphasizes asymmetric risks. it is better to wait a little longer and go to soon. emphasizes, we will know more in a little bit and then he emphasizes, we are sure to tell you before we actually do something. i think it is pretty straightforward. the european economy is picking up. it is doing better than the u.s. in many respects and in that environment, the ecb is going to have to start announcing

something on its balance sheet come the fall. they are not going to do it before they have to and the reason is there is a german election between now and then. they don't want to create headlines. david: do you anticipate the sequencing question mark there has been some speculation about qe versus rates. do you think they will bring qe down before they going to rates? >> i think it is a hard question. sometimes the ecb is implemented on conventional policies. down to the euro, they expanded the balance sheet and then it actually turns the positive rate negative. it doesn't have to reverse those policies in the same order they put it in. that is a choice. the balance sheet constraint is probably the more binding one because, by their own limitations, they are going to be running out of securities to buy by the fall so they will have to announce something there.

i think it is the negative deposit rate that is the more problematic policy tool. europe is a bank centric economy and making your deposit rate negative is basically taxing banks. and a tax on capital impaired banks is not the way to support a bank centric economy. jonathan: the ecb severely damaged any relationship between the price and credit. even before the turn in the eurozone, we had spreads that were incredibly tight because of the bond buying program. they have a significant amount of interest rate risks into credit. now, we face this counterintuitive problem of when the ecb steps back because the economy looks good, spreads are going to blowout. you will see credit behave like bonds. what are they going to do about that?

>> thinking back to 2013 and the taper tantrum, where the fed mentioned the possibility of swelling asset purchases. that led to outsized reactions across a wide spectrum of assets. why don't you think it won't happen when the ecb begins to lean towards the exit door. there is going to be a problem. that is why they will telegraph very far in advance what they are going to do. veryis why it will be incremental. slow the asset purchases and then stop them and slow reinvestment and just lay down railroad tracks so market participants understand what is going to happen. it was messy in the fed case. what it meant was it took the fed even longer than they initially planned to get it out of the business of buying assets. and the fed is not really done. they still have a four and a half trillion dollar balance sheet. there are still tiptoeing towards reinvestment's.

the process is even more incremental in europe because the ecb's record is even slower action. david: thanks so much to vincent reinhart of standish mellon. alix: over to the central bank of oil, you have the opec meeting tomorrow. what are they going to do is extending the cut? the market is looking at a net .ong finish in best position the yellow line is the 11 year average. we are right around the 11 year average for net long going into the meeting. running is now, francisco blanch , head of global commodities and derivatives research. >> i think the market is beginning between a six month and a nine-month cut. the six month will be disappointing, and nine months will support the price. but opec has boxed itself into an outcome. they have been telegraphing it for weeks. i think chances of a surprise or

small. -- our small. alix: the exit strategy. once you start this cycle and you have an opec push, how do you remove it when the circumstances change? >> i think it is a nice comparison but the reality is quite different. in the sense that opec actually kick started a price war with shale, with canadian, backing twice 14. this was a price war. that is why we keep elections steady. we need to see global demand recovering and eventually enabling them to go down. opec cannot control the price anymore. what they can do is they can actually enable a shift in the term structure of oil to allow spot prices to bowl forward.

that is the state of objective. the think that eventually, equity market would put downward pressure on forward prices and curve u.s. shale supply. shale suppliers are selling oil forward very actively. priceat is into the spot forward structure. in my view, it will limit growth in the u.s. eventually. alix: this is where we are in that conversation. we love the jargon at 7:30. this is the ccr be function on your terminal for oil prices. this is what the curve looks like when you have prices that are higher than they were later. then the curve winds up picking up. the issue is that it demands -- don't pump up. they are going to lose market share.

they will lose compliance in 2018. >> i think opec gained market share in this price war initially and now it is giving up some to stabilize the markets. that is the key message. i don't think opec can go back to gain market share next year without a tremendous cost to the price. shale technology has changed a lot of things for opec. but the biggest issue is that it takes three or four quarters for opec decisions and fill producers to respond. -- shale producers to respond. they are actually narrowing quite a lot. that is the opec challenge. i don't know if demand is doing ok -- it wasn't great in the first quarter -- but you are right.

opec is going to be in a lot of trouble but they were always going to be in trouble. everyone suffers in a commodity market. jonathan: here is the question i have. what is their capacity to play this game to saudi arabia specifically? how can they play this game after 2018 through 2019? , russia is playing its game and it has a lot of those companies so clearly you can play the game with no impediment that. i think the bigger issue for saudi is what happens over the next several years. if they manage to bring down their budgetary deficits. they have an enormous deficit which is close to 20% gdp. that is the bigger issue for saudi. that is where the discussions come into play. we allow the currency to float at some point, will they curtail

the investment in the military? there are issues to address long-term. > you bring up that comparison that russian output is at an all-time high. but a lot of people look at the saudi's with a massive capacity to make cuts whenever they want to. but if i buy into that company and that ipo, what is that message for me? i want them to do what is right for me, not what is right for the state and for their market share over a certain periods of time and again with russia and again with iran with u.s. shale. >> you can buy a growth company or dividend company. i'm not sure what the packers -- the bankers will do, but it is hard to believe it will be a growth company in the future. they cannot grow like shale. asle pitches themselves growth companies. aramco might say, -- i don't know.

as a shareholder, you won't get major dividends. message, whye would you be uncomfortable? alix: that would be the argument ask i would make because they are so diversified, but on point, there is diversity in the market that you will have the ipo. they have to justify the valuations of a have to pump it. do you buy that? day, saudind of the is an oil producer on many rates. what they cannot control is where the back end of the oil curve stabilizes. mexico with very large scale hedging, not just through the government but also the oil company. we have iraq and that was pretty

surprising. that is on top of all the investment grade, the high-yield names. in some ways, that forward pricing for 2018 and 2019 needs to act as a brake on investments. that is ultimately a thing that opec is looking for. we are looking for prices to be low enough to enable them to maintain their market share. i think it would kind of work. alix: francisco, way to sell it there. we will be sticking with you. coming up, moody's downgrade of china raising some red flags. iron ore fusion extending losses. what a china slowdown means for the metal market next. this is bloomberg. ♪

>> this is bloomberg daybreak. i am emma chandra in the hewlett-packard enterprise greenroom. in the next hour, doug holtz-eakin, the american action president, former cbo direct -- director. >> i were in or, led a slump in -- highlighting the challenge for the nation's leaders and maintaining growth. still what this is francisco blanch of bank of america merrill lynch. pointing towards the finance ministry's response to this, always pumps you whenever you get a downgrade. the ratings company has underestimated the capability of the government to reform. it is the commodity market underestimating china's ability to boost demand? >> china has a bit of a credit issue. everyone realizes that.

china has continued to move higher and that is not helping the metals markets. i don't think it is an issue that the chinese government won't be able to control for now . the economy is ok, more or less. we are going through this leadership contest. i don't see a lot of downside risks. is that theclear metals are not going to like any orancial related issues upgrades, or increasing rates. jonathan: pick any metal and it is a proxy for chinese growth. it has been for a long time. as you look from iron ore to copper, where has there been the most capacity cuts where that market is more insulated than this conversation around chinese growth? >> we just had our global conference in barcelona last .eek

you think about metals that are going to be picking up a lot of consumption in the medium-term from this metal enable technology, putting on the electric vehicle and all of these things coming out, there isn't investment in those metals. we are talking about copper. mostly, we are talking about sink. cobalt. there are metals like iron ore and steel threatening the overhang will last longer. but it is really quite a bifurcated market. we saw in the last five years is enormous. the industry has cut down 45% of investments in a five-year window. it is a seven-year their market. that is going to create a bottleneck. but it is going to be quite

bifurcated. the china centric metals like iron ore are going to struggle. alix: no doubt, china's demand for commodities have changed the way there influence of global commodities trades. noble group is under severe pressure. i am being nice to say severe pressure. is this a canary in the coal mine for the general trading of commodities and the proxy for demand? >> some trading groups are more credit related and related to capitalization issues. i don't think -- i don't think that the metals markets are necessarily a reflection of that. in my view, the metals complex premiumhier -- look at in china and it has been doing ok. we have some reasonable premiums

but we also have curtailment in steel investment. partly because they were working material. selling off that't think china is tight, necessarily, that bad, necessarily, and i don't see the linkage so much to the trading houses. alix: we will get your perspective, thank you very much. let's happening in china over the next 24 hours. francisco blanch of bank of america. i will be out in houston tomorrow, joined by regina mayor of the kpmg. david rock and charlie, who not only has the best name, but he puts money to work in shale. i will be digging into the shale response tomorrow. david: back to washington because yesterday the white house delivered a version of the budget for fiscal year 2000 feet -- 2015 -- 2018.

it reduces spending on plastic programs. here is diane black, republican represented a tennessee and chairman of the house budget committee. good to have you here. >> great to be with you. david: i do want to get to the process. what happens next? more importantly, how does this -- health care legislation is pending, and also the looming shutdown of the government as well as the debt ceiling. how does this come together for you? >> first of all we need to work on her budget and the president did give us his idea of what the budget should be. today in a budget committee we will have the director of omb, mick mulvaney there to discuss what their ideas are, how they got to the numbers they got to and we will be hearing from him. then -- this is a collaborative effort. we will work with the senate and the house and ultimately, it is

congress that has the power of the purse so we do all work together. i think ultimately, what you see in the plan that came out from the president yesterday is that he wants to get are spending under control. that is what i came here to do seven years ago and i am delighted that we now have an administration that understands we cannot keep up with this deficit spending. david: specifically, can you do a budget if you don't know how much money you are saving or spending on health care? if you don't know what the law of the land is? >> we do have a number from the cbo coming out this afternoon on what was done on our side. we will wait to see what the senate is doing. we can make some assumptions for what we have done in doing our budget. david: they do fit together. you say this does show fiscal discipline, the president's plan, to get spending under control. in fairness, it has increased spending on defense and reduced

spending on plastic programs? we are not just cutting back spending, we are cutting back some programs and increasing others. >> you are right on that but there is the mandatory side that is important because you are talking about the discretionary side. only a third of our budget is actually on the discretionary side. as a matter of fact, we have done a good job over the last seven years or six years that i have been here on the discretionary side. the biggest driver of debt is on the mandatory side. it is only five programs there so we have to dig into those. that is what the president has done in his plan. we also have some ideas on that. we will be putting that forward over the next several weeks. david: first of all, there is interest. there is not a lot you can do about that. about the deficits. the largest parts are social security and medicare. the president said those are off the table. are you willing to put them back on the table? >> right now, we are working on>> looking at the issues on medicare which we have done in

the past. we put that out over the six years i have been here and reforming medicare -- the program is -- it was put into place in the 1960's. obviously, it does need some reform. we have had a change in our population, an aging population. mandatory spending on the medicare side is something we will have in our budget. we will talk about that. david: just to make sure we are clear, you respect fully disagree with the president on that has the president said, i'm not going to touch medicare. >> he has said he wants to save medicare. so he doesn't have that in his budget. to we will put a plan out change medicare as we have done in the past six years. david: as you go forward with the budget, to what extent do you want to take into account possible consequences of tax reform? that is another element. >> it is. it is one of our priorities that reform becausex

we know pass reform would stimulate the economy and obviously, there are two ways to balance the budget. one is to bring in more money and the other is to find a balance between the two. we want to see the economy grow and that is what is important about tax reform. we've got to balance these issues and priorities and that is what we are working on in our budget committee. david: give us a sense of the timetable. when would you hope to have something out voted on by the house? >> we are looking at the june timeframe. i don't have an exact 84 when that would see that we are hoping to get our budget out here. sometimete on that out of our budget committee in june. david: you do that in an august recess. is that a deadline? when we come back in september we have this question of the overall deficit limit as well as the resolution.

>> i hope that our part of the process of getting the budget out of the committee and getting into our body will happen june. david: good to have you with us. presented of diane black of tennessee. tuesday, coming up on aursday, mohamed el-erian and chief economic advisor will be joining this program. alix steel will step aside. alix: it is a good trade. jonathan: from new york city, counting you down to the opening bell, about one hour and 34 minutes away, futures really don't know where. price action very muted. treasuries flat, euro-dollar unchanged. you are watching bloomberg. ♪

jonathan: china hit by the first downgrade since 1989. -- resistance in d.c. and skepticism on wall street. accounting gimmicks. to today's fed minutes on insight for the $4.5 trillion question. good morning from new york city. a good morning with jonathan ferro, david westin, and alix steel. futures unchanged, the euro-dollar on chair -- unchanged, 10-year unchanged. >> we have a busy day. 10:00 a.m., home sales coming out. watch this number. 10:30 a.m. eastern, week definitely see it with the oil number before tomorrow at 1:00 p.m..

2:00, one minute from the by the conversation critical for those minutes. high leverage. moody senior president spoke with bloomberg television earlier. >> we are looking at the policies being implemented and authorities recognize the risk and we takenerage into account to the point we think leverage will increase more slowly. these measures will not be enough to reverse these measures. -- in reverse leverage.

alix: what is the downgrade on china we saw in the u.s.? lot p or more of a fund-raising mechanism for cap markets we see in other countries. there is growing concern in china. it is also a sign that perhaps you want to build more careful about growth rates in the future . they will fall to 5% growth rate. something to keep an eye on. alix: other mike. it is different. there are companies that issue u.s. bonds. does that prevent them from doing so? >> i wouldn't say prevents them.

the u.s. downgrade in 2011 was a disaster. till my weekend. it was labor day, man. a real blow. jonathan: the finance minister push back against the credit rating company, it underestimates -- underestimates our ability to boost the demand. they keep playing with that lever. things -- they will boost the demand again and tap the pedal wants more? >> they have the capacity. another $500 billion. ifre is plenty of capital china wants to do that sort of thing. >> they contribute to exactly what moody's analysis is, as

they boost demand for the economy, which is part of the problem. gdp, which ise not unsustainable but happens with companies with higher cap incomes and makes it easier to pay off. capabilityhe command, can they do boast -- both? tough to do. as far as enacting reforms, it is a little challenging. it seems to me one or the other. growth is stabilizing, but you see new credit continue to grow. it is not boosting growth. this chart shows that you are blue bars are aggregate .inancing they have got to do more to keep it stable. something has got to give. >> they cannot keep up on the same path.

no one things they will stay on the same path. ping shoulding -- keep control of the country and the economy, and then we will see what he wants to do. he has consolidated control over the economy, more centrally planned than five or six years ago. do they go back to a market or further? david: you have a basic appointment problem. that reform, they are talking about laying off people which will leave to silt -- lead to civil unrest. at some point you need to address that. or the is a good point government needs to keep people

employed. that is clear. the message not work well. the u.s. -- china is growing at twice our clip. solid growth. a politicals problem but at some point, the method does not work well. the condition of population to accept 5% growth. if your labor -- avery gets sacked, you get laid off, it is good to talk about growth but who cares? i will have a job. jonathan: they have to keep pushing the demand panel and blowing things up. what is more likely, they reform and things turn out ok, or this is a story for 10 years time and a big debt bubble goes pop? >> i suspect it is a long-term story. you could argue trade

flows with europe so dependent on china, regional trade flows with the fx market, commodities, where is the trickle off psychology if the investors get whacked? already have been importing on a regular basis. we are seeing outside of what we're talking about in the chinese economy, we are become a higher wage economy. falling as -- china willed play a smaller role in the global economy and the same is true if the economy slows for the demand for commodities. impact will change on the overall economy. 2018 could be an interesting year. they know the numbers are unsustainable. what they do about that will be interesting. the firstaying for

time, they will not step on the pedal as they did for the past. they will risk civil unrest have a she ping will tighter roll over the government or they know they need to get out of this unsustainable path especially if they want to integrate with the global economy. controls.n capital if the chinese lose faith in their own country, they have been pretty successful in family it down. can they keep doing that? >> for the last few months, you can see that. it is pretty simple. capital flows and i sold u.s. month at month after month. this year, they have been flat even a net iron. they can maintain capital controls for a long time. history is not good for country after country. they can certainly try. what does it wind up doing

with equities? if you wind up reading the headline, do you care? getare, great, i will still more leverage. >> think about this in the -- in more detail. not a huge deal you talk about equities all day long. david: michael schumacher will stay with us. former cbothe director will be with us to talk about the budget and we are waiting for president trump to depart rome for brussels here .hat is air force one this is bloomberg. ♪

david: there's a lot of talk when the central bank might start backing off of the economy. when it mightt begin to make that turn. left by definition, it means something for the markets before the end of the year. i do not fear any problems or from oure resulting monetary policy decisions going forward.

david: we are joined by the man he was talking to. matt. he says he will stay the course through the end of the year but he will sink -- signal where they are going here it is this what you expect? miller: they happened called out in the past. the reason i talked this morning is because they held a financial stability review. they normally want to keep it separate from monetary policy but they raised the specter of abruptly higher interest rates and one thing that could cause that is unexpected change in policy by the ecb. they want to be careful that they communicate really well and go slowly with monetary policy so that the market understands it and does not overreact.

a synoptic inflation might interfere. does he see any evidence of that? >> he doesn't that he mentioned. sees the possibility inflation stays above target for a matter of months in the next year. we are talking about the headline number and not the core number, which have not gotten there yet, and it is not a number they officially lost or but thatt is above 2% is what the ecb wants to see. it harder in the core companies like germany. >> president trump, there he is with his wife, the first lady. jonathan: a question of whether they will hold hands. >> you went there.

jonathan: everyone is going there right now. that is the story. anyway, this is one -- not my game. i want no part of it. one, a view on bank on bank the two bullish earnings. what is the story there? matt: it was not necessarily surprising. can see when you look in earnings, analysts routinely overestimate bank results fear earnings fromat 2015, look, analysts are two bullish typically because they that theyto the banks are rating. there are proportionally too many by ratings compared to sell ratings, especially a

longer-term view. a classic example of a group of academics looking too far and may be mixing the picture -- missing the picture. analysts, at the start of the year and at the beginning of any given year, stocks will rise. it has always been about access. anddown grade the company you will lose access. i cannot tell you how many with to loseve met access because the company is not happy with them. if you want to bring market this theyto analyst ratings, are sure you have the same amount of axis to the company >> you do with a by

not ask to many questions. jonathan: you do a nice interview. we won't go there. that is politics. mike, great to have you with us. from 2013, they will move like a snail. >> very much like a snail. mario draghi is a tremendous communicator, probably the best of any communicator. there is no reason for the ecb to move quickly. they went from $80 billion a month to $60 billion a month. no particular need yet for deposit rate target. i think the ecb could move slowly at this point. expected tost change the risk analysis around the economy and the eurozone. the way he went about this last --e was talk up inflation

talk down inflation prospects and talk up -- well below target and we will have to do it we have to do. will that be the strategy? >> it is only in the last few months were every single country in the eurozone was out of it. we have this for a short time. -- getting out of control, they do not have to worry much. broadly speaking, i would say it is not a huge concern now. if oil does something strange, that could change calculations. what is the real relationship between the two? what is moving on what? differenceook at the of 10 year rates, people talking that the 10 year treasury, is to us it, it seems

seems to us a tracks a difference and short-term rates well. the difference can explain the most. you see this day to day, a global market and capital. this is much true or in the 10 year part of the curve. tokyo or beijing and everett might be look at markets and say, five basis points more than expected, i will go to -- it is a self-regulating mechanism, i guess that is the key point there. >> they were asking the question of whether people will pay the debt back if yields go up substantially. as leverage come back to market as we are concerned about credit risk? getou can look where rates shocked at 100 basis points. that is not getting a lot of

airtime now. most people seem footie -- pretty complacent. and a stretch. it will be factored in. >> whether we have seen the lows for 10 year yields, we see in the high, already in 2017. >> i hope not. people are missing the boat here where we focus on ranging rates. it is narrow. the range is 46 basis points. almost every single year you, -- you get the basis point some way or somehow. maybe we have not seen the high and we have been rolled into a calm sense of markets don't move much. markets always move and it is not always protectable. us.hank you for joining

coming up, president and owner with some bearish news. he is negative on demand and we will drill down. this is bloomberg. ♪

>> tiffany did not get any help for valentines year. another expected trap and sales in the last quarter. sluggish demand in america and asia. a slow recovery from shrinking oot traffic at its u.s. stores the second largest of proof -- home improvement chain posted first-quarter profits that missed estimates. homeowners spend a more to renovate. its larger rival, home depot, has been posting better revenue growth. cutting back from bonuses.

any details approved by the middle of next month. bank of america and ubs, similar moves. the labor department reached banks on account -- potential conflicts of interest. it is interesting because it is a regulatory thing at the end of the day. you have got to act in your clients own interest and you do .ot want them overpaid jonathan cohn will they act in your best influence -- interest? is, is it in the bank's best interest? it is not our fault, it is the regulators. class of thought we would have a freeze on this from president trump? >> i do not think that regulation will end up going through. if you are the ceo of a company --

then you don't need to go after them. you get the ceo's in one room. what wes here, this is .ere looking at 3% in the free market, japan's softbank took a $4 million stake , number coming the fourth trying toareholder change from videogame into driverless tech. here is where earnings have stacked up and they are now down by over 5%. sales were actually down 2%, trying to transition from less tourism as well as less activity in the u.s. a bitransition is taking longer than you might have thought earlier. the housing market, lows is

offering a different perspective. home depot feet by 3.6%. 1.9%. to state -- speaks contractors. >> i love a drill but they are really expensive. a really good one, it is like 500 bucks. >> the cordless ones. jonathan: the things i learn on this program. coming up next, former cbo from new york city, you're watching bloomberg tv. ♪

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public wifi for your customers. private wifi for your business. strong and secure. good for a door. and a network. comcast business. built for security. built for business. jonathan: big question, do we have price action? the answer is no. futures flat up i about 12

points. four days of gains, longest winning streak on the s&p since february. seven points south of an all-time high on the s&p 500. action? the price nowhere to be seen, the euro-dollar higher by 1/10 of 1% as we create toward one dollar 12. treasury yields lower by a single basis point on a 10 year. is emma. u.k., three men have been arrested in connection with the suicide bombing in manchester that killed 22 people. police are not route the sing -- not releasing any other details. imminent.tack theresa may is taking .nprecedented steps

pope francis appears to have tried to send president trump a message when the two met today. the pope gave the president a copy of his book on the importance of protecting the environment. president trump is meeting with world leaders. honoring his commitment to climate change. house republicans embracing a new financial estimate on the obamacare replace and it -- replacement bill. republicans in the house could be forced into an embarrassing -- on the measure they barely passed last month. they are trying to meet senate rules that allow them to pass with a simple majority. democrats are unanimously opposed. global news 24 hours a day powered by more than -- global news 24 hours a day powered by more than 2600 journalists and analysts in more than 120 countries. this is bloomberg. david: we are staying in washington to talk about the budget. the sparring began and not just about the substance.

it also had credibility challenged. larry summers wrote in the washington post, fair enough if you believe in tooth fairies and ludicrous supply side economics. it seems to be the most egregious counting error from it -- from a president in 40 years since i have been tracking them. we need a minimal standard of confidence and honesty. on the other hand, when mulvaney was asked about that, he went on a counterattack. >> this is the first administration in history, the first decade and the first eight years in history to not have a 3% growth rate. onlarry wants to talk about reasonable assumptions, we talk about my 3% growth rate and his 4.5, we will talk about who is closer to reality. is the formernow

cbo director. welcome back to the program, doug. is the budget. fantasy and should we be paying attention to it at all? >> you should be paying attention to it but they are 10 year projections and they involve our definition a lot of the guesswork. you need to get out of this the basic architecture of it. the u.s. has three fundamental budget problems, poor economic growth, and they want to get that up toward 3%. the top line mismatch between entitlement spending and revenue growth, and the fact that title meant spending is pushing out all of the discretionary spending. say,u start with that and let's get it in balance without touching social security and medicare, you have got to get a lot of growth and revenue and aggressively the budget. that is exactly what you see.

growth is what candidate trump talked about and president trump continues to talk about and that is essential. what in this budget would drive growth the most? the potential for a serious tax reform. the details are not in the budget. is a helpful document. we have seen an actual plan out of house republicans, it would have dramatic impacts to innovate and grow in the united states. if it were to get through the house and signed by the president, a fundamental rewrite of the task could of that nature, that could have an impact on the growth rate, perhaps one percentage point by itself. you have to grow anything to get another half of 1%. smart infrastructure projects, getting skill into the labor force, all of those things that at productivity. david: start with tax reform. draw that a station between tax reform and tax cuts are how much is getting the tax rate down for more money in the pockets, how much is actually reforming that

code fundamentally? >> it is all about fundamental tax reform, things that are permanent as that transported the economy. one is a stimulus and we are not going to get close to that. number two, you need genuine supply-side tax. he will get better investment incentives. it is nothing compared to a real tax reform. >> get us a sense of the timing , without play out knowing what the law is on health care, how do those connect up? >> i think it is important to get that settled. $1t passed the house is a trillion tax cut and two major

reforms on entitlement programs. is. a significant, but that the president embraced medicaid in his budget. that is a step toward fiscal reality. will you take a $1 trillion off the books and know what the medicaid books will look like. that is one of the victory driving. they need to know the answers and then they will have a good starting point for the next step. david: the proposal is for $800 billion in cuts. addressing it much less embrace. in the house is medicaid reforms over $1 trillion, we saw a budget that is medicaid reform that saves $800 million. essentially the same acknowledgment, which we need to do medicaid reform, medicare reform, social security reform,

because those programs are not working well. better sociales safety programs. david: we just had a chairman of the house on and she thought she would get it through her process i june. the june looking at timeframe. i do not have the exact date that we are hoping to get the budget out there so folks can see the budget and vote on that at some time out of our budget committee some time here in june. >> does that sound realistic giving -- given everything else going on, dealing with the budget, and looming in september, the question of whether you keep the budget going but also a deficit limit can this all be done over the summer? >> is pretty straightforward, getting this voted out of the budget committee.

there is a little catch of when they pass it on the floor. the reconciliation instructions that protect the health care bill expire. they have to get the senate to finish the health care bill, then vote on the resolution, which would then give them the ability for tax reform. other things are demanding their time so it will be tricky. >> thank you so much, former cbo director doug. alix: coming up, president and founder joins us next with his outlook. there is on-demand. this is bloomberg. ♪

>> this is bloomberg daybreak. coming up later on bloomberg markets, the founder of muddy waters research, this is bloomberg. now to your bloomberg business flash. fee at chrysler has run into trouble with the u.s. government. the justice department is suing the automaker claiming it cheated on the diesel emissions test. to it chrysler says it tends -- it will defend itself vigorously. accused fee it chrysler of falsifying results. they said they have not engaged with business talks. the giants said it approached about its conversation but there

is no certainty it would happen. sales have fallen in premarket chairman of the bloomberg lp is the bloomberg independent nonexecutive director at glencore. are close toallies extending cuts to another nine months. ways toher to discuss revise the economy's. the influential disappearance publicly backed the idea of extending the agreement to next march. that is your bloomberg business flash. >> it was all about opec jobs in the last weeks, stepping up to the opec cut again. countrynot heard of any against the extension. everyone wants it because we realize we have not achieved our

objective of being in global inventories. >> we can see we have full performance of the -- voluntary reduction of output has reached 1.7 million barrels per day. >> what we have seen is what we expected by the quarter of the year. a sharp decrease in the metrics. we look forward to seeing those numbers. >> oil prices up about 13% in the last few weeks. denver, philfrom also worked at the u.s. treasury. is the nine-month extension a done deal at this point? >> that is at least what the consensus expects. i hope it is a done deal. that would be a best case scenario, to extended for 12 months. i am right in line with consensus. i fear for the six months, god

for bid they don't extended at all, but i don't think it is a remote possibility. you have to think about those things. >> a magical story in the market that you will have this extension of opec cuts, and we will seat 92 100% of compliance and we will see oil back. is that true? >> even if you get the cuts, no. the inventories level is so high, producers really have to cut stocks by over one billion barrels in the next nine months. note thist out a morning that looks at the supply of stories based on new data in the supply of stories is an old concept that goes back to that shows inventories. you need to get global by one billion,

three hundred million. opec would have to its cut in production by 2 million barrels per day or more. if you look at share prices, and i know you have this queued up, the market just understands this. see prices essentially staying where they are, going up for the next three or four years. >> let's bring up the chart. you mentioned this to me a week ago and i was like, what are you talking about? gets the first 90 million barrels per day from the alaska region. is a plan in oil and the fact that it has not moved signals the fundamental market. >> yes. i have been following it since 1989. geely thing it holds is a call on production and you are buying a strip of oil production.

and investors actually believe something will work and if you look at the chart, it chumps briefly and then came back down. it is staying around $20 per share. a littlell go creep up and maybe they get to $55 per barrel some time at the end of this year or maybe next year. there is no expectation this will do much to prices. the reason is the global inventories are just too high. has done the hard work of looking at the relationship between inventories and the price curve. a good note on monday but they did not get it into the data. you start taking it to the data, you say the stocks are so high, that as i said, the cut would have to be double or more

for a year to get markets -- alix: what do you think about that? >> i do not know anything about royalty trust but i agree it would be highly beneficial if they would cut little more than they have. be onet know if it would or 2 million barrels per day. even the signaling they are if weg to take the step are not going to work through and of the year, it would be highly beneficial. i agree the need to take some extra action to put a -- amental >> like the ecb and the fed, this is opec. they changed the game. extendinghave to keep stability in the higher oil price for market share? >> i don't think so.

we got three or 4 million barrels of supply off the market . u.s. shale is the supplier and the question is can u.s. shale match demand every single year? it is questionable. on the high-end, it is very questionable and somewhat questionable on the low end. upre are no longer giving market share and you can get some balance. >> will a strong picture support ?hat how does opec not engage in the share war? >> opec has a choice. does not hold up, and i don't think it is given the efforts on hispanics, then opec

either lets the price go down or cuts more. the saudis wanting to prioritize, will cut additionally to try and keep the the ipo go. make but demand is not holding up. gasoline demand will hold up this year and they have another problem they will have to deal with in november. greatest u.s.e this city in demand? what are we looking at? >> it is ironically over the western hemisphere in the united states. and venezuela. everyone talks about the collapse in venezuela. it was consuming 700 barrels per day. 200 barrelsng to per day and the demand is

dropping off. up becausebly going they are trying to short-circuit oil. china is pushing hard and that is something we will see on 2020. much.thank you so i will be live out in houston tomorrow. don't miss it. her fingers aren't as free aspect. money to workuts billions to work. where is he doing it? check out tv . you can watch us online. interact with us directly. go to tv on the terminal. this is bloomberg. ♪

jonathan: some of the headlines coming out are quite interesting. on ecb remains vigilant financial stability, he says the qe may have more side effects than negative rates and that plays into the whole sequencing story, the idea that you wind down qe before you wind up in just rates. his view on what has the most side effects lays into a bias of how to sequence the movable -- removal of commendation. on the underlying inflation pressures, they remained subdued. it seems the same story going into june. you talk up growth and you talked on inflation here you leave things as they are. -- heis like he does not really manages -- manages it. euro is often the little bit on that but not a bonds. -- not a bunch. jonathan: the language around

the economy, we inched toward the end of the year and we promise the qe will go through the current rate at the end of 2017. year,e point later this they have got to talk about what happens next. what do you do with it and for how long? , this what is the point is what we will do after december and this is where we are going. jonathan: 2:00 p.m. eastern time. joining us now is the chief u.s. economist for bloomberg intelligence. back to the fed statement for the last meeting. solid.ed growth remains a huge consensus? there will be some people saying no, i don't think so. >> there could be a few in the periphery. it was the time to signal that the wobbling growth was just a transitory development that no

one is really buying into the effect that the economy is buying over. we have seen this story many times before in eight of the last of 11 years, q1 has underperformed the trailing average. not ak the meeting was particularly controversial meeting. raise rates, and the economic assessment was fairly straightforward, to maintain confidence in the outlook. they had a lot more time to discuss that and that will be the key in the minutes today. it is not so much grasping economic assessment. it looks like the june rate hike at this point, but instead, look the timingtails of and also the mechanism of the balance sheet. jonathan: we have already got a decent guide. are we anywhere close to

understanding how we want to do this? >> we talked about this being gradual and operating in the background. -- it seems like if they just pull out the plugs and they do not reinvest, that will lead to a lumpy profile for the balance sheet and they do not want to indicate that volatility in the marketplace. watching paint dry is a great way to put it and that is the challenge, how to orchestrate that. jonathan: thank you. we are counting it down and you are watching bloomberg tv. ♪

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jonathan: i downgrade since 1989. it is keep calm and carry on as futures take higher ahead of the open. .kepticism on wall street the path to a balanced budget is paid with accounting gimmicks. a look at when and how officials plan to unwind their monster balance sheet. good morning from new york city. i am jonathan ferro, alongside david westin and alix steel. treasuries are going nowhere. everything seems to be going nowhere. let's get you some movers and price action. here is alix steel. alix: we do have some individual movers to point to. intuit is one of them. they are a tax software company who got a big boost from taxes in. the third quarter is really a

key. for them -- a key period for them. updatednment store has their outlook after their first recording -- fourth quarter earnings. will be reorganizing subsidies, but the market is taking that as a positive this morning. this was a story yesterday that has trailed onto today. -- thed approach the act agricultural trader that could create one of the largest agricultural creators -- companies. a year ago, we were talking to your go if glencore was even talking make it -- years ago if glencore was even going to make it, as the market had seen to stop play along. if you had bought in at

the low that did, you have made a lot of money. jonathan: china a big story for glencore and the whole commodities market. there is concern from moody's about the continual buildup of debt. this what they had to say about the decision. looking at policies that the government is implement them. authorities have recognized the risk that comes with high leverage, and they have a very broad agenda of structural reform. we take that into account, and we think that leverage will increase or slowly. -- more slowly. we do not think this will help to decrease the leverage. joined by twore -- thishis market

morning. john, i want to start with you. on the symbolism of this. is moody's just confirming what a lot of us already kind of kn ow? >> that is right. i do not think we learned much from moody's today. it is well-known that china has a slowing growth trajectory and high debt levels. all of that has been discussed. that is in the market, and movies did not really at a lot into that. add ady's did not really lot to that. china has seen some surprising growth recently. a surprise in the last quarter was the growth of china gdp which has driven commodities at the end of the fourth quarter. against the long-term trajectory which is concerning, there has been a positive growth impulse recently. when you are approaching china, how those dynamics play all of each other will be the important question. i do not think moody's added

much today, and so those questions remain. jonathan: the story that is painted is one that many have painted. 2017 was looking good for the inflation trade. the epicenter of that was a recovering china until recently. until recently, a lot of people have become less constructive on china and the prospects of growth over the year. the chinese have provided push back in their statement from the finance ministry to moody's. they say that the rating company underestimates our ability to deepen reform and booster -- bolster demand. they say the markets also underestimate china's ability to deepen reform and bolster demand. that's the one problem we have is -- >> the one problem we have is that when sewing tries to do situation when leverage gets to hide which is what china is trying to do, trying to take a little leverage

out of the system, it is very hard to control that. it trust us we can do defense does not always work well. i do not want to draw comparisons to closely, but we so what happened in 1989 when japan saw things were getting way too overleveraged in their economy, and they tried to pull the plug. everything kind of fell apart. i do not want to draw the same comparison, as there are a lot of differences. however, when you try to slow down the buildup of leverage, it has ended badly in the past. i agree this is a big deal, but it is nothing really new. i still do not want to poo poo it, and say it is not a story we do not have to worry about either. jonathan: the story in europe this morning was the european central bank's financial stability with you. they had caution for market participants about that, the prospect of yield picking up and what that could mean for the general economy. we heard from the ecb vice

president. here's what he had to say. >> we are committed to a certain policy stance until the end of this year which by definition means that we have to communicate something to the markets before the end of the year. the markets understand that very well. fear any problems from ourence resulting monetary policy decisions going forward. jonathan: at the moment, we have the federal reserve timing. ecb is indicating a go slower process for accommodation, but they are removing accommodation at some point this year most people assume. china is on the fringes of slowing down. how can you be bullish on the reflation trade with those three things happening in the background? >> just a general -- general point on the leveraging, as you are trying to do leverage -- to

deleverage an economy like they are trying to do in china, you have to keep growth important. it can end up being very counterproductive. i think the emphasis you see on growth in china and the ecb -- china remains accommodative. also in the united states, where the fed has been very supportive of this recovery. they do not want to do anything to slow this down. that is the high approach as you deal with high debt levels around the world. keep growth levels supported. that is the most important thing. that will support the deleveraging overtime. alix: the goldilocks scenario fort central banks. both of you will be sticking with us. another big central bank story this week has to do with oil as leaders are gathering in vienna ahead of opec's meeting tomorrow. oil prices at about a month -- a one-month high. we have a special guest with us. >> good morning.

we are joined now by a special guest from the united arab emirates, the energy minister. welcome to bloomberg. >> thank you. >> a lot of people have come and spoken to me. however, you are the minister and a man in the know. you think we will get at the end of these discussions? is there a coalescing around nine months? >> first of all, today is a very important meeting of the committee. today, we will discuss all of the options. mentioned options you are going to be discussed. but why six months, nine months, or more? mentionedthe idea is for them p with a single recommendation or to prioritize those options. then, the ministers will meet tomorrow for a discussion. i think the recommendation of

the committee has always been supporting the organization, and i am sure we will not find it difficult to a line around the recommendation. >> do think there is a majority focused on nine months? is there a majority of support for a nine-month extension? >> i think it depends on the analysis of each individual country and that option. on that option. if you bring all the countries together and look at the factors in the market, nine months or more will come with justification. i think we need at least six for this deal to happen. significant inventories that we need to create a demand for differential between supply

and demand -- a demand for differential between -- a demand differential between supply and demand. >> what he prepared to do over the next couple of days to get an agreement? >> i think we need to talk about the organization. it is not about individual countries. whatever the organization is seeing that is the best for the us all, you will find supporting that decision. supportingn there the market stabilization from the beginning. so, i do not see it as a problem to do what it takes to create market stability. >> i want to take you forward. let's say we get an agreement, and we go forward to march of next year, 2018, the federal

reserve has to give an exit strategy. the markets are demanding the ecb give an exit strategy. for opec, in march of next year, what happens then? does it opened the gates? open the gates? what is the exit strategy in march of next year? >> first of all, are we going to discuss an exit strategy in this meeting? i doubt it. i think it is a little immature. we need to give markets or time. second, there are fundamentals in the market. if you do not spend more on investments, you will not be able to sustain your production, so naturally production will decline. only a few countries that i can capability of injecting more capital investment to increase their production to be ready in a year

, or six month, or nine-months time. who can say that they can increase the production to that october 2018. we are increasing our output $3.5 million to allow us to intervene we needed to create market stability. i think that question can be deferred to the next meeting. >> can i ask you then, in terms of production in a five-year -- production and a five-year average, will we hit the five-year average by the end of this year? >> i think it is difficult to because there are

different fundamentals in the market that we need to look at to answer that question. the shale oil response, the level of inventories -- whether --ands products or crude the geopolitical situation in the middle east that we need to look at. it is difficult to say, but i can tell you that the market recovery is going to be significantly much improved and itis today -- improved than is today at the end of the year. that we willu contribute more to the differential between supply and demand. >> so the uae will cut more?

sorry, the opec overall consensus is to move forward with cuts? >> the consensus is to wait until tomorrow to see the consensus. is thatthe logic today the majority are talking about supporting -- i have not seen a single country not supporting the extension. whether that is six months or nine months, we will hear that tomorrow. >> i'm going to ask you. if we get an agreement tomorrow, what does that do for the price of oil for you as the oil minister? do we put a floor in at $50 if there is a nine-month extension? where could an extension take the market to? >> i do not think the intention is to drive prices up. the intention from the beginning is to bring investments to the markets. the intention is to create jobs. the intention is to help the

international economy see a reliable and predictable price that is fair to the producers and investors. today, it is not fair to the investors. the reason we do not see investment companies -- we need to see them doing that. once they do that, whatever the price is and they are happy with it, then that is the price we will target. >> final question. it never ceases to amaze what the united states can do. i caught up with the bp president who said that the shale producers are just getting started in terms of the efficiencies they can deliver. does that concern you in the uae? are you surprised by how aggressive shale in the united states is?

>> no, i am not surprised. we all know that shale production is because of their infrastructure and the nature of that play. we all know the concentration in drilling of shale oil has been in the sweet spot for the past two years. there is a limit to how much of a sweet spot we will have. growth isale oil needed. we are not against shale oil. oil, wes not for shale would have bigger problems today. we would consider it conventional. balancewe need to see a on how much supply we get to balance the demand of the world. i think we will see some , ultimately, from the shale oil production. >> we wish you well, and we hope

you have a great meeting between yourselves and the non-opec members. the united emirates energy minister here with us. it continued hunt for the consensus. alix: i'm so jealous. what i would give to be in vienna right now. that is interesting that they do not have an exit strategy yet. number two, he wants stability in price. they do not want a price spike higher. three, i call bs that they were not surprised by shale. everyone was surprised by shale. they need shale to have a cut, a cap to be ok. david: he did say they are on the sweet spot right now. maybe they are thinking we will get beyond this week spot -- the sweet spot. jonathan: the was kind of a laugh when he said it was not about getting the price higher. next, a look at how and

when janet yellen plans to unwind the balance sheet. also, could small caps be pointing to big concerns right now. the pullback in the russell has some prepping for a selloff. this is bloomberg. ♪

♪ david: this is bloomberg. i am david westin. today, we will get the minutes from the most recent reserve meeting. there is no expectation not to expect the june rate hike increase. mr.ier, we heard from harper about how many rate hikes he expects for june. -- 42017.

for expect three rate hikes 2017. i see two more over the course of this year. david: still with us is matt miller. has the fed with themselves on some railroad tracks they are going down here. it was seems it will take an awful lot to get them off. >> i think it is pretty much established they are going to raise rates in a couple of weeks at their next meeting. the question is will they do it again and shrink some of their balance sheet? to a certain degree, they are data dependent. they are also very market dependent. we saw that the beginning of 2016 when they said they were going to raise rates that year. the market saw a steep decline, and all bets were on. the reason i like this is we

have had a nice rally this year. we have had a 7% to 10% correction every single year in the stock market since 1995. if we get another one of those, you could see the fed change their tune a little bit especially with all the stuff going on in washington that could change out some of these gop programs down the line. one if beingget the most important word. -- would will not make you be surprised if you do not read something in these minutes about what they are going to do about the balance sheet? >> definitely. first of all, they built up the expectations for that. they have been good about holding up on their expectations. the thing is, we need this balance sheet to shrink a little bit. the need to do it gradually, because people often say to just let it roll off. that creates less liquidity in the system. every time -- every time their

holdings mature, they buy more securities with it which as liquidity to the system. if they step away from that in a meaningful way and quickly, that will mean it will hurt the supply and demand situation quite a bit. that will be a problem. gradually,they do it it will not have as much of an impact, and that is going to be important. we need to see them going in that kind of a direction come up because we cannot rely on this monetary policy to the degree that we have had to in the recent years. we would be more from washington dc in terms of a fiscal policy. until the fed starts pushing and telling washington they are not going to get what they want to get, they are not going to stop. this is important. jonathan: everyone was freaking out about the end of the trump trade. i want to go back to david's point. the duration and magnitude of corrections are shorter,

smaller. you go back to the mid 90's and the size of these corrections, something has changed. talk to me about market structure and what is underlying story thatless dip has only increased in magnitude over the past couple of years and has not diminished. >> they have a couple of things going on. first of all, central bank it really has been a central bank put. the program in the u.s. has tapered off and ended, but it was uniquely picked up by the ecb and boj. now, we have this high-frequency trading who rely -- who react immediately to any kind of movement in the marketplace. has pickedken up, -- up, but i think that gave us

some complicity. with some of these technology companies, the way they made money is because they were selling puts. they said the stoxx would never go down -- the stocks would never go down, and they were seeing reviews off of that. i guess my point is that these high frequency traders have been buying everything. at some point, they are going to sell. when that happens, it is going to create a bigger problem. we cannot get too complacent here. jonathan: going back to this calmlast week, we had the break on wall street. the narrative changed aggressively with the price action. last week is now pretty much forgotten by a lot of people. can you explain this relentless bid from your standpoint as well? >> there has been a lot of volatility on the political front. at the beginning of the trump

trade, there was a lot of enthusiasm. last week, you saw expectations correct, and now nobody is expecting fiscal policy at all. that might be a little over pessimistic, too. clearly, there is a lot of clinical volatility. political -- lot of volatility. i think you see earnings in risky assets being supported. growth has been better, but reflation has also been a little bit weaker. the combination means the fed is not going to do very much this year. they are going to do as affected which is overall positive. jonathan: john and matt will be sticking with us. up next is the market open. this is bloomberg. ♪

♪ jonathan: from new york city, you are watching "bloomberg daybreak." a four-day winning streak for the s&p 500. seven points shy of an all-time

high after yesterday's close. upures big on the market 0.1%.-- up treasuries unchanged. 10-year gilts unchanged. s unchanged. the dollar is slightly positive. let's get the market open and get over to alix steel. alix: the s&p 500 sitting around a record, not even a point away from a record, closing high. it is up about three points. the dow up 11 points. this is the longest streak since february. we are seeing a record closing high for the nasdaq as well. china'sdowngrading

sovereign credit rating. you did not see that kind of liberation in european equities -- kind of reverberation in equities -- european equities trading. on the downside, retailers are getting killed today. tiffany's up by about 9%. sales missed estimates in about every single region. japan was the worst off. lows down by about 3%. -- lowe's down by about 3%. withdepot did a lot better a lot of contractor business. advanced auto parts down 5% yesterday because it's colleague autozone and a missing estimates. -- ended up missing estimates. chico's down about 20%. that is rough. comm sales down and has lowered expectations. seen laying out

right now in the market. are we seeing cracks below the surface in any assets? small caps might tell us yes. of $3.5 record here billion pulled from the etf. that is the biggest outflow we have seen in about 10 years. right after, we had just seen record inflows about a few weeks ago. favorestion is does that a market turn or is it investor specific? will we see more meaningful decline in the s&p? jonathan: that is one of many times alix has mentioned a

drill. we're going to have to buy her a drill. to reflect on the charts, small cap on the u.s. economy, it was a. play on the administration -- was a pure play on the administration's agenda. is this a small cap equity --ket throwing it in throwing in the towel on the d.c. equity agenda? >> at the gift a look at value. we are value managers. we look for places where we see confidence, and we look for places where the markets are not showing confidence. i think that is tough to say right now in the u.s. equities market. i think the prices are maybe not quite as attractive. one place where we do see value is in european banks. the fundamentals there have gotten better. they had raised capital.

their capital record -- ratios are looking pretty good right now. their earnings are positive. unlike the united states, they're pricing is fairly attractive. on u.s. cheap comparables and on an outright basis. i think the story in the u.s. is good, but prices are high in the u.s. equities market. looking around the world, if you look at european banks with the fundamentals are positive in the pricing is favorable, we find that a more attractive opportunity right now. jonathan: how many guests come onto the program and ring up europe by themselves -- bring up europe by themselves? matt, the story is good. let's talk about the price of the story. is it still good for small caps? is the story a little bit better given the price we have seen?

>> you always worry when the small-caps underperform which the market has been doing for a while. the outflows could turn on a dime and turn right back up. they turned it recently, but they could go back up. one thing i think people need to focus on is what is going on in the marketplace overall. we see this kind of barbell strategy that is usually associated with the fixed income market. people are using a barbell strategy with the risk. you see what is happening with the text group which had a great run. we have also seen in a performance in some of the defense groups. utilities, consumer health care, they have outperformed the s&p this year which usually do not see with tech stocks leading the way higher. i think that is a good strategy, and with prices elevated, it is a good one to use. you do not lose anything on the performance side by using that barbell, but you also get a

little bit of protection if the stock market rolls over. john says to forget it and just by european equities. can you wait in? in?eigh >> that is one of the things why i think it is important to look at the sector, because the react more -- they react more than large caps. it might be more sensitive to investor sentiment. if we have a day where $3.5 billion a week is pulled out of the etf, i think this might be an indication of a bigger story of nerves. if you look at the s&p 500, it has google and amazon leading nearly a quarter of the game. if you look at the small cap companies and they do not have those big stocks to carry it through, you can see why investors get nervous and go through -- go to this area. you have done some work

looking at the markets with a vix is showing some struggles. can you tell us where they are? next there are a couple of different things. one thing with the vix is how low volatility is at the moment. we have heard how concerned people are with how low volatility is. concern that there is not enough concern. one interesting thing that is missed in the picture we talk about how low volatility is is how hard it is to get returns when stocks are not moving around a lot. whenbuild strategies things are not moving around. returns,to get those you will have to find some sort of exotic, weird thing that will give you those returns or just really stack up that leverage. right now, managers are building that leverage. by some accounts, leverage in the quantitative equity space is near a multi-year high by some of these indicators as far back as 2012 or 2007. it does seem like they are

stretched, so what does it mean when the get risk that into the market? we could enter a very frightening scenario where people have to you leverage -- leverage, sell, and potentially hurt the market here. >> i think when volatility is low, that is a great point for value managers to identify places where prices are below their fair value. i mentioned european banks earlier. emerging markets might be another place where yields are still quite high and price is low. yet, the fundamentals are a story that can have some conviction in. they haven't stabilized there and currency -- there currency theiry have stabilized currency. i think we would say that when volatility is low, that is a great opportunity for value wherers to find places

the story has some conviction but the prices are low. again, european banks and emerging markets would be two of our favorites right now. david: one definition of value investor is sort of the warren buffett idea. you pick a company or stock you really like and invest in the long-term as it grows. , it is cheap or expensive, and that me sure -- let me make sure i'm getting the cheap one and not the expensive one. isn't it possible that if you think small-caps are just fine, but they are relatively expensive -- i would rather invest in where i can get a better deal, it does not say much about the long-term strength of the business. >> yes, i think that is right. i think cash flows are very important. as a fixed income manager, we think a lot about cash flows. when i was talking about emerging markets, i was talking about yields. when i talked about european

banks, the yield and the cash flow there is very important. one thing we do as fixed income management is focused on those cash flows which is keeping with those warren buffett insights. that cash flows are going to matter. you translate that into the u.s. stock market, places where you do get that income. we think that is better in fixed income, obviously. we think that is an important part the consideration, as well. alix: matt, you have plug-in that value trade. what is your favorite conviction right now give us your top two? >> going back to that defensive play, i think that has to be an important part of your investment mix. i agree with dani. as john said, it is great for value managers to have a little bit of next, but they're -- bit of vix, but there is a certain amount of risk there. the other thing we have to worry about is the emerging markets. at the beginning of the year, everyone was bearish on the euro

and bullish on the dollar. i was pounding the table and saying that the dollar would go down in the euro would go up. now, we have an opposite situation. the euro is getting back to levels that are usually marked as highs, and we are seeing bullishness on the dollar. it was at 97 percent at the beginning of the year, and it is now down to 5%. if you see a reversal in these currency marks which no one is looking for, that is going to be a problem for emerging markets at the end of the quarter. it is something we need to keep a close eye on. jonathan: to wrap up quickly, muted rice action across asset classes this morning. we expect in opec decision. if you were to get one of them now, which one would it be? matt? >> i'm not sure what the question is. jonathan: opec meeting outcome

or fed minutes, which one do you want? >> opec meeting outcome. >> i think that is right. i do not think the fed has any reason to change market expectations. the fed does not need to change policy to deliver as expected. think much new is going to come out of the fed today. >> can i say the fed just to be contrarian? jonathan: of course. n bellows, andh dani burger, thank you for joining us. futures were pre-much unchanged. 12 minutes into the cash open, we are up five points on the dow. you are watching bloomberg tv. ♪

♪ emma: this is "bloomberg daybreak." coming up on "bloomberg markets," we will have the founder of muddy waters research. not your bloomberg business flash. once again, if you chrysler has run into trouble with the u.s. government. the justice department is suing the automaker. fiathrysler says it in -- chrysler says it plans to defend itself vigorously. trainer -- grain trader says it has not engaged in merger talks with glencore. there is no certainty that the

deal will happen. ndy had soared lately, but has since fallen. close toits allies are extending its oil production outlook for another nine months. energy ministers are gathering in vienna to discuss ways to prop up prices. the most influential participants are russia, saudi arabia, and i rock, and they are q, and they are all backing the idea of standing -- of extending into next year. david: we expect the fed release the minutes of their upcoming meeting. isning us to talk about that our guest. jonathan said it earlier, but it seems like they want to be boring? are pulling the plug on 84 $.5 billion balance sheet,

it can get very exciting. a $4.5 billion lance she, it can get very exciting. i think the interesting detail is that despite a boring fed meeting, there could be some interesting minutes as this balance sheet unwinds. early on in the minutes, it will probably highlight that there is a staff meeting of different qe unwind policies and whatnot. that will give you some clues. at the back of the minutes, you will see how the meeting participants comment on different strategies. david: how much have they already telegraph, because we have heard from the new york fed president already that it would be by the end of the year? he also said we were going to do with forms of securities at the same time. how much has already been told to us? >> they have given us broad

parameters. we want to now see the next and bolts of what it is going to look like. how much her month, or how much are they going to control this fire hose affect? -- effect? they have not been clear how they are going to do that, but they have been more clear on how they will control that. what would be the amount per month? will they allow it to fluctuate, or will it be so small they are just reinvesting everything else running off the balance sheet? there is still some uncertainty if it will be at the end of this year or the start of next year. david: financial conditions have not yet tightened. does that give the fed any encouragement with respect to the balance sheet? maybe the economy can sustain this, and we will not have a panic? >> i think it absolutely gives them some confidence if they do

this in a smart, welcome indicated way. they want to rein in financial conditions to some degree. they are trying to remove policy accommodation, but i also think financial conditions are one of the motivating factors. you can see the stock market getting new high afternoon high, and they see lofty valuations in the real estate market whether it is residential or commercial real estate. amongcreate some concerns policymakers that they could be inflating the next bubble. so, they want to at least be moving gradually terrain that in. -- to reign that in. david: assume you are in the fed, what are you going to be looking at by 3:00 this afternoon? watching the treasury yields will be a good way to gauge the assessment. in terms of direct interest rate policy, it is priced in at near 100% certainty that they will

raise rates at the june meeting. the shorter end of the yield curve, i do not think will get a big impact from the release of the minutes. if they give substantive details about what the balance sheet on white is going to look like, and you look at the treasury yields further out on the curve. david: so the fed is going to look at staying boring? >> they will not mind if there is a moderate back up in yields, they do not want to see that carry on. to the other extent, they are keeping inflation pressures under control, and then the backup should be very content. david: thank you very much, carl. --x: not really shedding setting us up for a good 2:00 p.m. show. we still have to have somebody be excited about it. you can watch us online. you can also check out our charts and indirect with us directly -- and interact with us

directly. this is bloomberg. ♪

♪ alix: in independent power player built up from the ashes of one of the largest leveraged buyout in u.s. history. it was recently launched as a standalone company. it services customers in texas. the problem is that unregulated utility and power prices are low. he saw that dynamic play out whereday at the market prices fell to a four-year low. joining us now is curtis morgan, president and ceo, a big player in the international power industry. what is your take after the auction yesterday? >> i think there were some surprises. clearedne, the rto zone significantly below where the experts thought it would. clearedall eastern mac

at a higher level. there was a mixed bag of results. overall, i think it is probably in line with estimates. it is going to impact different companies differently. the idea is that at some point prices will get so low it will shake out the losers in the environment, and those that are there can build up better pricing. wind you see that happening with texas versus pgm? atin texas right now, we are the lows we have seen historically. we are beginning to see some bankruptcies. there are discussions of people and companies retiring -- people retiring and companies retiring plants. what has happened with pgm is historic in that you have the ng of gas andselli new plants being built the has offset the retirement of coal pl

ants, which has kept market prices down. i do not see that changing until you see that gap finding its way out in creating an equilibrium stage. alix: what winds up happening there is the company's get really hammered. you can see the all-time low three weeks ago. call thatt it up in a you have to see a discount for the levels that they might have. do we see that kind of discount because we had that bad option? >> well, we do. that is just one part of it. also, our sector just has a history of carrying way too much debt. when the low cycle hits, it creates too much distress in stocks. it puts a squeeze on them, and companies have to do unnatural things like selling off their best assets. are is why i think we

different, because we have extremely low leverage. i think we are trying to offer a very different model than what has been offered in the past. $11 millionuld pay ,r 12 many dollars for dynegy and you would be fine. how much leverage would you need before making a big acquisition? >> first of all, we do not comment on market rumors. if we found a very compelling opportunity, we might go little bit over four times, that we would always within a year want to come back to the three times or 3.5 times. we would want to stay there on a reasonable basis. the way you make money in the sector is you have to be able to buy assets and grow your company at the low times of the cycle. so, you always have to have dry powder to allow you to do that when the time is right. alix: are you looking at assets or an entire company?

>> we are focused right now on our taxes business which is a more asset oriented play. we might look at some retail energy companies in texas which would be more company related, but it is not the right time to buy retail right now. we are mainly focused on asset right now. alix: in the market, this debt is known as being a low leverage player. people point out that you are not very diversified. you are just in texas. what is your stomach for expanding outside of texas? >> first of all, i have been with companies that have been diversified. just a long generator, then i would say we need to diversify or market region -- reasons, but we are in the best date in the country from a regulatory standpoint. we also have the retail business that does well when commodity prices are low, so we do not feel compelled to go outside of texas.

if we did, it would have to be a very compelling value proposition to us. we are not favorable around some of the other markets, and so we are focused on our texas business. we still have a lot of would chop there. chop there.o alix: did you just take out the merger rumor right there? >> know, we do not comment on any rumors. i'm just telling you that we are focused on building our texas builders -- business. is at a think tjm point where you are going to acquire at the very lows of the market. i do not think we have seen that yet. in the last auction, you still had new assets coming in. that is a market that has not come to grips with the reality. alix: curtis, great to get your perspective on an interesting sector right now.

curtis morgan, this energy president and ceo. i think he just killed that dynegy rumor build. reallyn: they never actually tell you what they are going to do. alix: you just hurt my soul. jonathan: we will be covering the opec meeting tomorrow. that wraps up "bloomberg daybreak." making the fed boring again. we will see the minutes come out in a short time. " bloomberg markets" is coming up. ♪ vonnie: 10:00 a.m. in new york, 3:00 p.m. in hong kong. i'm vonnie quinn. mark: live from london, i mark barton. welcome to "bloomberg markets."

♪ vonnie: plenty to cover over the next hour, including an interview with carson block of muddy waters. let's get to julie hyman. existing home sales falling 2.3% went over month but still coming ahead of estimates. ,.5 -- a little below estimates excuse me. the annual case for the existing home sales, the largest part of the housing market. a little bit choppy or data as of late when it comes to the housing market. that number a little bit weaker than estimated. already we are not seeing much change in stocks. five straight sessions of games for the major averages here. not