francine: easy does it. draghi defends the ecb's lose policy stance. will there be any talk during his keynote speech? we will bring it to you live.

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are preparing to ditch the u.k. at least the republican senator say they will vote to block the current version of their party's health care bill. what does this mean for tax reform? this is "bloomberg surveillance ." mario draghi will speak shortly. we also have all your currency checks. ecks. first things first, let's check quickly on your stock market. global stocks, mixed. investors believing an appearance by janet yellen. she speaks in london later today. they are looking to her for a close on the outlook for ++ president trump says the supreme court's partial revival of the travel ban is a clear victory. people from six majority muslim countries will now be barred, unless they show a genuine relationship with a personal entity in the u.s. the court will consider in october whether the executive order is constitutional. republican senators will look to block the latest version of the party's health care bill. a new estimate from the congressional budget office found the bill would leave an

additional 22 million people without health insurance in a decade. republican leaders still hope to hold a final vote this week. brazil's president michel temer has been charged with corruption by the country's top prosecutor. the highly anticipated movies to be approved by 2/3 of the chamber of deputies to proceed. if found guilty, the president would be stripped of office and would be jailed. temer has repeatedly denied wrongdoing. the european union demanded britain go further to guarantee the rights of eu citizens after brexit. the comments deal a blow to the prime minister's hopes for a swiss deal. nhe artist antitrust fine i europe's history later. the announcement from competition is due at 10:45

u.k. time. global news 24 hours a day, powered by 2700 journalists and analysts in more than 120 countries around the world. i'm sebastian salek. this is bloomberg. hereine: simon derrick is and ed shing is also here. toare expecting mario draghi make his defense for the stimulus measures. eh's giving that -- he's giving the keynote speech in portugal. what will you be looking out for? clues about why he is not ready to start tapering? > we have very strong signals that the pace of tightening will be picked up. we have consistently strong numbers. it will be how he pushes back against that pressure from northern europe. know a lot of the

political concerns within europe are abating. there are concerns about greece, and the possible default that could have been in july is now gone, thanks to that deal. the short-term issues for the ecb, many of them have disappeared. francine: two you agree with -- do you agree with that, a robust defense? he also needs to explain why inflation is so low. >> that will be a tough one. he does what he can to get inflation up, but he is fighting a losing battle because we have a lot of global disinflationary influences, but he is doing what he can. he is continuing with qe. despite the fact that there is a wide gap in unemployment, he will run out of german bonds to buy. they will lead to be some sort of tapering, and how does he

communicate that message? he is doing everything he can, but at the same time, there are limits to what can be done with qe pragmatically. francine: at the same time, we understand that the president mario draghi will start speaking shortly. there is an introduction by his right hand woman, on the screen. he keeps exploding the inflation has to do with the labor market, but what if it were something deeper? >> you would have to look at oil prices, for example. i think we have another issue. we have been applying the singer monetary policy across the eurozone for 18 years. at no point, has it been ideally suited for all. we have such massive divergence of needs between what northern europe and southern europe requires. to get to these points, we have

to have some type of fiscal policy shift to help them process. francine: to hear from the president himself, mario draghi. you can also follow this on tliv . >> now, the global processes reaffirming. we need to make sure this massive growth is sustainable investment that drives stronger productivity growth is crucial for that. and the return for the eventual normalization of monetary policy. investment in productivity growth together can unleash a vi rtuous circle, so that strong growth becomes durable and self-sustaining and ultimately, is no longer dependent on a sizable monetary policy

stimulus. the discussions we will have over the next two days, in particular understanding the puzzles of low productivity growth and persistently low investment, are therefore, highly relevant for the past of the economy and our monetary policy. yet, as we anticipate, the problems of tomorrow, we must also work on the issues of today. for central banks, this means, an unusual situation. we see growth above trend and well distributed across the euro area, but inflation dynamics remain more muted than one would expect on the basis of output gap estimates and historical patterns. an accurate diagnosis of this apparent contradiction is crucial to the appropriate policy response. and the diagnosis by a large is

this. monetary policy is working to build up reflationary pressures, but this process has been slowed by a combination of price shocks, more slack in the labor market, and a change in the relationship between slack and inflation. low inflation is also perpetuating these dynamics. these effects however, are temporary and should not cause inflation to deviate from its trend over the medium term, so long as monetary policy continues to maintain the solid anchoring of inflation expectations. hence, we can be confident that our policy is working and its full effects on inflation will gradually materialize. but for that, our policy needs to be persistent and we need to be prudent in how we adjust its parameters to improve economic

conditions. understanding inflation dynamics requires us to divide up the inflation process into two legs , the effect of monetary policy on aggregate demand and the effect of aggregate demand on inflation. all the evidence suggests the first leg is working well. though the euro area recovery started later than those in other advanced economies, we have now enjoyed 16 straight quarters of growth with the dispersion of gdp and employment growth rates among countries falling record low levels. if one looks at the percentage areal sectors in all euro countries that currently have positive growth, the figure is the first4% in

quarter of 2017, well above the average. above 6.4 million jobs have been created in the euro area since the recovery began. the role of monetary policy in this will story is clear. 2014, our monetary policy stance has been determined by low policy rates, asset purchases in financial markets and retargeted operations for banks, reinforced by guidance on both. this has created strong downward pressure on financing costs with rates falling steeply across asset classes, maturities, and countries, as well as across different categories. converging financial conditions have in turn, fed into rising domestic demand. according to our bank lending

survey, our latest easing phase has coincided with a strong rebound in demand for consumer credit to purchase durable goods. the demand for loans for fixed investments has gradually firmed. at the same time, following reducedg costs have interest payments and whichtated deleveraging, is one reason why for the first time since 1999, spending has indebtednesswhile has been falling. this is a sign the recovery might be becoming more sustainable. to put our measures into context, since january of 2015, following the announcement of the expanded asset purchase 6%inram, gdp has grown by 3. the euro area, a higher growth

rate than in the same period following qe 1 and qe2 in the u.s., and the percentage point lower than that period following qe3. unemployment has also risen by more than 4 million since we announced the expanded asset purchase program, comparable with both qe-2 and qe-3 in the u.s., and considerably higher than qe-1. for the monetary transmission process to work however, stronger growth and employment should translate into higher capacity, scarcity and production factors, and in time, upward pressure on wages and prices. this is what we see. the unemployment gap, the difference between actual unemployment and the known acceleration rate of unemployment, is narrowing and forecast by the commission to close within the next two years.

surveys of business capacity utilization are now above their long-term average levels. and inflation is recovering. 2019, we016 and estimate that our monetary policy will have lifted inflation by 1.7 percentage points cumulatively. yet, the second leg of the inflation process, the transmission from rising demand to rising inflation has been more subdued than in the past. how can this be explained? the link between output and inflation is determined by three main factors. prices, thecks to size of the outfit gap, and the impact on inflation, and the extent to which current inflation feeds into prices and wages. in different ways, each of these relevant forbeen

the delayed reaction of inflation to the recovery. starting with external factors, one explanation for this low improvement in inflation dynamics is we are still suffering the after effects of price shocks in global energy and commodity markets, which have led inflation to move in different directions. inflation, has indeed, and subject to such shocks over recent years, most notably within the oil and commodity price collapse in 2014 and 2015. this is only depressed the cost of deported energy, but lowered global producer prices more generally. analysis suggests the global compartment was considerable. 2/3 of and 2016 around the deviation of the euro area headline inflation from a model based mean can be accounted for

by global shocks linked to oil prices. even though the downward pressure on inflation from past oil price falls is waning, oil and commodity prices are still having a drag in effect, if only because they continue to lack a clear upward trend. in fact, lower oil and food prices than those assumed in the march 2017 projections are an important factor behind the downward revision of our inflation forecasts. effects is the main driver of the considerable volatility in headline inflation that we have seen and will be seeing in the euro area. expandingices are the subdued prices of core inflation, too. this is because imported

consumer products account for 15% of industrial goods in the euro area. changes in commodity prices be through service items and into industrial goods produced with high energy intensity. as a result, in the first quarter of 2017, oil sensitive items were still holding back core inflation. illustrates that core inflation does not always give us a clear reading of underlying inflation dynamics. global factors therefore, do appear to be weighing on the path of inflation today. suggests thesis drivers of lower oil prices are mainly supply factors, which a central bank can typically look through. and even if supply factors

affect the path of inflation for some time, with inflation expectations secure, they should not ultimately affect the inflation trend. a second inflation for the discrepancy between real developments and inflation is uncertainty surrounding the size of the output gap, and its impact on inflation. this might be happening for a variety of reasons. one possible reason is we are currently experiencing positive supply developments, in particular, we do observe that as the recovery strengthens, the supply of labor is rising, too. labor force participation has been growing consistently over the last few years. there are increases in participation rates of older workers. we also see some evidence that labor supply has become more

elastic due to immigration, particularly in stronger growing economies, such as germany. euro area, the participation rate has risen by 1.5 percentage points, where in the u.s., it has fallen by three percentage points. structural reforms and labor markets have been a factor in his labor supply boost. similarly, past reforms in product markets may also have a positive effect on the supply side by reducing price caps, increasing productivity, and raising growth potential. another reason why there is in certainty is the correct notion of unemployment, that is, there might be residual slack in the labor market that is not being fully captured in the headline unemployment measures. unemployment in the euro area

has risen during the crisis, but so too has the number of workers who are underemployed, meaning they would like to work more hours, or who have temporary jobs and want permanent ones. this has implications for inflation dynamics, since these people might prioritize more hours, or job security, over higher wages in employment negotiations. if one uses a broader measure of labor market slack, including the unemployed, underemployed, and those marginally attached to the labor force, that measure currently covers 18% of the euro-yen area labor force -- of the euroa rea labor force. appear tourve models be more successful and privy to inflation. a third reason why slack might be larger is the effect of the so-called global slack.

this is the notion that globalization has made labor supply more uniform across the globe and labor markets more contestable. foreign labor markets therefore have a dampening effect on domestic inflation, even as domestic slack is shrinking. the evidence however, is not there. for example, new ecb announces five the limited support for the thesis that global slack is weighing on euro area inflation today over and above the impact it has on global prices. along the question of the level of slack is the impact of slack on inflation. this is the well known debate around the phillips curve. there are reasons to believe that wage and price setting behavior might have changed

during the crisis in ways that slow the responsiveness of inflation. for example, structural reforms that have increased wage wagesning may have made more flexible downwards, but not necessarily upwards. likewise, we see today that firms are absorbing input costs through lower margins due to uncertainty over future demand, which would also tend to temper price pressures. ecb estimates show that if we take into account the unusually large and purchased persistent shocks, the phillips curve right be somewhat flattene recently. this depends on the cyclical position, it might steepen the gains when the economy reaches and surpasses full potential.

various reasons might delay the transmission of our monetary policy to prices, they would not prevent it. cycle business matures, the higher demand result will accelerate price pressures, while firm's pricing power will increase, and the broader measures of slack will converge towards the outline measures. the u.s., the gap between unemployment and those broader measures typically opens in recessions and shrinks in expansion. it is convergent to the levels recorded before the 2001 and 2007 recessions. just as oil and commodity price shocks, we can be reasonably confident that the foreces

weighing on inflation are temporary, so long as the don't feed into lasting inflation dynamics. this brings us to the third possible at the nation for why growth might be divergent from inflation. the hypothesis that a persistent period of low inflation is feeding into price and a fourt morein persistent way. what is clear is our monetary policy measures have been successful and secure the anchoring of inflation expectations. in the past, as interest rates approached zero, some good question our ability to add sufficient accommodation to combat the prolonged period of too low inflation. doubts byd those demonstrating that we would take any measures necessary within our mende to deliver our mandate

and those measures were affected through further easing financial conditions. the inflation risk premium has now become more or less priced out of the market. that being said, the prolonged period of low inflation is always likely to be exacerbated formationd price that occurs due to institutional factors, such as wage taxation. this has plainly happened in the euro area. ecb analysis finds that compared with long-term averages, low inflation dragged down wage growth by about 0.25 percentage points each year between 2014 and 2016. where we areas to looking has increased recently and is mixed.

there were signs that taxation had fallen in the early part of the crisis and our empirical estimates suggest that the weight of fast inflation has decreased. yet, there is also evidence that it has returned in some large euro countries. in italy for example, the indexation of wages now covers 1/3 of private sector employees. indexation grows, it would only create inertia in price formation. it would not extract the transmission process. as economic slack shrinks, upward pressure on prices will materialize and gradually enter the indexation bracket. so, once again, we see temporary forces at work that should not affect medium-term price stability. and this assessment is probably what we see today.

interpreting with some caution, they are now consistent with a picture our policy is effective, but the full effects will take time to materialize. so, what do these various calculations apply for our monetary policy stance? the first point to make is we face a very different situation today from the one we encountered three years ago. then, we also faced global shocks and significant labor market slack. the recovery was still in its infancy. global growth was slowing. there was depression in global prices and exports. fiscal policy was less supportive than it is now. and headline inflation was much lower than today and inflation expectations were more fragile, creating a higher risk of low inflation becoming entrenched.

in this context, we face another risk, too. a permanent damage to the economy through the effects. given a large degree of slack at the time, the risk was we would see a permanent destruction of capacity. gap would close the wrong way, making the losses permanent. when we said we wanted our policy to have effects without undue delay, we meant we wanted the output gap to close upwards and before the rest of the effects could develop. this is why we had to act forcefully. now, we can be confident that our policy is working and those risks have abated. forces areonary at play.

once of the drivers of inflation today is positive supply development. so, this should be back positively with an potential output, rather than producing a stability. in these conditions, we can be more sure about the return of inflation to our objective than we were a few years ago. this more favorable balance of risks has already been reflected in our monetary policy stance via the adjustments we made to our guidance. another considerable change from three years ago is the clarification of the article outlook in the euro area. area has, the euro lived under a cloud of uncertainty about where the necessary reforms would be implemented, both the mastech le domestically and at the union levels. this is tantamount to tightening

of economic conditions. today, things have changed. political wins are becoming tailwinds. there is a newfoundtailwinds. is a newfound confidence in the reform process and a newfound support of european cohesion wits could release -- which could release pent-up demand. nevertheless, we are still in a situation of continuing slack. and translates into slower return of inflation for our objective. objectives are not durable and self-sustaining soever monetary policy needs to be persistent. that is why the governing auncil has emphasized substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up and support headline inflation in

the medium-term. this is reflected in our forward guidance and interest rates as well as our decision to reinvest the principal payments received under the app, asset purchase program for as long as necessary. with reflationary dynamics slowly taking hold, we need to ensure that other financial conditions continues to support that reflationary process until they are more durable and self-sustaining. as the economy continues to recover, a constant policy stance will become more accommodative in the central bank can accompany the recovery by adjusting the parameters of its instruments, not in order to tighten the policy stance but to keep it broadly unchanged. there is an important caveat that we need to consider.

financial conditions are not only determined by the calibration of central bank instruments, and also by other market prices, some of which are significantly affected by global developments. past, especially in times of global uncertainty, volatility and financial market prices has at times caused an unwarranted tightening of your financial conditions which has necessitated a monetary policy response. in the current context where global uncertainties remain elevated, there are strong grounds for prudence in the adjustment of monetary policy parameters even when accompanying the recovery. any adjustments to our policy, tower stands, have to be made gradually -- two hours stance, have to be made gradually and only when it appears sufficiently secure. let me conclude, our assessment of the outlook for inflation of

monetary policy can be summed up in three messages. the first is confidence that monetary policy is effective and the transmission process will work. all the signs now point to a strengthening and broadening recovery in the euro area. deflationary forces have been replaced by reflationary ones. while there are still factors that are weighing on the path of inflation, at present, they are mainly temporary factors that typically the central bank can look through. considerable degree of monetary accommodation is still needed for inflation dynamics to become durable and self-sustaining, so for us to be sure about the return of inflation to our objective, when a persistence in our monetary policy. finally, when he prudence. as the economy picks up we will need to be gradual when adjusting our policy parameters

so as to an sure stimulus accompanies the recovery amid lingering uncertainties. thank you. [applause] francine: mario draghi, the president of the european central bank speaking for about 25 minutes. this is his keynote speech in portugal. when he was saying was significant in terms of explaining what he has been doing so far and what he will do next. ,here are plenty more speeches also later on, but this time in london we will hear from janet yellen. i think the key message is that his assessment for the outlook in terms of inflation and for monetary policy can be summed up in three messages. first of all, the confidence that monetary policy is effectively putting in the markets, is working.

he said there is a considerable degree of monetary accommodation still needed for inflation dynamics, probably the understatement of the year. he also sent prudence is the name of the game and as the economy picks up they will need to be gradual adjusting parameters. let's get to our guests in the studio. thank you both for listening, first of all, to the speech with me. simon: i think he spent 25 minutes telling us don't worry, be happy. that sounded very much a message that we are going to continue with the process of removing the asset purchases on a slow, steady basis but still a long way to start to tighten interest rates, but that direction has studied. , thenk actually the market real reaction, not a sharp move higher in the euro.

that tells you people were expecting to see that move take place in the near future and after seven years, eight years of consistent euro selling, i think the amount of euros that that can flow-- back into the euro is substantial. ed: clearly, he is going to run out of german sovereign bonds, that we know. he basically told us that and there is no surprise there. is when he might do something like raise the deposit rate for the banks. maybe the deposit rate, there is an argument you could raise that closer to zero. having such a negative right as in japan and the eurozone hurts the banks and if you had a less negative deposit rate it could be good for the economy. francine: when you look at currencies, what will determine currency moves, dollar strength or weakness, or what mario

draghi can and will say? simon: i think there are some elements of both if you want to get a handle right now. you simply have to look at the 10 year yield differential between german bunds and u.s. treasury's. one of the fascinating things over the past 12 to 18 months, as yields become more intense i think the combination of what mr. draghi is telling us about the bond purchases and the easing pressures, political pressures within europe are almost certainly going to drive up european bond yields, german bund yields. with the continued flattening of the u.s. yield curve you might end in a situation where you could get a sharp move. francine: are we underestimating -- let's go back to the fed because janet yellen is speaking . are we underestimating the political factors in the rest of

europe? there seem to be concerns in italy and spain and because emmanuel macron was elected in france people are putting that to one side. what is interesting about europe is we had all the noise about extreme left and right parties, and frankly it has been a lot of talk about not very much. what has happened? we are threatened with melenchon against marine le pen, and emmanuel macron who has a new policy. in germany, angela merkel is not at all a threat. in holland the right wing party did not get a significant government so it when we look to italy next year, look at the local elections. what we might have is people democratically going to the brink and saying, i don't like what is on the other side of the brink, let's vote to the centrist right as we always do more or last.

there is a lot of talk and not a lot of action, and the political volatility is lower than markets would like to see. agree.i completely one of the key stories this year's we overestimate political wek and in europe underestimated. i think in part that was the shock of last year, led people to read the worst in any political story. here we are midyear and it doesn't look to be that much political risk left this year. i totally agree about the italian elections. greece, and end of 2018 story, it becomes, it is about the and whatthe revival mr. draghi was telling was an optimistic story. francine: simon derrick and ed

shing stay with us. not a lot of ambition, clarity. may'sebuffs theresa proposition on citizen rights. ♪

francine: you are watching bloomberg surveillance, i am francine lacqua in london. here is mark barton. mark: this is the stoxx 600 with all its industry groups. a busy day for central banks. draghi, carney in just over an hour, janet yellen in london. the s&p managing to eke out a small gain yesterday, .6% below

the record set on june 19. there is an uneasiness of the lack of volatility across asset classes. this is the sentiment index from citigroup, it captures stories containing the words bullish and bearish, signaling pessimism is decreasing. the green represents bullishness and the red represents bearishness. carney speaks in just over an hour. what a difference a year makes. last year just after brexit carney offered unlimited liquidity, flooding the financial system in the post brexit vote unease. a year later with consumer lending rising, an annual 10% pace, fastest since 2005, carney considering just pulling back on the easing of liquidity, maybe

asking banks today to raise the level of capital they employ. time.t over an hour's we heard from draghi today and yesterday he spoke to students and portugal. this is a great chart due to his comments about inequality in the job market, especially the youth. this measures youth unemployment 2004 through today, spain, germany, the e.u. average which is 18%. greece, we are down from 60% to 46%. portugal itself down to 24% from more than 40% but youth unemployment is still a massive issue within the eurozone. francine: mark barton with some great asset checks. the european union has demanded britain go further to guarantee the rights of its citizens after its brexit. michel barnier offered to

-- morework and rights than a million foreign workers are preparing to leave britain, adding two fears they are facing a brexit range rain according to the research. workerson-british currently in the country are thinking about leaving by 2022, with over a quarter planning to go as soon as 2020. let's get the thoughts of simon derrick and ed shing. what does that mean for u.k. companies? as long as pound is low the ftse 100 can continue. would say the ftse 100 sort of depends on simon's view on the pound because there is a very strong negative correlation . it is a global index, not a u.k. index. a bunch of u.k. listed companies

but the exposure is global. i would say when you abstract away from that and look at the underlying economy, it is not looking great. the consumer is looking week, over indebted. i think the peak of employment growth has been and gone already , and i think that signifies harder times ahead for the u.k. economy and therefore, for the mid-250 group that are more domestically exposed. clearly, what the bank of england might or might not do, that i find it astonishing that we are talking about rate hikes precisely given what ed is talking about, the consistent slowdown in the economy. i think that uncertainty will continue to weigh, and you add in the political uncertainty that has been brought about over the course of the last few weeks, even though we have got still likely now that the

government will be able to go of thisbeyond the end year, still that political uncertainty will weigh on investor sentiment and as a result the risk is that sterling continues to drive lower -- grind lower. francine: we have a cool function on the bloomberg gpt,inal if you type eur this is a trade by trade on this pairing. price,nge is the after the blue is the bid price. it is a cool function. simon: it is a cool function. unlike some conviction views at the moment, sterling is probably the strongest of all because as i said, we have underestimated the positive story for europe and we must have overestimated the positive story for sterling. for me, i have a strong feeling that at some point in the next six months or so that chart will have 90's against it rather than

88. francine: by the end of the summer? simon: absolutely. the risk is euro-sterling becomes the big mover. francine: what does that mean for european equities? they are undervalued but could they become much more expensive? ed: i don't think it is bad news for european equities as an aggregate because it is positive reflected the strength of the eurozone economy which is being translated into stronger corporate earnings. the problem we have a certain sectors which are very sensitive europe, the auto sector, they could be vulnerable to a real correction. francine: we are hearing a little bit later from mark carney so let me show you what the probability of a rate hike from the boe is and what a lot of currency people are expecting. ,hey are leaving the door open but inflation is going higher. at one point do you stop looking through it? >> you cannot say there is a

zero chance because three members voted in favor of it. mr. carney has made it very clear on this topic, he expects to see inflation in the summer and that it will ease away. the bank of england historically has been prepared to look through inflation considerably ahead of its target for long periods of time. slow the economy starts to i think there is expectations that raise hikes will start to ease substantially. when it comes to sterling, the share interest rates have been a comparatively minor factor. i am a big believer in the slowdown in consumption of the economy. i think really if they do it it will hurt the consumer even more , and we know what the consumer being overleveraged at this point, even a small interest rate hike will have a bigger

effect on the economy than in the past so if they do one it could be quite painful and they will definitely stop after that. francine: ed shing and simon derrick stay with us. let's get straight to the bloomberg business flash. sebastian: google said to be hit with the largest antitrust fine in european history later. the company favors its own shopping search results of those of other price comparison works -- websites. the determination is due at 10:55 u.k. time. sportveiled an advanced utility vehicle at the plant in south carolina and announced plans to continue -- increase spending and create 1000 jobs. they are an important shield against donald trump. >> we clearly believe in the u.s. market. we call the united states our second home, and the products we manufacturing, assembling,

that is why we invested another $600 million, another 1000 jobs in the next four manufacturing,. there will be a high demand and we are coming with the new x seven to the market. it is a big market for us here. sebastian: it ease -- italy's financial markets says no more banks will need -- the government organized a rescue of lenders. >> we don't expect other lenders needing state aid, and we are only considering as i said, cases in which this would be in theory -- let me underline that, in theory -- with new cases, but we don't expect new cases. sebastian: that is the bloomberg business flash. francine: u.s. durable good

orders fell the most in may, dropping 1.1% versus estimate for a 6% decline, the latest in a string of soft u.s. data points and could give the fed laws. -- fed was. -- pause. janet yellen speaks at 6:00 this evening. in terms of what you can expect from janet yellen, issue going to give any clues or waiting for the data? simon: i would be surprised if she gives us too many more clues. problem,have a expectations surrounding 2018 because the market has a radically different view about what the fed will do next year. , startse starts to lead laying out a little bit more strongly her view but the reality is i suspect the market is probably right, that we

actually are going to be talking about far less than three rate hikes next year. ed: it looks outwardly appalling . we have had a massive string of very poor economic outlook -- outcomes that tells you if they were data dependent they would never hike rates. francine: they are concerned they were never -- will not have enough ammunition in the next crisis hits. ed: if you raise rates you bring the risk of recession closer. over 80% of the time that fence hike rates they cause a recession so what they are preemptively raising rates they might -- it sounds a bit twisted. francine: employment was not bad. we were told that it is a little tricky to read and janet yellen keep saying that stuff is noisy. ed: the fed over the years has proved itself quite susceptible

to concerns over international pressures. when we went to the taper tantrum, said was focused purely on domestic issues -- if the fed was focused purely on domestic issues we would not have had that. think about when we have the concerns with regard to chinese monetary policy, what about 2016 when we were laying off the key rates because we were worried about chinese policy? it is always about external pressures and the fed should've of gone with this a lot earlier. francine: talking about the market volatility index, the lowest since may 2013 and the curve is flattening more and more. ed: what is really fascinating about the chart is you look at the spikes in volatility and they all come around major issues related to monetary policy. if you go to june 2013, they have been taper tantrum built in. second half of 2014, the ecb

going into negative territory. here we are once again pressing toward the lows and we are suddenly starting to talk about what the feds might or might not do. if we start having a fed that really starts to push on aggressively, and the risk is you get a huge spike in volatility as well, which given where we are in the market at we got these extremes in terms of valuations on the equity side and obviously equities and treasuries have a close relationship. clearly the impact could be hugely destabilizing. francine: what would it mean for equities? ed: a spike in volatility will not be good news. vix is pretty much at an all-time low and we are all very complacent against financial markets. there is no way you could say for risk on assets that any volatility spike would be good news. francine: what is your best play right now? ed: i would still buy eurozone

business small-cap equities and if you want to go -- have relative value go to the u.s. francine: thank you so much, both. simon derrick and edward should -- ed shing. bloomberg surveillance continues in the next hour, tom keene will be joining me out of new york. we will bring in the google ruling, we have a news conference at 10:45. the e.u. will slap google over its product searches, we will go to the fed and here about inflation in the u.k. this is bloomberg. ♪

francine: the big central-bank sayingrts with draghi

he is reasonably confident the factors weighing on inflation are temporary. the eu demands for citizens' rights to be protected. and the last chance for change. at least three republican senators say they will vote to block the current version of their party's health care bill. this is "bloomberg surveillance" and i'm francine lacqua in london and tom keene is in th new york. we had the ecb, and we have the boe later on. tom: we have the instabilities within the stability in the market. the euro jumpy off of draghi shows where we are, the theme without question over the next couple hours is inflation, or lack thereof. francine: of course, a couple

currency moves i'm quite interested in, but first, let's get straight to the bloomberg first word news with taylor riggs. reporter: the trump administration is warning the syrian president he will pay a heavy price for launching a chemical attack on rebel forces. the u.s. have identified potential uses for the use of chemical weapons. the european union has dealt a blow to theresa may's hopes for a swift brexit deal. the eu is demanding britain go further to guarantee the rights of millions of it citizens after brexit. hope toe after may protect rights for eu citizens within the u.k. there is an unprecedented development in hope to protect brazil, which has seen its share of political drama in recent years. president michel temer has been charged with corruption, which

could result in temer thing forced from office. 2/3 of the members of congress would have to approve the charges for temer to be put on trial. president trump warns india must reduce obstacles to imports. modi met with president trump. meanwhile, modi came to the u.s. with a shopping list for military equipment. global news 24 hours a day, powered by 2700 journalists and analysts in more than 120 countries around the world. i'm taylor riggs. this is bloomberg. datayou can really see the check. bonds, bonds, bonds. the yield curve continues to flatten. an04, the two cent spread, ever flatter yield curve, confounding the optimists this morning. here we drive forward to where

is.530 that is a new number. i put the swiss 20 year yield here. that should be green on the screen, not the zer0.22 red. that was lower before the draghi speech. draghi, moving the bond market towards higher yield. francine: that is extremely important. the color has to do not with the yield, but the bond price. here is what we are looking at overall, european stocks, down 0.5%. seem tosources shares be buffing the trend of commodities advance. gold is rebounding after a plunge in the price yesterday, monday. 0.5%.up, i am also looking at the u.s. two year yield. tom: a higher yield, that should

be green again up of the yield basis. 530 chart. we now have lagged below where we were at the end of 2013. for those of you on bloomberg radio, it is a flatter yield curve and this new, stunning leg down, this is higher bond price, lower yields, and a flattening as well, signaling weaker economic growth. really a delicious tension between what we see for chair yellen, and what we will see for governor carney at 6:00 a.m. my time. francine: i am looking at governor carney, but what is most significant overall is what janet yellen can or cannot say. she is speaking in london as it's about p.m. 6:00 p.m. n at

we are talking about that compression and the yield curve. this is a simple treasury market volatility index, and it is at the lowest since may of 2013. tom: wow. francine: that is a great chart that hillary clark found for us. the euro is strengthening after draghi says he is confident that the factors weighing on inflation are temporary, speaking at the central bank's annual forum in portugal. he says the central banking's to be prudent on the adjustment of monetary policy. >> we can be confident that our policy is working and the full effect on inflation will gradually materialized. but for that, our policy needs to be persistent and would need to be prudent in how we adjust the parameters to improve economic conditions. francine: that was of course, mario draghi. is simon derrick.

what did you make of what mario draghi said today? he said to put it simply, don't worry, but be confident about the future. >> i think when the ecb looks at the real economy in the eurozone, there is a lot of evidence that qe is having an impact. the private sector is improving. wouldurce of things you expect to see, if qe is having an impact on economic growth, including a narrowing of the dispersion of growth across industries and countries, those are all pretty clear. what draghi is saying is that means overtime, because growth is responding, inflation will come back and they will be ready to unwind qe next year. francine: his a speech lasted about 20 minutes and he gave three clear miessages. said there is a degree of

monetary accommodation still needed for inflation dynamics to take hold, but is confident that will happen. he finished by saying that we need prudence. is that a clear message they will not talk about tapering it? forcesaid deflationary have been replaced by reflationary forces, and i think that word is what this market has taken off on. that said, i'm not convinced the ecb is ready to taper this year. aims to start talking about --ering at the next meeting, it needs to start talking about tapering at the next meeting, but it is still a long way away. that is something the fed has not addressed yet. the overall balance sheet is what will signal the end of the extraordinary monetary conditions we have seen. tom: on "bloomberg surveillance" this morning, how mark gilbert

steals from francine lacqua. a. they chart we have all see -- we have seenchart about 12 times. mark gilbert stole this chart from francine lacqua. royalties, get realties though, tom. tom: we have central bankers dealing with no wage growth, or higher or even level inflation. when does that tension end? >> not in the foreseeable future, because the projections of what wage growth will do is remain flat. there has been a hard line shift in the labor market, which is confounding what the textbooks tell us, even after millions of euros and pounds of quantitative easing. janet yellen later today presumably will have to address this.

we're still looking at tightening later this year. that is looking more in doubt though. as the yield curve plans, that is telling us something about the global outlook. tom: what is that telling us, brian? i am worried. >> i'm not a bond trader. i don't quite understand why the bond market is ignoring central banks. it looks to me as if the risk assessment the central banks have been making for several years is, you raise interest rates, unwind qe, or phase it down too early, you create a recession. on the other hand, you let the economy run too tight, you then have to adjust interest rates and cause a recession down the line. the last three or four years, the first of those two has been more important to them.

they have been more worried about adjusting too early. that is because up until recently we had a large output gap. on nearly every measure now there is a small degree of spare capacity. unemployment has fallen below estimates in the u.s., even in the eurozone. germany is running about potential. that has changed the risk assessment banks are leaving. there is a bigger down for now in leaving it too late. that has changed in the last e ight to nine months for the fed. you have been talking about the recent data. inflation has become a bit weaker. had they been in the same mindset, they would have had plenty of fuel not to do anything. francine: this is the difference -- i know you look at breakevens a lot. bonds are rolling over more

dramatically in the u.s. what does this tell us? >> the trend is that inflation is still dormant. both the ecb and the fed are struggling to reach the 2% inflation target, suggesting more caution continues on the unwind. that's a reason for the fed to want to raise interest rates, but i am still convinced by the argument that you need to raise rates today so you have room to cut them tomorrow. tom: a really interesting market right now. it will become more interesting tonight in london, 6:00 p.m. and we see that at 1:00 p.m. new york time. chair yellen with an important speech. it will become more interesting bloomberg will have full coverage of that in the new york afternoon. stay with us. this is bloomberg, and that is

washington. ♪ reporter: this is "bloomberg

surveillance." i'm taylor riggs. google will receive a record fine today. google has more than $90 billion in cash, so the money is not the issue. there is concerned the eu will force google to change the way it handles its online shopping services, one of its biggest sources of growth. the european commissioner is due to speak on this in about 45 minutes. britain has been in talks with comcast and charter communications in the last month. the most likely scenario is the cable companies will threaten a deal.

comcast and charger also discussed jointly fining sprint, although that is less likely. that is your bloomberg business flash. francine: brazilian president michel temer has been charged with corruption by the nation's chief prosecutor, marking a return to political risk for latin america's biggest economy. the case is based on a secret recording of michel temer, though the charges need to be approved by 2/3 of the chamber of deputies to proceed. the market reaction has been contained. now to discuss is the emerging markets managing editor. justin, first of all, is this really a surprise? reporter: it is a surprise in the sense that they are very serious accusations thing made against michel temer, but not a surprise that we have gotten to this point in the whole process. this corruption process in

brazil has been going on for something like three years now. we saw the impeachment of roussef last year. it is what mark mobius described to me as a french revolution without the bloodshed. r brazil is growing up politically and it is looking deeply and carefully at what is going on behind the scenes, should these allegations prove to be founded. then, we are in a bad place. but michel temer will fight this and he has a lot of support in congress to survive. tom: you do so well linking nation to nation to commodities. forget about michel temer, rous seff and the rest. how much of the tension of brazil is tied to the desperation over the collapse of commodities? reporter: you have to look at the whole emerging-market horizon here, tom.

emerging markets arein a good place right now, notwithstanding the low commodity prices prevailing around the world. brazil has come through that quite well. the economy is starting to grow again. it has been in one of the deepest recessions in living memory. and inflation is coming down. they are cutting interest rates. on the ground a lot of things are looking quite well in brazil. you have to say they are riding out this bear market in commodities. francine: justin, thank you so much. still with us is brian coulton and mark gilbert. rbrian, what do you make of all this? again, this is a crisis that is steepening, but as justin laid it out, the economy is getting better. >> the economy has been through a massive adjustment. the source of the

declines in brazil allowed the economy to come back a little sseff'st after rou impeachment, there was a surge in risk confidence. shaped any chance of a v recovery in brazil, which you might expect, i think this puts a damper on that. >> if you look at the mscis function on bloomberg, the brazilian currency was the second worst performing currency against the dollar this year. foreign investors just don't like the concert. tom: we will come back to brazil and talk about a terrific essay yesterday. francine has got it. coming up later, what a treat for us today. with all this discussion about

price change and where the bond market is going, the former head of economics for credit suisse will join us for the entire 6:00 hour. that is wonderful. stay with us. this is bloomberg. ♪ francine: this is "bloomberg

surveillance" with tom and

francine from london and new york. a little bit later, we crash over to washington d.c. how to turn the ruling in official policy when it comes to the travel ban. the ban has been partially revived by the supreme court, but the government seems to be a little bit at a loss of what exactly that means, and what happens next. we will have a full update. it is time now for our morning must read. what we picked out comes about fed policy. in the cabinet in of those assessing the balance. another hike in the remainder of 2017 is wanted based on current indicators and policymakers should take seriously the growing risk of future financial instability, especially in the absence of a careful liberalization. brian coultont to

and mark gilbert. mark, you said it would be a mistake to start normalization in preparation of a downturn. >> yes, there is a risk by keeping interest rates so low create ang, you might sharper policy turn later on. mym fine with that idea concern is the fed has been on a path for normalization for normalization's sake. it has been on a campaign for almost a year now to raise itselft rates to give ammunition going forward. itself ammunition going forward. that seems to be backward thinking. francine: and certainly, brian, you have made it clear you are not a bond trader, but if you look at the chart, if you look at volatility, but also the yield curve compression, and means traders in the markets

don't believe what the fed is telling them. >> there is a risk that the market -- that the fed won't do what they should be doing from a policy perspective. there is no output gap in the u.s. why are interest rates so low? it does not make any sense. they did not do anything for three or four years. they should have moved earlier. i think now they have got that confidence we will see continued increases. maybe there was a mistake leaving it as long as they did. i think the bond market is overreacting to a few softish numbers. conditions for the consumer is still pretty descent. the jet market is still pretty strong. export demand is picking up. the fed is not that optimistic about growth. i think normalization is definitely here to stay. and this disconnect will have to

be resolved. >> but the backdrop to the fed moving earlier this year was the hopes for a reflationary trade with the new presidency, and that is not coming through from the administration. the tax reform looks dead. trade does relfation not seem to be happening. tom: mark gilbert and brian coulton with us. truly one of the nation's experts on economic policy. michelle meyer will join us. this is bloomberg. ♪

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yield curve is flat -- futures are flat but the yield curve has moved. draghioff of the comments, but with that is persistent curve flattening. 77.87 in the vanilla spread in the united states. thedifference between two-year and the 10 year, move the decimal point over to over. oil with a little bit of arise as well. francine, you have a report. francine: i do. this is the financial stability report. this is what we are seeing. the boe saying it is raising the capital buffer to 1% in november. we are also expecting a little more news and how much is available for lenders. boe is tightening mortgage

affordability tests for lenders. the main use is they plan to raise capital buffers to 1% in november. we have this great function which is year out gdp gipt. -- is euro gdp gipt. as and as we got that report from the boe, it started a little lower at around 0.88%. 0.8821. so this may disrupt clearinghouses. we were kind of expecting this because mark carney has talked about it. it also intends to set the at 2.5%.ratio this is the latest we are getting from mark carney. later on.ve a speech a lot of it will be what we just heard now on the bloomberg

terminal, but he will also take , which i think will be significant. tom: it will be interesting to see the dynamic. fromgilbert with us bloomberg gadfly and o'brien: as well. how much of this is linked to lton asg -- and brian cou well. how much of this is linked to sterling? >> it was an aggressive move they moved, including the slug of qe and they were worried there would be instability, but the reality was the opposite. we had a surge in bank lending, going,ept the economy consumer spending fueled by consumer debt. a kind of work too well and made the balance in the u.k. economy

less desirable. we have less capacity and they want to take out a little bit of a stimulus they put in. tom: that is where i wanted to go. you wrote a beautiful follow on of worry about inflation. then we do not. i understand this is your opinion, but within the gilbert guesstimate, what would be the catalyst to say we do not have a vector of higher inflation? >> wage growth. it all comes down to that in the u.k. economy. cure attack.s a i think brian is right. the outlook is not as bad as it looked a year ago. the increase in the buffers takes away some of the stimulus.

that might mean the bank of england does not need to raise interest rates as soon as the market thought, after this beach last week. last week.peech on might have the policy are hold until next year instead of on the move this year, which some economists had predicted. arecine: this is what we looking at, which is the classic chart of inflation versus wage growth. there it is. this is for the u.k.. tom: that is a chart you should be aware of, mark gilbert. francine: when you look at what saying, it looks particularly subdued. >> the move they took after the brexit vote was a good move. they have taken back a little in

terms of a couple of buffers. making banks set aside more capital, which means they will lend the less. the bank clearly thinks that has been too steep, too fast, and it wants to take some of it away. but i suspect it means they are on hold with kiwi and interest rates -- qe and interest rates for the rest of the year. >> they are in a dilemma in the previous workir did better than they thought it would. now some macro risks are rising. is an interesting contrast between household income, what is happening in the u.s. and in the u.k. in the u.s., leveraging has come down about 30 points. it has only come down about 10 points max in the u.k. i think they will be a little hamstrung the next six months or

so. tom: i want to sell bloomberg gadfly. this is why you read mark gilbert. it is kind of hard to see on television, but this is mark gilbert against steel and francine lacqua's chart. there is a really good chart on this wage inflation idea. the bond markets are how far from mr. carney? we understand the bond markets in the u.s. are far from where the fed is. how far are bond markets in the u.k. from what the bank of england describes? low, on anly economical basis and by historical perspective. when we look at these cyclical outlooks for the u.k. the next couple of years, because of all of the brexit uncertainties, i think that does mean any kind of move to normalization by the bank of england will be well

behind the fed. a different point in the cycle. we have a major negative demand shop still with us because of and weightainty shock. it is a different point in the cycle. it -- anecdotally, what do you see about economic slowdown in the u.k.? all i see are cranes building in london. the other element is political chaos. we have had an election. a hung parliament. before that, we had political instability, which was a result of brexit. now you have a situation where the government is having to deal billshe dup to get its passed through parliament. not an environment to

which consumer confidence will be maintained. as brexit negotiations kickoff and accelerate, attention is rising between the u.k. side and not an environment to the e.u. side. economys kept the afloat. if that turns, the bank of england faces more of a diorama in terms of how it keeps the wheels turning. governmenturely the would not risk of that, consumer confidence dropping off a cliff. after all, they want to be reelected. what was interesting last year was all of their pre-referendum concerns about the economy were focused on businesses and how businesses react. if you look at business investment last year, it went down 1.5%. we do not see any reason why that will turn around. now we have, thrown into the mix on the consumer side, and it was

the relatively rapid resolution of that political uncertainty, which helped the consumer side. the consumer is looking pretty weak. fitchne: brian coulton, ratings chief economist and mark gilbert from bloomberg gadfly. coming up, we will look at some of the difficult questions mark carney has to navigate. this is bloomberg. ♪

♪ francine: "bloomberg surveillance" with francine and tom. let's get to taylor riggs. taylor: three republican senators have come out against

the obamacare replacement bill, which is enough to block the legislation. the congressional budget office found the bill would leave an extra 23 million americans without health care. the chairman of the senate foreign relations committee is putting pressure on saudi arabia theirtar to resolve dispute. senator bob corker said he would block -- the saudi alliance has accused qatar of supporting terrorism. any report says half of high skilled e.u. workers living in the u.k. could leave in five years. deloitte says that could lead to a skills deficit. the u.k. and e.u. are at odds as to how e.u. citizens will be treated after brexit. more -- wants to put

argues canadian lumber is more subsidized, harming american subsidizes -- suppliers -- bank kia shares have risen. the spanish government is looking to cover the 41 billion bubblef funds after the burst. chiefg us now is bankia's executive officer. busyw he has been a pretty couple of days for you. in southernanup spain is accelerating. do you believe we are over the worst? >> i think, yes.

in spain, we have been over the worse for some time. there has been a huge conference to ration -- concentration in the financial system. banking it was able to perform better than expected, where we deliver. able to fully exiting we are shutting plans, we are starting a new era by acquiring another bank. francine: i will get back to you and a second. we are getting quite a lot of news from the european commission. mauga vestager, saying google has gotten a record fine of 2.4 billion euros for skewing search results. epts has been the worst k secret in brussels. google ofas accused

unfairly skewing shopping results on its search pages. i think the biggest fine after this is basically intel, and they were find about -- fined about 1.26. this is 2.4 billion euros. days -- its about 22 is a big number, but google is a huge company. what will be interesting here is to see how the american large technology companies react to this. yearis something unique to up. i do not understand what europe is thinking on this. francine: if you are a competition commissioner and you say you are cheating, it means you neither -- you either need to change how you operate or pay money. they can also issue a binding order for google to change what it does.

in their mind, they are looking out for consumers. let's switch back to labeled all alvear. -- leopoldo are you, at this point, saying there will be no capital increase, or do you think you may have to raise capital? no.oldo: we are finding this with excessive capital and we are raising shares to be given to shareholders of bmn, which would be 6.7% of the out coming -- outstanding company. capital in this acquisition, which we believe will give us and our shareholders a good return. s accruedit will be ep 6% of a one and about

cushion in year three. it will grant us access to over 25% of new clients. it is a very good transaction for our shareholders. francine: and your share price is up on the back of this, up almost 4%. wendy you expect spain's government to reduce its stake in your bank? leopoldo: the government has made clear they are willing to privatize bankia by the end of 2019. they have already disclosed they are willing to proceed as soon as this year. we are expecting to see the .utcome of the merger with bmn in the following months, we will see action from the government. italyou have lived what is going through.

what does italy need to learn about the day today experience -to-day experience that bankia has been through? leopoldo: we disclosed all of the capital needs we had and put forward a clear path and clear plan. we had a plan launched at the end of 2012 and lasted until 2015. then, we were clear in communication internally with our employees, which was important to change the culture of the bank. an external a with the stakeholders, so everyone could foresee where we were aiming. and we were lucky enough to fully deliver on that strategic plan, which has probably been one of the few cases of banks in europe that have been able to deliver. francine: how much damage does

the italian bank rescue we heard about yesterday and sunday do for the project of banking? is a difficult question to answer. we have the example of what ulare, wheree in po we saw the implementation of the bbrt. the regulation was well implemented here in spain on a fast and clean way, without any resolvedd and it was privately. it was a good solution. francine: thank you, leopoldo alvear, talking to us on the phone. goto tv . it is a great way to watch us. you can also see the breaking news we have, with google and the record fine. au can also ask guests

question under the video screen. mark and brian are here, ready to answer your questions. this is bloomberg. ♪

♪ francine: this is "bloomberg

surveillance" with tom and francine from london and new york. we heard that google has been fined a record $2.7 billion over its search results. e.u.enterpiece of the argument is that google put its shopping results at the top of its search results and competitors were pushed further down. that means the e.u. is leaving google up to how to comply to the order. they have about 90 days to say they will comply. coming up at the top of the hour, we will hear from the ,uropean competition competitor margaret vestager. tom: i do not think there is any reasoning on this.

people on both sides of the atlantic are baffled by this. francine: it is basically trying to protect the consumer. thati 100% disagree with statement. we will talk about this later. let's get to martin shanker, -- martin shanker -- schenker. nobody disagrees with the huge news out of washington. will senator mcconnell have to rewrite his legislation? convince he is able to three senators that the bill to repeal and replace obamacare will not come to a vote in the senate today or any other time. tom: i look at the cancellation of the votes and all of that. is he going to let it die orders he tried to rewrite this? not see how he rewrites this with a silver cast of -- class of care. that is dead on arrival, isn't

it? marty: it probably is, but scoring from the cbo says the center of eyes bill has higher deficit spending, so he does have some ability to entice those members to the vote. but he will be a tricky business. whether he actually brings this bill to a vote and sees it defeated is a question only mr. mcconnell can answer, and he is a master at this. it will be interesting to see what happens. francine: what do we know about the travel ban? we had a tweet after that courts acted monday saying that the president was grateful for what they have done. now the state department needs to understand what implementation means. marty: this falls into the category of be careful what you wish for. there were lights on all over washington last night. people working overtime, trying

to figure out how to implement this limited travel ban. because the supreme court gave no guidance as to what fidetitutes a "bona relationship to family members," and there is nothing in the statute that explains that. tom: it sounds like original territory, to say the least. marty schenker, thank you. coultonlden -- brian and mark gilbert, thank you. coming up in our next hour, a much watch -- credit suisse's vice-chairman joins us. this is bloomberg. ♪

♪ tom: in this hour, on slower --nomic growth, janet yellen

neil stossel and michelle meyer joins us. there is less inflation, except for in written. in moments, governor carney on rising inflation. and here is a partial score -- cbo, 22 million. senator mcconnell means 50 plus votes. this is "bloomberg surveillance ." i am tom keene. with me, francine lacqua. we have mario draghi and governor carney with two different headaches. andcine: similar headaches that inflation is going nowhere, but mark carney also has to deal with brexit. it is actually smaller event expected -- these are live pictures from the bank of england. he is just welcoming reporters. let's have a listen. >> over the past eight years,

that resilience has been increased. capital ratio for major u.k. banks, they are at 15 point 7%. losses that would have wiped out the entire basis of the banking system in the crisis can now be fully absorbed by bank capital buffers alone. the job is never done, though, and risks are always evolving. that is what has motivated the actions today. the fcc judges that the overall level of domestic risk is now at the standard level. most financial stability indicators are neither orticularly elevated subdued. there is talk of risk of that warrants extra vigilance. consumer credit has been increasing rapidly. lenders may be placing undue weight on the recent performance

of loans in benign conditions. there are potential risks to financial stability associated to the range of possible outcomes and the number of paths to them under the brexit process. the inconsistency between the valuation of some assets, such as commercial real estate and corporate bonds, and the risks implied by low long-term interest rates make those assets vulnerable to repricing, whether through an increase in long-term interest rates, adjustments to interest rates, or both. francine: that is mark carney theer rating -- reiterating bank of england planning to capital buffers. speech that will last about 10 to 15 minutes. the most interesting part of that will be the q&a, so we will go back to bank of england and listen to what journalists are

asking him. tom: it sets up our show with neil sauce of edits and michelle meyer of bank of america credit -- merrill lynch. right now, with your first word news, here is taylor riggs. taylor: the trump administration is warning syria's president that he will pay a heavy price for launching another chemical attack on rebel forces. the u.s. says it has the tech to preparations for the launch of chemical weapons. detecteds. says it has preparations for the launch of chemical weapons. e.u. is demanding britain go further to guarantee the rights of millions of its citizens after brexit. that came after me offered to protect work and residency rights for e.u. citizens living in the u.k. -- a development in brazil prosecutors chief

has charged president michel temer with corruption. two thirds of the members of congress would have to approve the charges for him to be put on trial. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. i am taylor riggs. this is bloomberg. tom: thanks. let's get to the data. mr. draghi shifted the bond market with his comments about an hour ago. and now itas flat, is a little more flat. some short movement in the yield curve. little bit of a big. and this was 20 has bounced back. two basis points higher in yield. that read should be green. -- that red should be green. francine: the euro jumping.

the dollar falling. mario draghi urged the need for persistence in monetary policy. but there is a mood of caution. this is european stocks falling and investors trying to digest. gold up a touch. know where toeven begin with neil sauce. he is one of the most astute soss.man -- with neal he is one of the most astute gentleman on wall street. it is wonderful to have you with us. i give great credit for the idea of ring fence. does mark carney, mario draghi, janet yellen, do they have the instability ring fest? neal: it depends on what you think instability is.

a school of thought thanks that int we are seeing broadly the markets is a problem. if it is the case, the only way to cure it is to create instability. they sure do not have that fence. tom: this is further up the yield curve, farther out from the land of janet yellen. this is what ben bernanke would call a hockey stick. the markets are going one way. guys like you are going another way. who is right? neal: i am not going different from that in particular. tom: does the flattening indicate recession or slowdown? not so much as acknowledges something that has been persistent for a long time now and will continue for a decade or more into the future, which is there is a tremendous need for financial duration in

the system, because we have a lot of duration with respect to the aging of the population. pension systems, insurance systems, and all the rest need financial duration. before the financial crisis, we tried to create that was leverage. but we do not do that -- tom: you are celebrating 10 -- s of we are 10 years down the road. we figured out leverage did not work. are we really ever jing -- re -leveraging? neal: i am not sure. i think we are trying to find duration in a different way. that is what one might think of as unusually low and the yield curve. you have to do a with low coupons if not with leverage. francine: we are getting live pictures of margrethe vestager

after she said that it is a victory for companies, including yelp. let's have a look at her decision to find google. >> google must and its conduct within 90 days or face penalty fame and -- penalty payments. rules apply to all companies that operate in the europe economic area. no matter where they are based. the hurt this is to ensure competition and innovation for the benefit of european consumers. manye has come up with innovative products. also services that have made a difference in our lives. that is a good thing. strategy for comparison shopping service was not just about attracting

customers. it was not just about making its product better then those of its rivals. abused its market dominance in search engines by promoting its own shopping comparison service in its search results and promoting -- de moting its competitors. is illegal has done under a you antitrust rules. it has denied other companies the chance to compete on the merits and to innovate, and most importantly, it has denied european consumers the benefits of competition. happened in this case? flagship product is the

google search engine. it provides search results to consumers who pay for the pay -- for services with their data. every year, google makes almost 80 billion u.s. dollars worldwide. so the more consumers see and click on those advertisements, though more revenue google generates. google enter the separate market for comparison shopping. the product started with what is called "frugal." frugal allowed customers to prices from all different kinds of retailers. over the years, google renamed

its comparison-shopping service twice, first to google product googlein 2008, and then shopping in 2013. the first in this market. a number of established players were already competing in the same space. frugal, on the other hand, did not perform well, as google confirmed in an internal document from 2006. because by contrast, google's search engine work very well. it was also a significant source of traffic for comparison-shopping services. so in 2008, google made a fundamental change to its

strategy. google started to give its own products a significantly better treatment than rivals. , googleh results systematically gave prominent placement only to its own products. demoted rival companies, rival comparison-shopping services, which means a lower ranking in generic search response. what does it mean? looking for a product, you type it in, the google search -- you type it in the google search engine. what you see at the top of the page is a box with google shopping results. francine: that is the e.u. competition omission or margrethe vestager -- competition commissioner margrethe vestager.

meanwhile, we hear the governor of the bank of england delivering his financial stability report. a lot of headlines came out of that, but i am looking forward to the q&a session he will have with reporters there. the pound has dived against the euro. now let's get to the governor here in london. ey: we see risk-taking and the economy moving to a more normal environment, despite obvious uncertainties. and we want to move the level of capital buffers for the banks back up to the level they should so that is the countercyclical adjustment. any time you move to more benign credit environments, there has been more defaults. and we all know that this process exiting the european

union has begun, and there are risks around that process. so contingency planning needs to be not just put in place but, in some cases, activated. that is all there for a reason. orthat their same consumer business person knows that this system will be there for them down the road. orthey have a good idea opportunity to move into a property down the road, this system will be there for them. a lot of people will read this report and feel it like it pinhead.g on a it appears to say that lenders are not following criteria, that they are being reckless in lending money to consumers, but we as consumers pinhead. are not going

out on step. it seems to put the blame on lenders. is there not a middle way that lenders should put -- consumers should be more careful when we borrow money? consumer lending has gone up massively. gov. carney: first thing, a bit of context. if we look at what is happening since the crisis, the british --sumer has d leveraged de-leveraged considerably. there has only been some modest re-leveraging as a whole in the last 18 months. we have been seeing a the celebration in the pace up of mortgage credit in recent months. is more or less

gdp, with line with income, so i would not the behavior of u.k. household as a whole as taking particularly elevated risks. the second is in an environment where the economy has been growing for a while, and particularly employment has been haveng strongly, you people in work, it is relatively easy to get credit, and they continue to make payments. that is where there is a underwritingf standards of the banks can slip p they can give people more money, they can take extra risk because standards have slipped. that is one of the things that in our second line of defense is

to take a closer look at the supervisory side. brieflysk sam to speak to what we call the weaknesses that they found. >> let me just -- francine: that was mark carney answering questions about inflation and how it impacts consumer spending. nuancedpretty explanation. both -- keptcap both options open. tom: i like how he told the guy -- and the guy from sky news says the governor is dancing on a pinhead. -- within the nuances that francine

talks about, the blind in sherman there is no wage growth. what you do so well is a linkage of policy. policy and economic babble is about wage growth. deep sense,, in a is created by what the circumstances require. , as governorting carney was saying, how it harks back to something that is well established. bad loans are made in good times. we are having good times with respect to the number of jobs. we are not having terrific times with respect to the renumeration of labor across first world economies. it is not unique to the u.s. or u.k., they have the same phenomenon in japan. i talked about continental illinois yesterday. in the old days, we cleared markets. have we spent the last few years

with mark carney and janet yellen avoiding clearing markets, is that still where we are here? cost.a social neal: it sure is. think about the great recession, which came from trying to clear the subpar market. it is a costly process. if there is a way to solve the problem without that cost, it is hard to fault policy makers for making it. tom: can we bring up my morning must-read? we have so much going on. we have steve roche as we continue to see governor carney discussing financial stability. neal soss, when you look at this, james sweeney says there is no deflation fears. have we won the victory on deflation? can you say all clear? neal: i think what we achieved

is a sense of broad stability in the price level. a bit of a is problem. it is a good thing, but it is a bit of a problem, because there ought to be price pressure now. we think we are in the zone of full employment in a lot of places. if that is the case, all of the old rules of thumb says we have to observe some cyclical, not necessarily structural, inflation, and we are not. if you look at inflation, and i do not know whether there are that many parallels between the u.s. and the u.k., but what is the one thing you would look out for to make sure this country and the u.s. is ready to raise rates? neal: in the u.k. context, it has a lot to do with the idea that writes it requires some adjustment in the economy. one form of that clearly is the weaker pound sterling. because they import a lot of

their standard of living, that means they have to experience a certain amount of inflation. the question is what is that certain amount? it will come presumably at one point the bank of england leadership will say we have gone far enough in that regard, but i think it is evidence it has not quite been achieved yet. in the american context, it boils that to the idea that wages are simply not responding to unemployment the way almost everyone's economic model says it should. until that changes, yes, the putral reserve can short-term interest rates up, but some sort of real assault on the market seems hard to justify until that wage employment link is reestablished. francine: all right. let's get back to what mark carney been saying. he is talking about race, the fact that they are taking a little risk when they make loans

to distrust borrowers -- distressed borrowers in bad times. end, it is: in the going to be those individuals who make the judgments about whether they feel it is the buy a property or make an investment in the business. what we are doing is making sure the financial system continues to provide them the opportunity for that. >> thanks. you can talk a bit about how you see the role of interest rates in terms of this whole picture, in terms of exaggerating or reining in potential risks. and i wonder if you can give your view on the suggestion that committees and broader central-bank responsibilities

may have distracted you from the key question of raising rates and controlling inflation. the carney: in terms of coordination of the works of the various committees and of the type of policy, so macro credential policy, which is a responsible of this committee, the ftc, monetary policy. we -- each committee has different objectives. they are related. they support an ultimate objective, which is balanced sustainable growth in an economy. so we are focused on financial stability. the view we have taken is that monetary policy is the last line of defense to address financial stability issues. we have a fairly wide range of tools, and we have any burn --

and even wider range of influence in order to build the resilience of the system and promote financial stability. right now in the united kingdom, we are in a situation where debt is not growing that rapidly as a whole. it is growing roughly in line with the economy. situationreasonable in which to be. but there are pockets which warned vigilance -- which warrant vigilance. action.an take targeted which would help address issues related to that. in that regard, we do not need monetary policy to do our job. in fact, by doing our job, we allow monetary policy to focus

on its job, which is repealing inflation sustainably to targets in an exceptional period. distraction -- no is the short answer. decides as much time to to hold interest rates as it does to lower interest rates as it does to raise interest rates. i have been doing this for a number of years across to central banks, i cannot sure you that we devote the necessary wee -- i can assure you devote the necessary time when it -- in regards to monetary decisions. with different perspectives around the table, so diverse of the around the table, to make decisions, for example the ones we have announced today.

we have external members of the ftc who have experienced in banking, who are academics, who have experienced different jurisdictions, and they provide different perspectives. just as the individuals you see here, we have our own perspectives on these issue. s. is somecan also bring sense of how policy works together across the institution. , to go backnd thing to the first part of your question, which is there are -- nitely it does not mean they always move in the same direction, but ,y focusing on their objectives the policy committees, you allow other policy committees to maximize their degrees of freedom in order to achieve their goals. >> caroline and then scott.

mark carney speaking there. we will continue to monitor any breaking news we have from that speech. in the meantime in brussels, we still have the e.u. competition commissioner marker vestager -- marker vestager. --margaret vestager margrethe vestager. have -- we still have with us neal soss and michelle meyer. .elcome to the program does brag to change the name of the game for the u.k. completely? michelle: in the u.s., the unemployment rate is low but wage growth is remaining stubborn. you are not seeing an environment where it is passing broadly to overall consumer

prices. one of the parallels can be the fact that overall consumer inflation remains somewhat subdued. you are not getting the typical mechanism that would lead to real acceleration in underlying prices. that is one of the challenges for central banks now. francine: what do you make of what we have heard from governor carney? we are talking about overall linkage with the u.s., but now about mortgages and the need for banks to lend. neal: i am sympathetic to the financialmacro policy, that kind of policy can be a substitute for fluctuations in interest rates. 70,es used to argue this 80, 90 years ago. there is a lot of merit to the idea. trying torney is

articulate that. he wants to make sure the financial system does not get too aggressive in a low interest rate environment. francine: you can see our own scott hamilton asking questions to governor carney. what would you be asking governor carney now? neal: i would ask questions which would be rude in this context, which is what is your own opinion of brexit? because i think that colors every judgment that has to be made, not just by the bank of england but with respect to everything in the u.k. economy. what kind of brexit, what underlying force gave rise to this path, and what do you do about that? listen in to's governor carney's answer on the u.k. stability and thae election. gov. carney: the point estimates of this andbility

process concluding with that any agreement, rather it is to think about if it were to conclude with that agreement, whether a thesition agreement or agreement on the ongoing relationship, what with the financial stability risks be at that point and how can that motivates all of our condition agency planning -- contingency planning. that's not to say that there could be stability issues that can arise with race types of agreements that we do the same process that we start from. the most difficult situation for a financial stability perspective, difficult for europe, difficult for the cake, difficult for us collectively, is what can we do now in order to minimize that? we are working with other firms and regulators here. obviously as you expect, i will state the obvious, we are working with european authorities as much as possible in order to help reduce those.

tom: listening to governor carney and some important questions among the usual press conference moments. there are important perspectives, particularly on brexit linking to policy. this is a special moment as we have neal and michelle meyer joins us. the absolutely nailed slow gdp growth when everybody else was saying up up and away. dovetailing with this is morgan with a's stephen roach scathing mmr yesterday. let's bring up the roach mmr. the first chapter of this table's written many years ago in japan with lost decades stretching to a quarter of a century to arrest a 19 year stretch of job dropping 16.5%

thantion lasting longer neil served at credit suisse. from richardphrase baldwin at the university of geneva. i may bring up a chart that thing mr. roaches of what they are trying to avoid. they start in 1984. do we need to provide more fuel to the fire and more stimulus to get global nominal gdp to avoid the train wreck that mr. roach writes about? neal: you have topline growth that is pretty flat, but gdp per capita is not flat.

that's not an ideal solution perhaps, but that's the fact of it. economic performance in japan is not nearly as dire as figures might suggest. do we need more nominal growth? yeah, i think we do. we have made a lot of promises to ourselves about what the future would look like. they made those promises a while back. the future has arrived and we cannot afford all those promises. that is really what the health-care debate is about that we were talking about earlier on. magnitudes do not make for transfers, but they make it easier t to absorb. tom: when we free ourselves from this? you have been way out front. the real fed funds target rate. we are negative, negative as you

have written about numerous times. we are nowhere near the old normality that governor carney wants to see. michelle: and we should not be expecting to be near that normality. maybe not in the cycle. tom: maybe not in this lifetime. michelle: we have to accept the fact that there been structural changes in the economy and global economy. we have an aging population. if you look at labor force participation going forward, it's going to be slower. how francine, do you see michelle looks at me as she says aging population? what's that about? francine: she's talking about other people, clearly not you. let's go back to mark carney talking about banks and indebted households of u.k. gov. carney: a simple capital relative to the amount of assets

to the bank. at present, the banking system has 5.25% leverage ratio. we are reapportionment capital within the system. i'm not suggesting that doesn't have an impact. i'm not suggesting bank small ad capital to add a, but there is considerable lending capacity. which finish with this, is to go back to your viewers or people who are watching, but last year the u.k. economy net lending was about 65 billion pounds. 4% difference between that and the 5.25%, even after they built up the buffer, is equivalent to about 250 billion pounds of lending capacity. y is there and o banks will release it for good ideas and viable mortgages. >> tim wallace of "the daily

telegraph." are banks gaming the system? francine: that was mark carney giving a comment on some of the indebted households. when you look at fixed income, i want to concentrate on the yield curve and a great chart showing the treasury market volatility index is at the lowest since may 2013. what do bond market investors see that the fed does not want to admit? neal: i think the bond market flattening of the yield curve is because of this need for duration. when you look around the economy flows back, nominal cash in a lot of sectors are simply not adequate to deal with some of the nominal obligations that some people have. we saw taylor riggs before and we have been talking a lot about state and local governments and their revenue problems.

federal revenues are not red-hot considering the economy as well. it is pretty clear that what the bond market is saying is that there is not enough nominal cash flow to satisfy obligation and therefore the safety of treasuries is a some value. in reality we are not creating a lot of securities. the mortgage market is not having a red-hot housing recovery. corporate debt was growing rapidly a while back, not so much of late as governor carney cited in the u.k. context. consumer credit not growing the way it was. auto credit not growing as fast as it was. the scarcity of securities is not a surprise to people buying treasuries. with respect to volatility, i think a lot of this is embedded in a couple of developments. one is that the central banks, when all is said and done, will go softly, softly, gently, gently. they will not attack the markets

and that gives the low volatility by itself. and i think the indexing business going on in some of the areas of the financial sector to suppress volatility because you're not selecting one asset or the other. you are not asset allocated but staying in the market. thehat becomes more visible in equity context, but i think it spills over into all of our financial obligations. i'm not surprised by low volatility. i'm not even particularly unhappy about it, although i mindful some people are. francine: what you make of treasuries and what they tell us about the housing market? michelle: we have seen rates continue to come down and the flattening of the curve. part of what is happening is that investors are becoming a lot less confident that we will see reflation. you are starting to see the opposite where you're getting concerned about a deflationary environment coming back with not the typical mechanisms of

that phillips curve. tom: where is the mechanism that the orthodoxy speaks of? michelle: if you listen to yellen at her press conference, she continues to reiterate the midterm pressures are there, but clearly we do not see evidence of it yet. tom: why not? michelle: there is still slack in the labor market, long lags, or maybe it is even lower. we will see a good that out. -- figure that out. tom: meanwhile, we have to get on with our jobs. where is merrill lynch economic growth for the rest of the year? are we sub 3%? michelle: oh yeah. neal: this quarter might be better because the previous quarter was weak, but it's a two plus percent world. tom: two plus percent world is not politically successful of the united states of america. do we need more stimulus? nobody is talking about that , but nobody's talking

about that. michelle: look at where the stock market is. look at where the unemployment rate is. we are still making progress. talking about the unemployment rate going down to 3.5% in this bimodal economy. when he worked at the fed, was that thousand are hamilton or martin? we do not have a to america's analysis when you worked at the fed. neal: that is part of the change that michelle was setting. structural change creeps up on you. the transition from agriculture to industry come we tell it in textbooks as if it was a paragraph, but it took the century. there's a lot of change underway as we speak in the structure of this. the respect to where's

phillips curve and so forth, remember there was a time when we thought a big central bank balance sheet was guaranteed to give inflation. that was the big complaint a few years back when the fed did qe. that didn't work and now the phillips curve does not work with the timetable we had in my. maybe inflation is like the influenza. we should be humble about quite where it comes from. it does not mean not being prudent, but it does mean that we cannot be knee-jerk about this. i think the fed for all the moment it is puzzling why they are so eas eager to cut the balance sheet and raise rates and so forth, but they haven't pretty accommodating -- have been pretty accommodating so far. is suggestive of still accommodative posture. does that give you a lot of growth or does that prevent you from having a lot less growth than you would like? that seems to be the outcome so far. francine: you are talking about

the changing influence from year-to-year. what if we need a new vaccine? this such a huge shift in the way that our economy is working that you need to go back to the drawing board. do need to get back to the drawing board, what do we look at? neal: in the form of progressive do need to get back to the drawing board, what do we lookmovements and politics, we d the unbridled capitalism of the gilded age did not work anymore . trust busting, encouraging through public policy labor unions, all kinds of changes to accommodate a world that had changed. its not always so easy to know what the right changes are. they are never permanent because the world will change yet again in due course. there's an element in the politics here and in a lot of places that is saying something about this is not comfortable. something needs to change and maybe we have not found out what

that change is quite yet. soss and michelle meyer of stay with us. later today we will also hear from fed chair janet yellen. she is speaking live from london at the british academy. we will bring you that live event at 1:00 p.m. in new york and 6:00 p.m. in london. we are watching for what mark carney is talking about, the stability report saying that the bank of england will increase capital requirements. this comes on the back of mario draghi calling for continued euro area stimulus. a busy morning when it comes to central-bank watch. this is bloomberg. ♪

♪ francine: this is "bloomberg surveillance." tom inferencing from london and new york, although we have really been going around the world because we heard from mr. mario draghi, talking in portugal earlier on. we heard from mark carney, still talking at the bank of england potential stability report. we are also hearing from the competition commissioner. she find google a record amount. this is what we know so far.

this is an antitrust investigation. she's tried to field questions on donald trump and the u.s. she is basically saying this is not vengeance for the u.s. and there no european rival that can rival google. she says this is a case based on facts. the decision could resurrect .awsuits could ther google is fined $2.7 billion and they have 90 days to comply with that. because we will have our own competition with the eu competition commissioner. look for that at 9:00 a.m. eastern time. if you were to do the interview, you would have quite a lot of questions for her. tom: i think it is the most visible divide between europe and the united states of america. i don't mean it about google in general, but the whole slew of competitive dynamics is just extraordinary. let's go to the dynamics of politics and economics in washington. 70% ofuld be our 1

gdp was spent on health care. kevin, and "show within the chaos. you will go to capitol hill today. which of the five senators do you want to speak to? kevin: senator collins, senator murkowski, and senator heller. he is the most important. 17% of the gdp. i will tell you that privately some republicans like bill cassidy are trying to make the case that this type of legislation from senate majority leader mitch mcconnell is about only 4% gdp. they are already trying to downplay expectations and suggest that this is little more than obamacare light. to conservatives that's not enough. to moderate it's too much. hat tip to i get a l'affaire, which wrote in full essays on the minutia. say i'm flabbergasted by even $6,000 deductibles.

i cannot pay that. michelle meyer cannot pay that. how can we expect most americans to pay a $5,000 adoptable? kevin: they can't. this really does take me back to the campaign trail because this was without question a big part of the reason many voters in states like pennsylvania, where michigan, and wisconsin ultimately decide to vote front. it was a result of these premiums and these deductibles. as a result, the republican party feels like they have to do something to address them. it is very much unclear whether or not the plan put forth by the senate majority leader will be able to do that. francine: have you heard in the last couple of days whether there is a linkage between the battle over health care and the battle over potential tax reform in the future? kevin: they have really separated it. several months ago, we were under the impression that these two policy issues with have to be juxtaposed together. it is becoming increasingly clear that perhaps they don't

have to be. the new two issues that are being juxtaposed together are actually tax reform and infrastructure. look for a tax plan coming from the house of representatives by the august recess, even if the white house does not put forth one. francine: there was a lovefest yesterday at the white house. tom: mr. modi and mr. trump all hugs as well. this china toast? is this the new love affair with asia? kevin: i think the president wants to work with china, especially on north korea. where there is division between india and china is on h-1b one visas. with you that hug. -- look at that hug. we do not hear much on the prescription policy trades on visas, but look at that hug. cirilli, i will need some hugs when i'm in washington. he is our chief washington correspondent. single best chart here, i will go to michelle meyer on it. she is so staying away from me.

[laughter] we call this the taylor riggs rule. michelle, this goes to the orthodoxy that we can blame on neil soss. we have never seen this gap in the taylor rule and where we are versus the ancient history going back. is the orthodoxy debt? ad? are we in a whole new paradigm? michelle: as many different versions of the taylor rule. one of the challenges is that it makes assumptions of where we are. all these targets are really hard to determine and likely have been changing. you can look at some adaptive versions of the taylor rule. it's not necessarily as high. so i think that's a challenge. you do have to put your own judgment on top of that. tom: here is the taylor rule for adaptive. , help me out here.

myra is nehru that miss was talking about. come on, this is squishy to stay the least. neal: this is his extended. ending.cs an in the physics world, the odds are if it is learned, it stays learned. in a social life, the odds are pretty good that pesky human beings operating the social season and the economy will change. tom: francine, down here is the same row phenomenon. bring it up here again. rho, francine, what do you got? francine: neal is even funnier than you today. from pesky human beings, where do you see pesky bubbles? know, you never know bubbles until after they first.

in rapturous that come -- you never know bubbles until after they burst. in retrospect, it's obvious. broadly volatility is simply too low to be in equilibrium to see sustainable. it is not obvious to me that that is absolutely true, but i can identify forces that will give change to that volatility stored in due course. as long as the central banks are going to be relatively predictable, as long as the central bank allen shoots hold -- balance sheets hold sequester some of the more volatile instruments, peripheral debt and the ecb context, as long as we have stock ibex, which in effect take a leverage bet on the corporate sector and price-earnings multiple being greater than one and replace it with corporate debt, which is a leveraged that so to speak on corporate revenue from corporate

cash flow, volatility ought to be low. why is it such a big surprise that we observe that it is low? their big changes happening. -- there are big changes happening. no question that the modality of retail distribution in the u.s. and perhaps around the world is changing. maybe that's part of the google story we were hearing from europe a few moments ago. there's no question that commercial real estate in the context of retail distribution has some challenges. that does not mean that the volume of consumer spending is low. that means that the venue has changed. it is in the process of change. this goes back to what michelle was emphasizing before. period ofare in a change, comes on faster than expected. they can take rather a while to settle down. during that settling down process, you do not have to have volatility broadly. it is pretty clear that you will some very isolated and significant issues as we did

with dot-coms a decade and a half ago, as we did perhaps with energy a year and a half go. ago. these are sectoral rather than economy wide phenomena. francine: you see any bubbles in the economy? michelle: is very hard to pick out in real time where there are bubbles. pick out areas like housing, the area i like to think about, where home prices relative to income, most conventional measures would argue that prices are high relative to income. the typical signs of overvaluation are there. however, that can persist for a while in an environment where rates are low. you also have potentially limited supplies and restrictions in the market. i think it's very hard to identify the bubbles and to figure out when they may or may not pop. francine: michelle, thank you so much. neal soss and michelle meyer of

bank of america merrill lynch. the bank of england lending to increase capital requirements for u.k. lenders by around 11.4 billion pounds. this is as they try to tackle risks posed by consumer credit growth but also prepare for the uncertain outcome of brexit talks. we did talk about what brexit means for the future of the bank of england, not for interest rates, but for banks. later today, we will have the fed chair janet yellen speaking live here from london, tom. tom: janet yellen speaking at 1:00 p.m. new york time. we will have that coverage for you. it is a beautiful new york. not if you are a pitcher for the new york yankees. this is bloomberg. ♪

♪ jonathan: tax reform remains on

the back burner as the republican health care bill runs into resistance with some of its own lawmakers. the eu slaps google with a record $2.7 billion fine, accusing the company of skewing search results in its favor. present draghi provides fuel for the euro bulls. forces have been replaced by reflationary once. good morning. this is "bloomberg daybreak." i'm jonathan ferro alongside david westin and alix steel. futures are little bit softer in the united states. we are down by a temp of 1%, but there is your fuel for the euro bulls. 11262 on the euro-dollar. alix: seeing some serious selling off in the euro market. the yield jumping by six basis points in the same over the u.k.. if you want reflation, you buy equities, short bonds, and end up buying the euro. we take a look at the