earnings season. president trump is at abroad. republicans are putting together a half -- health care bill. the u.k. admits it will have to pay an exit bill. from your city, good morning. a well work -- warm welcome to bloomberg daybreak. i am jonathan ferro. flat on the dead s&p 500. are up by a single basis point. front and center, wall street. david: let's go through these earnings. we're joined by charles peabody. analyzed morgan stanley. let's start with you.

we are trying to process these numbers as they come out. it looks like a good story. allison: the first thing we look at is in line with some of these estimates we've gathered. the interest margin is something i'm looking at. the yield curve is something that everyone has been watching over the past quarter. pastgan has said in the it's more important to them. it down.merica had it were people paying attention to this? it doesn't like the interest margin is coming in low. david: it looks a fair making more loans and making it up on volume. allison: it has to do with the expectations. when you look at the data, it is slowing. it looks like they are talking about 8% loan growth for the year. i think we will hear more about

what they see in terms of demand. one of the things jamie dimon has been vocal about his tax reform and how that can help his corporation. charles, your initial thoughts? think there is $400 million in reserve recovery. that is $.12 per share. say $1.69. i would like to see what the tax rate was in some of the other issues. joanathan: what are your thoughts on that western mark compared to many analysts we have had, you have been more bearish. >> i've been skeptical about the earnings power. i don't know if you can put up bit e.g. function for jpm. if you look at that function it, you will see prices are going

up, but earnings estimates are going down. the marketplace is looking through second-quarter earnings toward mnuchin's promised tax reform. second-quarter earnings are being looked through. something you touched on was the importance of the results coming in to this earning season. from jpmorgan, it was not great. from many of these big banks, it wasn't great arid the prices up because of buybacks in the dividend. buybacksi think the where a positive surprise and will help earnings per share in 18. i think they are going to be very honorable to changes in the macro backdrop. that's was new. we will let you have your buyback, but we will cut them

off. i want to recap the numbers for you. $1.82.n is coming in revenue is just over $26 billion. these are the trading numbers. it's down $1 billion from last quarter. equities are trading down by 1%. core loan growth is up 8% year on year. expectations, you have jpmorgan down by .3%. allison, where are we? last quarter, that was the thing. you had credit card rising and charges rising. allison: i think that is the thing we are looking at. i'm not sure with the expectations are. they are looking at $5 billion for charge-offs.

they will continue to look at the consumer side of things. the commercial is where they focus to year ago. there is a tale one from that from energy. there might be some questions given what is happening with oil prices. people are looking forward. people are wondering about the business. card is tied to income and unemployment. the auto sector is something that is subprime. will that expand? , it tends toand not be isolated when you have those issues. alix: the credit card sales volume was a 15%. charles: that is for the whole year. that breaks down to $4 billion in charge-offs. did it card charge-offs come down a bit? that is what you would expect.

, they first quarter enhanced their earnings by releasing energy reserves. did that stop in the second quarter? you have improvement in the shift in corporate. that's what you want to look forward to. david: we are looking at citibank earnings. fdic is that with numbers in the auto area and credit cards. they are creeping up to multiyear highs. are we expecting increasing headwinds from that sort of failure? charles: the auto industry is not a big number four city or jpmorgan. it's not big. cards are the most important thing. we are expecting deterioration over a cycle. the seasonals are actually better. autos may not be that big. would that lead into other areas of credit western mark is the

credit cycle getting old? allison: i think that's why people are looking at auto. the card is the biggest area. if you look across the big for, the companies that we covered, there index versus the largest regional banking companies, they are over indexed to compute -- consumers. they have less exposure to commercial real estate and that's why it's so important. the question round auto, there been some issues going on there. if you look at the overall general health of credit broadly, it does look like consumers are really not using credit to spend. of aggressive marketing.

will that cause a bigger problem down the road? that's not a this quarter issue. are there signals of trouble ahead? charles: the expected was the sharp drop off. it was down 19%. i want to know how you plug in estimates of any quarter going forward and what the trading environment is going to be like. how do you do that? charles: i follow the different asset classes closely. i follow interest rate structures. let's look at junk bond spreads. when you get is tight as they are, on normal spread is round 800 basis points. to be a there is going widening base on what happens in the macro economy. that is why it can be very disruptive. that is one of the things jamie dimon was alluding to when he talked about the unwinding of qe.

i think we are looking at a very difficult trading environment in the second half of the year. i have very weak capital market expectations, which assumes capital markets start off and adjust the numbers as the quarter progresses. alix: on the margin, we know that arid it seems like that has high volume is challenging the banks. you think higher volume is going to be better? volatility isood broken down. thin liquidity, we have seen reduced engagement. we have not seen the volatility with prices. that is going to characterize the second half of the year. alix: what are we going to do about deposit data? do we have any clarity on that yet?

allison: so far, so good. are one or two rate hikes away from things getting interesting on that front. the data has been lower than expected. that is what most analysts expected given the environment we were coming from. charles: she is right. so far so good. there is a rate for developing. if you look at the nonbank system and the rates being paid there, it is 1.3%. it's the nonbank system that is starting to that up deposit rates. that will feed through to the banking system. i think the site -- seeds for a rate hike are being planted arid -- planted. allison: what's different this time, technology. this bank versus

that bank. it's very easy to go to your phone a get the latest rating. you have new competitors coming in. down the road, things are going to get interesting. joanathan: the benefit would be to get in the room and say no war on deposits at all. are withdrawing liquidity and that's going to be helpful. david: it would also put you in jail. joanathan: it's not in their interest. charles: they are paying eight basis points. there is going to be a narrowing of that back. .- cap alix: we will break down more bank earnings. it's time for your morning brief. they are reporting earnings threat the morning. we have wells fargo and 8:00. we will bring you an interview from robert kaplan at 8:10 a.m.

we will be on data watch. on, we are going to get industrial production for june. joanathan: that's coming up through this program. coming up, the u.k. must pay for the brexit bill. we will talk to the irish finance minister. from new york, this is bloomberg.

alix: the rate hike boils down to inflation. it needs to get back to 2%. janet yellen weighed in on her testimony to congress yesterday. >> we are aware of the fact that

inflation has 10 running below 2%. this is been for many years. we're focused on trying to bring inflation up to our 2% objective. alix: we have the latest cpi numbers. the fourth straight month of lower information. joining us is steven wieting. it's great to see you. how hard is it to hike rates if we get another miss today? stephen: it's not difficult. the scope of how far they go, they are planning their language about the future. it's not just this month, the next couple of months. for them to be thinking about having to go all the way back to a neutral policy stance, it will depend on seen some progress on getting up and inflation. the problem is inflation has the greatest inertia of all.

it's a hard to sway trend. alix: we hear the transitory. that's it we keep hearing. if you look at the cpi, that is rolling over. accountsn't bring into telecom services. can they still hide behind this temporary cat or is a station? stephen: despite the financial exuberance we've had in recent years, the imbalances in the real economy, there is demand it is not exceeding supply. we are very globalized. there is a lot of capacity around the rest of the world. that is holding inflation. massivelysome ambitious target. it does suggest that if you are worried about price inflation, you should stay on. of do you build up your

financial balances the you pay for against a future recession russian mark that is the sort of think they grapple with. it should give them some confidence that they can move deliberately and watch what happens. interaction between the economy and their policy. david: i want to pull up the chart. our colleague put this together. it illustrates that yellow line which is 2%. whether it's core pg or headline is theon, what relationship between monetary policy and inflation? will it ever get back to 2%? something more closely aligned like the labor market, the demand for labor is an economic fundamental. we had this very long time of

remarkable slack in the labor markets. that sank inflation lower. we have a lot of strength in the u.s. dollar in the last six years. this is holding back in place right now. the basic problem is do you create this for the future? you can pay for it with a lower inflation rate down the road if you don't have a more neutral financial setting. that is what they struggle with. it does give them room to go much more cautiously here, particularly as they approach balance sheet adjustment. they don't want to hold a larger bond portfolios and they need. this could stretch at this time of monetary policy. david: as we wait for the cpi numbers coming out, what is the balance you want? if there is a fourth month that does that mean you can

afford to come up with the balance sheets more western mark stephen: if they had nothing but downside surprises, they would probably put adjustment off until next year. again, if the economy were not unfolding on a path upward in terms of consumption and investment, that would change things and they would not be tightening they'll. i think they can't so easily calibrate this. by takingsucceeded things off the balance sheet adjustment by communicating it so's clearly -- so clearly. that minimizes volatility. in aare trying to tighten very cautious way. joanathan: let's talk about something more subjective. did you sense she was losing her conviction somewhat the last couple of days? stephen: not much.

i think we were in a time listening to central bankers. the outlook seem to be on autopilot. this is what we've got to do. i don't care about the facts. in the meantime, it was good to see her knowledge where they are with inflation. the labor market is not improving. fastness,e to improve you might burn out a little too fast. joanathan: is she unhappy about the interpretation given their concern of financial stability and her comments. speculating on her position. financial conditions are using while the fed is tightening. that is not desirable. you have to remember they are not hitting on both of their mandates right now. they are trying to be extremely gradual.

it would be a wonderful thing if the economy could blow inflation and prices into recovery. stephen is going to be staying with us. coming up, ireland's finance minister will be weighing in on the cost of exit for ireland. this is bloomberg. ♪

amount: they creating a new airline to operate flights after the u.k. leaves the eu. it will be headquartered. it will ensure the routes are shielded from fallout rum brexit negotiation. there is a changing of the garnett vanguard. the chief executive officer will step down at the end of the

year. he will be replaced by tim buckley. they have tripled in size. at&t is dialing up organizational changes. sayle familiar the matter they will drop the ceo title. he will become executive chairman. he will oversee ceos who will independently manage the businesses. that is your bloomberg business flash. bank earnings, jpmorgan is off i 10% to it was up by 1%. that is the big number. is $1 billion less than we saw in the first quarter. i want to dig into their loan growth portfolio. it was up by 8%. $425eserve build was million.

that is because of the higher loss rate, especially in the card does this. we are going to have to dig deeper to see what their readers about the consumer and the credit quality. citibank is on deck 48:00. that stock is up by .2%. the estimates are looking for that coming in. this is well positioned as any retailer to handle amazon's increase focus. focused, theys have been hammering when it comes to amazon. this is a great from goldman sachs.

it's going to be about those bank earnings. joanathan: coming up a little bit later, don't miss this one. the conversation with robert kaplan, the dallas fed president. he will be joining tom keene at 8:00 eastern. let's whip through things for you. futures go nowhere on the dow. the s&p is grinding toward a second week of gains. treasuries, yields are low. you are watching bloomberg. ♪

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...on the hotel you want. go on, try something fresh. tripadvisor. the latest reviews. the lowest prices. you are watching bloomberg daybreak. futures go nowhere on the dow after another record in the session. the s&p was flat as well.

there is not much price action across europe. we are about an hour away from some important economic data. retail sales are on deck. grinding lower over the last five sessions. single basisother point. been seen is is emerging. 2%. about the senateot republicans redo of their health care bill yesterday. it seems like there was something in it for everyone to love and hate. kevin's really is joining us. pity to republican senators, they can only afford to lose two said they are voting against. kevin: there are more that are undecided heard -- undecided.

there is a large contingency right now people who are very much undecided for very different reasons. there is no room for error. the president is overseas right now in france. he is tweeting this morning, urging republicans to all in line behind mitch mcconnell to do this. he is said the vice president has worked very hard in order to get this done. they are trying to get it approved after seven years of vomit care. corkert up with bob yesterday. he seemingly is supporting this plan. not repealinge some of the taxes. does is keep revenue

base in place, tax reform will deal with what, taxes sure should not be in place. i don't the giddy but he should look at the types of taxes. look at it as a revenue base. kevin: there you have it. lawmakers say let's get through health care and then we can get to tax reform. david: leave us with a thought on tax reform. we get the cbo score on the budget. it said we can't tell. it's way too optimistic on growth. his is going to help tax reform? kevin: the republicans are saying they like the cbo score. does it help? it does. they cannot get to it unless they first address health care. there is no appetite to juggle

two issues. david: thank you much. we will come back to you. after such high hopes after donald trump's election, things have settled down quite a bit there is still room for some upside surprise. even: there can be surprised from washington. politics is surprising all the time. what markets have become used to, when something gets done it's a more substantial surprise. think of the impact on potential trade issues, all of these positives and negatives from november through january, all of that is in the marketplace. it's a very small risk that there will be some substantial stimulus. that could change things. it could be a much more substantial surprise.

does it mean the probability is as high as it was? it does not mean the size of the impact of the needle much. it is now priced out of the market. david: what about investors? are they spending much time focused on what going on in washington? stephen: there is less focus on it. the good news has been that the world economy was more resilient, stronger and interest rightthat could be used u.s. policy are less disruptive in the world. we are not going to have the kind of disruptive and positive affect on domestic activity in the rest of the world. we scaled back considerably the scope of action. alix: it was go long.

we have seen the trade for the dollar and treasuries reverse. how do you explain that? steven: it's different kinds of equities. companies with very high tax rates have not been outperforming those with low tax rates. -- ofies with overseas not been performing any differently. these metrics tell us we are substantially priced out. the exchange rate has been priced out. this is based on some big plan. alix: i'm looking at the index, it's right around record highs. i wonder how much is taken to that. trade wars seem to be bubbling up again. steven: we've had a nominal trade agreement with china on energy and agriculture. nafta is not falling apart.

if you look at the overall backdrop, this is a u.s. earnings tape with 12% growth. the backdrop is changed. that is going to have some influence. alix: you're going to be sticking with us. coming up, the u.k. accepts it must pay the brexit to leave the you -- eu. ireland's finance minister will be waiting on that next. this is bloomberg. ♪

emma: exclusive interview with robert kaplan at 8:00.

joanathan: from new york city, the british government has conceded on paper it will have to pay a bill to leave the european union. said this in a statement to parliament and joining us is the finance minister ireland. it's great to have you with us on the program. let's start with the exit bill. -- brexit bill. have you got any idea what the numbers are? european unionhe wants to do with ireland is supportive of is the process in relation to that. at the end of that process, that yields a figure. that is very important to the european union to i think what crucial at this stage is both parties engage in this.

joanathan: i appreciate you using the word european union. what is ireland's interest? will there be budget gap western mark a range ofere are financial consequences. one is the environment of the union. we're participating in this is a member of the european union. arefinancial consequences very significant. what is as important is how we develop a relationship with united kingdom in a processed brexit u.k.. there are also issues that are very important to us in the

context of the peace process in northern ireland. joanathan: let's take out of those issues. with the prospect that ireland could be undone by the european union exit. could you seek any aid package to compensate you for what may happen on the other side of that exit? nature of thethe exit of britain from the european union becomes clearer, the irish government has indicated we want the consequences to be recognized. what we are also doing is what steps we can take with the resources available to us to deal with this issue. we are engaged in a process of looking at how we can strengthen our own investments into irish capital like our universities and public transport, to make

our country more competitive in the future. of course, we have an ongoing focus on what we can do to ensure our economy and tax rates are competitive. as a result of that, we have seen 200,000 jobs created in our economy. we will continue without work. you,a trading appointive we will have the most effect. joanathan: i want to get into the financial aspects. from a trading point of view, like can they not agree with the united kingdom? paschal: we had a process with japan for many years. this is as we have with south korea and canada. this is the process that has been underway for quite some time, it's assigned to the

european commission to negotiate on our behalf. they have said that future engagement will be after the current relationship will be between the u.k. in the european union. joanathan: i understand that it takes time. i get that. the approach seems to be very political, about punishing the united kingdom. the sensible economic approach would be with japan. from ireland's perspective, is your message to europe get on with it? paschal: the outcome of the byde agreement is driven clinical objectives it is driven by the understanding that trade when it's free and properly structured is mutually beneficial 12. there is no intent to be engage in a process of punishing the

united kingdom. very brieflyendums in ireland. we respect the decision of the british people. in terms of the pace of negotiations between you and the u.k., we are participating as members of the union. we think what's important is we have negotiations that are successful. particularnt a timeframe set against them. the negotiations have to be concluded by a particular point. but we have always said as we think it will be increasingly important to look at the issue of transitional agreements, to see how the british economy and the european economy can move to a new landing point in the next years. david: tickets into the mechanics of the negotiations.

each country has somewhat different relations with the u.k. right now. linesd is on the front with the land border. into this have input position? are there other countries aligned with you in what you think ought to be done? paschal: i think that's a nice way of expressing it. within europe, we have the commission, which is an institution. what all the existing members of the european union have decided is we will allow the commission to negotiate on our behalf. regulare through contact from government with the commission. different i met two commissioners who will be

involved. they are essential to the commission and the work that goes on. ongoing contact at the highest level. the mercy we are at of a news break. we have earnings from citigroup out. it's an upside surprise. it is $17.9 billion. the estimate was $17.4 billion. a decent upside surprise across the board coming from citigroup. i do want to talk to about the financials. some of those big banks in the united states, what are you doing to attract banks from london it? have you been disappointed by the dividend it?

>> we have a very significant financial service industry in ireland. dublin is one of the capitals of europe. disappointed, we are making very solid progress and getting more than our fair share. we've seen for example jpmorgan make a big impressment in ireland. they're looking to create more jobs there. we expect very soon announcements in that area. joanathan: you sold off 25% of allied irish banks. i understand you need cabinet approval to sell more. given the share price performance, how likely is it you will seek the approval? anythingwe can't sell else in 2017. we are in a lockout.

we sold over one quarter of the bank recently. in terms of any future we will the market conditions continually. we will see other opportunities to make our banking sector more sustainable. process ispens, the to go back to the irish cabinet. joanathan: i do want to wrap things up. the president of the united states would like to slash the corporate tax rate what are your thoughts on what that means for the competitiveness of ireland? you have had a competitive advantage with the tax rate. that's a matter for president trump and the american political system to decide what a want.

looking at any changes that may happen, we are confident we have a competitive offering, broadly across our country. what we have in our corporate tax code is a long-standing response to the scale of our economy. we now have to offer so much more. in terms of the infrastructure of our country and what we can offer investors want to come to our country. we are confident ireland will offer a very competitive offering to international companies want to come to ireland, not to mention the huge number of irish can -- companies. joanathan: we really appreciate your time, sir. alix steel is sitting in.

alix: here is the deal. 128 earnings per share. let's get to the juicy numbers. you've got revenue down 6%. it was a the versus estimates. investment banking is crushing it your onion -- you're on your. also, the commentary on consumer banking. revenue is up 5%, deposits rep, loans were up. allowances for loan losses was down. moreve more loans, but not for loan losses. we will discuss that dynamic through the next two hours. if you have a bloomberg terminal, check out the go. you can interact with us directly.

♪ this is bloomberg.

joanathan: earnings are coming in for citigroup. alix: revenues almost $18 billion. equities a down year on year. investment banking was the best in seven years. charles: the numbers are stronger-than-expected the revenue number was in line. thetrying to figure where heat was. i don't -- i haven't seen the numbers yet. alix: we are going to the press

release right now. consumerl customer rating was up as well as their loan and loan losses were down. that feels like a different story than the headline at jpmorgan. charles: they been talking about generating positive operating leverage out of mexico. american banks, they've been looking for the second half to be with the story starts to build because of the card business. you want to look for something in the card is this that shows momentum. have higher rates bailed out? charles: that was the big disappointment. topline revenue to be up $400 million. it was only up $100 million. thatheir loin -- lowering guidance. joanathan: what is your base

case? charles: i think this gets back to the core businesses. i do think they are showing a lot of momentum. whether you are talking about cards, mortgage banking, lending . it even the capital markets. alix: is it too early to say who will capitalize on these credit issues? charles: i think we are at the point of diminishing returns. you saw that in jpmorgan's quarter. and if you will see that in bank of america. they've been lowering expectations. i don't think higher rates of the big story going forward. the great war has a tendency to pick up at this point in david: there is a certain irony. you think about cards and international.

that does not seem to be the top of these earnings. even in the fixed trading, they did less well than last year. they came in much closer and better than estimates. charles: they've got one of the best platforms in the business. that is their core strength. they need to improve and the equity side. i have not seen those numbers. david: it was down 6% in fixed income. joanathan: we've got to leave it there. thank you very much. we would get those bank earnings wrapped up for you. from new york, you are watching bloomberg. ♪

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the lowest price... ...on the hotel you want. go on, try something fresh. tripadvisor. the latest reviews. the lowest prices. ♪ jonathan: jpmorgan and citi kicking off earnings with a

beat. the pomp andd by ceremony abroad. frexit negotiations take a baby step forward. negotiations take a baby step forward. from new york city, good morning. this is "bloomberg daybreak." i am jonathan ferro alongside david westin and alix steel. here is wells fargo. they are coming in at $1.07 a share. the number i am interested in is creditvisions for losses. the estimate was over $800 million. credit provisions for the last -- 605 million5 -- $605 million. the number we are looking to is what will happen to their

mortgage, what kind of loans they are going to see. we will bring those numbers as they cross. jonathan: wells fargo earnings, citi and jpmorgan. we are joined by charles peabody and allison. what jumps out? >> net interest after jpmorgan's notable miss. fargo one basis point better than expected. keep in mind they have hedges going on there. credit also coming in better than expected. their charget offs, less than expected. seeill want to dig in and how they did. interesting that it has been able case for banks. credit is a bear case for banks.

it looks like credit may be weakening, so that may be a focus rather than overall credit. people will give less credence to a beat based on energy adam moore on the consumer book. charles: alison hit it on the nose. i do not follow wells fargo. the question is what would happen on the corporate side. released implying they on the energy side? alison: it looks like charge-offs themselves were lower. of $555 million versus $804 million. you also have to be careful of year-to-year. because there was a tax adjustment. numbers on loan

origination? alison: i have not see them. alix: i have them for you. total average loans up by 1%. 6.1 were up by about billion -- 64 $1 billion. david: relatively -- $6.1 billion. it is important, particularly for wells fargo. one of the questions is the continuing consumer relationships. the concern by investors if -- is if they can hold on to those positives. they are also looking at the cost side. at 601%.ing on to the that relates sales and conduct issues of last year. people will also be looking at retail metrics. we were getting monthly updates for a while. investors will be looking to see that they are continuing to come

out of that. jonathan: there was concern about loan growth on the corporate side, and consumers, through the rest of the year. what did we learn so far? continues,an growth but it has slowed incrementally. it continues at a low to single-digit range. jonathan: coming into the year, confidence right appeared. what is your case based on the median estimate on the street? charles: i think you see the soft data rollover closer to the hard data, which continues to be sluggish. david: loan growth is up , newtly, but issuance corporate issuers, is down somewhat. does that give us warning signals about where we are going? i think there is a lot of hesitancy about what future policies are going to look like. and you are ceo

trying to plan on a five-year project and you do not know whether the tax rate will be 25% or 20% or 28%, it is hard to make that commitment right now. you do not know how long it will be in place. if that tax cut is not paid for, it could sunset after three years. it is hard to make commitment. was interesting in the past few quarters is we could paint banks with a broad stroke. are we in an environment where we are not going to be able to paint the banks with one broad stroke, they will be idiosyncratic stories? alison: there are always broad theds, so u.s. gdp will be core driver of earnings growth. then it depends on bank positioning. u.s. interest rates will help bank of america the most. six trading -- fixed trading is

more important to citigroup than some of the other companies. netles: i have been interest number four citigroup, and it is down 1% year-over-year but up 3% sequentially. that is kind of in line, but weak. be someems to indication that top line revenue growth is not as strong as expected. jonathan: set me up for next week. goldman sachs coming out as well. what do we expect? charles: the big issue is what will happen on the trading from. and -- dman the one thing that differentiates goldman from jpmorgan or citi, is they do not get as much benefit from nii. i am trying to figure out if

jpmorgan's shortfall was related to their trading. the importance is whether you have a more areitutional base or if you -- set me up for earnings next week. charles: citi has a strong situation -- relation to for the corporate client. goldman is more interactive with the broker, which have been less active. sure that explains citi's wrong banking activity. alix: sustainable? alison: we will seem next quarter. alix: but we had that question with fic. alison: it is a question of what is the driver. sharek a lot about market

every quarter, but a lot of it has been to your point that it is mixed. corporate clients are outperforming. .ou see it in citi's results if commodity has a huge quarter, it will help goldman more than anyone else. charles: investment banking trading tends to seasonally weaken in the third quarter. but a lock a change based on central banker comments -- but a lot could change based on central banker comments if yellen makes strong statements about the future. david: the problem with the banks is regulation -- would any of these results be affected by less regulation? if there is not a demand for loans, it does not matter how many reserves you have to hold. alison: the good -- the big thing they're looking for in terms of policy is tax reform.

i am sure jamie dimon will talk about that today. from a specific bang greg latorre standpoint, people got excited about -- after the election about change. investors are learning those changes will take time. indication,itive but some of the changes investors are hoping for are not going to be as immediate as perhaps they had optimistic about. williams and charles peabody, thank you for being here. coming up, the man you want to hear from between come on the one hand, chairman janet yellen -- robert kaplan. we will talk to him exclusively. this is bloomberg. ♪

♪ jonathan: from new york city, let's go through the market action. stocks that flat head of the open if you're looking at futures, that is the situation. now he can head over to tom keene. tom: we speak with robert kaplan of the dallas fed. we welcome him into our bloomberg radio studios here in new york. president kaplan is in mexico city, an important part of the dallas fed mission. let me begin with the idea of why you are in mexico city. u.n. i know the research heritage -- you and i know the research heritage of the dallas fed. did you have to climb a wall to get to mexico city today? not at all. we have a very long-standing relationship with the dallas fed , with the central bank of mexico, and with senior government officials of mexico. andme here regularly,

officials from expo come to the 11th -- from mexico come to the 11th district regularly. theyphd's there, did quantify what a trump wall would mean to the gdp of mexico or to the 11th district or to america? robert: let me state it more positively. one, the trading relationship between the united states and mexico, our research at the dallas fed shows it is critical to competitiveness in the united states. that aree goods imported from mexico to the united states are what are referred to as "intermediate goods," meaning goods that go

back-and-forth across the border as part of integrated supply chains and logistical arrangements. and 40% of the content of u.s. imports from nice account is u.s. content. u.s. content. is this relationship has allowed u.s. companies to be more competitive in their manufacturing, allowed us to grow jobs in the united states. if we did not have this trading relationship, we would probably lose those jobs to asia. tom: you know i have a good team helping me here at bloomberg. let me begin with michael mckee on nafta. out does robert kaplan need of new nafta negotiations? robert: as a central banker, i will be careful about not commenting on a specific trade negotiation. i am optimistic, talking to parties on both sides, that the

importance of this trading relationship and the fact that it is more of a strategic supply , sophisticated logistical relationship, i think that is being appreciated. i am relatively optimistic, and people in mexico are as well, that this will be renegotiated in a successful way. tom: we just heard testimony from chair yellen. help me with the word "transitory." toave a definition back 1734. i want to know cap live's -- k aplan's definition. at 8:30? and -- end robert: there are two parts. at 4.4% unemployment and relatively low amount of labor slack, and i look at u-6, which

is the unemployed plus discouraged workers plus people working part-time for economic reasons, and that is still not far away from the pre-recession low. at that level, you would have seen more inflation pressures. we are not, so far. march was weak. april and may were a little stronger. i believe some of this is transitory, meaning there is some one-time factors in the march numbers. but i think some of it is not. technology-enabled disruption. workers are being displaced by technology, shoppers are using technology. is this is how far less pricing businesses have far less pricing power. and, to some extent, globalization, that goods and forices are being competed

globally. some of this muted inflation is because we are in a different economy. tom: that is brilliant. for the pricing power issue, is this a different rising power madee than the one that jack welch? robert: it is dramatically different. -- newe of disruption business models being replaced by more efficient models that are technology-enabled. you go down the list. the film industry. kodak getting replaced. retailers being displaced by amazon. uber displacing taxis. it goes on and on. because of that, businesses, even if they have wage pressure, which i think there will be more wage pressure in the months

ahead, it is harder for them to pass that on to consumers. consumers have far more choices. traditional business models are a rate iplanted at have not seen in my lifetime by new business models that are cheaper and better value for the consumers. tom: robert kaplan joining us from the dallas fed. bloomberg radio and television worldwide. will seell, you say he wage growth. when will he see it? robert: i got to tell you, in my conversations with business leaders throughout the 11th districts and throughout the country, we are already seeing wage pressure for skilled workers. we are now starting to see more wage pressure for unskilled workers. companies talk about the word "churn." unskilled workers are leaving for higher wages, and they

realize they will have to pay more to keep those workers. lag, you willa see more wage pressure in the months ahead. we are seeing labor shortages across industries. increasingly, for unskilled workers. that makes me think we will see more wage pressure. tom: robert kaplan, i think you and john williams are attuned to dynamics. analysis oftiful the timeline of rate movements versus balance sheet movements. our carl riccadonna is focused on the dollar dynamics of unloading that balance sheet. do we care about currency movements when we finally taper to this or that? robert: currencies and the dollar strength or weakness is something we watch carefully. i am sitting in a country that

has had enormous currency volatility. that has spurred inflation here. the central bank of mexico has had to raise rates 10 times over the last number of months. so a very volatile currency can have an effect. own judgment on the balance sheet in the united states, i think we designed it to be done gradually in a way that is expect willat i have a minimal impact on the treasury and mortgage-backed securities markets. we designed it that way, to be slow, gradual, so it minimizes the destruction -- disruption. tom: robert kaplan, you got to answer this -- you are more qualified than everyone in the federal reserve system to talk about leadership and transition. you are classic book -- your

classic book. how theyr politicians get to june of next year with a presumed retirement of chair yellen or vice chairman fisher and empty governor seats. what is the best practice for politicians to get to a good and better fed in 2019? i will not comment on potential candidates, but i will say this -- there are two major qualities i would highlight in a fed chair, said governor, or fedn fed resident -- sai governor, or fed president. he or she must be a respected person in the economy and have that on economic policy

are relevant. they have to be respected. the reason that is critical is the second part of the job, which is they got to be able to mobilize a consensus among presidents and governors. it is much easier to do that if you have interpersonal skills and people skills, but it is much easier to do that if you are respected in your own views. it is much easier to forge a consensus. i think the next chair needs to have those qualities. janet yellen does have those qualities. a replacement needs to have those qualities. tom: we have an eclectic fed. i think of others over the years. we have mr. quarles being appointed. how crucial is it to have a monetary phd, a la chair yellen, a la bill dudley, and certainly

la stan fischer. how important is it? robert: i think having very strong, grounded phd skills -- and i am speaking as someone who does not have a phd. tom: somebody would say that is an advantage. he is in france right now. robert: i understand. i would say you need to have some number of people with phd, strong, technical, fundamental skills. need somehink you number of people who have a different background, is this background. background. i think the combination is powerful. i would not go so far to say which seats need which skills, but as long as you have a mix

and you have a leader that is good at organizing and orchestrating that makes -- mix, the fed should and will work effectively. tom: is this a fully employed america? employed fully america? robert: it is an america that is getting close to fully employed. in prerecession low was 8.1% unemployment plus scourged workers plus people working part-time for economic reasons. i prefer that measure over the headline unemployment rate. eight point 1% was the prerecession low. we are at 8.6 percent now. that tells me if we are not at full employment, we are moving close to getting full employment. i am not sure we are there yet,

but we are moving toward getting there. tom: thank you. so much alix: that was tom keene speaking with dallas fed president robert kaplan. david: key, given janet yellen's testimony. and we have cbi numbers in a few minutes. we will get reaction now. we are joined from london from and carln medecin riccadonna. alixhe point alex just -- just made, is the issue with inflation, is a transitory or structural? mr. kaplan wants it both ways. carl: i will say both, because we have these one-off factors, whether it is cell phone contracts or drug prices.

those you isolate components, you still seek soft inflation and inflation that is backsliding. the fed is taking a step back and realizing what they saw in march was not a one-off event and there is a more pervasive problem. it is difficult for the fed to we arehe table and say serious about a metric focus on 2% inflation is they are accelerating -- if they are accelerating the pace of inflation. david: what does this mean for an investor? a. kaplan said there is profound change in the economy because of technology and globalization coming together. one other things it means is a reduced pricing power on the part of companies. how does that affect you as an investor? jean: i could not agree more. it is interesting to see that president kaplan recognized the structural forces of

globalization and technology disruption. but on the other hand, the fed is still relying on this academic framework. investors, what we could have --a continuous the nine benign monetary policy. in this environment, where growth is moderate and where interest rates are relatively moderate, particularly in the is powerful or that question. jonathan: i want to ask about the balance sheet. he referenced that short-term rates are what matters for the

fx channels and that balance sheet unwinds for a term premiums. you do not think that holds true for the balance sheet? they do not seem to have a clue either. carl: i do not know if it holds true, because this is something that has never been done on a massive scale by a central bank. thatould have low faith the balance sheet will run out havealf the dollar we -- the dollar weaken. we should not be definitively saying this certainly will not happen, because if we have a strengthening of the dollar, that will cause considerable problems for the fed agenda, not only as it tightens financial conditions but also as a drives inflation even further. alix: this goes to the point

that it seems the balance sheet reduction is about economic growth, but somehow rate hikes are about inflation. does that make sense to you? drivethe fed is trying to a wedge between the two, which is ironic, because when they introducing qe, the message was this is the same as interest rate cuts, and we can describe a certain amount of qe2 be equivalent introducing to rate certain amount of qe to be equivalent to rate cuts. things go haywire, the balance sheet will be the only strategy, and then it will not be theive, it will active strategy, especially if they have to dial back the number of rate increases. jonathan: carl riccadonna, thank you. medecin willean stick with us. bond trading up and down. the press should focus on things

critical to america, like infrastructure and tax reform. david: a little trump-ian. jonathan: we will bring you highlights on that in a moment. the economy and the data that dropped right now in the u.s. cpi comes in month on month, 0%, dropping -- rising from -0.1% previously, just below the estimate of 0.1%. year on year, coming in at 1.6%. below the median estimate of 1.7%. retail sales. month on month, coming in at -0.2% from a revised -.01%. surprise on retail sales and inflation. that is not what you want to see

if you are looking to raise rates. you can see the market today the dollar index down by one third of 1%. average weekly earnings were up over 1% year on year. that is what is odd. retail sales week, inflation lower, and yet earnings are higher. robert kaplan pointed that out. david: the one thing you know is if it is transitory, it is not transitory for four months straight. alix: but what was weak? david: to help us put these numbers in perspective, we want to go back to jean medecin of carmignac. we have four months straight of softening inflation data. what does that tell you about the economy? is this a temporary thing? jean: it tells us the american is at the aging side of

its economic cycle. we have economies around the world that are accelerating. slowing downomy is gently, but still slowing down. of the moderate inflation is something which is going beyond the economic momentum. there are some structural forces behind it. necessarily bad for investors, because it ensures we are keeping an environment of relatively moderate interest rates, which is important to support the level of equity markets. a famousd paraphrase central banker, i would say we are in an environment of rational exuberance. alix: what is your base case for the fed, when we have this fourth month of weaker inflation? jean: we've think what is important for investors -- we

think what is important for investors is what is going to happen with the balance sheets. it is more important because there is no textbook for a shrinking of the balance sheet this size. cautious one segments of the fixed income space, like credit, where you do not get the valuations which will help you to whether -- to weather this. alix: also joining us is frances donald. in terms of the weakness, did we learn anything? airlines were the biggest hit. frances: we wait categorize that as an idiosyncratic factor. what we need to focus on is the core service numbers. reservewhat the federal is going to pay the most

attention to. we need to recognize we will not solve the is it transitory or structural question this month. onathan: just saw a comment twitter that said "transitory forever." this has been a number of months now. how many months does a have to be before it is a trend? frances: we have three more of those prints by september, which is why we have a balance sheet reduction and not a rate hike, because i do not think we will have solved those numbers. the wireless cell phone numbers will take a year to shake out. but there is the difference andeen one-off factors cyclical price declines. we are seeing auto prices decline. seeing things like health care inflation fall. those may be a cyclical trend in terms of a one-off. david: so it comes back to the fed and what they should do with this information. frances: yes.

one of the important things we learned is in june, we heard a speech from janet yellen, where she seemed to downplay her concern about inflation. she has reversed that. from my point of view, inflation numbers probably will not influence a rate hike, but it will influence the order of events. with numbers like this, it looks like balance sheet reduction comes first. david: we focus on inflation and what it will do to the fed. if you are a company, often, inflation is the move towards increased earnings. what is the danger that if you slowingo have inflation, it may affect earnings down the road. the reflationary momentum of prices has been good to our earnings of corporations. if we go in terms of earnings downh this year, it is

primarily to this environment. we have to be careful we are not back in a deflationary environment. low inflation environment, we have subdued wage growth. thead released numbers in u.k. where we also had a record high level of employment, and we have a higher participation rate than in the u.s. market,the strong job we see that wage growth is slowing down. for corporations, this is not so the cpi measures but the relationship between cbi on one hand and wage growth on the other. see thecorporations environment as relatively favorable. alix: we did see weekly earnings rise over 1%. when you look at the cleveland ,--cleveland median

cpi, it is supposed to strip out the cell phone numbers. at what point is this a strand -- a trend? frances: even the san fran said the price isat increasing -- this is actually more motivating. 68% of the items are still ,eeing increases out of the cpi so this adjusts we have price momentum. and we are closing the output gap gradually. structural force that will push inflation higher over time. we are in the camp it will stay below 2%. core inflation has been structue that will push at 1.7% average.

i would not get overwhelmed up by things like airfare prices, which are clearly not an example of deflationary forces. alix: you know people will talk about airline prices the next threei would not get overwhelmep months. jonathan: transitory forever. frances donald of manulife, thank you. jean medecin of carmignac wills the growth us. stickion data -- will with us. inflation data more than forecast. 1.6% on the cpi read. signs of some lost momentum in the u.s. economy. that is the story in the markets. let's cross over and get you some headlines. here is emma chandra. emma: trump and the first lady are headed back to the u.s. they attended bastille day in paris, which marks 100 years since the u.s. answered world

war i. mcconnell., mitch latest health care bill is almost certainly headed to another rewrite. appease aeeds to handful of republican moderates worried about medicaid cuts. 's" from has drawn 2 "no senate republicans. two israeli police officers have been killed and a third wounded after an attack. the attack took place near a sacred site in jerusalem, revered by both jews and muslims. the gunman was shot and killed. the british government has conceded it will have to pay a bill to leave the european union. david davis referred to financial settlement in a statement to parliament. is -- t bill

global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. i'm emma chandra. alix: thank you. week, laura efron will be joining us next week. jonathan: here is the market action for you. reaction to economic data in the united states. the real story will be the price action elsewhere. the 10 year yields pushing lower by four basis points. in the fx market and g10 space, the dollar weaker against every single g-10 currency. just off a high for the year -- 1.1489. this is bloomberg. ♪

♪ emma: this is "bloomberg daybreak." this is the hewlett-packard enterprise green room. oil and gase's president. this is bloomberg. ♪ now to your bloomberg business flash. at&t is dialing of organizational changes following its acquisition of time warner. randall stephenson will drop the ceo title he has held to become executive chairman, where he will oversee a pair of ceos. there is a changing of the guard at vanguard. the second-largest money manager said its chief executive officer will step down at the end of the year and cede his role to tim

buckley. european car demand rose at a slower race in -- great in june. brexit related concerns weighed in on a vehicle market said to be peaking. that marks the strongest june since 2007, but it was a high may jump. alix: thank you. disappointing cpi numbers out in june. to me, it is all about oil. you have core and regular cpi. core, the whitepointing cpi is line is regular. correlation,erfect but it is undeniable as we have weaker prices, we have a decline in core and overall cpi.

-- this is my thesis that everything in the world has to do with oil. what is your prediction? >> i think we get a bit of recovery in oil prices. it is season really a period where we see a pickup in demand. we will see inventory draws pair prices have retreated enough that we will start to see a slowdown in this relentless pace. some recovery, but we are obviously at low levels. you need followthrough beyond the back half of the year dependent upon opec taking further action in the market. the real question is what is the marginal cost of shale. it seems every analyst is lowering back. goldman sachs is the latest saying it was $50, now it is $45. why are we at this level at $48? jason: it is right to have cycle

economics if you are drawing from a well. but there is also the incorporate cast -- cached cycle to consider -- cash cycle to consider. so you get limitations on the ability to put further rigs into production. alix: this story of energy equities, that they are the value trade, but no one seems to want to buy them because of their relationship to oil because of potential dividend cuts. what is your take on the sector? u.s. we are positive on energy companies, shale energy companies. in the sweet are spot in the sense they are not just relying on oil prices but also on the volume train coming oil products in the u.s.

it has been penalized at the top of the year from the up and downs in oil price, but we maintain a constructive view. we believe demand is quite robust and that, in particular, there is a lot of negative perception in the market that shifts like electric cars will negatively hit oil demand. electric vehicles, even if you build some aggressive assumptions, will not make up for the increase in oil consumption from boats, aircraft, or trucks. we think from a demand standpoint, the outlook remains well supported. talk about big oil -- that is the big case. can they cover their dividend, their growing debt loads? call?s your

aren: in particular, there companies in the u.s. that have lowered their cost structures significantly that they can cover their capital expenditure requirements, as well as their dividend. fitron and conoco really that description. they are companies that can generate a good level of free cash flow if we get into a of $50 cash flow. companies need to be able to grow their eps in a way that is not dependent on oil price. chevron has strong production growth coming through. conoco has an aggressive share program. alix: so chevron and conoco are two of your favorites. which oil stocks do you need to avoid? jason: we do not have any stellar ratings, so we have to be careful. but you want to point to those companies that have a hard time covering their dividend and capital expenditure requirements

in something less than a $50 price environment. we do have underperform ratings in europe for those reasons. amongst u.s. names, we see occidental petroleum as requiring $60 per barrel to cover capital expenditures and their dividend in 2018. alix: great stuff. jason gammel of jeffries and jean medecin of carmignac. it still depends on "if." you have bloomberg terminal, check out tv . check us out online, interact with us directly. if you missed anything on the show, you can just read watch. -- re-watch. this is bloomberg. ♪

♪ jonathan: from new york city, let's get you up to speed.

economic data came out in the united states soft. retail sales down a second straight month. transitory, the fed called it. inflation looking soft as well. here's the story in the bond market. yields lower by five basis points. 2.29 on the u.s. 10 year. and the softer inflation pulling the floor away from the doctor. a weaker dollar story. 1.2999. 1.1451 is how we trade on the euro-dollar. some weak data in the united states. that is the story on the east coast side. on the corporate side, asome wef bank earnings coming through on wall street. i want the crossover to julie hyman, who has been listening to the jpmorgan call. this one sided fascinating. how interesting is it? julie: they have just begun the

q&a portion of the call. the first question came about the fed's unwind, marianne lake answering and saying that the bank is expecting normalizations of balance sheets to begin in september. she is talking about shrinking $1.5 billion the next four years. she says that does not mean a dollar per dollar reduction in deposits, but we could have a $75 billion reduction in deposits, so it would slow, not stop, growth. talking about the effect not just on her bank but banks overall. there was also interesting -- jamie dimon saying that the media call should focus on infrastructure and the opioid crisis, speaking politically, as he has tended to do on recent calls.

i do want to talk about what is going on with the stock price this morning, because it is lower. the company's forecast for net interest income is a reduction for the full year, late on the call, because of increased cost to mortgage services. she also says there is a little work commercial bank net income. thought it was fascinating that jamie dimon comes on the call and says who cares about the two weeks of the bank's earnings, look at d.c. david: and he said that traders are trading -- on the weather. jean medecin of carmignac joining us from london. is bond trading like the weather? but i think not,

what it is showing you is you get a lot more bang for your buck by investing in european banks at this stage of the cycle, where there is more opportunity to see credit growth accelerate or even interest rates. it is interesting to me how quickly people want to bring up their european trades without even being asked. you have done it with year. banks this time. when you look at the situation of european lenders, what do you think of state aid being introduced this late after the financial crisis? does that so you with some dread? jean: we need to be a bit more specific. had aalian situation little bit of a time lag, but when you look at the situation of irish banks or spanish banks,

the situation has been dealt with a long time ago. we believe that some of the irish or spanish names are interesting for investors. alix: thanks, jean medecin of carmignac. coming up, david lefkowitz of ubs will join us on inflation, retail sales, and bank earnings. jonathan: let's get you set up for the cash open. s&p futures up by about 1/10 of 1%. is in bond yields, grinding lower. byasuries bid, yields above -- yields up by about six basis points. ♪

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inflation forces fade and retail sales drop for a second month. j.p. morgan and city kick of earnings season with a beat. president trump is wooed by the pomp and ceremony are broad. at home, republicans uncle to put together a health care bill they can agree on. from new york city, good morning. welcome to bloomberg daybreak. i'm jonathan ferro. alongside alix steel and david westin. , thees are up about .1% price action elsewhere, the dollar index at 82017 low off the back of that week data. now down .6% on euro-dollar. treasuries with a strong bid, done by six basis points on the 10-year. 2.29. that is the price action. it's get to the movers and the banks. alix: across the board banks are getting hit.

yields move lower, that will affect the banks on a macro level. on a micro level, jpmorgan and wells fargo getting hit the hardest. trading down 19%. it percent happened year on year but the reserves built because of that. also cited a higher lost rate in cards. we want to know what that means when we hear from the call. wells fargo picking up some steam, now down to percent. deposits up 5%, net charge-offs modestly lower. those metrics seem relatively positive for the company. citigroup faring the best, off 5.4%. they had the best investment banking revenue in seven years. %. 0.4 we head into as the open. also watching some retail names. walmart, ulta getting an upgrade

from goldman sachs from neutral to buy. channel checks show no great changes in trends. it will be all about the banks, inflation, and the fed, going forward. david: the big news was the cpi numbers. if the fed was looking for inflation in june to turn things around, it did not get it. this was the focus of janet yellen's testimony earlier this week. earlier in the program, we spoke with robert kaplan. he gave us his thoughts on the subject. robert: march was week, april and may were stronger. i believe strongly some of this is transitory, meaning there are some one-time factors in the march numbers but i think some of it is not transitory. have the did not latest cpi numbers when talking

about the prior months, in fairness to him. joining us now is david lefkowitz. he is joining us from new york. ira jersey is here as well. he is in princeton. ira, i will start with you, our rate strategist. this is the fourth month where inflation numbers have been softening. it will be hard for the federal reserve to be more hawkish. the markets are not even pricing half a rate hike this year. any hike by the fed would be a surprise, probably would end up causing rates to go lower. we have seen a decent rally in the long end of the treasury curve today. if you had a federal reserve height, you would be pricing in for a policy mistake, lower long-term yields. david: this is one of the questions about whether the fed may make a policy mistake. do these numbers make it less likely that that would happen? --david: that's right

that's right. this gives the reason to pause if they need to. the most important part about this, this fed has demonstrated they are very pragmatic. they want to have the appropriate policy to support the expansion. one inflation is missing their targets, they will take the appropriate action. i think the markets are beginning to recognize the odds of a policy mistake are lower than maybe some have been thinking a few weeks ago. the word transitory seems to be the ultimate crux to valentin your monetary policy stance, whether you are the ecb and don't want to make a move, inflation ticking higher, or whether you are the fed and you talk about inflation rolling over astros atari. talk to me about that word and the importance of it going forward from here. we need to start asking the

central bankers how you define transitory. is that six months or a couple of months? it used to be when we were thinking about transitory, and the first on the federal reserve use that language was a few years ago, when the first quarter was week in terms of gdp and inflation, and that things bounceback. three months, looking for a quarter of data. now we are talking about, in terms of inflation, being more than a quarter. basically six months of relatively weak cpi prints and core cpi prints. transitory has to have some finite amount of time. if we don't get a bounce back when we get the july data a month from now, it will be hard to see how they can start: this transitory and not being, we will be at a 1.5, 1.7 core cpi environment. have been a rate strategist.

as you look at things, is the market pretty well priced for what they see, the reality of economic data, compared to the conversation in the federal reserve? ira: certainly the markets are not as convinced of federal reserve will be able to hike. this data confirms what the market sentiment has been, which is interest sentiment will go up a little, not a lot. quickly.ot go up i think the market is perfectly priced for that. alix: david, when you look at the reaction in the balance sheet undermine, the fed does not think it will have a big impact. it is rates that will have a big impact on the dollar. what is your call on that? david: i think the markets have the correct, the balance sheet reduction will be gradual. the pace of this will be much slower than the pace that they were using when they were actually buying the securities. i think it is going to be pretty much something that runs in the background, that is what the fed

would like to see. a the end of the day, this is little bit unprecedented, they have never done this before. we could see some volatility around this but it is certainly the fence attention -- intention to have something running in the background, not a big impact on the markets. i think that will likely be the outcome. ira, i want to win a million dollars, we all monsanto to happen, but it does not mean it will happen. we end up seeing what happened to the dollar when they ended up introducing qe. when we have a runoff, all we have is debt maturing. the debt that will mature on the 15th

buying long-term debt. they are selling short-term debt, buying long-term debt. when it comes to the rates market, it's in the hands of the treasury department. how do they deal with issuing more bond to the public, investors? i think the treasury department will focus on very short-term debt. t-bills, two-year notes, three-your notes. that being said, i think the dollar might be impacted somewhat just because of the idea that we are taking liquidity out of the system, even if it is lower than we thought and maybe slower than some feared. nonetheless, you are taking liquidity out, so the dollar will be impacted at some level. whether that is a couple of big figures for many, is certainly up for debate. we will see that, probably as soon as they announce when they will start. david: when we hear lower and longer, we think of rates. what if inflation is going to be lower for longer? what if the neutral rate has really come down? we heard from mr. kaplan that maybe there are some structural

factors. what does that do to the equities market? a company can borrow money more cheaply, but on the other hand, but as a due to pricing power? we are talking about lower for longer interest rates, how that affects equities, i think it's a good story. i would say this is the continuation of the goldilocks environment where we have had durable growth. it has not been extremely strong, but it's been consistent. no inflation. limited inflation. that means the fed can stay looser for longer. we will notaid, have that acceleration in gdp growth. maybe some people were expecting that after the election. but i don't think the markets are priced for an acceleration. i think they are priced for more of a continuation of the status quo, which is around 2% gdp growth, which we have been seeing over the last few years.

if we get that outcome, that is perfectly fine for equities, you'll see corporate profits rising, especially as we get more data points. jonathan: ira, for the rates story, the federal reserve, it seems like this economic data does not count for much because the market had already pushed out that next rate hike to the back end of the year. i wonder what that means for the balance sheet debate. that debate and policy independent of the data, or is it data dependent? i suspect they want to do it, will use the excuse that there has been cumulative improvement in the economy, recovery continues, and by doing the balance sheet reduction, they can do that instead of hiking. then they cannot hike anytime this year. that is i think that the market is time to tell you. assuming the debt ceiling is raised, the fed will start runoff this year. whether or not they hike again is data dependent.

right now, the data is not there for them to hike again this year. ira: thank you so much, jersey, and david lefkowitz. it is time for me to say goodbye, heading down to the new york stock exchange. i will be speaking with lorenzo simonellli. that merger got approval over the past few weeks. that will be at 10:30. jonathan: you are getting in the subway? alix: i don't think so. this means a cab. jonathan: futures look a little something like this. on the s&per by .1% 500. muted price action elsewhere. yields pushing lower by six basis points. 2.28. dollar off the back of some soft u.s. data.

this is bloomberg. ♪

havehan: u.s. banks officially kicked off their earnings season today and here with us to go through the numbers is allison williams. david left of its is also with us, ubs equity strategist, who has an overweight in financials. let's get to the banks quickly. are a little moves bit of a head fake given the big move in the bond market. yields lower, which tend to weigh on the financials. look at the numbers in absolute terms. i would say, overall, things were maybe a bit weaker

than expected and jpmorgan, especially in terms of the guidance, especially that income. that ties into your comments of seeing lower bonds this morning. core net interest income looks like it is doing well. the bread and butter business of lending, taking in positive -- deposits, etc. jpmorgan talked about weakness in the investment bank. we also saw trading down, basically in line. citi trading a little better but the interest income in those segments may be a little week. our interest income at wells fargo, interest margin coming in better and improving. the other thing is loan growth coming in weaker. jpmorgan bringing their guidance down, wells fargo loans coming in weaker than expected. jonathan: that was the u.s. data. the factory output numbers increase their .2%. the estimate was your .2%.

industrial production rising 0.5%. marginal upside. estimate was your .3. the big move was retail sales and cpi. went surging, yields went lower. i wonder if what is happening with u.s. rates will be the head went to the conviction call you have, overweight on financials. david: the rates environment is a big driver of earnings for the the datas but i think out today does not change the big picture. the big picture is the output gap is slowly closing in the u.s. we think inflation will begin to firm very moderately, the fed will continue to raise rates very moderately, looking over the next 12 months or so. that is a pretty supportive environment for financials, but it is more about deregulation. results of a few

weeks ago, better return of capital to shareholders. that will accelerate. when you get new regulators in washington, i think you will see some of those trends improve further. given that outlook, valuations are pretty reasonable, i think financials can continue to work in this environment. david: right now we are hearing a lot of talk about run there will be another rate hike. if you go back 18 months, we we don'tks ceos saying have the interest rate we would like. we now have three increases. have they gotten the benefit they said they would get out of those? if you look at return on equity, price to book, is it showing up in financials? david: a little bit. moved up a little bit, but still pretty low. i would say, if you look at the roe's that banks are currently generating, they are still well below what we think are

normalized levels. some of that is because they have excess capital, which we think will be returned to shareholders. some of it is due to the interest rate environment, which we think will improve. i think that's a good point you bring up. returns, we think, or below normal in a different environment, an environment that we think we are moving into, returns should be better. that will be a key driver of earnings going forward. jonathan: let's talk about the communication and guidance. telling the press to do their job and focus on d.c., reforms, infrastructure them a tax reform. alison: he is doing a good job telling endless investors the same thing. jonathan: we are not going to do that and we are going to focus on bond trading, which he says is like the weather. in that,something isn't out of their control in terms of what numbers come out of that division? alison: some of it is market dependent.

it is cyclical, seasonal. we are heading into the second quarter, generally weaker than the first. now heading into an even slower period. some of it is seasonal and you have to run your business and take advantage of opportunities where you can. a lot of it will be driven by client flow. that depends on what is happening at the fed. volatility has been low across businesses, and we are seeing that. williams andn david lefkowitz, thank you both very much. coming up at 1:00, i'll be talking with wendy cutler, a former u.s. trade negotiator, and the man who ran the u.s. import export bank. remember when we were talking about steel trade? this is bloomberg. ♪

jonathan: and smiling because anyone following the jpmorgan call -- david: it's entertaining.

jonathan: julie hyman has been listening. jamie dimon making some headlines. onie: he is getting fired up this call, still about politics and policy. he talked about how he has been traveling the world and he finds it frustrating to listen to what expletive the stupid that americans have to deal with. he talks about the bureaucracy in the u.s. he said we have been growing since the great recession at 1.5% to 2% in spite of stupidity and political gridlock. clearly he's frustrated. as i said, this is something he is talked about time and again, but it seems like his frustration is growing with washington's inability to get things done on tax reform, for example. he also talked about other types of financial regulation, crimson on lending that have constrained the banks lending, although he

is as usual careful to say it has been negative not just for the bank but for everyday americans as well. a rant. was on a bit of jonathan: stay with us. i want to bring allison williams into the conversation. to $2 trillion, really? alison: you could make a mathematical argument. in this capital was not trapped, we could make ex amount of loans. but if we look at the categories that have been fastest-growing, we also have concerns. years ago, it was leveraged lending, regulators upset about that. commercial real estate another area that was maybe growing too fast, a pullback. pullback in auto originations. we are seeing banks going gang busters in terms of wanting to

make those loans. take a macro look at it, the corporations have been re-leveraging. how much more leverage does he want u.s. corporations to take on their balance sheets? your point, loan growth has been slowing at the banks. where we see a pickup is at the debt capital markets. credit spreads, very tight. bank customers have been taking advantage of that. but i would say, as we are listening to this call, we talk about earnings, how they have come in versus expectations. werests and investors likely expecting to hear some of this from jamie but perhaps a little more impassioned. jonathan: music to the here's a pretty much every investor. are in saying the market is the market every day making loans. julie: he said we would rather

grow organically rather than coming in and doing that. he seems to say that there is this growth, not just for the for the economy to be unlocked, if they get policy help. that seems to be where his frustration is coming from. david: we should everyone know on a secret, they should go to tlive on the bloomberg. it is pretty entertaining. jonathan: have we gotten any guidance from the bank today? we have the cfo kind of touching on june. have we come into q3 off of that week quarter? about not a lot of talk the trading, some guidance on other issues, net interest income. the forecast is to grow $4 billion this year. for $.5r forecast was billion. the net charge-off rate should prove -- improved to some extent through the year. we are getting some other

individual businesses outlook. we are not getting an earnings-per-share outlook. that is not typically what the bank provides. but we are getting some insight into the other businesses. jonathan: thank you for your time. fantastic insights to a pretty entertaining call. allison williams, thank you. todavid said, if you want follow it, it is on the bloomberg. the opening bell is just around the corner. futures are pretty much unchanged. the dollar index at a 2017 low. we could data in the u.s., retail sales and inflation. a weaker dollar and a stronger session for treasuries. this is bloomberg. ♪

jonathan: this is bloomberg daybreak. i'm jonathan ferro. we are 22 seconds away from the cache open here in new york city.

futures are softer on the down by about .1%. then flat on the s&p 500 as we grind toward a second straight week of gains on the s&p 500. there is the price action for you. u.s.,ata in the disappointing inflation and retail sales, down for a second month. that means a weaker dollar. that is a 2017 low, the dollar weaker than everything in a g10 space. 2.29 on the u.s. 10-year. a lot of moves cross asset. let's get to the open with abigail doolittle. abigail: looking at a bit of a mixed open for the averages. very small moves with the dow down less than .1%. the nasdaq up, the s&p 500 ever so slightly. no records but the day is young.

alling at weekly gains for three. the nasdaq on pace for its best week since the end of may. let's take a look at a sector very much in the spotlight, financials. jpmorgan, citigroup, wells fargo trading lower after reporting second-quarter earnings. all three beat on the top and bottom line. jpmorgan missed on fixed income, commodity, and currency trading. wells fargo also talked about how auto lending is weakening. that could raise some concerns around the consumer. we take a look at some of the other banks yet to report including bank of america, goldman sachs, morgan stanley. big losses here. goldman sachs and morgan stanley derive even more of their revenue from trading. yields arein mind, down as you have been talking about, down five basis points on the session. down 10 for the week.

the biggest drop for a yield since the middle of april. that tells us haven bonds are rallying. something else that could be going on. is a very long-term chart of the forward price-to-earnings ratio for the financial sector. long-term average in yellow right around 12, a big spike higher in 2009 on the recovery. right now, we see it is starting to move higher. rotation into financials that we have been seeing recent the. you could say the banks were priced to perfection and perhaps what they delivered was just not enough. maybe the p/e drops back down to the long-term average. jonathan: thank you. let's bring in oliver renick. have theone we

managing capital director from rbc. jarrod, i want to get to the bank stocks. a move to the downside but it is difficult to get a clean read on the price action given what's happening in the rates market and the bond market. i want to get to the jpmorgan call. you were on it, big conversation about regulation. what did you ask the ceo jamie dimon? >> i think he spoke very well about what needs to be done from a regulatory and political standpoint in this country to move the economy higher, specifically on regulation, he cited, there does not need to be major changes in regulation to really offer opportunities for better growth in this country through more lending at the banks could do if they would just make some of the regulations. we expect that to happen with this administration over the next 12 to 18 months. that bodes well for better earnings for the banks. jpmorgan is also very well positioned to capture that growth. jonathan: i also noticed on the call, jamie dimon pointed out

this was not about taking bank standards in the u.s. below anywhere else, he was keen to emphasize that they have put on extra regulations here in the u.s. above and beyond what basel had suggested. is that the story in the u.s., leveling the playing field? you do find it well. the expression that was used by the former federal reserve board member carrillo, who set the standards, he wanted to gold plate the regulatory standards here in the u.s. versus the world. dimon pointed out that our standards here are tougher than the basel standards. if they tweak them, such as this supplementary leverage ratio or liquidity coverage ratio, which are two examples of the gold plating, it would bring them down to where the european banks are to level the playing field. david: if you took that away, what would happen in the marketplace? we saw jamie dimon in his

remarks a, we could lend as much as one join dollars to $2 trillion more collectively as banks. where would that money go to? it is one thing to say you can do it, who wants it? gerard: the people that want it would be in the mortgage space. we don't want to go back to the standards that we had in 2005, 2006 when the subprime mortgage problem was being turned into a disaster, but the mortgage restrictions are very high today on the residential side. the residential housing market needs more help in terms of putting out mortgages. putting the standards to where they were in the 1990's and early 2000's before some prime. that is where a lot of the growth would come from. david: you said the magic word, subprime. you say we will loosen up the markets. for some reason i get a chill down my spine. is that something we want to do?

>> presumably the banks learned their lesson from the crisis. i noticed wells fargo earnings released, tightening of their auto lending standards. this is something they are doing without really facing an acute crisis or any pressure from the regulators. it is something they are correcting on their own. one would hope that they would learn their lesson and keep the risk off. incomen: on fixed trading revenue, does not want to talk about it much. .e were expecting it are we now expecting it to roll over? oliver: that is a big part of it because this has been a key focal point for the banks, whether they will be able to adapt to the new environment that exists for markets. low volatility environment, people invest through bonds and etf's. to see that number is very important. overall, when you look at the

fundamentals, maybe some of these companies selling off will not be a surprise. in the terminal, i have a chart looking at the financial industry. white line versus the spread on the 2/10. you have a huge jump in the market that never really died down. this was a rally we had post trump. banks have been flat to higher. the problem is, fundamentals have been rolling over. the estimates for banks have been getting weaker. brands getting narrower on the bond curve. there is a little bit of profit taking here when earnings do not fit what investors and analysts want, not a big surprise. david: for the big deposit taking banks, they have an advantage, they don't need to pay us for the use of their money. some believe there is a bit of a rate were going on with deposits. >> we are seeing the seas for a deposit rate for developing. if you look at the nonbank

system, the rates being paid, it 1.13.5 to goldman sachs, other nonbank systems are starting to bid up deposit rates, and that will be through to the money market funds. i think the seeds for a rate were are being planted right now. david: do you see a possible deposit rate were on the horizon? gerard: the key were there is on the horizon. i agree with charlie that we will see higher rates. one of the interesting fax today loanat the banking systems to deposit ratio, a measure of leverage, is very low relative to the prior three tightening periods. that means the banks to not need to pass on higher deposit rates as rates go higher because they are not forced to support the loans since there are not as many loans in the system. that being said, with the federal reserve's expected unwind that will go full speed , likeear, i would suggest

charlie is, we will see higher deposit rate in 2018, especially second half of the year. whether it gets into a war or not, we can debate that. but yes, higher deposit rate will be coming. jonathan: i wonder if the his recounts so much given that we have gone through 10 years of zero interest rates and whether the banking model and what consumers are willing to accept has really changed. does history tell us anything about what we can expect? that is an interesting observation because we are in uncharted territory. the banks going into the first couple of rate increases that they would have to pass on more of those increases. they have not done it. if you have more money in a non-interest checking account, moving it over to a money market fund for 1% may not be enticing. but those money market funds a be paid 2% next year, which seems likely to draw the money out. what we will see, they will stay

lower for longer but then they will move parabolic lee as rates go higher in the second half of next year. jonathan: great to have you with us on the program, gerard. gerard cassidy of rbc capital markets. michael regan, oliver renick. minutes into the session, let's get you up to speed. dead flat on the dow. grinding out another record high. does not take much when you close at a record yesterday. yields lower by five basis points. 2.30 on the u.s. 10 year. ,eek data here in the u.s. inflation and retail sales disappointing across the board. this is bloomberg. ♪

>> this is bloomberg daybreak. coming up on bloomberg markets fred hofburg, the former import export bank chairman. david: this is bloomberg. i'm david westin. since the election of donald trump, the s&p has been up 14%, but the tech sector is up even more, 21.6%. recently, there is been selling of tech stocks, and some companies have been hit worse than others. snap has fallen below it $17 ipo price this week and was downgraded by morgan stanley and , who were both underwriters of the company's ipo. joining us now is caroline hyde in london.

here in new york, michael regan. the news keeps coming in for snap. not very good. caroline: not very good when two of your underwriters have decided to downgrade you. morgan stanley and kalman doing it for similar reasons. we are seeing some concerns on competition, monetization of its advertising products. saying.what cowen is competition in digital advertising, will take longer to monetize. the stock is down more than 40% off of its peak in march. meanwhile, the nasdaq has rally 7% in the same amount of time. i think there's a lot of selling pressure going into the so-called lockup expertly. that is those initial shares, the initial investors in snap, private investors finally get to cash in. perhaps not at that juicy price point they had hoped. david: there are some analysts

who have a buy rating on the stock. caroline: there are some that raised it to a buy this week, no less. sun saying, this july about the lockup expiration date, you are overflowing it. there will not be much more selling on the stock. also the competition with instagram is overdone. if you look at the downloads, that is pretty nice. he also says, you don't get it, you don't use it. you are trying to equate it to the likes of twitter, but it is not, it is different. that is why you have this negative bias. on the bloomberg, you can see anr has been pretty steady. buys remains at five, around 11, and the bulk of everyone saying hold it.

meanwhile, that yellow line keeps tracking lower, blowing the initial ipo. david: i guess you have the less than 22 to be an analyst for snap. jonathan: the price target is astronomical. because some of the sales are the underwriters, there is a big reaction. return potential, 32% apparently. disclosure, my kids are completely addicted to snap. i keep hearing comments from investors, other analysts saying the same thing. our kids are on this thing all day. there is some potential there. obviously, the genius of facebook was not creating the social network. as caroline said, it is monetizing all of those eyeballs, the downloads, clicks. snap is a very sticky app. kids want to continue their streaks, they tally of how many

days in a row you talk to someone. for some reason kids love that. can they monetize it? i don't know. it reminds me a bit of the .com days when restarted to look at metrics far away from profitability and sales. the difference, i think, this time is when you see an ipo like snap, blue apron, it makes all of the other unicorns back off a bit. we are not ready to come into the markets just yet. for the legacy tech companies, that is not the worst news. you don't want this flood of ipo's overwhelming the market. jonathan: i always wonder when you look at a tech company like snap how we will view these companies in 20 years time. snap of look back at people looking at their phones and rainbows falling out of their mouths and you wonder what that is all about. to make ae very keen comparison between the performance after the ipo and remembering how facebook really

underperformed. is there anything in that? caroline: we did see facebook take about a year to prove to the market that it was mobile first. that was what the big story was for the market. the big storynap is we are not just experimental, we are going to be a must-have advertising area for big companies. as yet, they have yet to prove it. daily active user underwhelm the market in the q1 numbers. q2 numbers come out in august. will they managed to study the ship? in the meantime, a third of the float is currently shorted. clearly, people word about going into this lockup expiration. point, it'se's interesting, a lot of these startups, the so-called has to showen uber that they can be profitable, that they can narrow their

losses. you cannot be a blue apron or a snap. you have to show where the money is coming in. otherwise, you can get private liquidity. caroline hyde, great to have us from london. michael regan, things for joining us as well. if you have the terminal, check out tv . you can interact with us directly and check out our charts. jonathan: here is the story of the markets. the s&p 500 up by .2%. the dow grounding out an all-time high for the third straight session. the dollar keeps heading south, sterling north. up by .3%. the euro higher as well. stronger euro, stronger pound. the real theme is a weaker dollar story off the back of

some softer retail sales and inflation data here in the u.s. this is bloomberg. ♪

david: this is bloomberg. i'm david westin. senate republicans say they will pass a health care bill before they leave in august, but the initial reaction to their bill makes that a lot less certain, and that is before we get the updated cbo proposal -- score on the proposal. for more on what to expect out of d.c., we turn to kevin cirilli. looking from new york, it looks and and talk at this point. kevin: that is a good way to put it. afford to lose to republican votes in the senate in order to advance this legislation. already, two senators have come out against the senate majority leaders of hated health care proposal, susan collins of maine, as well as rand paul,

republican from kentucky. one is a centrist, one is a more conservative member. when you look at the list of senators who came out in the republican party as being undecided, that's where it gets interesting. a majority leader cannot afford to lose one more vote. people like dean heller, lisa murkowski, all of these folks are more moderate, but look at senator mike lee from utah, who has worked hand-in-hand with rand paul in the past. that is why the chances of this are really, literally, no room for error. even after that nonpartisan cbo score gets released next week. and then to throw all of this into the mix, if it gets out of the senate and gets reconciliation, it is anyone's guess whether it will be advanced out of the house. david: if they pass anything out of the senate, is in the house or do have to go along to get something to the president? there is increasing

pressure on these folks in the house of representatives, especially in the freedom caucus, to get on board, before the august recess. behind the scenes, working through back channels, negotiations on tax reform are underway and there is suggestion to lawmakers, if you get on board, it may not be everything you want, but you'll get a shot to repeal parts of obamacare, and you'll also get leverage in ongoing tax negotiations. david: kevin cirilli, thank you. that is the situation with the politics, let's get you up to date with the data. soft retail sales numbers, some disappointing inflation numbers as well. before the data came out, we caught up exclusively with dallas fed president robert kaplan, who gave us his thoughts on the economy. >> march was week, april and may were stronger. some ofe strongly that this is transitory, meaning

there is some one-time factors in the march numbers, but i think some of it is not transitory. jonathan: that was robert kaplan in an exclusive interview earlier on. the question of the day, david, that was before the data came out. how many months make a trend, how long does it have to go on for before it is no longer transitory? david: it becomes permanent at some point. you saw the markets react right away. jonathan: huge move. bonds with a solid bid today. a big move on the dollar, too. that is the equity situation. look at the action elsewhere. big time. that weaker dollar story coming through. if you are looking for stronger u.s. to it to validate the move over the federal reserve, you are struggling to find it. david: i think janet yellen and pleasantly recognized transitory

only go so far in her testimony. she started to back off a little bit. yellen, ithat chair asked the guests earlier about conviction, whether she still had conviction. i know this is very fuzzy and subjective, but you didn't get the sense that she had a conviction about the sense of the direction of the economy. conviction,e had would you believe her, which he be credible? that was the other big story, the fascinating one. when you think about who will be the next federal reserve chairman and whether the words this week really counted for much. you are watching bloomberg tv. ♪

vonnie: ifs 10:00 a.m. in new york, 3 p.m. in london and 10 p.m. in hong kong. mark: welcome to bloomberg markets. ♪

vonnie: u.s. inflation data came out a little disappointing earlier today with retail sales and we have more economic data. julie: we have university of michigan's consumer confidence for july, the pulmonary number came in at 93.1 which is lower than the prior month's reading 9595.1 and lower than the even that economists were estimating. it looks like current conditions in the index ticked up of the expectations index went down, going to 80.2. that is potentially what's responsible for the shortfall in consumer confidence. we earlier got the consumer price index coming in unchanged. even if you back out food and energy, only rising 1/10