high ahead of the meeting. germany economic growth lags european peers for the first time in 12 years and tesla stock surges, demand is solid. elon musk says he never felt better. good morning to our viewers worldwide, and we begin with the bank of england decision with no change at the bank of england, --e unchanged at 0.24% 0.25%. the corporate bond target remains at 10. on rates.- vote 6-2 the minutes come out with the forecast. let's get to guy johnson. the cable rate down, a 31% on the session, what are you seeing in the minutes? saunderserty and likely sticking the next out against flow, suggesting they

feel rates should be going higher. they are warning that more tightening is likely than the market is pricing in. the curve has steepened considerably and they are saying that maybe even that is not priced accurately at this point. that is an interesting story going forward. with the run sternly -- sterling has had with expectation that maybe there was a tell risk tightening, there was the obvious downside risk to sterling and the market, from a positioning point of view, has become significantly less short of late been it has been. as a result, short on again. >> bank of england cutting the , the inflation forecast

unchanged but what stands out is an aggressive cut to wage growth in 2018 versus 3.5% and couple of months ago. if you are the bank of england and pushing for a rate hike because of the tight labor market and you think wage growth is coming, that is an aggressive cut. guy: it is and they think we are at a neutral rate when it comes to unemployment. we are not getting a wage growth . the fact they are cutting it is interesting, maybe it suggests the bank thinks there may be more slack in the economy going forward. no surprise they have downgraded the 2017 forecast where we had a .2 and a quarter one, .3, quarter to. as a result, mathematical probability the members had to come down by the conundrum is wages, when by wage pickup come through? saunders in mccafferty fit with the labor market tight, that will happen and as a result, the

rates should go higher. i am only speculating, we have not seen their names. yields are lower given the reaction and sterling is softer. the diplomatic way of talking about brexit, domestic uncertainty to weigh on u.k. investment, that is the majority view on the bank of england. the diplomatic way of talking about brexit? >> it has to be, they are basting -- basing -- they cannot model and the other way because that is what they had been told by the government. been toldat they have and as a result, that is the only way that can model the scenario. to model it based on the fact it will go well. london is us from steven major, the hsbc head of fixed global and danny

blanchflower. we having a discussion about the prospect for interest rate hikes at the bank of england, and is it a conversation that is not going away? >> let's go for lunch, it was not going to happen in the first place and some people may have delayed their lunch because there was a small possibility but let's face it, they were not going to do it. the market reaction tells you everything. 4 basis points across the curve lower means there must of it being priced in by some people. the reality is, it was not worth the risk. big image from a mistaken rate hike could have been huge and what would've happened to the yield curve? what it of steepened, i guess so, how about sterling? it had gone up sharply, that could have been bad news. at the same time, our analysts

said that a mistake rate hike would mean sterling went down. we have to be careful. nothing is as it seems these days. if they raised and it was seen as a mistake, sterling could have gone down. vote, taking a guess you would not have been part of the two? >> no. i would not have been. people see how these think it is appropriate to vote for a weight death rate hike when considering the softness -- rate hike when considering the softness of the economy. .nflation data came down real wages are falling, retail sales are falling, the u.k. is the slowest growing country in the g7 and they think wage growth is about to take off. i do not think i would have been

with them and i agree with steven, this is an obvious move but the question is -- what would be next move be? i think it will be down and not up. inx: something that came out the statement, they say if the economy performs as expects, the benchmark interest rate will need to rise by somewhat greater extent than markets are anticipating. talking about what is next comment is the boe in a position where they have to be devilishly hawkish and prepare the markets for the next 1.5 years while keeping things under control in the short-term? >> maybe, but they have been saying these things, that everything will take off, wages will take off and be prepared for a rate hike. they said that for a long time and did not convince me or steven. the commentary about brexit is that they have taken the view that this will go smoothly because the government is saying

that is their position. it looks like the risk are to the downside and i cannot see the minutes, there is a great things that says we are experiencing technical difficulties at the bank website. ,hat relates to what you said in terms of the forecast, experiencing technical difficulty and i do not think you should take that credibly. we are experiencing technical difficulties, the site will be available soon. jonathan: the union strike. did we get the green light to buy more linkers? >> they linger market is probably quite expensive, if you look like the bond like the linker 68, you have had two thirds of the potential return you would expect over a 50 year time already. bondsal yields on these are hugely negative. that means they are prepared for the kind of inflation we are seeing printed.

inflation needs to go up beyond expectations to justify buying a linker. no, you have already seen a bit of inflation, they just set up the bank of england, they do not see wage growth as a problem. why there is as to any kind of you that the bank of england is hawkish. seems like they are trying to affect merit donna --marr that they are trying to get the market to imply a rate hike may have no intention of doing. alix: i want to pick up on the weaker wage inflation, at the last meeting they cut estimates, do you think we will have to see a nehru cut if they downgraded their wage expectations? >> we think these theoretical or natural rates are following the actual rates. they have not got a clue on what that level is, it follows the actual rate.

people are pricing themselves into jobs which is how it works now. i do not get this phillips curve arguments which may work in some parts of the world or in some sectors and regions but i do not think it is appropriate for setting policy these days. jonathan: bank of england policy, when you were there, they have the sec and macro policy and the mpc, the heart of a debate on both sides is the issue of financial stability, the sbc have made a move and try has toomething the mpc think about more? to.learly, they have the issue of unsecured borrowing and how that has exploded in the u.k., clearly you need to worry about financial stability and getting the economy moving but i thek -- we have not seen

sbc doing very much, they have to work together but the mpc has to note the fundamental weakness because we have seen people spending too much, borrowing rising, it looks unsustainable. you cannot deal with that by raising rates, which will kill the economy. on the one hand, you have to deal with the financial stability and the sbc has done little and we did not get a vote from them which i do not understand. you have a committee that does not vote and the minutes are not published. they have to work together. let's understand that you cannot control financial stability with the monetary instrument of interest rate with very little room to maneuver. they have to coordinate but the mpc has to look through that. happy to comment on the way to stop, i have written endless things saying the mpc forecast of wages has been a disaster, wade growth -- they say will be

four and it is two. and they have to lower expectations. these things work and conflict and rate rises are off the table for the foreseeable future i see. jonathan: a credibility issue. up, andwrap things ideas exchange on bloomberg, for a lot of people coming forward and talking about the prospect of tighter monetary policy of the bank of england, from the conversation you had, going forward, listening to our guests, are the voices going to die out in terms of the guys in front of us talking about the prospect of tighter monetary policy of the back of it went, or is the debate here to stay? >> i do not think most people in the market believe the bank of england will be raising anytime soon. house believes we right have bitten a read

-- have gotten a rate rise and we will get one intimately. -- surrounding the ability of the bank to forecast and go forward and the ability of the governor to point us in any given direction, the -- the government is talking about the fact that they feel market pricing going forward on key interest rates is wrong. the markets are right on a lot of these metrics. the bank has struggled. we will see what the story is going forward. jonathan: a federal reserve story. what happened the last two years? appreciate it. major is sticking with us and we will go to westminster in about 15 minutes to bring you complete coverage of the bank of england news conference with mark carney.

7:30 a.m. eastern time. a level of cap dancing. on friday, an all-star lineup of guests reacting to the u.s. payroll report. this is bloomberg. ♪

>> this is bloomberg daybreak. anya says it wants to make good relationship with the u.s. when it comes to intellectual property and the prospect of an investigation by the trump administration has raised the risk of retaliation by beijing. u.s. officials gearing up for a probe into whether china violates international -- intellectual property rules.

russia says ties with u.s. are getting worse, they said he knew sanctions are a declaration of economic war on russia that could last for decades and he accused the president trump of caving into congress by signing a law that could keep the sanctions in place for a few more years. u.s. attorney general jeff sessions can keep his job, for now, the white house chief of staff has told him that president trump does not intend to fire him. that is according to a person familiar with the matter and donald trump publicly attacked jeff sessions for being weak, the president unhappy he recused himself from the russian investigation. global news 24 hours a day, powered by more than 2700 journalist and analysts in more than 120 countries. i am emma chandra. this is bloomberg. alix: thank you. it has been a rough few months for the dollar, the dollar index at one point at its lowest level in two years and the question is what does it mean for the treasury market? look at this chart, some say the

lower the dollar goes, the more appealing u.s. treasuries will be and in theory going to stabilize yield. is there with us, the lowest call on the 10 year yield and 1.9%, walk me through the knock on effect of the weaker dollar and the treasury market. steven: i wonder whether the weaker dollar is telling us the same thing, that the treasuries have been telling us for a while. the facts are that yields have been falling. since the start of the year. expectations of a more -- move towards 3% never happen and the treasury market and the dollar are both reflecting a weaker economy. and the fact that the fed is getting very close to the end of the tightening phrase -- phase. the other thing to watch, the rate differentials are the cyclical isolation but there is a political angle perhaps and a more structural story that all supports the trade in the dollar going down. alix: walk me through what does

it mean for the fed. if i remember correctly, someone from morgan stanley sees for somehikes in 2018 and holdingts outlook are up well in terms of hikes, what are you seeing as different? >> i wish them luck with the forecast but i doubt it will happen, we are not forecasting much more from here, perhaps more next year. the fact that the fed has been clear about their intentions to start testing the runoff, which i guess is a third quarter event, which could happen at the same time as the debt ceiling and the ecb running a taper. a gentle test of the runoff. probably it means that they do not do anything with the fed funds rate at the same time, if they want to see the implications of this shrinkage of the balance sheet what it may mean for global markets, not just the treasuries.

my view is that it will be quite benign for the treasury market, yields will keep sinking to reflect the disinflation pressure and a recovery that is not as strong as some at the fed want to get. i think that, i have a different view. david: put this in a longer perspective, we came up with a chart and i will show it. about what is happened to the dollar. going back in history, it shows that when the dollar start rolling over, it does it for 10 years, going back to 1985, 10 thes, and in fairness, height it was coming down was higher and we are starting higher but the right-hand side, it is rolling up. why is that, if it is true it goes a longer cycles, what drives that and should we be

concerned about that now? steven: i guess the longer-term fundamentals are pretty poor. i am sure you are familiar with david talking about the structural, cyclical, and political for these currencies. structural is long-term. it talks about the debt overhang, lack of productivity, excess savings and feeds into the demographic story. the cyclical site is the idea that rates will probably have gone up enough already and the politics picks for itself. to me, that would justify a weaker trend. the chart was interesting. i had not thought about it, you could have a decade at a time of these moves. i guess ray cycles in the past -- rate cycles in the past 5-10 years, this one has taken a long time to get going.

cycle, this one is very long in the tooth. so, it is interesting that, when these trends start, their point long-term. history is no guide to the future and i would not invest on the single chart but the idea the dollar could fall further seems to be consistent with all of the evidence we can see. when people got optimistic about washington, d.c., you were out front and said the optimism will fade and ultimately bottom at some point in 2017. looking at the fixed income market, 10 year treasuries at 2.25, you forecast 1.90, 35 basis points, or is it a market that is still not understood what is happening in washington, d.c. and needs to face some of that? >> you are right, it is not understood. we should take a global perspective when looking at

these markets. 10 year treasuries look good with their value and have done for a long time. we are forecasting a convergence between europe and the u.s. and european yields can go up and treasury yields can fall. that needs to be understood. people are not doing anything wrong but perhaps they are looking at too narrow of a data set. there is a tendency to be very u.s.-centric and the forecasting approach. based on domestic, economic data, people are setting up their rate forecast and treasury forecasts. you have to remember that these are huge markets with take cross-border flows, central banks openly talk about spillage of the qe from one part of the world into another. data shows hundreds of billions and trillions of dollars are moving from one part of the world to another. the 10 year rate is much more a function of longer-term growth fundamentals. at the start of the year, we

talked about the five-year rate, the five-year rate starting in time, it wast the above 3% and the fed was talking about trying to get to 3% for the fed funds, three hikes for years until we reached 3% is what janet yellen said in january of this year. to us, it was in the price. the reality is setting in. as people start to realize the fed is probably not going to get 3%, theellow and forward rates are adjusting lower. i think that we will probably see a curve that settles on the central tendency around the 2% level, rather than the 3% level that others have put out. jonathan: a transatlantic view, what is it mean for the spread between buns and -- the spread is 176 basis points, it was north of 200 a number of months ago, where are you seeing that go? steven: by using the term

continental drift, we talk about plate tectonics and berlin this, slow -- relentless, slow moves. it may take longer than we are projecting but we forecast 90 basis points or bonds and 194 treasuries at the end of the year. for treasuries at the end of the year. i would not want to change the numbers. we are in august and there is still time to get there. to me, the bond yields goes up because at some stage inevitably they make a step towards reducing the asset purchases and the market starts to factor in that even at some stage the rates go up, not saying in the next couple of years but when you buy a 10 year bond, you have to measure what will happen during the 10 years. i am thinking, by the end of this year, we should have a

clear sight of for will happen for the ecb. as for the treasury, i recommend it could be at the top of the rate cycle sooner rather than later and do not think the balance sheet run-up will be a problem for treasuries. it may be a problem for credit or equities and we will find out. up, i thinkt treasury yields should be lower and bond yields should be higher. table set at the start of the year, that forecast will not work, possible to imagine why one market yields would go up on the other would go down. here we are. it can happen. i think it was a function of valuations. the u.s. treasury yield was just too high and the bond yields were too low. jonathan: stay with us, 4.5 minutes away from the bank of england news conference with mark carney which we will bring you live and in full. the fx strategist joins us from london ahead of the bank of england news conference. an outlier call for a rate hike, walk me through the thinking

behind the outlier call and what you expect from the news conference? >> disappointing today not to see the bank of england hike as we thought, down but not out sort of view on the bank of england. they are keeping the november meeting live. and there forward guidance, still talking to us about the fact that monetary policy could need to be tightened but to a greater than over the forecast time that what is priced into the market. the fact that they lowered forecast and lowered the gdp forecast as we hit a slower rate and the quarter one and quarter two of this year and wages lower. they still put in hawkish guidance in the future and the markets are not listening to them until they get more clarity as to the thinking. bank ofaiting for the england, mark carney to talk at the conference in a few minutes. i have seen inflation report days where you have a dovish

outcome on the central predictions and a hawkish comments from mark carney or anyone on the mpc. not over but disappointing. alix: looking for the words from carney and what it would mean to look hawkish, what would it be? >> if you read through the extent of the inflation report in summary, similar to what was said at the june meeting, there are limits to the extent to which above target inflation from the bank of england can be tolerated. today, they added that a small degree of flight in the economy is absorbed and the domestic inflationary pressure, the big focus in the market, are likely to increase over the forecast time. if he emphasizes those points, it keeps november live but if he focuses on the weaker data on the growth side and the reason for why they lowered wages, the forecast for unemployment, it goes up slightly towards the end of the time and he focuses on that come in reduce the market pricing further. david: it strikes me that there

is a version of the same problem in the united states with the bed, a lack of wage pressure -- fed, a lack of wage pressure. contrary to what he is expecting, what is going on in england? steven: what is going on in the whole world because we are not particularly unique, we have to face the gel and job brexit over the next few years -- faced a challenge of brexit over the next the years, people are pricing themselves into jobs and that is what matters. when looking at why wages are forecasts,p as these thick about demographics and technology and the way the labor market is changing, there is a lot of slack. some of the slack is hidden. maybe the bank of england is unraveling further slack that we do not know about. slack can drop in all kinds of ways and there are people who work part-time who would like to work full-time.

it is difficult to know but i think the facts are fairly clear to us that something is going on in the wages market that does not fit with historical patterns . our economists have written about this, our team wrote a piece on the wage and they explain this well. jonathan: governor carney will walk out in a minute. a question for him today, what would you ask? steven: why would you cut the forecast for wage growth and then suggest the market may be wrong in terms of the rate expectations. jonathan: very simple and to the point. thank you for joining us. good to see you. if you are just tuning in, the bank of england keeping rates on hold with a record low of 0.25%, the vote 6-2. two members the sending.

the sending. asset purchase program is 35 billionat 4 sterling with the corporate bond program remains unchanged at 10 billion the bank of england cut their wage forecast aggressively as well as keeping monetary policy unchanged. the guidance is a touch hawkish despite the cut to wage growth. we'll get to that in a moment. stocks in london poffer by half a percent. the story in the f.x., it was softer and down by the session by 1/3 of 1% following the decision. we can turn to the governor and listen in. >> the u.k. economy is beginning the process of adjusting to a new and as yet uncertain relationship with the european union. monetary policy cannot prevent

the trading arrangements with the e.u. but can influence how this hit to incomes is distributed between job losses and price rises and can support u.k. households and businesses as they adjust to such profound change. the m.p.c. has long emphasized the effects of the brexit process would be the product of its impact on demand, supply and exchange rate and it has consistently stressed that as a result the implications for monetary policy would not be automatic. the august innation report released today updeats on how these and other dynamics are affecting the economic outlook. since the referendum was called, u.k. households, businesses and the financial markets have reacted at different speeds and to varying degrees to the prospects of u.k.'s departure from the e.u. sterling marked down the relative prospects quickly and sharply. households look through brexit

uncertainties initially but more recently as the consequences of sterling's fall has shown up in the shops and squeezed their real incomes they've cut back on spending, slowing the economy. businesses have been somewhere in between. sinced referendum, they've invested much less aggressively than usual in response to a very favorable environment. the m.p.c.'s projections continue to be conditioned on a smooth transition to the average of possible outcomes for the u.k.'s post brexit trading relationships. to be clear, assuming a smooth transition doesn't mean the m.p.c. thinks u.k. households and businesses know the end result of negotiations that have just started. indeed, in the m.p.c. forecast, uncertainty about the eventual shape of the u.k.'s economic relationship with the e.u. weighs on the decisions of businesses and households and pulls down both demand and supply. rather, the assumption of a smooth brexit means u.k.

households and businesses act on the expectation that the u.k. will forge a new relationship with europe without material disruptions to trading conditions or financial stability. this simplified assumption broadly fit the behavior of the economy the past year. in the m.p.c. central projection, g.d.p. growth remains sluggish in the near term as the squeeze on real incomes continues to weigh on consumption. growth end picks up to its reduced or modest potential rate as net trade and business investment firm up and consumption growth gradually recovers in line with mod earthly rising household incomess. the outlook for net trade is bolstered by strong global growth and the fast depreciation of sterling. global growth firmed in line with the expectations and is now broad-based across advanced and emerging economies. global trade is growing at its strongest rate since 2011 and

there are encouraging signs the composition of advanced economy growth is rotating towards investment, supporting the sustainability of the expansion and potentially raising the equilibrium rate of interest. the combination of this strong external environment, u.k. businesses high rates of profitability, their low cost of capital and the limited spare capacity in the economy are all expected to support investment by u.k. firms over the forecast period. however, while on balance these incentives more than offset the drag from continued uncertainties around brexit. business investment is still likely to grow below historic averages with adverse consequences for productivity, capacity and wages. turning to inflation, c.p.i. inflation fell back to 2.6% in june in line with our projection in may. the m.p.c. expects inflation to peak around 3% in october and

to remain around 2 quarters and 3 quarters until early next year. conditional on the curve that bank rate will rise the next three years, inflation is projected to remain a little above target the end of the forecast period and overshoot the reflects entirely of the referendum fall in sterling. as the effect of rising import prices gradually diminishes, domestic inflationary measures pick up over the forecast period with the unemployment rate expected to remain around 40-year lows, wage growth is projected to recover as the remaining slack in the economy is absorbed. in addition, margins in the consumer sector having been squeezed by the pickup in import prices are expected to be rebuilt. consequently inflation is projected to remain at a level slightly above that 2% target by the end of the forecast. as the brexit negotiations

proceed, the assumption of a smooth transition to a new economic relationship with the e.u. will be tested. if u.k. households and businesses look through the flurry of headlines then the economy can be expected to pick up from its current period of sluggishness. given the outlook for supply in the economy, even a limited pickup in growth is likely to have consequences for the stance of monetary policy. that's because as the m.p.c. has previously emphasized, the process of leaving the european union is beginning to affect potential supply in the u.k. brexit related uncertainties are causing some companies to delay decisions about building capacity and entering new markets. and the u.k.'s eventual new arrangements will require a period of reallocation as some sectors of the economy expand and others contract.

moreover, prolonged low investment will restrain growth in the capital stock and increases in productivity. indeed if the m.p.c.'s current forecast comes to pass the level of investment in 2020 is expected to be 20% below the level which the m.p.c. had projected just before the referendum. as a result, the supply capacity of the economy is likely to expand at only modest rates throughout the forecast period. that means only a modest uptick in demand growth from current sluggish rates will be sufficient to reduce and eventually eliminate slack. the m.p.c. agreement specifies that in exceptional circumstances the committee must balance any tradeoff between the speed which it intends to return inflation sustainably to target and the support that monetary policy provides to jobs and activity. through most of the forecast period, the economy operates

with a small degree of spare capacity and c.p.i. inflation is well above target. by the end of the forecast, that tradeoff is eliminated. spare capacity is fully absorbed and inflation remains above the 2% target. the committee judges that given the assumptions underlining its projections, including the closure of the drawdown period of the t.f.s. and the recent decisions of the f.p.c. and p.r.a., some tightening and monetary policy would be required in order to achieve a sustainable return of inflation to target. specifically, if the economy follows a path broadly consistent with the august central projection, then monetary policy could need to be tightened by somewhat greater extent over the forecast period and then the path implied by the yield curve underlying those projections. any increases in bank rate would be expected to be at a gradual pace and to a limited extent.

the committee will continue to monitor closely the incoming evidence and it stands ready to respond to changes in the economic outlook as they unfold to ensure sustainable return of inflation to the 2% target. and with that, ben and i would be pleased to answer your questions. reporter: please wait for the mikes to come around and as .sual wait reporter: from sky news, ed conway. you said in your opening remarks, brexit is beginning to affect potential supply. translated, does that mean the economy has now been damaged by the vote? and just supplementry to that, are you less confident about the smooth transition happening than you were three months ago? mr. carney: in terms of the first part of your question, i

think it's evident in our discussions across the country with businesses, it's evident in our decisionmaking panel survey, it's evident in other business surveys, it's evident i think in the reporting of a number of people in this room that uncertainty is about the eventual relationship are weighing on the decisions of some businesses but distilled down from the thousand businesses that our decisionmaker panel which is run by our agents, about 40% of those businesses are affected in some way either through the supply chain or end markets by uncertainties around brexit. we see it directly in the macroeconomic numbers, investment has been weaker than we otherwise would have expected in a very strong world, high degrees of profitability, ample availability and low cost of capital and limited spare capacity.

so the consequence of that is starting to build and the judgment of the m.p.c. in the forecast is that while we will see a rotation towards business investment, we do see business investment picking up from very subdued rates over the forecast, it is still below historic rates and the cumulative effect of that deferral of investment is going to mean the supply capacity of the economy expands at a slower rate. the speed limit, if you will, of the economy has slowed and as i said in the opening statement, that has consequences -- could have consequences for monetary policy depending on the evolution of demand. in terms of transition and other aspects related to the negotiations, because any transition or implementation arrangement is part of the negotiations, negotiations which have really just started, i wouldn't handicap the

probabilities. we're not directly involved in those negotiations and see how they transpire. we do think it is important, however, to have a transition arrangement. reporter: from the financial times, on a similar point, in your forecast, for the long term, you essentially say you take an average of possible arrangements in the future. but for the short term transition, you are currently assuming a smooth transition towards that which might be considered perhaps the best possible outcome in the short term would be that very smooth transition. is that consistent and what would you need to see to actually change your view in the short term that that smooth outcome will actually happen? mr. carney: why don't i start by quoting the president of the european council, which he has said that -- and similar statements have been made by other european authorities,

national leaders, european officials, that a disorderly disruptive process is in no one's interest and that we should be working towards avoiding that. so whatever the end states the desire of both sides is to have as smooth as possible a transition to that end state. so it's a reasonable assumption. but if i can make a point about the forecast, the important thing is not necessarily what we think as people slightly closer, we're not in the egotiations but maybe slightly closer to the zullingsings and it's not what we think but u.k. houses and businesses think and how they react to that and at present we do not see any material evidence that their expectation is that the transition would be anything but smooth. to the first

question, the uncertainty of market access post brexit is starting to affect business decisions and it has consequences for investment but people are not building in the possibility of a more disruptive process in any material way. so what does it take? it takes to see that in behavior, whether it's through confidence or direct discussions, whether through its survey evidence and whether it's more broadly held. i would underscore that it's clearly in the interest of both sides in the negotiations to have a smooth transition to whatever the end state is. it's the stated objective of both sides. and it's the way the economy is behaving at present so it's the most realistic assumption. reporter: how worried are you, governor, the growth we are seeing is fueled by rising household borrowing and given

the fact that if you are, how worried are you that that -- you know, that rising credit, unemployment at 40-year low and inflation above the bank's target, what is it you're waiting for before raising interest rate? the credit question. and then what would it take? mr. carney: well, start from where you finished, which is to be absolutely clear what we as the m.p.c. focuses on is achieving a sustainable return to target. we've been conscious since the referendum the principal cause being above target, in fact the sole inflation being above target since recent quarters and as we forecast and continue to forecast is like the fallen sterling, fallen sterling caused by the market's judgment, not endorsing it but about the implications of brexit for the u.k.'s relative prospects. first question is how to get

back to it and i answered that in the opening statement and the committee did in the report. the second thing is to go to e question of to what extent is the recovery of the product of borrowing and what we're eeing now is consumers are adjusting to their squeeze on real incomes and one of the reasons why growth slowed in the first half of the year and one of the reasons why we think growth will be relatively sluggish this quarter before only modestly picking up. and over the course of the forecast, we expect consumer growth -- consumption growth to be in line, broadly in line with income growth. so again, it's not a forecast that relies particularly on the consumer, it's investment and that exports are much more important than the consumer going forward and the consumer his or herself is relying on what they're getting paid and

not on what they can borrow. the next point to put in context is that this country and the u.k. households have gone through a decade of very painful deleverages and only really in the last year that growth of debt has started to exceed income, so there's been some comboroing. consumer credit is the minority in that, mortgages are still much more important. there are some issues that the f.t.c. has raised around the nature of some of the credit that's on offer and the potential channels for substantial ability for some developments in the consumer credit side. that's part of the reason why a return to more standard risk taking environment, the countercyclical capital buffer has been raised, you know, and part of the reason idea adjustment has been made to the stress test and guidance being

given through underwriting standards through the p.r.a. supervisors to banks. and what that's for is to address tail risk to the economy, not central expectations. likelihood is that we have a relatively modest recovery, one matching the growth of supply and that it's principally driven at least initially by investment and net exports and a consumer that's consuming out of his or her income as opposed to borrowing. >> what about complacency, one of your officials, you flagged it as a danger before. mr. carney: first off, you're not quoting me in that line and secondly, the issue that we have, and this is now we're moving quite a ways away from monetary policy because this is not what's driving the economy.

i'm going to say that again. this is not what's driving the economy. it's an issue for a subset of borrows and a subset of lenders, the percentage of vulnerable consumers, consumers who have debt more than 40%, debt service requirements, more than 40% of their income is one and a .25%, it was 2.5% five years ago. so again, we keep it in context. the complacency -- the thing we have to worry about as the other side of the bank, if you will, is that underwriters don't shift from good standards to irresponsible standards, responsible to reckless and where we get concerned and what e're clamping down on with the p.r.a. is where some lenders started to extrapolate the good the event ume in

the economy does slow the osses will be lowered. that's important to deal with but it's "good housekeeping" as opposed to the core issues. >> channel 4 news. governor, can i pick up on something you said earlier because in may the committee said it seemed there would be a smooth adjustment in the transitional period and this time the bank has lost confidence in trying to predict such outcome because the language has changed and now says companies and households assume there will be a smooth transitional arrangement. is that because there's less clarity about the transitional period an there was three months ago and at what point will households and companies need to have something in place before they, too, lose faith with the smooth transitional period? mr. carney: you're far more clever than the m.p.c. you read something into words

that isn't there. what matters is not what we think, it's what households and businesses across the country think about the end state and certainly over the policy of the horizon is what matters because that will drive whether or not the economy moves into excess demand and out of excess supply into excess demand. in terms of -- there are a series of issues around brexit which we are not necessarily better about -- about which we are not necessarily better informed but are much more in the public domain than they were several months ago back in may. that's got to be a healthy thing and part of the discussion of the end state and transition to the end state. but i think the first part of your question was implying that we've necessarily learned something over recent months

regarding those issues and i would say we haven't. >> thank you. back to the middle. reporter: david smith from the times. governor, can i ask you to elaborate on the reduced rates of potential growth that you referred to? it looks from the monetary policy summary that reduced rate is around about 1.75% a year and maybe a bit less than that. how does that compare with what the bank believes the rate of potential growth was a little over a year ago? mr. carney: i'll start and hand to ben to elaborate. a little less than 1.75% is the important thing. nd a gradual accumulation of disappointments on productivity as you're well familiar. but also an accumulation, if i can put it this way, stock shortfalls in capital for long period of relatively weak

investment initially post crisis, we all understood about one of the biggest constraints both fundamental uncertainties in the economy and secondly, access to capital. the latter has been solved. there's new aspects of uncertainty that seem to be weighing down and there's bigger restructuring to be done, which ultimate longer term can be very positive, obviously but as we reorient trading relationships, there will be, as i said at the start, some sectors which contract and others expand. that process as you've seen in the past normally drags a bit on productivity before it expands. so we have that aspect. i would underscore we haven't made any change to our assumption on the labor supply-side, so we just take the o.n.s. view on net migration as part of this and different people could ascribe different risk to that. as i say, we're taking a base

assumption. big picture this has moved down, as you know, from precrisis of 2.25% to some of that was ephemeral supply because it was based in the financial sector but certainly there's been a steady shaving of basis points if you will at a time when other indicators and the performance of the economy, particularly in the labor market, has been using up supply. obviously it's a good news story. we'd rather have unemployment at a 40-year low than the contrary but it does have implications for monetary policy as i said. reporter: if by reduce, you mean relative to precrisis rates, that we've been living with this very low rate of productivity growth for quite some time now.

but are they worse adjustments than expected and weaker investment growth and in turn that weaker investment goes through top slightly lower productivity growth, and making things very uncertain. but i think the important point is that one should not think that the economy at the moment can grow at rates to enjoy certainly before the crisis. before running into inflation ary pressure. >> governor, you say the uncertain inflation report in the road and policy needs to be tightened to a greater extent than is implied by the yield curve and do you think the curve is currently underestimating the timing of the first hike, the number of hikes or both across the period? mr. carney: well, look, i don't think it's appropriate for me to tie the hands of the

expanding on our view as a committee, particularly with respect to timing. but to recap as clearly as i our perspective we've been operating under certain circumstances and will be because of the extraordinary nature of the brexit process and what that has done to all aspects relative to the target, exchange rate, demand and supply. >> those exceptional circumstances have meant that we can take a judgment if we think is appropriate and take a little longer to bring nflation back to target. in order to change above caused by the exchange rate and the degree of spare capacity in the economy particularly in the

labor market. ut as time goes on and the capacity is used up, that tradeoff lessens and ultimately by the end of the forecast, this forecast on the basis of the market curve goes away and in fact we still have inflation bove target at year three. it follows from that in the judgment of the committee that we should -- it would be appropriate if we knew the world is going to transpire as per our forecast to withdraw more stimulus than the market urrently has imbedded. timing degree marks beyond that general direction, we're giving that you but not going to further specify it. i would underscore the conversation we've been having with the questions about relative supply and demand growth and that the supply

capacity not just being used up as the economy has progressed but actually the judgment will grow at more modest rates certainly to the distance paths. commile the economy is sluggish at present it doesn't have to pick up that much in order to take back further supply and focus the attention on the committee. >> jason douglas of "the wall street journal." also in interest rates, may i ask please how the m.p.c. is thinking of the first move back to 0.5%, should we think of it as the start of a traditional tightening cycle like other central banks albeit one that will be more gradual than in

the past or could it be a one off to withdraw this sort of extra bit of stimulus that you put in place last year because of these extraordinary circumstances you described? mr. carney: i think we're clear with the way we're thinking about it which is the first thing is we conditioned the forecast on the market curve in the run-up and that curve had more than one interest rate hike over the course of three years and we think that would be a little insufficient -- or insufficient in relative to what would be required in order to fulfill our mandate. those increases would be done a gradual pace and relative and you used a traditional hiking cycle. tradition is gone for some time so relative to a traditional hiking cycle to a limited

extent, more than the mark, less than traditional. >> governor, you appear to be warning households and businesses to get ready for rates to rise, albeit slowly over the coming year, possibly three years, while at the same time warning economy is sluggish and business investment is below what it could otherwise be. how can you be so confident that the economy can withstand such rate rises against such a gloomy backdrop? mr. carney: well, first thing to state is that we haven't actually changed interest rates at this meeting so maybe we should make that absolutely clear. secondly, we have a pretty good read on household's positions.

we in fact, our most recent survey of thousands of households which we did with the m.m.g., as to what you would expect with these questions, either they have an income shock or rate shock and how would they adjust? and consistent with the response to some, we're in a position households are less vulnerable than they were. there are vulnerable households. recognize that. and recognize it's difficult when there are negatives across as a whole. in terms of the overall position of households, there is an ability to withstand an adjustment to monetary policy if it's appropriate and it being appropriate is a function

of where the economy is and that is going to be more in our judgment, more a function of not what households do, but what businesses and exporters do and we do think there are reasons to expect some modest uptick in activity, or contribution from both of those sectors. reporter: as a follow-up to hugo's question, if we are shifting to a world of weaker productivity growth meaning rate rises may be necessary though we might see weaker growth rates or pay rates in the past, what is your message to households who have been driving down savings or borrowing a bit more in the hopes of sunnier days ahead? and also in your conversations with businesses, what have they been telling you about the difference a quicker transitional arrangement would

make to their investment plans to affect productivity in the future? mr. carney: let me start on transition and then start on your first pit of your question and go to ben. in terms of transition, you know, consistently across sectors, so not limited to the financial sector manufacturing sector, service sectors, there's a desire for some form of transition arrangement because there's an understanding of product standard issues, authorization ssues, data issues that will affect both sides of which is an integrated economy to the nited kingdom and e.u.-27.

pretty clear that in the first best world for europe and for the united kingdom there would be some transition to whatever end state is agreed. exactly what that end state is or period will look like or be, that's the core part of the negotiations and absolutely for others to answer. in terms of message to households and the court, what's going on in the economy now, we're going through a uggish period in the economy and not growing as fast as we did in 2013 and part of that is for reasons exactly what they're feeling which is real incomes are being squeezed because prices are going up in the shops and wages haven't been growing as rapidly. the second thing to say is we think we're in the teeth of this now so over the course of the next couple quarters we'll

feel like this but the new year we'll see inflation come down and household income come up. i'm not saying roaring out of the real income squeeze but we move out of the income squeeze. the third thing is to recognize we're in a position of strength. we made a decision a year ago to -- we could see this inflation coming paw of the exchange rate and see why it was driven and took a decision more in prices than jobs. we're now in a position unemployment is at a 40-year low and we're in a position of strength because our financial system is rock solid. we have rebuilt the financial system and also in a position other bits of the bank are addressing potential risks in

the economy. we talked earlier about household debt and consumer credit. i won't go into all the acronyms but behind them of actual action. we're also, as you would expect, and people would expect, the bank in its areas of responsibility is engaged in sustained contingency planning for all possible outcomes around brexit. transition deal, no transition deal, comprehensive agreement, narrow agreement. to take away those potential tail risks. it is a more difficult time but in terms of the bigger risk, we're taking our responsibilities to take those bigger -- i hate to use the term "tail risk but i can't think of another one, the tail risk off the table. ben? reporter: i need to emphasize what the government said, less rapid growth and potential output of capacity for real

wage rise, it doesn't mean no growth. and i still think it's reasonable, the committee still thinks it's reasonable with unemployment at very low levels we will see faster growth with nominal wages over the forecast period than we have the last couple years and have been disappointed by that but still think that's a reasonable judgment and the governor just pass e are right at the roads and the hit they're parting to real incomes and those will dissipate. the status level for a while now but then begin to fall away and households will feel the benefit of that. so things are particularly touch right now. with regard to the borrowing point you made, i just want to again say something the governor said earlier about

keeping things in context, the consumer credit went up 10% over the last year than the previous year. total household borrowing from banks is over 3.9% and this is not a big number. nothing remotely like we saw, the crisis in the nether labbeds, household debt is still materially lower relative to income than it was for many, many years in the crisis, actually. so keep the numbers in context in that sense. reporter: what has materially changed between your speech in portugal the end of june and slightly back of expectations around a rate rise, and if we're in a new environment, would you consider

lesser point than a basis point move higher in rates when you start the incremental -- >> to the latter, there's been no discussion of that so i wouldn't put any weight on changing the increment. secondly, obviously when i spoke, i spoke for myself but i view what i said there is entirely consistent with what we're seeing here, the difference being is that now we have a updated forecast of the committee, which uses a higher rate curve than existed at the time. and the committee's judgment, some i share, is that more withdrawal of monetary stimulus would be relationshipped above and beyond that if the economy is proceeding consistent with that orecast. >> go ahead.

reporter: casey from the guardian. you trimmed the forecast to wage growth. can you say how much of that is down to, according to the bank's worried, the change in nature of employment and the types of jobs people are in, their ability to negotiate pay raises at the moment? mr. carney: first, the big elements here are productivity, softer -- ultimately productivity gets shared out between firms and workers so that softer productivity which in part is a product of accumulated lower investment and sustained for a long period of lower investment helps explain that. the second thing, what we're picking up across the country, number of firms, is that there is an element of brexit uncertainty affecting the wage bargaining. some firms are potentially material number of firms are less willing to give bigger pay

rises given it's not as clear what their market access is going to be over the course of the next few years. now, -- and then there's an unexplained element to this. we have a relatively tight job market and do think wages will begin to firm. we're seeing one doesn't want to overinterpret but certainly on a survey basis and recent data, some elements of that firming, we'll see if they're consistent but to me those are the big drivers. ben: bear in mind the big influence on real wages over the last year has seen rising import prices over the last seven years, it's been weak productivity growth and have not been material changes and the share has gained profit from the one hand and wages on the other. and in fact, the share of labor

is slightly over the last year, the forecasts were expected to go back up again. in the big picture, the predominance of wages has been the much bigger trends in productivity growth and more recently is in import prices than the relative change in lane market -- labor market but do pick up in the last year, some signs from some firms have been a little bit cautious and some uncertainty about brexit. reporter: governor, you mentioned the bank is engaged in contingency planning for all states of the world, whether a transational deal or no transition. how advanced are you in making the plans and will we see a stage of the economic nams underpinning those various

scenarios because as you know, there are those who say if we crush out of europe with no deal at all, it will be a great oon for our economy. mr. carney: ok. on the contingency plans, they're extensive, we started from -- well, we started from prior to the referendum but certainly accelerated post the people's decision. there are a range of issues, and these at a high level have been detailed in the last financial stability report, there are a range of cross-cutting issues, issues around access to data, issues around contractual continuity, the latter in insurance and derivative markets. there's different fixes, if you will, fonings -- potential fixes depending on the type of market we're engaged with others including the private

sector to address those issues. some issues might require legislative cures or cures through the nature of the agreement and so obviously we're working in close concert with the treasury and her magesty's government as necessary. i want to reassure you that there are a range of issues and including cross cutting ones, we're actively engaged and think we've identified the main ones. the second bucket, if you will relates to plans of financial firms, both those who are headquartered here and potentially may lose some market access in europe and those that are based in europe and that are active here, and there's a process, it's a uasipublic process, anchored around so-called letter by sam woods, the p.r.a. to the c.e.o.'s of all these

institutions for their contingency plans. the fact is we had most of people's contingency plans prior to this but now we're getting in their latest in comprehensive and covering everybody across banks and insurers in the u.k. and there will be firm, specific issues as well as issues of general application that we'll be addressing. ou snuck in there a very big macro question which is probably a question for another day. t there's a reason why we're disengaged in contingency planning to take out a tail risk from planning which obviously would affect the economy. then there's a separate question which is what's the impact of the economy of moving from the relationship we currently have with the e.u. to a w.t.o. relationship with the e.u. overnight? so you can strip out financial stability amplifiers to that

but then there's a fundamental economic question. to bring it back to today, what we're seeing is that financial markets are putting a certain weight on that, business uncertainty is causing certain -- has certain -- and the weight of financial markets is flowing through to households through the sterling and inflation channel. businesses are putting a certain weight on that and it's affecting investment and potentially some of the wage bargaining and all of that comes together and we have to make judgments about the impact of growth and inflation and we will -- we can do so and are doing so. i whang this all underscores is that -- and it goes a bit back to earlier questions about messages to households and difficulties, the big, big macro decisions are not the decisions of the bank of england in this environment. the decisions of the bank of

england, monetary financial stability, we have to get them right so the environment for adjustment is appropriate. but what's going to move the needle, what's going to change the prospects of real incomes for households and prospects for businesses is going to be this negotiation with europe, other negotiations with other countries and the transitions to those. that is the story. and we play a supporting but very much second-tier role in this to just ensure the economy can respond to that. so there are limits and we're clearly in the territory of limits to monetary policy when we start discussing what can we do to change the real income rofile for households.

reporter: you noted in the statement that there are a few signs of domestically generated inflation but also said the market might be underestimating how early a rate hike is going to come, multiple rate hikes are going to come. is it viable to have multiple rate hikes while there are few signs of domestically generated inflation? mr. carney: i didn't quite accurately quote either of what we said in those cases, jasper, on important issues, so i'm going to have to correct, if you don't mind. the first thing is that what we say and we go in some detail in the report, is that most measures of domestically generated inflation are not yet at target consistent rates, and so we detail in the report a series of measures of so-called d.g.i., though not yet at rates that historically have been consistent with inflation being

at the 2% target. the most obvious and easily measured and almost cleanest one relates to average weekly earnings and stills of labor costs. we do expect those to build and it's not universe 58 and some are close to target consistent rates and even though there may be some element of exchange rate through there, we look at those closely. there are signs and we have an expectation that genetically inflations will build during the period and it builds to levels consistent with the inflation target and doesn't overshoot from that point, which is why we're having as much of a discussion around where supply capacity is and demand relative to that. we did not give any signal on timing of rates on that.

reporter: from the dutch financial times. there's a modest strike going on in front of this building, a modest but related to an interesting topic, of course. t's about the cap of 1% of a rate rise. should the government abandon this policy at the moment and to give a good example to show -- to give to the people some rate growth and do they not have a point because they're losing out at the moment, inflation is much higher than their pay rise? mr. carney: your german readers want to know the answer? let me say a couple things about that question because it's an important question. look, i think the first thing is that in terms of the strike here, it's regrettable in that we were in discussions right up

to the day before the strike, including at the mediation service and my colleagues at the bank stand ready to resume discussions at any time. i do want to reassure, which i think is clear but i'll take a moment to reassure given the strike is 1% of employees were fully covered and operating business as usual at the institution and will continue to be so. now, moving to your question, which is the broader environment, and i think it is important to look at it in the context of the broader environment. i wouldn't start in the public sector first but start in the private sector which is that this country has been in a period -- a prolonged period of very weak private sector wages nd that's related to the productivity performance but other factors and in fact we're at a period where over the

course of over a decade now, real incomes are negative. real income growth relative to where it was prior to the crisis, real income levels in real terms on average is still 2007-2008 it was in and driven by the private sector. in that context for a variety of reasons, it's understandable that there is public sector wage restraint, while the bank of england is separate from the government, it's a public institution and obviously in that context we operate in that context and we operate with a limited budget, and we have to be fair both to our employees, use that limited budget within the group of people who work at the institution to compensate those who are most underpaid,

most underpaid, relative to their peers and relative to people outside this institution. and we have to be fair obviously to go back to the general point which is to taxpayers to operate with restraint consistent with the overall environment, and that all means difficult decisions. and they have to be made and we share those difficult decisions with others in the public sector and think all of us in the public sector are conscious that in the private sector, a series of difficult decisions and disappointments have been there. but that's the macro environment. in the end, to bring it back to monetary policy, if i may, monetary policy is not going to shift, the fundamental drivers of those wages. much bigger structural decisions and the big structural decisions are around

brexit and other trading relationships right now in the u.k. and a series of decisions by private entities, businesses across the country that of course are heavily influenced by brexit but not exclusively influenced by brexit will determine when wages sustainably begin to rise. jonathan: we'll leave it there with mark carney wrapping up the news conference over the bank of england, the summary of the decision for the m.p.c., no change to the interest rate or asset purchase program. the vote on rates, 6-2, the two being ian mccassity andean saunders and up for a 25 basis point rate hike and does not happen for the bank of england. the message is rates need to rise more than the markets currently imply and the message to the bank of england is i don't think so, the cable rate down by .7. and perhaps more interestingly we strip out the dollar story and get to euro sterling, 90 pence at a high for 2017 and

trade zero and spot 920 and a couple threes and a two and up 3/4 of 1%. testing some big levels of euro sterling. i want to head out live outside the bank of england. that story, how the bank of england can cut wage forecast but continue to try to communicate to the market that at some point, who knows when, when a monetary policy will be needed? nejra: i love how you summed it up, saying the bank of england saying we'll tighten faster or at a faster pace to some degree than the markets saying i don't think so because one thing i kind of read into this press conference from mark carney is it really is mark carney tussling with the markets. you remember where he made those comments and we got a real repricing and that since has pulled back and we got the 6-2 vote today where some were

saying perhaps we could get by three and mark carney is saying a lot of the increase we had in inflation, in fact the sole reason for a lot of the increase in inflation has been a weaker sterling and almost as if he's trying to talk sterling up. when it comes to that wage growth, the point they've cut their wage growth forecast and he was questioned on that in the press conference. part of the reason mark carney gave for perhaps the wage growth is brexit uncertainty and meaning perhaps those negotiations can't go quite as people want. so brexit was part of that reason and then a lot of it seems to be as well that big question many central bankers are facing, they don't know why wages are not keeping pace with the fact we have such low unemployment. jonathan: nejra, sometimes you can't make it up and sometimes the truth is better than fiction and there's a lot of noise outside the bank of england. the m.p.c. cut their forecast for wage growth and the bank of england is on strike at the

same time. explain that to me? nejra: yeah, ok. so i saw the irony is not lost on mark carney or the rest of the policymakers and they were asked in the press conference and behind me as you see and hear, you have protesters for a third day protesting the fact security and maintenance staff at the bank of england are having a 1% on average wage increase and of course that's far below the rate of inflation which is 2.6% and not only that but mirrors the issue in the u.k. as a whole, issue the bank of england is facing, which is that wage growth is trailing inflation meaning real incomes are being squeezed and it is happening today. as far as we know they've not had any concrete response from the bank of england whether they'll get the twage increase. you're seeing what's happening in the press conference and outside on a microcosm, john? jonathan: joining us from

london is daniel, the senior global economist and then also a guest from brussels, jp morgan market strategist. daniel, please make sense for us, it's confusing people why the bank continues to communicate the same line when the market is not i woulding -- not buying it. daniel: the m.p.c. is in a difficult situation facing aing supply shock and brexit vote and most likely will lead to a less open cumplet economy and meant higher prices from the effects of the falling value of sterling and above target inflation and the effects of uncertainty coupled with a queeze in income growth. so a tradeoff, the tradeoff over the last month appears to have steepened a bit because we've got weaker growth evidence that further evidence the commufment economy is slowing and inflation has eased

and that means the bank has said today that they're going to remain on hold and i don't think that will change over the 15 negotiations and we expect them to remain on hold throughout the period which started in march of 2017. jonathan: daniel, quickly if i may, what does it say about the credibility of the bank of england they continue doing this and no one believes they're actually going to do it? daniel: i think the big problem is of course the traditional government policy and the policy is they have a transition deal and that's crucial for businesses and without that there would be a cliff edge in march of 2019 the u.k. would fall out of the e.u. and cause chaos. of course that transition, though, is noil not done definitely and far from it. and if we do get a transition deal, we think is likely but there's a significant risk they don't agree to that, then it won't become clear under the end of next year and businesses

won't be able to wait that long for that kind of clarity anded evidence is they'll need a year in advance to take action on their contingency plans and that would be early next year. we see that in today's forecast that they've downgraded and certainly more uncertainty over their business forecast and further evidence that uncertainty is weighing on weiss investment plans -- on business investment plans. jonathan: we went through some of the economic data in the united states, initial jobless claims, 240, the estimate 243 and revised upwards to 245 and we are bang in line at this very tight rang and very low level we seem to have hit. multidecade level of jobless claims and the suggestion you'd get in looking at that number alone is it's a tight labor market and i say a suggestion because the debate continues whether that's actually what we've got.

from h us to react is j.p. morgan, what is your expectation on the job market tomorrow? >> definitely we see a very strong job market in the u.s. still as we've seen over the last couple months, and looking at the current state of the job market in the u.s. and lacking the u.k. on those with full employment and would expect those figures to gradually become less supportive in the coming weeks. but this year we expect ongoing improvement in the job market in the u.s. -- your s your nay rue forecast? what has full employment been in the u.s. and what will make those wages move higher? vincent: that's a hot debate in the u.s. for employment or the level of accelerating inflation

rates and employment. it's debated at the moment and knew it was around 4.6% before and probably much lower today. i heard the discussion we had earlier on the low wage growth in the u.k. we should also remind people of the slow wage growth in the u.s., it's not typical from the u.s. or u.k. we see it in several economics globally and the u.s. has shown it. we're seeing it in europe across countries operating at full employment where switzerland where we hardly see any wage growth. the u.s. is coming in with exactly the same and probably from a wage growth perspective doing slightly better than what we see elsewhere, definitely in the u.k. or europe from that perspect pitch. jonathan: vincent, you think there's a significant rethink going on in the f 1-c the suggestion they wait until the end of the year for wage hikes

because they need to look at the data and think about what's going on and what's happening with inflation and wage growth and the things they thought would bite haven't bit at all? vincent: to me looking at the challenges the main central bank are facing today, the picture is probably the clearest for me in the u.s. where we've seen weakening of the u.s. economy the first quarter of the year and a slight rebound in the second quarter but the u.s. economy is operating at full employment as we mentioned and obviously still growing at the pace of oughly 2% at the moment. jonathan: we have a problem with vincent, the story of the federal reserve, the idea they'll have to wait until the end of the year because they don't have an idea what's going on with the inflation data and it was softer and softer when they were expecting it to get better. >> in ohio they zreased the

question of the low and she has to take her number down. we have a bit of that sound to lay for you. >> i expect over the next year the unemployment rate will stay below the estimate rate which i estimate at 4.3/4 of a percent. i lowered my estimate from 5% and though it's not significant, it's time to acknowledge even as labor markets continue to tighten, inflation has remained moderate. >> vincent, one of our fed presidents was saying we have to readjust what we're expecting in terms of unemployment given what we've seen and we hear as well from mark carney saying our employment rates are best rated in 40 years and yet we don't have any job pressure, any wage pressure, beg your pardon. are the markets fundamentally broken for these central banks? vincent: no, with definitely

not and what we were trying to explain before we got an interruption, the fed is pretty clear looking at the current level of employment and compare t, continuing to hike trade to normalize and the balance sheet is a scenario from their perspective and if there's one economy in the world which is in ways still for creating wage growth, it's in the u.s. this is definitely an issue that economics globally will need to evaluate and there are several factors in which way wage growth globally and we know we have a baby boomers leaving the job market at the moment and we know obviously others are leaving the market a replaced by younger people paid less and we know we're not competing with each other anymore but more with an estimation of the process and it weighs on job growth an we've seen that during the

crisis. we've reformed the labor accord, the job market generally speaking with sector regulations like in the u.k. we've seen the so-called zero contract which is much more flexible and gives less support for the employee to ask for a pay rise. we've seen globally the borrower, the rate of the union sore so decrease. it's probably a mix of all these factors which is playing out at the moment in several economics globally and again i do not think it's british necessary or american at the moment but a global sentiment and probably the u.s. is better from that perspective than every other economy in the world when i look at the several wage measures for the u.s. i see a wage growth of two or three persons which is much higher than what we agree. david: the economists think roughly 2.5% of wage growth is anemic and not that strong and certainly is not enough to

stimulate our consumers the way we'd like to get to the fundamental underliing growth. you went through the factors and talk about things like automation or the dinl tall phenomenon or globalization and the reduced pricing power of employees of the workers. that does sound like a structural change that will not allow it to go away and may make the federal reserve rethink their models? vincent: the federal reserve needs to be prepared for the next crisis and doesn't have to maintain this rate at in level given the economic situation that we see, full employment is one of the targets of the fed aving growth which is also well on track and the fed managed revise the u.s. economy and can proceed with their rate hike. i see structures playing out in

terms of wage growth and we need to remain vigilant. but what we see in the u.k. and what we don't see in the u.s. or europe at this stage, actually real income growth is ok in europe and we had retail sales in europe which were pretty strong. in the u.s. consumption is strong and what we have in the u.k. is due to the weakening of the sterling, higher inflation which divides the possible income, what we don't have as well. jonathan: thank you for sticking with us. thank you very much. i think what we need is all the policymakers of the bank of england go on strike and all the federal reserve go on strike and stay there the rest of the year. > you'd love that, though. jonathan: projecting they'll be significant. david: or pay their workers more money to get the wage up. they have it within their

power. >> clearly their fault, obviously. jonathan: i blame the bank of england for everything. to wrap up with the central data, let's get to emma chandra with the bloomberg business flash. emma: facebook is automating its effort to catch fake news. the social network has created software algorithm to send anything suspicious to fact checkers and they debunk the story while adding context. subscriber losses eased last quarter at dish network and gives the chairman time to work on plans to his company's $35 billion stockpile of unused airwaves. dish lost 190,000 customers in the second quarter and less than expected but still one of dish's worst quarters ever. aetna has surprised investors with a big increase in its forecast. the company was visited by strong results by the unions that ofoer health insurance coverage to employers. they've gotten out of the

obamacare after suffering loss in the program. that's your bloomberg business flash. alyx: we'll hear on the chief financial officer with iron ore sitting at $72 a ton. this is bloomberg.

dd >> this is bloomberg daybreak, i'm emma chandra in the hewlett-packard greenroom. jonathan: from new york for our viewers worldwide, this is

"bloomberg daybreak" i'm jonathan ferro. a divergent euro you're not familiar with. germany lagging its european peers for the first time in 12 years. s, nt to bring in the guest daniel and vincent. daniel, looking at p.m.i.'s, decent in italy. surprised, it's actually a surprise but germany lagging behind the rest of europe. what's the read across there? daniel: i think germany is doing rather well. there is underlying strength and the construction sector is doing very well. confidence is very high in germany. i think we're seeing a firming global picture lifting germany in general and hopefully the whole euro zone is lifting all boats including italy. jonathan: compensate for a

10-month low and maybe a glass half full the idea you're lacking behind france and italy and spain is perhaps a good thing for the continent. it's the very idea playing out in front of it is a recovery more broadly across europe. is that what you see as well, that maybe we've not become accustomed to the last couple years? daniel: yeah, i think so. that strength in growth is broadening and we see that in spain but now in italy as well, growth has picked up to above 1% annualized and across the europeo -- euro zone growth is looking better and we saw that this week, second quarter g.d.p. 6% and in line with the p.m.i.'s across the euro zone suggesting growth around 2.5%. the strongest growth almost in the area of c.d. the euro zone is doing rather well and starting from a

position of where it was behind the leaders which were the u.s. and u.k. but we're seeing catch-up now. alix: exactly, vincent, that's basically the bull cage of why you want to invest in europe and not necessarily in the u.s. when it comes to equities. but i'm wondering if we're kind of at the peak of that, vincent, when you look at the ecosurprise index for the euro zone, it's starting to roll over just a touch. germany sort of in my mind forecast a little bit and how do you read it? vincent: for europe the best is yet to come in my mind. we've seen very strong macroeconomic data recently, maybe somewhat softer in germany than elsewhere but you see some decent improvement across europe and i'm there across europe and can see it across the field and was in france earlier this week and see it with the arrival of emanuel macron and the cities in the french business is

improving substantially and you see it a little bit everywhere in europe which is this year a positive backdrop for investment in the region, especially? equities. so we remain long, europe's equities and you see good news that we've already seen and are prices in but the best is yet to come. also because investors tend to be focused on what the e.c.b. is doing but there's more to the e.c.b. in europe at the moment. alix: it's a growth story, was played germany story but we've seen those companies more sensitive to exports, for example and the dax rolls over and the euro has gotten stronger. has the story now turned by france by italy and will be it a regional story you want to buy the peripherals? vincent: i guess you still need to be active in europe. you see there are different stories in every country and a lot of it depends on reform

which are in every country about the orientation of the market, more export driven and consumer driven and you see consumption is improving in europe and you've seen that today in the retail sales. you see also, i'm speaking from brussels today and you may have noticed but last week it was announced a big tax reform which means easing in belgium, they'll see their tax rate from 30% to 20% next year and 25% ly moved from 35% to in the coming year and something we've heard in other economies but not seen yet and actually happened last week in belgium. you see the index has increased quite a lot on the back of that news and you have these type of stories in europe which makes you capture the portfolio and you definitely need to be active. david: you say the best is yet to come. is one of the factors the

relative strengthening of the banks in europe and for some time seemed to be behind the united states but now are seeing strength through the european banks. how important is that to the growth pattern for europe? vincent: well, the banks are usually on financial markets, like in the coal mine and we've been positive for banks almost two years and in europe on the credit side but more and more you see on the equity side and you've seen two weeks ago the e.c.b. released its lone growth data which is encouraging and banks managed even with low yield environment to keep their interest margin at average level which they had before. so the increase in credit or credit origination have helped to compensate for lower interest rates and you see that with an improving economy, with decreasing unemployment rate the likelihood of default is

decreasing which is good for banks and makes it still a long sector and on top of that still a decent dividend shielder. alix: thanks very much, daniel and vincent. good stuff. we have bloomberg terminal and check out tv go and click on our charts and graphics and interact with us directly. go to tv go on your terminal. this is bloomberg.

alix: the hot topic, can the monster rally in iron ore continue and barclays is warning of a correction. we're sitting at $72 a ton. one company dependent of iron valley. joining us is the chief financial officer, luciano, great to see you.

you'd have to average a high and low end price for the year. what is that range you're focusing on right now? luciano: look, we believe the market is in a sweet spot now from $60 to $70 and is a price which does not incentivize too much swing capacity to come back and is very profitable range for major mining companies. if on the one hand the demand is very strong and on the other hand you have supply which is a little more tanked and the initial forecast is prices could go lower at 50/40 and betting on the $60 to $70 until the end of the year. alix: can you quantify if we have a correction in the 50's and how much it hurts you in profitability and earnings? luciano: every one dollar $350 tion impacts us by million of -- i'm sorry, i lost audio.

jonathan: we'll give you a chance to get the microphone and earpiece together. we caught up with jean-sebastien, the rio tinto c.e.o. on china and the steel production we've seen in the world's second largest economy in the past few months. take a listen to what he had to say about that. jean-sebastien: for them to use a output with less capacity, they need better burden and impactability, that's what we speak, the downgrade has been very strong and you see the premium between high grade and low grade being significant. and am i confident going toward? yes. and jonathan: that was jean-sebastien speaking to us from rio. i believe you have the earpiece back. rio tinto is optimistic and confident about china, does vale share that optimism?

luciano: yes, we do. we believe demand is very strong. people may argue that is because of stimulus or not but the very fact with a we're seeing on the ground is very positive. we still believe infrastructure investment will be strong. and there's an initiative taking a lot of steam and we're positive about china and we never shared the views that the country would collapse. what we saw in 2015, declining steel production by almost 5% was definitely just one single data point and not the trend going forward. that's not to say we believe it will keep growing by 6% we've seen this year but more to the view we'll have a more normalized scenario of mild demand going forward. alix: the other part of vale's story is you're trying to broaden your investment base to get more exposure, say, london investors and not so much a focus on brazil.

>> new this transition and how quickly do you expect to make this change? luciano: it's composed by people who look at metals in mining and the emerging markets. the emerging market base has been predominant recently and sometimes we get upset because we have a lot of coverage on the major minings based in london and people don't talk about vale and this is something this will take some time but want to position ourselves as a viable investment opportunity for u.k. investors. alix: if you want emerging markets, brazil is tenuous and political corruption running rampant. there's the recession. what's the risk there? how do you operate and attract investors when you have those headwinds? luciano: that's a big problem because people put everything on the same basket. vale has 90% of investments coming u.s. dollars abroad and way more exposed what happens outside of the world than what

happens in brazil. when brazil looks bad it benefits us because the currency depreciates and we have lower costs in u.s. dollars. this is how investor relations work and what we have to do over and over. jonathan: we appreciate your time. luciano siani piresvale. coming up tomorrow, huge lineup. the report drops at 8:30 a.m. eastern tomorrow. we're joined by several experts. we also round it up with immediate reaction of the job growth report. join us. the coverage continues from new york. this is bloomberg. . ♪

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what should i watch? show me sports. it's so fluffy! look at that fluffy unicorn! he's so fluffy i'm gonna die! your voice is awesome.

the x1 voice remote. xfinity. the future of awesome. jonathan: a drop in jobless

claims highlights demand for workers. the u.s. payrolls report comes tomorrow. the german economy lacking for the first time in 12 years as a divergent europe you are not familiar with. and tesla stock climbs despite burning through cash. demand looks good. elon musk says he has never felt better. from new york city, good morning. this is "bloomberg daybreak." 30 minutes away from the opening bell here in new york this thursday. positive slightly, but not -- by not even one point on the s&p 500. euro-dollar going nowhere, still very close to 2017 highs. treasuries with a little bit of a bid. heels are lower, two point wi-fi percent on the u.s. 10-year -- , two point 25er percent on the u.s. 10-year. alix: tesla up, the first on the company spent over $1 billion and a quarter, but that is not

worrying investors yet at all. billion, andout $3 elon musk seems confident he will be able to meet production needs without issuing shares, but some analysts are skeptical. you had earnings coming in lower than estimated. nonetheless, so much and mr. so much investor hopes is around tesla and elon musk. chesapeake energy is up 3%. earnings came in at 18 cents a share, but output was down 20% from a year earlier, the lowest level now since 2011. the company is shutting down some wells and trying to conserve cash. looking at 14 operating rigs versus 18. the company was made famous by tom ward. they are trying to reform the company and pay down debt. 4% in premarket.

leaving theed from affordable care exchange system, boosting the forecast. they had a lot of losses in the aca and left it, and that helped them. they are trying to expand into medicare and medicaid businesses for growth. these are the earnings helping with the markets today. jonathan: if i burned through one point -- 1.1 billion dollars last quarter, i would be feeling good, too. the thing with tesla is it continues to have demand. and the base believes it. david: hyperdrive free -- piper jaffray took it up. is the horrible food in the united kingdom called marmite, you do love it or hated. tesla, for me, is like that. in terms of broader equity markets, president trump

weighing in on the rally. president trump: the stock market had an all-time record high today, over 22,000. we picked up substantially now more than $4 trillion in net worth in terms of our country, our stocks, our companies. we have a growth rate, gdp, which has been much higher than, as you know, anybody anticipated, except maybe us. and it is going to go up. it is going to go higher, too. jonathan:ng a job or the president of united states with washington somewhat in turmoil and no major legislation being passed. what is behind the uptrend? we have russell investment's chief market strategist, steve wood. do you want to put your name to this at this point? steve: apparently so. i think there are a lot of headwinds in the market. valuations are rich, to put it mildly. so valuations, ultimately, have

the last laugh. looking at these levels come i think it is a good opportunity for a u.s. dollar-based investor in the united states that has done well over the last eight and half years to be very disciplined and rebalance valuations are not as much of a challenge. jonathan: whether the president should put his name to this rally or not, based on what do you think we are up here? s&p 500 at the 50 record high. towards businesses, markets, and towards the economy has changed. it has been captured by the sediment data. steve: they momentum data, short-term numbers are really driving the market. what we see out of washington perhaps is better than getting a reform agenda is getting nothing.

and gridlock in washington. markets tend to like that at the economy is doing ok. we do not think there will be a recession. earnings in the first half of this year look pretty good. a lot of those short-term numbers and moment of data can burn through. longer-term, we think valuations should be taken into consideration. david: a number of companies have done really well enough for a couple of earnings turns. what do you expect in the second half? steve: first quarter was extremely strong, second quarter less soap it we think earnings are coming a little bit off the boil in the u.s. predominantlyts from energy and oil, not exclusively, but predominantly. if you look at the global and international composition of earnings and a first and second quarter, that is something that will come off the boil, as well. you get an earnings environment in the back half of this year that looks ok, probably mid-single digits, a bit higher

for the next half. david: you argue the other side a little bit. you still have a very accommodative monetary policy. dollar, a weakening which helps a lot of u.s. companies make a lot of money overseas. not stellar but solid growth, consistent growth over time. that might indicate to a company we're going in the right direction. steve: we do not have a bearish call, but we think this is a good opportunity for a u.s. investor who has probably gotten out of balance in equity allocation. over the last five plus years, 50/50 u.s. has become distorted in favor of the u.s.. turning back to policy, and you are looking at monetary policy in europe, which is going the other direction of the u.s. and looking in japan, as well. valuations with fun images and

monetary policy, just be incremental. in not panic or be extreme, but marginally take advantage of the opportunity. -- do not panic. alix: it used to be that you have got to get in the stock market if fundamentals and earnings are good. now it is, you know what, maybe it is time to take a pause. no one has a really clear understanding of what you do when you desririsk. howard mark says you could get up, but that is not the right call because you miss out on the value. were: when valuations different, we were making a different argument. that has changed. to take issue, i do not know if you necessarily want to derisk the portfolio by changing the composition of the risk exposure and the portfolio. alix: value trade has also not played out. it comes back to growth. steve: and growth is something

that is selling at a premium. but in a global portfolio, you can change or composition of risk exposure. it can the global. global fixed income, infrastructure, real assets, global equities. more multi-assets and a more active in robust way of looking at how one establishes the risks profile. jonathan: the portfolio construction thing is an issue. th correlation between the bond market and the equity markete, if you try and be diversified, the things that used to work may not work this time around. if you think fixed income and that universe is really overpriced, where is the hedge in the portfolio? where does the diversification come from if you expect on markets and equities to become incredibly correlated? steve: i think we are getting divergence in the fixed income markets and the equity markets. we are getting significantly

different information. when those markets disagree, i go with the bond market. there is a some softness in the u.s. economic data. not recessionary. we think the fed is on hold to the end of this year he would we want to know what information we will get from the federal reserve in terms of the details of how they are going to allow the unwind of their balance sheets starting next year. in terms of asset allocation, start looking at offense and defense. continuing to deprive investors of any capital signs of risk-free yield, essentially zero, that is a very material constraint and has been for over a decade and will continue to be a very significant constraint going forward for global fixed income investors. trying to find harvestable reasons of risk will be an ongoing active process. jonathan: is that a constraint or is that a risk estimate some people say the risk is in the suppose it risk free assets.

aeve: i think it is constraint that has a risk in it. if the markets to go sideways on us, you want to do have some negative correlations built into your portfolio. that said, for a longer-term investor, they are going to need to look at diverse sources of risk, global nature, using valuations as a tailwind on headwind, and that will be a longer process. wood of russell investments will be staying with us. we will have a great lineup of guests tomorrow to react to the u.s. payroll report am including alan krueger and bill gross of janus henderson. live from new york, this is bloomberg. ♪

david: this is bloomberg. the on again come tensions between the u.s. and china may the on-again with reports the trump on administration is preparing a new action against china on intellectual property abuse, and action that could lead to the u.s. imposing terrace on chinese goods. bloomberg reports china is ready to retaliate by could telling imports from the u.s. on soybeans. soybean steps down. it is a commodity, so it is complicated. coincidentally, about the time they were talking about this trade action, you see what happened to soybean futures. we're still talking with steve wood, and oliver renick is joining us, a bloomberg stocks reported. there was a lot of apprehension in the market place about trade. a lot of enthusiasm about long-term growth but a lot of apprehension. sort of went away because it

seem like things were going well, particularly with china after the mar-a-lago meetings. you look at the expectations, i think the thought processes proper, which is looking at the tension between countries and the easing of the tengion, which we saw with china and other world leaders that came in trump's first circuit of meeting world leaders, but is that then reverses and it seems like we will be at odds with the rest of the world, whether it is geopolitics or addressing trade, i do not think it will necessarily be a great thing for markets. this is supposed to be a sort of reset to think it is clear that trump wanted to come in and have a reset on different fronts. the markets like to that. the commodity interpretation is interesting. you get into a trade battle with china. you have to think about, all right, what tools are in each country's toolbelt? i know you were talking about soybeans, one potential commodity mentioned.

you have to look at what the commodities space will have an effect on stock markets. a tick up in the correlation between materials comedies and commodities. very goodit is not for equities overall, which sectors might be hit more or real deception a in trade? steve: i do not think we will have a deception and trade, but i think it goes back to a more global perspective. -- i do not think we will have a disruption in trade. this strikes me as being less driven, moreoric policy and more detail oriented. this could be information the president is getting from trade negotiations going through career bureaucrats. it may not just became henry rhetoric. from an equity perspective, i think you want to look at commodities as an opportunity to buy lower. it could be concentrated in soybeans right now, but i think commodities at large will

respond. china is stabilizing a little bit more. back to november fest forward to january, i said we would get this. you take it now, as well. at the start of the year when the president would talk about drug pricing and drug companies, talking about tax cuts in the dow would rally, the rhetoric, does it mean much anymore? the market does not move much on it. the policies are not really that big. thisinvestors would take at the start of the year, wouldn't they? the unknowns surrounding the administration, i think a potential conflict over exports in soybeans or one particular commodity is probably a small price to pay. the thing is, it is not just

going to be one particular asset or commodity. it will be a rebutting of heads of world leaders on trade. what is interesting is we were talking yesterday about small caps kind of rolling over, very domestic-oriented companies. we started thinking about relations around the world in trade, the exporters and who sells products in the u.s. interestingn conversation. unclear where it is going to go, but so far, gets are not really rewarding those domestic companies right now. alix: funny to hear you guys talk about soybeans. david: a soybean farmer probably would not take the deal, by the way. jonathan: to most people, this is nothing compared to what it could have been. what we probably found out was the power of the white house is curtailed by the power of the lobbyists. if the lobbyists and big business in the u.s. want something, usually they get it.

it,republicans pushing for every business leader coming out and saying, what are you talking about? guess what, it is gone. alix: to that point, other countries have responded in a particular way. if you look at oil imports from south korea from the u.s. and also china, they are buying more u.s. crude, in part because they do not want to upset president trump. so it is having a material impact in that way. david: the flows will continue. there a bigger dynamics than just policies and stipulation. i would like to know what some of the details are within the specific dispute. ultimately, the commodity complex looks to be responding to the emerging market economic cycle, the chinese economic cycle. i think it will overwhelm a specific weekly policy. inx: but you want to go long

soybean exports are go short and u.s. -- david: start right now. alix: steve wood and oliver renick about sticking with us. coming up tomorrow, bill gross of janus henderson would join us at 8:30 a.m. eastern to react to the july payrolls report. this is bloomberg. ♪

alix: the conversation here, marmite and vegimite. jobs, employment rate estimates are to slip to 4.3% and about 180 thousand jobs to be added. steve wood's of russell investments is joining us and oliver renick of bloomberg news. steve, what is your call for tomorrow? steve: i think the numbers will come and a little bit stronger than the consensus. the labor market is looking ok.

the best part of what the fed is doing in the balancing act written, labor markets looking ok and employment looking ok that wages not really coming through the way the fed would have expected. when you look at wages and the labor market, you balance that and the inflationary data, it shows that they will probably provide a lot of guidance in the press conference is going between september and december. i think we will want to look at wages data and how soft that will be. alix: in the earnings calls, what are they saying about wages and their unit labor costs? oliver: i do not think it is at a point where there is a material effect on margins right now for companies. a lot of companies have stretched those margins to close to record high levels, levels that are high historically. i think there is a certain absolute level, a magnitude issue in terms of whether or not costs are high enough. orn if we see wage increases

relative move higher in terms of ratings, i think there is a certain level you have to get to. i do not know what that is, but there is a certain level that really makes a difference. i do not think we're quite there yet, even if you see a fair amount of movement upwards in terms of costs. effect.tarts to have an some strategist are more worried about this than others. for tom lee, it is a key point of his right now. his estimate, that this will be a problem as inflation moves higher and labor costs move higher. whether or not it happens in a month from now or a year for now is where the debate is. jonathan: a year ago, i asked the question to an economist, if we are at full employment, how do we print payrolls of 200,000 every month? he said that would change throughout 2016. , last number $222,000, the estimate $180,000.

steve: i think the labor market is tighter in terms of hours worked in terms of the headline number. the issue for investors in the fed is how they blew through in wages. that is what we have not seen. until we see the bleed through into wages, i think the fed will be a little bit more in the wait and see mode. jonathan: tightening is an easy were to use. tight is different. of course we're tightening. it is a tighter labor market. i get that. steve: i think there is some slack. if you look at workers that have high school sets versus low skill sets, much of the tightness is coming in high school sets versus low signal -- low skill sets. you brought up the point of how correlation has changed.

so it may not translate into this current environment. i think the fed is on the fly, rewriting a lot of their models here at alix: how are the markets positioned for tomorrow? oliver: i think we can look at a market that is breaking away from economic data. look at my terminal. this is one of my favorite comparisons that is looking at the economics and the u.s. versus the s&p 500. i start in 2016, a period in which the economic surprises were moving in the same direction in the market and earnings, as well. the earnings part is not run away, but it is pretty clear that the economic surprise part has not gone away. that is basically the trend down, now below zero, which means surprises are on the downside. they're actually missing. we look at numbers, jobless, inflation, and all this will be important. thatant to see if there is

dual pronged support of corporate earnings growth, which is there, and the economic data, which is there, as well. got about half of it. you have to think the further this moves down, you have to see something. jonathan: next, four minutes away -- futures are marginally firmer on the dow. pretty much flat on the s&p 500. gains in london, up by .8% on the ftse 100. and here is foreign exchange, sterling weaker. .75%.ble rate down by treasury bid. from new york, this is bloomberg. ♪

jonathan: from new york, you are watching "bloomberg daybreak." moments away from the opening bell. 22 seconds good features go nowhere. the dow on quite in winning streak, a seventh straight gain

yesterday in an all-time high on the dow, just north of 22,000 points. the story, not much of one. the s&p 500 trending lower. just short of a record on a closing basis and a couple points short of an all-time high on an intraday basis on the s&p 500. you see price action. bid but yields are lower by a couple of basis points, two point wi-fi percent on the10-year -- 2.25% 10-year. people are expecting the jobs report tomorrow to be pretty solid. the dollar index from her. -- the dollar index firmer. that is your story. alix: muted trading across the board. the dow flat, s&p down when 1%, and the nasdaq is flat. the dow still hovering around

22,000, hovering around a record high but not able to push through that today. a lot of earnings out this morning and last night. first is tesla. thes up by 5% in premarket despite the fact they burned through $1 billion in cash last quarter for the first time. they ended it with $3 billion in the bank. will they need to raise more? investors not seeming to care. it is about the hope and what could be priced into the stock going forward. in terms of the energy market, these are the independents who work in the u.s.. they were responsible for the shale revolution. chesapeake natural gas on the upswing, up by 2%. they want of dropping production by 20%, the lowest since 2011. they are shutting down some to conserve some cash. that discipline seems to be

rewarded in the markets as the earnings came in above estimates. arehe, pioneer, and eog different. apache down over 4%. revenues were flat. it was because of lower expenses they see 2017 coming in with more cash. apache not getting the benefit of the market. ryan near was taken out to the woodshed yesterday, down by 10% at one point -- pioneer was taken up to the woodshed. it lowered its production target for this year by 1%. it is differing some completions of wells to 2018. so that discipline, even a minor change in production guidance, really hammering the stock, showing how much optimism is in these energy companies. here is the chart of the day for me, the impact on the dollar on energy equities. the white line is the s&p energy sector, the ratio.

as a comes down, the energy stocks are underperforming. the blue line is the dollar index. they tanned to move in tandem. recently, we have seen the dollar index inverted, so the dollar index is coming down, and we saw the s&p energy sector still underperformed. weaker dollar, stronger oil, as some point your energy stocks post some kind of rally. jonathan: thank you. still with us is steve wood of russell investments and bloomberg's oliver renick. the relationship between crude, the dollar, and what is not happening in the equity market? steve: it is an interesting chart. -- oliver: i think it is an interesting chart. waiting tot of it is see how long things hold and what habits around the world. we are seeing a little bit of weakness today in the euro. we do not really know what will

happen is a lot of the global geopolitical we'll skip turning -- geopolitical wheels keeps turning. what is important to the energy sector right now include the financial earnings story, and i think it is also the fact that -- i should clarify, earnings are not great, but they are now at a point where analysts can get a handle on where they are. alix: depends what you look at. oliver: that is true. you have a rebound coming from companies making money. oil in a range for the better part of the year, allowing investors and executives to get a handle on what they can produce, where they can do it, and i think that will be important. jonathan: i have heard a lot of conversations exploring global growth and whether we have witnessed a change. the sensitivity of some of these crude equities to the big oil

majors to the absolute crude price may have diminished somewhat. steve: that is potentially true. i think the broader issue with an the entities within the u.s., there is the fact we think it is range bound and that $45 to $55, dollar weakness helps that to the upside. the the ability in the u.s. context is a really tight trade up and down. that is very significant. that is largely a u.s. phenomena. i was in canada a week or two about ago, and they do not have quite the ability to bring on and off-line production. i think it will be perhaps more sensitive in a positive way for u.s. producers, but the currency plays will probably be more impactful in the near-term. alix: part of the story has been that they are crushing it, what is good for the micro is bad for the macro situation. it feels like the story is changing a little bit. do you need to change where you

focus? european integrated has killer free cash flow, making do with very little. you need to search aging where you go look for that value? steve: i still think this is largely a currency play. if you look at what the european central bank will be required to do to bring this up to the macro level more, i think the european central bank going to have to be in a qe longer than they expected coming into this. the currency effects will probably cloud a little more going into the second half in terms of earnings and what you would have expected otherwise. oliver: i am going to do a little terminal magic. very simple, but i'm looking at the member list for the s&p 500 energy. 32 members in the red. here is the magic. i will set this back to three years ago, and that number jumps to 45. it is about taking companies and the micro versus the macro.

i think some of the selection have it automatically over the oft three years because mergers, acquisitions, and companies in the energy space that have fallen out because they cannot hang with the s&p 500 requirements. there is such a washout in this sector that i think right now, as an investor, if you think oil is going to be in a range are you think commodities are the dollar will be at a certain level, maybe buy the s&p 500 sector for energy. great degree of washout and changes that happen of whatomposition companies have survived the big oil downfall. david: is part of the reason for that wash up not just the fact we had a change in oil price but also a shift in the way western developed economies work overall ? to the point, commodities are less important and driving the economies and the stock markets. look at tech versus energy. tech is where the energy is coming from. -- if you look at

the amount of oil needed in 2017 to generate one dollar and gdp versus 1980, a dramatic drop, as well. in terms of not just automobile efficiency but industrial efficiency at large in the u.s., increasingly in europe, some volatility coming from the volvo statement. i think there are company-specific issues and country-specific issues. a lot of this cross sector of volatility within energy, there is an active opportunity, as well. theole of one sleep on equity side and the debt side in energy. fromhan: steve wood hear russell investments. great to have you guys here. after couple of days of grinding higher on the s&p 500 by marginal amounts, we're a little bit lower, .14%.

falling.ank payrollsyou don't to friday. this is bloomberg. ♪

emma: this is "bloomberg daybreak." coming up, standard chartered cfo at 11:00 a.m. eastern. this is bloomberg. ♪ david: tesla reported earnings yesterday. it reported losses, which were not as bad as expected. the stockray thinks

is further to go, putting its target price up by 18%. in a quarter, it burned through over $1 billion in cash come a roughly the total it raised in new capital just last march. here to explain whether this is good news or bad news is the senior auto analyst from bloomberg television, joining us from princeton. the stock keeps going up, defying gravity, and they are burning through all the cash they have pretty fast. kevin: i think the problem is that you are looking to connect with the reported in second-quarter earnings to the waythe stock reacts or the that investors feel about the prospects for the ev market going forward. time, you have not been able to do that. if you look over time, to show was twothe consensus years ago, it was about over five dollars a share and profit. over the past when he for

months, that number is now a minus $6.24. an $11 swing for full-year eps for 2017 show you how difficult it is to model out this company. david: what is the point to get to break even? their losses were less than expected, but i understand a lot of that improvement was selling special credits for fuel. kevin: they have zero emission vehicle credits. in their profitable quarter they have had with positive free cash flow, that was because of those ev credits. the idea is that, going forward, operating leverage get to the point where the company is profitable. they talk about gross margins being way higher than what you typically see in the auto industry. orm not sure 76,000 units

80,000 of production last year, up to 500 thousand and one million units, of that operation is there. margins are sort of protected right now because they ultimately have no competition because they're not profitable. jonathan: i believe elon musk said there is pain in shortsville. there is again. they are pushing 22% in the equity flow, a big number. there must be a lot of pain for investors right now. kevin: it is interesting. there is a lot of pain but that short case or even the bear case you make makes sense when you way the numbers. -- when you weigh the numbers. the bull case looks out a terminal value. the consensus is it has been profitable. by 2021, it is $17 a share is a

ridiculous number. on the short side of the trade, the numbers make sense. it does look like that should be the case, yet the stock keeps going up and up. alix: thank you so much. still with us is steve wood of russell investments. it is a great point, you look at the numbers, it short make sense, but the stock keeps going up. looks like a hope stock to me. how do you view those investments? steve: if you brought in the envelope, this gets back to the earlier conversation about driving theomentum market. up significantly since the election on financial that largely have not changed. when we look in the tech space , there are earnings, real companies with real business models. not everyone is burning through cash. the question is, how much of the s&p's performance are accounted

for by the movement in these stocks and earnings? longer-term, valuations and financials always have the last laugh. looking new term, we understand that sentiment and momentum will really drive markets. but we're using long-term valuation work for discipline within our portfolio to allow investors to be diversified away from some of the short-term risk. jonathan: equity market investing was described as buying a dream and then selling it to someone with a bigger dream. is that what it is, to sell to someone with a bigger dream? or is it a big picture about what the future looks like and you want a slice of it? look athen we technology in the u.s., this strikes us as short-term strength. but we are doing a lot more work on fundamentals, looking at economic cycle, quality of earnings, valuations.

that leads us from the specific to the general. the u.s. generally looks expensive and some of these companies do, as well. david: it is generally received that we're going to go to electric vehicles. there will be a huge business there. as an investor, how do you participate in that business? you know it is coming. steve: we talked about the efficiency of automobiles and global advanced economies. we think if you look at a global industrial perspective, a mobile transportation perspective, that makes a lot of sense right now. the oil markets can have more weakness in the medium to longer term, so $45 looks more likely than six to five dollars. playing a lot of those longer-term things, and i think getting too focused on one technology within one industry can add value of the security level, but we look at the total

portfolio level. alix: steve wood of russell investment, thank you for being with us. check out tv . you can watch as online and interact with us directly. your terminal,n and you can ask us a question. this is bloomberg. ♪

alix: 23 hours before the jobs report, and wages are the conversation. gary shilling, a bloomberg columnist, wrote a piece on what central banks do not get about wages, saying wages have either been stagnant or declining in the u.s. and other developed economies for more than a decade once inflation is taken into account the red yet, the federal reserve another major central banks remain convinced labor markets are tight, and that is surge and employee cost and inflation are just around the corner.

policymakers are failing to take into account the significant economic changes in recent decades that are holding wage growth down. joining us is gary shilling himself. great to see you. thank you for being here. looks like you think the fed is going to set us up for policy mistake european. what to do you think they are missing? missingey're globalization, first and foremost. you have moved manufacturing another production out of the west to asia. we're looking at a global economy. i think there is still focused on a domestic economy and kind of a classic post-world war ii expansion without realizing that the world has changed. we look at the tremendous availability of labor and equipment on a global basis, it is very equipped -- very different. you were about wages in the u.s. and so on -- and less trump up does build a wall around the country and we become completely protectionist, you have to look at things on a globalized basis.

4%?: what if we get to does that change the game? gary: that number is a terrible number or the fed, in december 2012, they said in writing that if the unemployment rate got to 6.5%, they were basically going to discontinue ease. jonathan: bank of england used 7%. gary: the point is, the unemployment rate is the ratio to thele looking to work denominator, plus the people at work. fewer able looking for work, the unemployment rate goes down. people dropped out of the labor force, a lot of them retiring, but younger people stayed in school hoping better education would get them a better job. middle-aged people cannot find a job and dropped out. you had not had

this decline in the participation rate, the unemployment rate would be in double digits now, not 4.4%. oned: labor is not homogeneous entity. there are different has of labor. if you look at your numbers about real wage growth and you break it down according to skills and training, education, what do you get? gary: you find shortages in some areas of skills, though i think a lot of employers say they cannot find the skills they want, but i think they are saying i cannot find the price i'm willing to paper they do not think they can pass on this labor costs. we have had very low productivity, and there is no pricing power. we're in a globalized economy. i think productivity is going to revive. one reason is the maturations of today's new technologies, things like self driving cars, like robotics, like biotech, and so on. it just takes time.

they have to get big enough. and i think we will probably have a big push for fiscal stimulus. you have had no growth in real wages for over a decade. so i think that is going to change. employers are saying, hey, i cannot afford to pay a higher wage. david: what form of fiscal stimulus would most address the question of real wage growth? not all fiscal stimulus is created equal. is not, but it spreads out. i think it will come in two forms, one being military. theblicans pointed to chinese building these artificial islands in the south china sea. russia and ukraine coming out from the postwar neutrality. the other area is infrastructure. everybody in congress is pretty much for that, and they realize they have to be. voters are mad, and they say you have to do something for my purchasing power. they cannot do anything now that

is going to create jobs. once you create them, it is go through the economy. but they cannot do anything now that will be effective before the first tuesday in november of 2018, pick a random date. what they can do anything they will do is put enough programs in place, and they will say it is common. that is what fdr did. when he was inaugurated in march of 1933, he promised all these things with the new deal. they did not come into practice for two or three years, but it was the promised to do know, nothing to fear but fear itself. alix: that was before twitter though. i cannot let you go without talking about the warnings of bubbles. and oneenspan, bubble market. where is the biggest miss price in the market? gary: i say treasury. i have been able on treasury since 1981.

the yield is now 2.8%. i think we are in an area which is more reflationary than anything else. -- which is more than anything else. treasuries are higher than almost any other developed country. i say that is the biggest, but that has been in my forecast. i have been on it for 36 years. alix: gary shilling, thanks so much. jonathan: 25 minutes into the session. downside on the dow. the s&p 500 ♪ going further back from record highs. ♪\ ♪

vonnie: from new york, i am vonnie quinn. from london, i am mark

barton. ♪ vonnie: the bank of england report this morning but first, breaking economic data. >> nonmanufacturing index, a measure of the services industry. the 56.9orse than estimated by analysts. we also got factory orders for june coming in with a rise of 3% in line with estimates as may was revised to a small drop of .3%. 6.4%, the final reading from drew -- from june. the biggest one just cannot hear.