unveiling plans to unwind the balance sheet before the year-end. china's credit rating is cut for the first time since 1999, just before the party congress next month, and prime minister may considers the need to discuss billeed for me your brexit worth tens of billions of pounds. good morning, good morning, this is bloomberg daybreak, i'm jonathan ferro. futures are dead flat, grinding up four days of ends on the s&p 500, and four records on the trot as well. -dollar bounces back, we are up about 1/10 of 1%, and treasury yields keep writing higher. we are up about two basis points on the 10-year. upx: we have the dollar yen, by 2/10 of 1%, and the euro-dollar.

out withee a playing the aussie dollar. i want to highlight copper, off about 1%. that stronger dollar story radiating throughout the commodities. update on's get an what is making headlines outside the business world. made aurricane maria has bad situation worse. the storm knocked out power to the whole island, and caused intentionally billions of dollars in damage. continuing the population exit is that help push the u.s. commonwealth into bankruptcy. in mexico city, there is a race against time to rescue a young girl trapped in the rubble of a school. she has been there for more than a day since a killer earthquake rocks the mexican capital and the region. the death toll is now 230. dozens of buildings have

collapsed and dozens more are in danger of falling. a british prime minister theresa may may try to jumpstart brexit negotiations. needs discussing the use for a brexit bill worth tens of billions of dollars. global news, 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. i am emma chandra, this is bloomberg. david? david: thank you so much, emma. earlier this morning, s&p cut china's credit rating. to discuss this is our chief asian correspondent. as i said, this was not unexpected, but why do they say they are doing it now? >> not unexpected, but i second downgrade by a major ratings firm this year. they're looking at the unsustainable buildup of debt in china's economy.

reminder of the challenges that china is facing. they say they need to deleverage and slow the pace of credit growth. they have had two major ratings this year now. david: as you have said, says they know they have a problem, and they are making progress. is this just too little too late? >> they made a move some months ago abroad a broader backdrop. this led to risks being buildup in the system itself. they are somewhat behind the curve, but the timing of it is interesting. we are a few weeks away of an all-important party congress next month, and china selling its first overseas bond in some time. the feeling with as in the is

right with the decision, but they are behind the curve in terms of everyone else. practicalt is the effect in the real world of this? is there an effect on chinese corporate bonds? >> there is all the mechanical impact when a sovereign gets might driveand it up costs for those companies. china's markets are closed right now, we will know more tomorrow. what i will say is that china's capital is closed. they do not rely on foreign funding like countries in the eurozone did during the european crisis. so the approximate effect of it might not be as that is the headline suggests. alix: there is one voice you want to hear when it comes to china, it is probably stephen roach. here is what he had to say on bloomberg surveillance. >> china has a debt problem. china has talked very directly and especially about its debt .roblem for a number of years

you can be critical of china for aggressively to force its state on enterprises -- state owned enterprises to be levered. are our twog us now guests. they also said that agencies are the last to know anything on the day. do you care about this downgrade? sean: i think in reality, the wasit -- budget deficit always going to deepen. they knowledge that over the last 18 months. -- it knowledge to that over the last 18 months. tax receipts should be coming back right now. the companies have started to issue special dividends, going back to the chinese government's coffers. i think it is some of a lag effect, the worst part of

the but it might start to improve over the next six months. looking tois to rise by the double digits. >> we think financials will be in the mid teens. it has been a good cycle for the equity market, and what has also been happening, i have seen a a significant amount of deleveraging in some chinese companies. jonathan: about a month ago they predicted nonfinancial sector debt to reach 300% of gdp by 2022. what can they do about the trajectory, because it is not flattening out? >> what has been happening is over the last 18 months, the government for the balance sheet --deteriorating, and that wil that is so we has improved s has has improved -- soc

improved. this will be the state of play over the next 12 months when they start to do reforms. jonathan: so when they say financial risks are increasing, are they looking at the government and not the wider economy? sean: yes. i think the reality is there has been a very big switch in who is actually taking the bulk of the risk anymore. it is less and the equity market and more with the government's balance sheet. julia, as you look at this is this a different situation in china? the chinese savings rate is so high, did that reduce some of the risk? manifest itself very differently in china because of the closed capital account and the current account surplus. but it is nonetheless a macro economic problem. what china has been seeing over the most recent explosive of debt is exactly what the europeans did and what in terms ofd

shadow banking. i think the numbers are large, and the chicken will come home to roost. the question is when? fighting that has always been the biggest challenge. david: as i said, president xi has not made a secret of this. how difficult is this to make a transition without disruptions? difficult.ly they did that a few years ago. reigned credit, tried to cut capacity, and looks very close to a hard landing. measures of growth slowed very sharply in 2015 and 2016, and bailout that credit back out of thatarn -- they allowed credit back out of the barn and that is what fueled the growth and the agencies are focusing on. chinese: two thirds of debt are bought domestically, so the savings story -- maybe you

can comment on it. the savings story is an example of do they need to get consumption up and savings down? savings keep going toward overcapacity, workplaces they do not need it to go. sean: i agree with that, but it some point you need to use the current account position to bail out the banking system. the longer they leave it, the worst the position will be down the road. i do think they are serious about the soe reform. we will see more of that in october at the people's party congress. having a high household savings rate is a bit of a bailout, provided they can use it over the next 24 months. alix: i am glad you brought up the people's congress in october, because that debate as to what reforms will look like after the fact. will we see this growth, stimulus, the same supply-side reforms afterward? what is your base case? thrust the economy

into a growth phase to allow the supply-side reforms to go on. china fromn 2011-2015, but when you slow down and becomes difficult to do any reform. i think he tried he give the -- to give the economy a jet boost, and now is really starting to clamp down on the bank lending. there is a huge lot of to bank regulations going on. that will move through until 2018. you.han: sean darby, thank up next, our global economic advisor reacting to the fed decision. we will also be set up for a rate hike before year-end. for our audience worldwide, this is bloomberg. ♪

>> the committee decided at this meeting to maintain its target for the federal funds rate. we continue to expect that the on growing strength of the gradualwill warrant increases to the rate to sustain a healthy label market and stabilize inflation around our 2% objective. in october, we will begin the balance sheet normalization program that we outlined in june. this program will reduce our securities holdings in a gradual and protectable manner. overall, we expect that the economy will continue to expand at a moderate pace over the next few years. in the third quarter, however, economic growth will be held down by the severe disruptions caused by hurricanes harvey,

irma, and maria. jonathan: that was fed chair janet yellen, sounding a bit more hawkish than anticipated. is sean us -- with us darby and julia coronado. julia, let's begin with you. the federal reserve has a history of making policy mistakes. what strikes me as odd as the confidence that the investors have in them this time around. what is your view on that? julia: i imagine janet yellen is doing cartwheels behind the scene at how well the market has taken the whole balance sheet reduction plan and announcement area -- announcement. i think it is that global liquidity we are seeing that is helping to smooth the path for the fed and maybe normalize a little bit more steadily than they have been in the past couple of years. i think they are taking advantage of that moment. investors had maybe expected

them to be more sensitive to the low inflation numbers that we have been seeing, as they have instead decided to recommit to a december rate hike. markets took that reasonably well. jonathan: sean, markets have taken it reasonably well, but they are flashing a bit of a light at a flat yield curve. i wonder what the messages from the fed coming to the treasury market following the decision yesterday? sean: i do not think they necessarily wanted to raise the too much,e because it would have flattened the yield curve. but they do not necessarily control the long and. -- end. when we look at the bond market from an equity point of view, most markets are negative. the global economy will not be slowing down, it will be accelerating. i think the balance sheet reduction is a good idea in yieldof shifting the curve steeper and bringing back some of that relaxation and policy. it is still good for equity markets, great story for

financials globally. had a greatn price line in his piece today, saying "traders have become so fed --med to a dovish even what it is tightening policy, that they have seem to actually forgotten what a hawkish fed looks like." >> they are data dependent, they highlighted that over, over, and over again. a need apple in -- they need to be flexible and 28 team -- in 2018 and beyond. we do not know if they will be flexible because the composer -- how hawkish or dovish the fed might be in 2018, what it

might be leaving it. upathan: i want to bring this dot plot and go through the estimates we are looking for from the various fomc officials. price is talking about 2020, right here on the plot.erg. plot -- dot you have to wait for the tightening to come in 2020. that is where the forecasters are above the longer term mutual rate. you have to take these forecasts with a grain of salt. does that matter? julia: it has not matter. leadinget has been the fed for so long they will take a wait and see approach on that. they have been ahead of the fed, growth, lowerr inflation globally, and the fed would have to react with a ander pace of tightening normalization, and the market has been right. the fed is following the market. it may be that the market is a

little overconfident in that, but it remains to be seen. david: as you suggested, there is a debate going on between the market and the fed. you used to work at the fed. pay attention to what the market is doing? does it influence you at all? julia: of course it does. different people to different degrees, the new york fed is very focused on that since they are managing the balance sheet, they have to make sure that as well communicated. but they do want their policies to be priced in and good communicators. they do not want to shop and surprise the market because that means they are not doing their job communicating. yes, they will watch the market, and yes, it matters to them. but yellen's mantra, because twistsave been so many and turns in the recovery that are unexpected, and the drop inflation is another unexpected developments, so she is different from the greenspan

stands let me micromanage the market and make sure it is in line with my guidance. she is flexible, i will take the data as it comes. this is our path, but the path is data dependent. we will react to circumstances as we evolve. alix: what happened to real rates? sean: this is a nice environment for equities because the cpi is quite low. we have the inflationary boom, but prices like in energy are rising quite dramatically. it has been rising in the last come back, and they to the corporate sector very robustly. you have this emergence building up. low cpi numbers, strong producing, that tends to be a for equities over bonds. that is where we are at the moment. think the pricing -- we think the pricing globally has a big tailwinds to it in the next six-mine months. alix: sean darby and julia coronado, both of them will be sticking with us. coming up in an exclusive

interview today, we have harold hamm. no surprise, he is bullish on oil prices but has an interesting reason why. you have to listen. this is bloomberg. ♪

david: this is bloomberg. i'm david westin. tech stocks have been on a tear this year with the likes of netflix, amazon, and google of 150%. but there is a growing force of lawmakers in europe calling for increased regulation on the mega-internet companies are doing business, everything from how they are taxed to political advertising to being responsible on terrorist content posted their site. just this week, chancellor angela merkel, president a cron, and prime minister

say -- one -- gentiloni still with us are sean darby of jefferies and julia coronado of macro policy perspectives. sean, as an equity strategist, what point do you need to take into account government regulation when you have a sector like tech? sean: they have a business model which allows infinite returns to scale, which again, in economic terms, is very rare. the issue is not necessarily that the u.s. wants to go to the regulatory route. in europe, they want to find them and force them to change the way they operate, or, indeed, change their business models. think it will start to be a headwind. they havein europe,

started to introduce this tax levy on their sales. they're coming up from a variety of directions, not just from the regulatory side but on the tax side as well. if -- david: if they can change the way they do business, will that not cut into returns? sean: i think it will. the business were these operators is that they will find investing difficulty to in the same rate. that was the problem with microsoft, in a similar position in the late 1990's. it faced a backlash against a regulator and was found to build up cash balances, because they cannot make this infinite returns to scale. jonathan: there are two threats coming from the government to andtex, and one up -- tech, one of them is that they pay a tax rate of 10%, normal business is paying around 23%. another is around things like

facebook advertising in russia. as an equity investor, what is the biggest threat? living down on the tax side of things or the moral side of things? sean: in the short run, the tax side. they will introduce this tax levy, which i think will start to be focused on the amount of sales in each of their european countries, and that will start to hurt the bottom line overseas. i think other issues are ones that have to span out over a longer amount of time. -- company theater rate companies need to wait for the regulatory commission to change. julia: i think technology has become such an important macro economic driver, i think of low inflation. one of the reasons consumers can use their smart phones and search for the best price. it has transformed everything, and it is inevitable that the regulators would start to pay attention. it is a matter of national security now. -- it is a matter of

personal security, information security. in all of our lives, and eventually -- even though we are deregulatory regime and environment, it is still a target and a big part of consumers lives. julia sean darby and coronado will both be staying with us. for more tech stories, pick up the latest issue of bloomberg businessweek. the magazine focuses on facebook's challenges, especially for ceo mark zuckerberg. close to theare cache open, and a series of record highs, four days of gains on the s&p 500. futures flat on the dow. from new york, this is bloomberg.

♪ jonathan: from new york city, daybreak.oomberg i'm jonathan ferro. four straight days of gains on the s&p 500, four all-time

highs. futures just a little soft, but dead flat on the dow and s&p 500. in europe, the banks outperform. that is the biggest gaining sector on the session. it might be able to be found in the bond market. a little softer in europe, treasuries softer as well, yields climbing high. market, the euro-dollar weaker, weaker, weaker,. 1.1892. at now let's head over to emma chandra to get some headlines outside of the business world. emma: hurricane maria destroyed hundreds of homes and knocked the island.ross damage may be in the tens of billions of dollars. puerto rico is trying to restructure its massive debt

will the government has warned it is running out of money. special counsel robert mueller has asked the white house for documents related to donald president,ions as including the firing of his national security adviser and fbi director. this indicates how wide a net mueller is casting. and u.s. secretary of state rex tillerson is urging european allies to make changes in the iranian nuclear agreement. he says the deal has not stopped iran from playing a destabilizing role in the middle east. he spoke hours after president trump says he made a decision on whether to walk away from the agreement, but would not say what it was. global news, 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. i'm emma chandra, this is bloomberg. david? david: thank you, emma. president trump is wrapping up his trip to new york to the united nations meetings by making his issue with iran front and center, but they will also

be talking about north korea today. meanwhile, in washington, congress is moving forward on health care and tax reform. with us is marty schenker. so a lot is going on in new york. going back to washington for a moment, there is a big drama playing out with health care. marty: high drama, with mitch mcconnell saying he will bring up the obamacare repeal, the bill that would replace obamacare. he does not know if he has the votes. that, and i think john mccain is the key figure in that decision. remind people, he needs all the votes he can get. he has 52 senators, he needs 50 votes. he does not have a lot to play with. marty: he doesn't, and john mccain, the last time did not play his hand until he actually cast his vote. as mitch mcconnell brings this up and it is not know which way -- and does not know which way mccain will vote, this could be

disastrous for the gop. david: there is real pressure from the gop -- not with the president, so much. pressure from the republicans. why are they doing this? marty: mayfield have promised this for eight years, and if they fail to do it it is embarrassing and does not have the promise they made. david: and supposedly, the 25th or thereabouts we will get the tax reform. are we still going to get that proposal? marty: that is going forward, and we do think we will get more specificity on what is in that plan. the first plan was a series of bullet points. this will give us how much more detail -- this will give us more detail, but how much more remains to be seen. alix: in the markets, it is all about tax reform. a sat down with representative of avenue q who gave us his perspective on what would happen if tax reform does not come through as promised. priced, someirly

will tell you it is overpriced. it still keeps going up, and the reason for all of that is $2 trillionlieves coming in from offshore that comes back, and that will bring back more jobs, and you will get tax reform done. if none of that happened, i think you will see the market take a big hit. alix: still with us is sean darby of jefferies and julia coronado of macro policy perspectives. sean, how much of a hit can we take at this point? sean: i do not think it is much of an issue at this point. the more the republican party has been on tax reform, the weaker the dollar has got. so the global economy has bailed out the s&p 500 over the past six months. i think we will get the same effect going into 2018. ironically, it is not as dependent on the tax reform as many people think. some ways, julia, if tax reform the worst case scenario in some aspects -- you get a stronger dollar, more priced in, and a stronger fed.

is that a risk to talk about? julia: you have to talk about the offsetting forces, yes, to be sure. some of the tax reform potential, it not happening would be a hit. there were defense of going into stronger growth -- there would be a sense of going into stronger growth, and if we do not get that then maybe growth is slowing down. and china has that global bush as well -- push as well. we come into the year with a global economy on the upswing because of the chinese upswing, and all of this potential stimulus coming in the pipeline. alix: let's break down the sectors here. this is deutsche bank's high tax rate stocks versus low tax rate stocks. we see that big jump in high tax rate after the election, grinding lower. now we are seeing another rally here. sean, are you of the ilk that you want to be buying the small caps, the multinationals for repatriation, high tax rate companies. is this the trade?

sean: we are looking at a lot of the investment spending indicators, like the fed and ceo surveys. there will be a spending boom in the united states. the u.s. smaller caps would benefit from that. they have been big laggards globally over the past 18 months. a big if there will be spending boom anyway, julia, and full employment, do we need $1.5 trillion two $2 trillion injected into the economy right now? was forhe original plan there to be tax cuts, not tax reform. i think republicans and democrats agree that we have an arcane tax code that requires companies to manage all of this, but it has morphed into tax cuts. and no, we do not need it at

this point in the cycle. we are close to full employment and the economy is humming along, the global economy is fine. there is no need for stimulus at all. jonathan: where's the evidence that we will get the spending boat? has been a984 high good lead-in to nonresidential spending. this feels like the late 1990's -- low inflation. and the companies will recycle those profits back into the economy. the 2018r will be when margins start to come in and that pressure is put on the economy. u.s.: and that the consumer is not experiencing a late 90 90's boom -- 1990's boom. they are not seeing real wage growth, and are very insecure. you have an aging workforce that has not saved for retirement. stock marketming and in a booming job market,

they are holding onto their savings pretty conservatively. if consumers don't loosen the purse strings couple why would companies commit capital? sean: you have record high profits to gdp, record -- and they cannot raise sales any further. they also have to make efficiency gains. maybe the drought has been that the money was not recycled back into the domestic economy and it was ported for capital -- hoarded fort capital quarters. this is a oil company. they are supposed to invest. you wanted them to investor money back in. -- invest your money back in. does that change? sets of surveys are showing that sales numbers are improving, and that is a good leading indicator for investment spending. by the way, it is not just the united states. this is in japan and germany as well. capex is picking up, not just a u.s. story.

sean darby and julia coronado will both be staying with us. youou commute in today, want to turn into bloomberg radio. you can hear it in new york, washington, dc, boston, and the bay area and sirius xm radio. live from new york, this is bloomberg.

♪ alix: this death emma: this is bloomberg

daybreak. coming up on bloomberg daybreak, .arold hamm this is bloomberg. daybreak.oomberg i'm emma chandra with your business flash. the securities and exchange commission that's is a hack -- says that a hack of one of their databases may have led to legal trading. forr filing system is used market moving corporate announcements. the agency did not conclude until last month that the cyber criminals may have used the stolen information to make trades. managing $3 trillion worth of assets, the worst month in a decade has gone far enough. they are buying dollars and forr view gain traction --

another interest rate hike this year. google is trying to boost its growing hardware business. the internet search giant has agreed to buy part of htc's engineering and design team. help google gain tighter control over the production of its pixel devices.e and other htc is one of the world's biggest smartphone makers. primen: u.k. minister theresa may is weighing -- thet is good so-called brexit bill is estimated at more than 20 billion pounds, perhaps north of that. may is preparing for her landmark beach -- speech on brexit in florence this friday. >> theresa may has met with her cabinet in london. they are overlooking the speech

she has dropped in for tomorrow, signing off on it. this will result in a cabinet meeting two. the eyes and cross the tease. tomorrow, she goes to florence, and the hope of the eu is that she will give more ground on the exit bill, which could run up to a 100 billion euros. a huge number out there. she is expected to give it over tomorrow that the u.k. is willing to pay. there is a sign she is willing to open discussions on it and brought in the framework to calculate the final bill. jonathan: we can have a discussion about what this ultimately means for negotiations with the european union as far as getting past the bill and getting onto the trading relationship. i am interested to see how this will play out domestically in the u k when the prime minister could -- the u.k. when the prime minister could admit there is a of money to pay.

>> she has kind of been forced to address the issue sooner. johnson is the most high-profile brexit supporter in her. he flew back with her last night from that trip -- in her cabinet. he flew back with her last night from that trip to new york. keeper she can permanently it on the downside, that will remain to be seen, but that will cut that brexit force within the camp. jonathan: boris johnson and theresa may being that relationship -- i wonder what the timeline is now, simon. she comes out in florence tomorrow, lays out that speech, talks about the relationship, maybe. where are we on the timeline? >> then goes back to being quite democratic. eu officials have long said they will not negotiate with speeches and landmark occasions such as

tomorrow in florence, but the work continues next week. there are talks in brussels, in the british and european commissions. they continue next week. they were delayed this week so that theresa may could make that so-called "intervention," and in mid-october the leaders will gather from the 27 other eu capitals to discuss where they are and be advised. and theresa may tomorrow will use her florence addressed to speak over the head to fellow politicians, and hopefully in her eyes she will be able to force them onto her side and try and get that trade ands going that she wants, will then be holding out against sanctioning. simon, always good to catch up with you. we will full coverage of theresa may's speech in florence 9:00row, it will be around

eastern, so 2:00 u.k. time. joining us now are sean darby from jefferies and julia from macro policy perspectives. this is not mattered over the past 12 months or so. does it start to matter? because int does, the background the u.k. is one of the few places we have seen where household the link with these are going up. --there is evidently a wage household delinquencies are going up. ande is evidently -- markets will start to panic if we going to 2018 where there are no signs of a deal at all. i am a little confused as to how the pound is holding up. in contrast to what is going on underneath -- holding up here in contrast to what is going on underneath. there ishe reality is

less chance of a negotiated deal in early 2018, the market would assume rightly there would be a hard brexit. jonathan: what is the market? sean: sterling, -- sterling, guilt, or something bigger than that? all three, actually. it would not be good for sterling, gilt, or equities either. julia, how is this uncertainly limited to the u.k., or does it spill over to a broader global economy? julia: there is a cautionary tale about moving away from the globalization realities that our companies operate in, and it has been a slow moving -- we expected an initial hit we never got. the u.k. economy weathered it rather well, but that consumers are now feeling the pinch and real wages aren't going down.

it is becoming more of a problem and more of a problem for companies planning. it is starting to take into the economy, and the more this hard brexit looks like a possibility, the more that will weigh on investors. it is a cautionary tale for the euro and the u.s. as we contemplate the process of closing up our borders and looking inward. unforeseeable, of course, that miss mabel see a challenge to her -- ms. may will see a challenge to her leadership as well. she does not have the full backing of the party. whatever deal will have to go in front of parliament, and that is the problem with the bill. it is too large, a lot of ministers in the conservative party will have to look at it. will ber guests sticking with us. in our bloomberg terminal, check out tv . you can look at things online, check out charts and graphics, just go to tv on your

terminal. be able to look at anything you might have missed. this is bloomberg.

alix: oil prices up by about 1% board meets in vienna. the cartel not be looking into extending production cuts at this meeting. ouring us from more is bloomberg markets: middle east anger. -- anchor. >> we are hearing different views on this issue, and the says thisime minister is not on his agenda, but what happens is after the compliance is up to standards. you have the reality on the ground, where compliance is in line with expectations.

in august,hat is 94% for non-opec, that is 119%. they will have to look at other options if they want to maintain the kind of favorable conditions they have in the market. that could mean extensive opec april, or other cuts. this is what the iraqi minister has been very vocal about. the data is suggesting that unless they act, those global inventories could rebuild quickly. alix: i like how the iraq guys do is saying you it, we will let even attend the meeting. this bloomberg shows what you are talking about. u.s. production versus oil inventories -- they are coming down. that is the blue bars has opec production comes down -- as opec production comes down, the yellow bars. they have to maintain and be consistent. >> this is a beautiful chart. this is one of my base case charts in terms of hitting a

better view of where opec production is and u.s. crude inventories are. you also aftermath ever that u.s. shale in general is -- you u.s.have to remember that shale in general is thriving, and this could bring a fresh new into the bigger conversation. there is concern that there could be further downside pressure going forward. this is where a lot of the deliberations will come into play. it is not still clear -- 1% year, 1% there, that will not make much of a difference. what will really make a difference is the forward guidance. if they can maintain a level of agility here. they said we will react based on the data as it comes in, so --re is seanstill with us is darby from jefferies.

do you like oil? sean: it has been a big laggard &p 500.s unfortunately, oil has been undermined by supply-side issue. it is not a demand problem, it is a supply issue. reach a deal, it would be bullish for the s&p 500, because that part of the bigings indexes having a jump in base effect over the next nine months. valueour energy stocks stocks right now, or are they still pricing and $60 oil and have to rerate we stay at 50? sean: i think they have come over in the last five months that we will not get anywhere close to $60 a barrel. alix: is there an oil price you need to see, or an extension that would make you say enough of value, i am in. sean: if we get back to $55 a barrel, that would put people back into it and be a good floor for the s&p 500 majors.

unfortunately, this has been one of the most disappointing stories this year for the s&p. a big drag in a sense for the earnings numbers. alix: is there any trickle-down e.m.? sean: not really. globally, it is a pretty good environment for oil demand and energy demand as well. but supply has been running even faster. opec, perhaps, does not have its story completely together at the moment. alix: shocker. darby, great to catch up with you. coming up next, we will be st-fed to get a po reaction. from new york to our audience worldwide, this is bloomberg. ♪

jon: chair yellen brushes aside inflation concerns.

s&p cuts china's credit rating for the first time since 1999. reduction comes just before the congress next month. prime minister may -- worth tens of billions of pounds. good morning. this is "bloomberg daybreak." i'm jonathan ferro. high, high after record four straight days of gains. futures are dead flat. that --lar dropped post yields settle down at 2.27. alix: aussie dollar down over

1%. central banks wind up looking more dovish, especially compared to the fed. color string reverberates in the commodity markets. reverberates in the commodity markets. moved on to puerto rico where it caused more misery two weeks after hurricane irma struck. forecasters are warning that flooding is still a danger. racexico city, it is a against time to rescue a young girl trapped in the rubble of a school. at 245.h toll is now dozens of buildings collapsed and many more are in danger of falling. special counsel robert mueller has asked the white house to

for documents related to donald trump's actions as president. this includes the firing of his national security adviser and fbi director. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. i'm emma chandra. this is bloomberg. david: the fed kept rates unchanged and told us they would start unwinding the balance sheet in october. it wasn't because we had no surprises that came out of this announcement, even though we expected both those things to happen. joining us now is mike mckee. we kind of knew about the rates and the balance sheet unwind, but the market was a bit surprised. >> everyone went first to the dot plot.

this is the old fed forecast for where they would end up with rates and this is the new fed forecast. it has come down. it has come down a lot. market participants are thinking maybe the fed is starting to get what they have been saying all along. there is an issue with inflation being lower than it has been in the past. i asked janet yellen about that. the fed doesn't quite understand what's going on. here's what they think should happen. this is the inflation rate and the unemployment rate. back in the 1990's, we saw on employment go down and inflation started to rise. same thing in the early 2000's. look what has happened since. we have seen the unemployment rate go down but inflation has not moved higher. janet yellen is concerned maybe it is not going to be they don't quite understand why. have they been too low for too long? this is the fed's balance sheet

and this is the s&p. notice how they move together. this is corporate profits. corporate profits are driving the s&p. the fed is worried about financial stability. there are concerns out there, so they will stay on a rate path, but they are not going to move as quickly as they thought they were because of that inflation component. jon: joining us now around the table is the managing director at cia investments and jim caron . how can the fed maintain the same number of hikes next year and then offer a small cut inflation outlook at the same time? >> it is a question. the fed it seems to continue to struggle with understanding where we are in this cycle and what the data is telling them. aey've been trying to project positive attitude regarding where we are seeing growth and inflation will eventually pick

up to their 2% target but the data continues to struggle. it is curious to me how they could have come up with that combination when you look at what they have projected in the longer run of 2019 and 2020. jon: chair yellen, it is a mystery for her. where the surprise came from was in the fact that the fed is doing exactly as advertised. market participants were weighing the low inflation we've had more so than what yellen was doing. when yellen was talking about her decision, she was like we will look past this inflation stuff, don't worry about it, our models are right. the markets are saying no, you are supposed to be more data dependent. when the fed voted 12 out of 16 member's to keep the rate hike in december, that is telling you that the fed is a ignoring -- is ignoring the recent evidence. alix: and what the markets think.

this is the market expectation of how many hikes they see fit the white line is the end of 2018, they barely see one hike. by the end of 2019, they see 1.5 hikes. youfed told us yesterday, have to listen to us, we are not listening to you anymore. they continue to project what they believe is going to occur. whether or not they are sticking to the phillips curve model or their own internal data that is trying to tell them we will eventually see the pickup. what the market has said has been that inflation is not moving up. pc deflator's come down this year. deflators come down this year. what is it that is structurally going on? we saw that yesterday in some of chair yellen's comments where it's somewhat of a mystery. the market is moving to a place where they are believing this may be more structural than what

the fed is willing to acknowledge at this point. david: the market must be believing that inflation is coming down rather than going up. if you believe what the fed is saying that they will end up at 2.75, we are still too low on the rates p. stephen: and the u.s. economy is 7% driven by consumer spending. n averagea hourly earnings growth stuck at 2%. their ability to spend more and have disposable income increased to grow has been constrained. we are not seeing that. the market is already discounted that and the fed is still sticking to that longer run concept that we have low unemployment, we could be at full employment, so inflation will have to eventually pick up

and wages will eventually have to grow coul. jon: the spread is narrowing to 236. to 2.25%,e fed moves that's where the treasury yield is to th today. that is typically where the fed ends their cycle. there is a key element to what we are all talking about here. is the fed becoming more mission focused? are they on a preset course to hike rates and become less data dependent? i was under the assumption that they are more data dependent because they told us so. what did you make of the fact that they lowered their terminal rate? jim: it didn't take much to do that. it took two voters to do that. alix: we are talking about a

global reflation story. market tomore of a -- there's concern within the fed that perhaps they may be too aggressive. we also have a new set of players going forward. maybe what the market is actually telling you is that they don't believe that the goingt set of players are to be dictating what the new set of players are actually going to do. great to have you with us. continues, stocks at record highs, the opening bell one hour and 20 minutes away. this is bloomberg. ♪

emma: this is "bloomberg daybreak." crh is expanding its th footprint in the u.s. the deal is valued at $3.5 billion. that represents a 59% premium to the closing price yesterday. google is trying to boost its hardware business. they are buying parts of htc's design team for $1 billion. they will gain control of manufacturing of some of their pixel devices. china has had its sovereign credit rating downgraded. s&p global ratings cut china plus.a minus to a

ofna's prolonged period economic growth increased its financial risks. jon: my favorite reaction to that came from the chairman of morgan stanley asia. >> they are the last ones to know anything. ande is a fire in the room everybody has left the room and they say i think the smoke detectors are going. alix: you have to love that. to illustrate what he's talking about, take a look at corporate debt, household debt, government debt and bank debt in china. has that even factored into 2017 yet? gdp, the white bar there. still with us, stephen and jim caron. what was your reaction to the downgrade here?

does it affect how you invest? stephen: what china does really is it does drive a lot of global commerce and global growth. you see it especially in places like europe where there ties for trade are more direct than here in the u.s. benefitthe subsequent of seeing european growth improve. growth improveee above the 6.5% target that china had to 6.9% last quarter. they are trying to position themselves to deal with these bubbles because they know they have an investment and a debt issue. the pboc did turn slightly more hawkish trying to raise short-term rates. they are also pumping more liquidity into banks at the same

time. if you get a downgrade in the u.s., you wind up having a trickle down to corporate debt, but this is a different circumstance because china owns so much of internal debt. jim: that's right. when we look at that, we also have to look at the servicing costs. how can they fund the debt? how big of a risk is this really to china? can they service it, can they fund it, can they get external cash if they need that to fund? yes, that is growing. you can argue that their growth is being funded by some would call it a credit bubble -- there's a lot of credit being created that's finding a lot of loose debt. what if the credit goes away? that's the big risk. we may not see the event. it's a question of timing. too much debt is never good, but

it's always a question of when does it become a really bad detrimental thing for the markets. i don't think we are there yet. china has enough reserves that they can still pay for this. arguing their course is the best course to be on but it doesn't -- jon: why don't you think there's a credit bubble? jim: a global would mean there has to be some irrational level of debt. they are getting that growth. was moreowth in china like 2% and they were having more and more debt, the nominal growth is relatively good, over time, they could take that down. -- pay that down. david: one of the things china is working on his liberalizing the financial services to tap

into international markets. does this help or hurt? jim: i think it helps. china moving into some of these indices, you will find willing buyers. it's something i would take a look at myself. it becomes a very interesting story. if china does open up its capital markets and financial markets, it will find that it will have many people around the world willing to fund it. alix: what is your allocation to em? stephen: we have no exposure to china currently in our funds. .e have a 5% exposure to em the funds i managed are socially responsible funds. that fitt found any into the category where looking -- and em, we see green bonds to fund process

improvements that have green assets to them -- aspects to them. alix: they are shutting down certain plants or mills because of environmental reasons. like that changes after the national people's congress in august? stephen: the question will be what comes out of that. we've seen a recent announcement from china that they will stop the sale of fossil fuel vehicles. changes like that and a change for the country as a whole to become more environmentally positivele will be a and something we will be looking at closely going forward. alwayse message there is stability and a growth plan. i think china does need to set itself on a course where it does have some organic growth. opening itself up to global

financial markets where they have domestic internal demand. these are things that have been out there for quite a while. china is making progress towards that. the congress could make some strides there. david: steve lipitor and jim caron will be staying with us. joins us, dan chung with his topics in the tech space. this is bloomberg. ♪

david: this is bloomberg. price, comes to stock tech companies have had a particularly good year so far accountingnk stocks for over a fifth of s&p 500 gains so far. there may be some political and regulatory storm clouds gathering as authorities are

ramping up their calls for reining in the tech giants with european leaders and saying they need to get their arms around crackxes and they want to down on terrorism posts on their sites. facebook has been brought up in the investigation of russia tampering with the u.s. election and congress is working on legislation allowing criminal prosecution for allowing content linked to sex trafficking. we have two fixed income guys here. i want to ask an equity question. tech has driven some much of the economy that so much of the economy, what is the prospect that there may be a reckoning coming here? what effects might that have on the bond market? jim: it is a very macro question. , the bond the s&p 500 guy looks at the broad index. if the tech companies and start

to come under some scrutiny and that means that could put downward pressure on prices, that will take the indices down. -- feedss directly directly into financial conditions. equity prices lower, that would send a signal that perhaps on a forward-looking basis might lead to economic weakness. if the equity indices start to move lower, it might slow the pace at which the fed may start to hike interest rates. it is more of a bond bull story. it's a balanced portfolio. that's part of -- jon: you mentioned you only invest in socially responsible companies. >> on the debt side, they don't have any public debt outstanding at the moment. jon: how do you assign what is and isn't socially responsible?

many politicians are asking that question about this company. managing first started socially response funds 13 years ago, it was driven by an exclusionary screening methodology. now, we have evolved a place n industry a class approach. you can make a direct and measurable socially and environmental impact. jim: in my mental and social responsibility investments are becoming more and more important. a lot of our investors demand that we can show good marks in this exact category. it is attracting a lot of capital. it's something that is not going away. it is probably going to intensify. jon: something else intensifying, the european union

taking a closer look at the kind of things that u.s. tech companies are doing. the eu says they are being fair about this. takes off from how much growth is being driven by tech companies. if you think about what you could possibly see those companies are forced to slow down growth and slow down their impact, what the impact would be longer run on the economy, you could see a slowing economy and slowing inflation. great to have you with us on the program. mm will be harold ha sitting down with alix steel. alix says he's bullish. we are 60 minutes away from the cash open. on the s&p 500, we've had four

straight days of gains. the gains have been muted, but we are grinding higher. futures that flat on the s&p 500 and on the dow. down 10 points on the doubt. -- on the dow. yields pushingon --her on the european debt treasuries to stabilize after at thedrive it higher -- moment, we trade at 2.26. euro-dollar with a bit of a rebound at 1.19. you are watching bloomberg tv could. -- you are watching bloomberg tv. ♪ what did we do before phones?

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see how much you can save when you pay by the gig. xfinity mobile. it's a new kind of network designed to save you money. call, visit, or go to xfinitymobile.com. jon: 60 minutes and some change away from the open in new york city. record highs coming into today's session once again. features in the u.s. really dead flat. gains have been really muted.

we just grind out record highs after record highs. the banks outperforming largely because of what happened in the bond market and the euro. yields a bit lower in the united states. 10 year treasuries down by a basis point. initial jobless claims come through, the print at 2.59. the previous number, a revised 2.82 -- of three andimate 2,000.- 30 alix: we had initial jobless claims fall. let's see if there are any revisions later on. jon: much better than the estimate of 17.1.

talking about global growth, erik schatzker sat down with david rubenstein at bloomberg's global business forum yesterday. here's what he said about global and u.s. growth. >> the economy is in reasonably good shape. a recession is due at some point. we have one every seven years on average. we are now 8.5 years into the growth cycle. i don't know when it will occur. right now, the economy is doing well. we are growing at more than 2.5% for gdp. i don't see any signs of a real slow down right now. erik: some people are talking about synchronized global growth. david: there is more synchronization than before. developed markets are doing well now that emerging markets are doing better. >> does that surprise you?

david: it does. historically, some parts of the world did well when other parts of the world were doing well. brazil is coming back slowly. still with us right here, scott wren of tiaa investments and jim caron of morgan stanley. are you interested in brazil? jim: absolutely. emerging markets are still one of our top picks. it's 20% of our unconstrained portfolio. the story is right. we have global growth, you have commodity prices which have been stabilizing and rising, going down recently a bit because of the dollar, but still on an upward trend. these countries are in a better structural position versus their

history. all of this together is a good story for emerging markets. emerging markets are up this year. if we look at local indices, up 15%. half of that is from bonds. the bond yields and real yields in emerging markets complex at historically wide levels -- many of these central banks like theil -- brazil started year with the policy rate -- they have been cutting rates 100 basis points per meeting. story. same type of looking to year. -- looking to cut next year. it becomes more of a bond story looking at how these emerging-market economies become that can absorb the global growth.

it makes their bonds look very attractive. good foresee returns essentially for the foreseeable future. it is just soh of much liquidity injected into the marketplace? combination ofa the tremendous amount of liquidity that has been put in place across the globe and a reflection of how the global economy continues to become far more integrated. be moreity to coordinated with positives and negatives is ever-increasing. very solid growth globally. here in the u.s., we are low growth, low inflation, which is not a bad place to be when you are generating real growth of 1.7%. printing twoey are percentage points gdp growth while maintaining decent inflation metrics and the ecb is

clearly committed to providing accommodation. you can see some improvement in europe as well. alix: you have a lot of tech waiting in the s&p and emerging-market equities. you don't have that with european equities. if it is a technology story on the equity side, does that forecast that you want to be in em and u.s. versus europe? stephen: one of the things you to consider is the overall impacts. one of the benefits of technology is a vision sees and improvements, that has helped to reduce wages and keep wages down. when you look at countries and , with a highrope correlation of trait with asia and especially with china, that ability to transfer through trade is a benefit for that particular part of the globe. i wonder if you want to buy

the banks when you hear stories i creditt chatting interest in buying -- type of structural reform and any type of structural macron isning. trying to push through labor reforms. using reforms attempted in spain -- even italy is starting to come to the table was trying to put in structural reforms around the labor. anytime you can consolidate and stabilize the global picture in europe, you are in a better position. the banks there, one of the reasons they have not grown is over stability -- that should be better in the long run for their ability to grow. david: i think about spreads and

how narrow they have gotten. are there any opportunities left? jim: if you look broadly on high yield an investment grade credit spreads have come in quite a bit. we are a bit defensive there and we acknowledge that. what we do think is a risk is as the global economy gets better and the ecb starts to pull away from their stimulus programs, you get higher bond yields, the could get up to 45 basis points day, that could be a bit disturbing. when you think about em equity and european equities, european equities and emerging-market equities are unloved. most of the time just looked past. this will feed into easier financial conditions in these asset classes, which will be good for the bonds and good for the equities as well. similar to what's happening in the u.s. today. we have bond returns that are

positive and equity returns that are positive. this is only locks. it could be more of a goldilocks story in the em complexes going forward and even possibly somewhat in the european complex. maybe the bond side on a bit more hesitant on. david: when you have all asset values up, the challenge becomes what is underpriced. are you saying em bonds are underpriced? jim: on a relative basis. foot on a cheap, relative basis to develop market ares, the real yields historically very wide levels. as a foreign investor, an i'm getting a for the risk more. alix: what yields -- how many hikes for the fed? jim: i'd say if the fed does

exactly what they are going to say and go up to 2.75% as a terminal rate, that would strengthen the dollar considerably. the biggest risk that is out there is if that does happen in the dollar strengthens a lot, that would be bad for em and even the global economy in general. stephen: if the fed does follow through with their projection yesterday, that will put a lot of pressure. alix: basically if they do what they say they are going to do. and -- stephenen liberatore and jim caron joining us. this is bloomberg. ♪

emma: this is "bloomberg daybreak." coming up today on "bloomberg markets" -- this is bloomberg. general electric's new management is taking aim at its rate.ate jet

the company intends to sell its planes. the ceo is trying to implement the $2 billion savings plan. the securities and exchange commission says a hack of one of its databases may have led to illegal trading -- last year, a filingacked into system. conclude untild last month that the cyber criminals may have used the stolen information to make trades. unicredit is interested in a possible combination with germany's commerzbank. is in talks with the german government with its commerzbank -- which is commerzbank's largest shareholder.

but companies are cutting jobs in selling assets to boost profits. that's both companies. a bank has just come out with a big plan for the future. >> a lot of it goes to the point made earlier about structural reforms and how to become more efficient. if there are synergies, it makes sense. it may not be obvious to me to leeward those synergies are, but at the end of the day, it comes down to the regulatory nature of the markets. if they can consolidate and get rid of bad loans, it could be a good story for both. let's turn to the u.k. theresa may's cabinet appears to support her vision for brexit. this after a two-hour discussion in florence. joining us from london to discuss is simon kennedy. the chief brexit negotiator on the eu side of things commenting that we need to first solve the divorce issues. the bill is something that is a matter of trust and the eu budget planning requires the u.k. to settle the bill.

the two yearsill, of the eu budget that needs to be covered and you have the longer-term liabilities that go well beyond u.k.'s exit. what do they look to settle tomorrow? >> you got the problem we've had since day one. the eu would like the u.k. to settle past commitments, things and feels the u.k. sign up for when it was a member. u.k. would like to see it more of a trade. tomorrow, what we are likely to -- that willa may allow the businesses to adapt, that she will continue to pay into the eu budget from that period. that is the bare minimum that brussels wants.

his signal that she is willing pay the pastint obligations or willing to discuss that issue more than she has done in the past. that, she might be able to rewrite those trade talks that she wants to discussions to turn to. it's a case of the eu wanting to and britaindivorce wanting to discuss the future relationship. jon: who is the audience tomorrow? is the u.k. electorate? >> you try to appeal to lots of different viewers. that's exactly what she's going to try to do tomorrow. try to make a positive case for brexit and explain how she is keen to make that split. negotiatorsk to

capital inropean the hopes that she can find common ground with the likes of angela merkel and emmanuel euron and make the case that trade is as important to them as it is for her and they can el along a bitich and get those trade talks going faster than he's willing to apparently allow. jon: take me inside westminster politics.. whe how many people will she upset within her own team, her own cabinet? >> she can't redo anything without upsetting someone. that's the result of the june election that left her weake ned. boris johnson came back onto the brexit teen last week and forced -- she had a cabinet meeting today.

the word from that is the cabinet backs her approach to brexit. she's bound to boris johnson for the next 72 hours. some like boris johnson who is continually running for the leadership in the view of many, he will know that not many people inherit the job having wielded the night. -- the knife. they wouldn't have to hold the election -- that new leader would want legitimacy. that's a question a lot of conservative mps don't want to ask. jon: boris johnson has been running for leadership since he was 16 years old. >> his long-term ambition was to become world king. big ambitions. u.k.,ticking with the

sticking with us around the table, stephen liberatore and jim caron. the bias of the market is to buy the monetary policy. table at 135. is that a cell for you? stephen: it is for me. nothing of what has gotten cable to 135 -- when i think of what has gotten cable to 135, it's the weak sterling does being at 135 today is largely a function of weakness from bad things, which i will put brexit in the back category in my opinion. that's why we are where we are because inflation pressure is taking up. that's what the markets are reacting to be the endpoint is not a positive story for sterling. .t probably does go lower we are seeing an extended

exercise of damage control. it's hard to understand the day today -- the day to day. we feel confident that this nation is a weaker sterling. alix: because of the global growth story and the secret in global recovery, that's why we might have to hike. is this the one country where you have to ignore the global growth story? stephen: there's so much noise there because of brexit and you don't know at the end of the day what's going to happen. you have britain in a very weak position with theresa may as their prime minister at this point because we just seen what happened with the election. that level of uncertainty continues to cause problems for the english economy as well as sterling. tiaa stephen liberatore of investments and jim caron of morgan stanley. check out tv .

you can interact with us directly. go to tv on your terminal. click on something if you missed it and rewatch. this is bloomberg. ♪

alix: oil prices off by 1%, but off the lows of the session. yet ministers from opec and non-opec meeting at a committee in vienna -- are they considering an informal monitoring of exports in addition to monitoring production? love how we get 17 headlines per hour on what they are thinking and what they are not thinking. what is the export conversation? is as export situation follows. trying to add another layer to how opec non-opec monitors what's going on in this group of 21 countries. buteveryone is on board,

the thinking is going beyond the production data and looking at your export data as well, even informally, would give them additional perspective on the accuracy of the compliance level. this is an organization that is in compliance no coming up with new ways of trying to increase the credibility of this group and also try to explore more creative ways of just trying to make best in a market that could switch against global supplies. alix: saudi arabia could overproduce in the summer. because they need that more domestic demand level. how do you monitor exports when they are already -- there are already 17 estimates of individual production? >> that is a very good point. that again tells the story of how opec has grown into opec 2.0, this group of 21 countries

where there are now a lot more complex processes going on within the group, a lot more sources of data, a lot more input from organizations. we use that data to tell a different story -- what it comes down to is getting a better understanding of how effective these cuts really are and whether they need to make a case against that this is critical to the deliberations on the ground. we are seeing a growing disparity about whether or not you need extensions beyond the expiration in april of 2018. the kuwaiti minister's comments pushed brent crude lower. we will have to wait and see if there's any consensus on that front. alix: i find it difficult that they are not going to have to --

difficult to believe that they're not going to have to extend it. ultimately, the more you take ,ut, you might support prices but you are also supporting the u.s. shale industry. it becomes more difficult to win this market off the oil that's this marketo wean off the oil. jon: putting little hints about what they want much i can manage the market. -- what they want, trying to manage the market.

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aside inflation concerns, unveiling plans to unwind the balance sheet. china's credit rating is cut for the first time since 1999, the production comes before the party congress . and the biggest loser in september forced to a one-month low. good morning, good morning. counting down to the opening bell, i'm jonathan ferro with david westin and alix steel. futures are unchanged. oncet at all-time highs again going into the open this week. in the fx market, the dollar caught a bit. this morning, we catch up. ..1 916 neil scribing and higher -- yields grabbing higher to 2.27. lower now with a basis point at 2.26. going into the open, let's get you some movers. alix: i have a random company

for you that is making a big move. tiled on carbon, up on a 62% in calgon carbon, up on a 62% in premarket. the rumor is that a chinese company would come in and make a bid for calgon, japaneseow it is a company. albertson is agreeing to buy its consumera distinct brand. not only does it give the consumer credibility, but that is becoming a tip route -- takeout target as well. and tesla drama -- drama in the chip world. nvidia up by two. with said to be working advanced micro devices on driverless technology chips. currently, that goes to nvidia. they can make those graphics

chips for driverless tech. they set a tie up would be have al for amd, but we loss of tesla for nvidia. more of a headline, not a financial hit. some interesting change in supplier potentially for tesla. jonathan: yesterday, the federal reserve announced its plan for rates. chair yellen: the committee decided at this meeting to maintain its target for the federal funds rate. we continue to expect that the ongoing strength of the economy will warrant gradual increases in that rate to maintain a healthy labor market and inflation around our 2% longer run objective. we also decided in october, we will begin the balance sheet normalization program we outlined in june. this program will reduce our securities holdings in the

gradual and predictable manner. overall, we expect that the economy will continue to expand at a moderate pace over the next few years. in the third quarter, however, economic growth will be held down by the severe disruptions caused by hurricanes harvey, irma, and maria. jonathan: joining us now is pimco global economic advisor and ahead of global assets. look at what the fed is doing with the balance sheet. walk me through what they are going to do in the coming months. >> jonathan, the fed wants this --be like us watching kate paint dry. they said it would be very preannounced, very transparent. no surprise in the announcement yesterday. i think we will be watching quantitative tightening in slow motion. i think the baseline is that this will not have a major

impact on markets, but there is a huge uncertainty around that because there is no historical precedent for a historical bank -- for a bank running down its balance sheet. i think we know how qe helps to raise prices. it won't -- will not only reduce the risk premium and bonds, but in other markets. there is a decent chance or risk that we will see some of people in the markets, maybe not quite yet. .ut the fed will increase they will run down there balance sheet at a faster pace each quarter. if you get more treasury issuance over time, especially if we get some fiscal stimulus next year, this could have a bigger impact on both bond yields and risk assets. jonathan: at the moment, investors have never experienced of this -- this. central banks have never done. but it is the story that it is

going to be ok. when you sat with the portfolio managers of pimco, is that the view at the moment? that it will be ok? were at one b, it will be a 2018 story? in the nearthink term, it is going to be ok. but as i said, there is huge risk around that. there is uncertainty. this is why we emphasize caution in our own investment approach. david: what about the possible fiscal stimulus? this pointis that at with tax reform coming out of washington? sebastian: our analysts like to spend some time with insiders in washington. a view that the iselihood of tax cuts, it probably higher than what is priced in. if you look at the performance of growth stocks you today relative to value stocks, or large caps relative to small

caps, it does not look like the market is really typing it -- pricing in the tax cuts, setting in the high valuations to begin with. in our portfolios, it means we are thinking hard about this rotation between value and growth. we are thinking about the trump trough, we had the trump trade postelection, and the growth date, and perhaps this is a return of the cyclical. we have been monitoring some of our overweight growth positions. is a move onre taxes, how big will it be and how big of a difference is there between the cuts that you talked about and reform? to think: two ways about it. to begin with, valuations are high across the board, across markets. peas, investment spreads, high-yield spreads. you made a reference to central banks popping up valuations. this is the starting point.

whether that is going to jump overall and market valuations of the questions. what we think will occur is over the six-month horizon or so, a rotation file. what we have seen postelection and year to date has been a substantial rotation in style and size in the equities markets. we think that is more likely. the details of the tax cuts versus tax reforms have to be worked out. we are combing through these details, but the general sentiment is there is more consensus then there was initially, for example, around health care. the republicans really want to get something done. get itnd if they do passed, they might have to tighten more aggressively. this is one of my favorite chart of the day. it is the market at how they are pricing in the fed. this white line is how many hikes the market is looking at by the end of 2018. not even one. the yellow line is by the end of 2019. 1.6. swat team, if you send up seeing you and up seeing a

fed that is correct, how much do you have to do risk of the market due rate? joachim: i think it would be a risk to the markets of the fed hiked interest rates four times between now and the index of next year. that would come it is a -- come as a major surprised to the market. i can only see that happening in an environment where we get a significance of large tax reform , which we think is less likely. secondly, i could see it happening in an environment where inflation picks up much more than we think is likely. the fed still believes that pce inflation, which is what they are looking at, is going back to close to 2% by the end of the year. we think that is a bit optimistic as well. if they were to implement this plan of hiking four times, it would come as a major surprised to the markets. in reality, they would probably not be able to put this plan through. i think it is much more likely that we see something like 2, 3

rate hikes between now and the end of next year. that is still more than the markets are pricing in, but it is less than they are planning to do. jonathan: i want to build on that question alex asked, the tug-of-war between the market and what the fed is setting out to do. if you look at the plot and the end of your 2018, they are looking for 2.1%. that is the medium estimate of the dot plot. at trester he -- treasury is 2.25, 2.26. if they do a little less than what you think they are going to wrong here is really or are you are going to get a flat real -- yield curve. who is wrong, or are we getting a flat yield curve? joachim: i think we already have a fairly flat yield curve. do not think the fed will be able to put through all of these rate hikes that they are planning to. if they did, indeed, it would lead to a very flat yield curve.

but i think they will do less than that. i think the tendency will rather be for the yield curve to steepen somewhat from current levels. the main reason is what we talked about at the beginning. the balance sheet runoff, which over time should put back some term premium and to the longer end of the bond market. i think that is why it is more likely we see a steepening of field curve than a flattening . david: this is not about what the fed is going to do at all, but where the economy, inflation, and growth is going to be. if the fed is right about inflation and growth, they will be fine raising. on the other hand, the fed will not raise if it does not come in there. look at theyou statements yesterday, some of them are upsetting. there is a hint that growth is strong, which could be considered hawkish. but at the same time, there is a recognition that perhaps the soft inflation data is not that transitory. this could be more dovish. maybe those statements offset

each other. there is also the uncertainty -- the certainty around december yesterday,ncrease and that is hawkish. you saw the dollar pop and rates pickup, but as far as the flattening yield curve, the longer and of the plots have come down. another offset. the fed is doing a wonderful job of managing expectations, and as im said,m said -- joach they are being very communicative and what they do. alix: but it does not matter because we do not know who will be on the fed in the next few months. coming up in the next hour, i will sit down exclusively with harold hamm, continental resources chairman. he is bullish on oil, but the why is pretty interesting. we would love to get his take on what is going on in d.c.. this is bloomberg. ♪

♪ last feweadline in the hours, as the cutting china's sovereign credit ratings for the first time since 1999. risks from soaring debt. the step will -- they also downgraded some of the banks ratings as well. here's what our guests had to say. >> china has a debt problem. directly talked very and exquisitely about its debt problem for a number -- explicitly about its debt problem for a number of years. >> if gdp in china was more like 2% to they were continuing to do more and have more and more debt, so the nominal growth in china is relatively good. it shows over time they could pay that down. i do not view it as a bubble, i would say it is high but u.s.

-- is high aso well. >> they have had a good as a we profit cycle over the last 18 profit cycle over the last 18 months, and they are issuing dividends going back to the chinese government's coffers. >> these are notoriously lagging indicators. they are the last ones to know anything. if there is a fire in the room and everybody has left the room, and they say i think the smoke detectors are going. us, we havewith what team felt of pimco and -- of pimco and sebastian page. joachim: i do not think it was a huge surprise.

i think he is right. i think this is a lagging announcement. i would not reach too much into this. i think the key is that china this year really dampened volatility by tightening the screws on capital outflows by doing something about the excessive buildup of leverage domestically. this is why china has been very contained. it has not exported volatility as it did back in 2015, 2000 16. i think what we have seen from china this year is that they really help this globally synchronized economic expansion that has had a calming impact on the rest of the world. i would expect that at least in the near term that stability will continue. it is a big question after the party congress, what happens after president she has consolidated his power and strengthened his power base? that i could see a scenario where they can get tougher on

reform, and you might see a sharper slowing of growth next year. but that is a story for 2018. alix: would you agree? there was that story that hey, you got to the downgrade today and we will see a lot of liquidity because you have to look at a head of the congress. what is your call? sebastien: it is possible that the numbers look better than they truly are ahead of the congress. that could be a risk in the market. china is important. it is connected to all markets, thes a big component of emerging markets, it is linked to commodities price. we talk about risks on the horizon going over the congress in china, that is a risk. david: this is not a new issue. when president xi came to office five years ago, he had this at the top of his list. why has he had so much development, and more poignantly, can he get his arms around the credit expansion

without hurting his growth? when he came to power, you were right. he started some reforms, but it turned out that first of all, he was still facing opposition within his own party because he did not have his people in all the relevant places. the other thing that happened is that they lost control a little .it by liberalizing so you had a sharper slowdown in the economy than they expected. and then they experimented with the exchange rate. domestically, they pumped up and equity bubble that burst, so capital wanted out. the chinese wanted to put their money abroad to put downward pressure on the exchange rate. so after all of this experimenting, they realized they created too much volatility and this is why they tightened the screws again. we have seen the result this year with much kolmar environments. environments. jonathan: we have talked about a lot of things being a 2018

story, but going into next year if you wanted a low correlated return, where do you get that from now? joachim: i think you have to look very carefully. it is more about the micro-relative value. it is about idiosyncratic thinking rations -- situations. so i think you want to be very close to neutral. you would want to focus on some areas in the market where you can still get returns, we like areas in the mortgage areas. --h agency and not agency nonagency mortgages in the u.s.. fxthink there are -- i carry , current season emerging markets, selective local markets. generally, i think you would want to emphasize caution if you think about rates. we are probably on the lower end of the range.

generally cautious, at a think opportunities will open up as we get more volatility. felds of pimco page will be staying with us. this is bloomberg. ♪

david: this is bloomberg. i'm david westin. this morning, we learned that president trump today would make an announcement on north korea. say it will be about sanctions, nothing done military the -- militarily. in the meantime, turning to health care. after two failed attempts to repeal and replace obamacare,

they will take another shot at it. even talk show hosts are taking a role, with jimmy kimmel front and summer -- center. here is what he had to say last night on his show. >> i get it, i do not understand because i am in talkshow host, right? help me out, which part you are not understand. -- do i not understand? do i not understand the part where states would be allowed to let insurance companies price you out of coverage for having pre-existing conditions? david: joining us now is daniel isng, as still with us joachim felds of pimco. the reforms that they are talking about right now in this will, what would it do to the health care industry and health care stoxx? -- stocks? great question.

i think the main thing to remember is that the health-care industry is extremely dynamic right now in the u.s.. it is not just policy changes, genetics,new drugs, and it is really hard to protect what their reaction will be in as far asplace regulatory framework. david: i met with someone in private equity involved in health care this week. he said the technology issue is much bigger than the washington issue. certainly, when you put drugs aside. dan: i think that is true. the historic reaction is fear change willnty, so often cause these stocks to pause and take a breather. the underlying growth and technology in the health care , newtry, robotic surgery drugs, targeted medicine, and all the software technologies improving the cost efficiency of the industry.

it is really a ripe opportunity for investors in the industry right now. alix: let's talk about what is trading and where your pixar. are.cks you can see the performance and health care from 2013 through 2016. and then it has underperformed the s&p since president trump was elected. thing toink one remember is 2016 was a terrible year for health care. androve at valuations health care below their 20 median, becoming one of the cheapest sectors in the market. this year has been a terrific reversal of that, but it has only brought them to average. many investors realized about health care is it has both growth and defensive characteristics. if the economy weakens, the health care industry is not economically sensitive as others. these stocks are still very attractive. the major trends that around technology.

we like companies like metadata, electronic clinical data for running clinical trials. they are now taking decades of data on running clinical trials and big data analysis and running it to their customers, pharmaceutical companies to -- the f the th of theirfficiency trials. jonathan: we are about four minutes away from the opening bell, coming in today with on an all-time high on the s&p 500, as we have done all week. futures are soft, dead flat through much of the session so far. from new york, the opening bell up next. ♪ is this a phone?

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call, visit, or go to xfinitymobile.com. thethan: counting down to market opening, record highs once again. 25 seconds away, futures a little bit soft, down 16 points. s&p 500 futures that flat, as

they have been through the whole session so far. bounce backweek, we for four straight days of gains, but rather muted, just one half of 1%, zero point 051% on the s&p 500. it is four records on the trough. nevertheless, that is the scene ahead of the equity market open. bond market looks like this. treasury yields a little bit lower, driving higher over the past couple of weeks. the dollar index a little bit after bouncing yesterday post fed. 92.40 is how we are on the dollar index, down about 0.12%. let's get you that cash open. flat, flat. s&p, nasdaq, all on the downside. major equity indices are right around their record levels. appearing below the markets, you have to take a look at the material stocks and industrial

stocks when you wind up having some based metals really off today. down 1%, a gold story -- newmont down one percent, a gold story. that is bad for those mining stock. freeport has gold and copper, and it hits it done. -- double. down 2%. inalso have that downgrade the debt rating for china on the s&p. that set the tone for all metals as well. if you end up having supply-side reform, more reform coming out of china, does that wind up shutting in its demand? does that trickle down to commodities? that sector is one to watch through trading today. --lso wanted to hype highlight apple, sitting on its 100 day moving average. this is a big charts -- bear with me. the white line there is netflix, the yellow line is facebook, and

then you have the green line is apple. the blue line, amazon. google, the pink line. the dotted one is the s&p. here is what we need to know. that is the one starting to roll over while the rest are moving higher or holding up. is apple one dragging down the frank -- faang-- and s&p? jonathan: tech is set to take over financials as the biggest waiting on the msci global index for equities. what does that really mean, and how does that change the nature of the equity market as you look at it? >> i think it means it is about time. technology has been a leading growth sector for decades now. it is the most innovative sector of any of them. i think it is appropriate that it recognizes really that

internet, mobile communications, big data analysis, genetic analysis, all of this is being driven by waves of technology. i think it is a preference that this industry be the largest one of the msi. let's talk about the price of the story. these stocks, apple included, have had some big gains for 2017. are they justified? >> i think you have to pick and choose among them. apple is quite inexpensive. about 15, 16 times next year's earnings. it is actually a little below the market multiple, and that is because people are wondering how big will this next big upgrade cycle b. i think we will bet on the positive and believe that apple asked, 10, and it will be good cycles for them. and the watch is quite interesting with cellular capability. we were looking at the accolades, and saying "it will not be there in the way people thought it would be. who will want to upgrade from a seven when the difference is not

that big? what do you say back to that? >> possible. it is early to say, based on demand checks that we do, which and our team. if that demand is because people are waiting for the 10, much more expensive, or they want to add a watch, we think it will end up being positive for apple. david: i will not ask you to pick stocks unless you want to. more generally, and a broader sense, what does this tech phenomenon mean? be seeing a long-term trend trading over more and more of the business of the economy. i think this changes everything. there are very big macro implications from these faang companies. we are seeing increasing concentration. these companies have a technological edge and globalization helps them to reap

large and huge economies on scale. largere taking a revenues of profit, and stock market cap, as we talked. we areat means is that seeing increasing concentration. that also has an impact on the global savings glut. it not only has an impact on stock markets, but on rates because these companies do not invest a lot, but they save a lot. they make huge profits. there is no big need for major in these companies. they invest in people, in ideas. and so you have a corporate savings glut, which helps to explain why this natural rate of interest, or the neutral rate of interest is so low. we live in a new neutral, which is something we have been talking about for many years. these companies are contributing to it because they are accumulating huge hordes of cash

, which they need to invest. that, by the way, gives us the link to the fed yesterday, reducing its estimate of the long run neutral interest rate. they called it by 25 basis points. i think there is a link between what these companies are doing and what we are seeing in the bond market. be below the long-term interest rate. it is not just the fed, but the corporate savings glut that adds to the global savings glut. alix: i should point out we are at a 23 record -- 23 record for the dow this year, hitting another one this day. so what is your strongest conviction trade right now? we touched health care and apple. dan: i actually like amazon quite a bit, and this is not a corporate spender. they actually are. there is quite large. one additional feature of these supersmart companies is there being trusted as better capital

allocators than traditional companies. so think about amazon buying whole foods, amazon posies huge -- amazon's huge foray into logistics. because those are industries where there is a lot of change and opportunity still, technology, logistics, ada -- data, and amazon has proven itself aggressive investors there, and that is really better results for consumers. this company is listed on the stock market, but the amount of patience that the base has for this company to reinvest, grow, and carry on doing its thing is incredibly rare. i wonder if that patients carries over from the investor base to the regulator, at what point do we get to that point when politicians in the united states have to take a look at how big this company is and how much disruption it could cause and start to do things and move things around? dan: amazon's it

vantage, versus google, where google is search dominant. amazon, if you break them down, they are not dominant in groceries, for example. they improved rices and delivery for us all, and it is a huge win for consumers. but i think they will be quite cautious about stepping on a large part of amazon's business. jonathan: we to have you on the program. we really appreciate your time here. we kind of toss between up gains and losses. the dow now down by about 1/10 of 1%. off the back.ming we are soft by 2/10 of 1%. the gains over the past few days have been muted, the losses today muted as well. from new york to our audience worldwide, this is bloomberg. ♪

♪ alix: this is bloombergalix:: daybreak -- emma: this is bloomberg: daybreak. coming up, california's s.presentative david: president trump has been speaking to world leaders this morning before he heads back to washington. we see him live with the head of afghanistan. sendingthey will be more troops, but they will not be in combat. the afghanistan government is going after terrorism. alix? brand,ti lagging behind but one expert says that will not continue. harold hamm says the u.s. supply

growth that the eia expects from shale is just plain wrong. you can see there it is the september and 2017 exceptions, which is much smaller growth. when harold talks, you will want -- listen. he is one of the fathers of shale, and is on the have to independent.energy harold, always a pleasure to talk with you. walk me through what you think shaleng on with the u.s. supply story versus what the ia is saying? i was talking 12 producers across the u.s., but they were flat wrong. eia was flat wrong. people were very disciplined across america, the producers were. they had cut back. obviously, the price fell when livia came along

with about 400,000 barrels unexpectedly in april through june. the price fell a good 20% through that amount of time. and eiators cut back did not recognize that, and kept predicting that we would be close to 10 million barrels by the end of the year. thought that era, and a lot of people went to work and came up with calculations that showed they were about 100% off. so some 500,000 barrels. so we looked at the numbers by the end of the are, and it would be a rush to get there. that was about nine point three 5 million barrels by year end. that is a big mess. so we met with them, showed them the data that we had, and they have corrected some of it. we have had an increase in price

as a result of that. but still, they are way off, some 360,000 barrels high for this year. and those were emerging and oversupplied market. when you talk to most eeoc, they say everything is fine, i am drilling as we have always drilled, we may have had some stumbles but 2018 will be awesome. you do not the it's that way. you see drillers doing something different? dan: -- harold: the new normal is that we have capability of producing a whole lot. but we have to get return on investment, and operators like myself and others realized that they have to have returned through shareholders. to go outt just going there and drill in an environment that you got at a decent rate of return. that is where people have been this past quarter, and this year. we noticed that in the second quarter, we took a reading of all the public companies and found out that they had cut and

number two production was down for the second quarter. all the public companies have reported. what i want to pick up on you said about returns, because we were talking about a buyback after the bell yesterday. the idea that there is growth at any cost is no longer the story. it will be about returns, getting balance free cash flow. his continental doing the same thing? harold: we are interested in rate of return and making money for the shareholders, and we are doing everything to position our company to do that. we have done that over the past three years. prices under $50 were unsustainable and building new supply in a world. that is basically what we are seeing today. so we look at every angle to make sure that we have a rate of return through the shareholders that makes sense. see aso at $50, would you

dividend or buy back before you put more money into? -- into? capex? harold: we are seeing this above $50, and i think it is sustainable. but we are seeing inventories come crashing down, coming down faster than they have over the past two years. it is correcting, as we see it today. but this oversupply that eia is talking about isn't happening. the market has to realize that -- if it is distorting, it is making it tough. you talk about putting america first. when we are talking about oil prices lagging at six dollars a barrel, that is not putting america first, that is putting america last. that is the result of this exaggerated amount that eia has

out there. and everybody pays attention to them. they are supposed to be the ultimate authority, if you will. trading at 10:30 on a wednesday. for this to be clear from continental, you will be doing you do ast before buyback or dividend? we have adjusted it in the past. we have not this past year. we stayed with our capex, and we have cut costs. we have raised our production forecast for the end of the year . continental has done well across the country. best your plate -- your client the nation -- alix: if you are looking for higher oil prices, which you are. that means you are not hedged, is that correct, for 2018? harold: excuse me, i did not

understand. alix: art -- are you -- is continental hedge for 28 -- h edged for 2018? harold: if you look back and see what happened when nigeria and libya brought on that 400,000 extra barrels, the price was cut about 20%. that is what we are talking about here in this market. still 360,000 barrels over on their forecast. if they get it right and the market gets it right, we should pickup 20%. amount ofout the same barrels. we do not believe today's environment, that you should be hedging barrels and -- in. wti? are you at $60 were harold: that is an entirely

different story. a 20% upsidesee for wti, what price is that and when? on 50 today, you are looking at $60 a barrel. there are a lot of analysts predicting that we should see those prices that when percent -- at 20% up. inx: so the opec committee vienna, they are talking about will they or won't they extend the cuts. but by your scenario, they should not. we are seeing production come down in the u.s., they should not extend those cuts. harold: well, i think they should. what they are doing is working and there is no doubt that they are going to extend the cuts in my opinion. they have in good consensus, i about you're talking supplies over there that last

many, many decades. so it is another six months or nine months to get it right? what we are seeing is good compliance out of opec. they know they need to correct this market and they are doing their part to do it. they cannot do it alone. everyone will have to help. alix: and i cannot let you go without asking about politics. to do you feel like the trump administration is the filling is promised supportive of the oil whattry, and if so, specific things has he been able to do that have helped you? harold: first of all, cutting all of the ridiculous regulations on our industry. when you look back and tally $1m up, there were some trillion of bad regulations on this industry. and there are a lot of them still in place. so removing those, correcting that beyond the prior administration, which wanted to

put us out of business. this administration saw it as a driver for this economy, putting forle back to work and jobs americans first. we are seeing that happen. this is the 43rd day that we have had record highs with the dow, the market. so trumponomics works. it is working. the trump rally that we talked about, it has become much, much more than that. believer,ld the always a pleasure to talk to you. good to see you. harold hamm, continental resources chairman, see you are, -- ceo, and founder. david: as we have been reporting, president trump is concluding his meeting with the leader of afghanistan. most of what he had to say was the u.s. commitment to terrorism to -- wiping out terrorism in

that country. but he did say that we will "be putting more sanctions on north korea." this is after general mcmasters mentioned today that president trump would make an announcement on north korea. the president is having lunch with the leaders of japan and south korea today, we might hear more after that. dayshan: after four of game, we are almost back to breaking through on the s&p 500. -- gains, we are almost back to breaking through on the s&p 500. this is bloomberg. ♪

♪ david: this is bloomberg, i'm david westin. president trump is promising new sanctions on north korea ahead of a meeting today he is having over lunch with leaders of japan and south korea to talk about that growing crisis over

pyongyang's weapons program. .oining me now is michael mckee michael, they have already put on more than one round of sanctions. what is left to do? michael: not much more, except sanction individuals like kim jong-un. they could stop some of his transactions of use bringing money out of the country -- and probably key is. -- he is. it will upset him, but it is likely to deter him. the sanctions put on do not have a major part because in some stopped coals exports, and the oil exports -- they do not have a huge oil need because they do not have cars. tweet about long gas lines, but that is not really an issue. sections can be painful, but it takes a long time for them to get anywhere, especially in an economy like this. there is not much impact it will have. so he is meeting with the

head of south korea and japan. that is not the problem. it is china and russia. they are not in the room. and there is some doubt about what china would be able to a college either, because the --th koreans do not team seem to have a lot of worries about what china would do. jonathan: if they are going to act the way they are to a ron and throw that negotiation and conversation and you doubt, with the north koreans believe in any opportunity? session,s into the stuck at 2500 on the s&p 500 after blasting threw it on friday for the first time ever. we come back from record highs, down 4/10 of 1%. this is bloomberg. who knew that phones would start doing everything?

entertaining us, getting us back on track, and finding us dates. phones really have changed. so why hasn't the way we pay for them? introducing xfinity mobile. you only pay for data and can easily switch between pay per gig and unlimited. no one else lets you do that.

see how much you can save. choose by the gig or unlimited. xfinity mobile. a new kind of network designed to save you money. call, visit or go to xfinitymobile.com. vonnie: is 10:00 a.m. and 3 p.m. in london and 10:00 p.m. in hong kong. ra: welcome to bloomberg markets.

vonnie: will profits continue into next year. in politics, the facebook ceo speaks to bloomberg businessweek about the massive controversy surrounding political ads on facebook. what he says about ad buys russians, neo-nazis and more. in company news, norwegian air takes up high as it its transatlantic fares. i will speak with the ceo to find out if his ambitious plan is already boosting the bottom line. about already minutes into the