. tenure yield hit the highest level in years. 17 hours. the government inching towards a government shutdown. david: welcome to "bloomberg this friday. i am david westin. are you staying up until midnight? alix: i am still at work midnight. that is what i am worried about. about two and a half hours until the cash open on this potential government shutdown day. a continuedignoring climb higher. the dollar continues to roll over, seeing its worst level since 2014. euro-dollar up like 2/10 of 1%. the 10 year yield unchanged. 2.63%. what is the knock on effect equities? we will examine that. crude getting hit a little bit. the iea taking the wind out of those sails, seeing explosive u.s. growth. david: time for the morning

brief. at 1:00 eastern time, we will see -- hear from randal quarles. at midnight tonight, the u.s. government will shut down unless of the house and senate can, up with a last-minute compromise. now, let's find out what is going on outside the business world. >> time is running out for a partialo avert shutdown of the u.s. government pay the house passed a measure that would keep the government open past tonight while lawmakers debate a long-term spending measure. senate say they have the votes to block the bill. they want to include productions for young undocumented immigrants. according to people familiar with the matter, the fed wants to relax part of the post crisis demand to drastically increase capital levels.

the fed is said to be opposed by the fdic, which has authority over banking rules. the european central bank seems to be getting closer to signaling an end to quantitative easing. almost half of those surveyed believe there will be a definite end date by june. that is a sign that more optimistic inflation these maybe gaining traction among policymakers. global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. i am kailey leinz. this is bloomberg. david: thanks. time for our daybreak first take, where we discussed the first -- top three stories this morning. in yields andk up the 10 year. second, the drama that is congress struggling to keep the government working. and third, zeroing in on the next fed vice chair, with the reports that john williams of san francisco may be in the running. alix: joining us now, gina martin adams and marty schenker. take a look at this.

is the rise in 10 year yield all about crude? both of them extending the rally since last september. gina: i do not know if it is about crude as it is about improving growth prospects. alix: what has changed to propel this? gina: first, we are waking up to the idea that we actually are having tax reform. it is kind of amazing, but s&p 500 estimates for earnings growth did not change at all until january 1. january 3, to be specific. analysts finally started revising expeditions for earnings higher. also, you have been seeing these trends play out. the treasure has been rising for a longer period of time than the last three weeks. oil prices have been rising over last fall. it is a combination of thing. oil, it is supply. supply at extreme lows compared to historical averages. and economic data is improving momentum. look at the consumer spending

numbers -- everyone was relatively surprised by the economy in the fall months, especially into the holiday shopping season. we have gotten followthrough so far this year. these are rational responses. two years ago,r you said 2% on the 10 year, freaking everyone out. what is that level now? gina: i think you have to get their 3.5% paid you can get a 3% and feel good. as long as the 10 year is rising, financials perform relatively well. which is a great backdrop for the s&p 500. rising as the 10 year is , as long as we do not see a massive inflation break out, it is generally supportive for stuff. but if you get to the .5%, you are talking about territory have not seen since 2011. that is the new reality. he probably start to see some compression on the market multiple. david: let's turn to our second

story, the government shutdown. midnight coming up. been shutment has down before you we have a graph that shows the range in the number of days. the big one was back in 1995, which had real political consequent is good what are the chances right now? marty: i think it is 50-50. conventional wisdom is that they will go right to the wire, and it could go past the midnight deadline. it could go into early this morning. i know our washington bureau re: bureaue sleeping mats -- already has sleeping mats. -- publications could make it a longer shutdown. david: we had house republicans going left -- it seems to be going away from each other, not towards each other. marty: there is tremendous pressure on chuck schumer not to give in on the daca deal.

there are republicans -- republican senators are throwing up their hands. lindsey graham says i will not vote on a short-term cr. david: to equity market care about this at all? gina: no. we have become desensitized. we experienced 2013. we have a model for what happens when the government shuts down. the reality for the equity market was we did see a spike in volatility, but it was not nearly as large as a spike in the bond market. starks -- stocks started selling off of, but they were selling off before that. this first shows up as a yield rally, which result in compression in the equity markets. alix: let's take a look. this is the three-month bill -- gild versus the 10 year yield.

we have not seen that spike at all. should we be? gina: it depends on a lot of factors. right now, there is a coupling of issues between the debt more worrying is for the bond market than a government shutdown. a government shutdown right now is perceived as may be having a short-term impact on economic growth that is fairly minimal. it depends on how long it lasts. if it is two or three weeks, it is nothing. if it is six weeks, eight weeks, if this becomes a longer-term, persistent issue, it becomes a problem. bunknig overnight? marty: it depends on what donald trump will do. if he goes to mar-a-lago -- david: and have a big party, celebrating his first year. marty: the optics of that during a government shutdown are rather

amazing. alix: let's move on in terms of potential new people we may see at the fed. the news overnight was john williams is in the running to be the fed vice chair. how seriously are you taking these reports? until donald trump decide to his pic is, they are just a bunch of names. you cannot base your decision making on who is the next vice chair of the fed based on reports. the cause it is donald trump's -- because it is donald trump's decision p it until you hear him speak those words, you do not go -- do not know. david: interesting they are all phd economists. larry lindsey worked for george w. bush. mr. williams was in the obama administration. as an economic advisor. gina: and you do not get the sense the vice chair will create a massive ripple effect. it is more about consistency, especially if you bring in someone like john williams. minds, atof folks

least in the financial market. it does not seem to create a lot of potential turmoil. marty: and it is interesting that donald trump's choice on the fed has been mainstream, as opposed to the concerns that he would take a disruptive. -- disrupter. alix: will we look at inflation price levels now, and overshoot and undershoot now? it seems that is a conversation we can focus on, because it does not seem to be a big change at the fed. gina: yeah. that will be the conversation -- is the phillips curve broken, will we see inflation pressures rise? the fed is getting close to inverting the curve to that will be part of the discussion later this year. do we need to tighten this much? is inflation supporting the tightening. the other thing we have not talked about is this is the year where we see balance sheet contractions. the fed has an interesting

process on its hands, because it has two arms of policy it is managing in a tightening phase. that is a new reality for markets. alix: thank you, gina martin adams and marty schenker. marty, hope you get some sleep. earnings the last two minutes. stocks down 2/10 by 1%. oil services slowly returning from the worst downturn in about a decade. the question is capital expenditures. do you miss the lowest estimates? if is lower, what does that mean for and demand? that is a key point to how much oil we will see in the likes of the gulf of mexico and also in brazil. coming up, hold on the streets. can the market meltdown continue? our next guest thinks we hit 3000 by the end of the year. this is bloomberg. ♪

♪ kailey: this is "bloomberg daybreak." i am kailey leinz. shares of home security company abt begin trading today on the new york stock exchange. abt raised about $1.5 billion in its ipo -- adt raised about $1.5 billion in its ipo. uber completed its $9.3 billion deal with a group of investors led by softbank. shareholders sold about $8 billion of stock at a discounted price.

softbank also invested directly into the ride-hailing service. hsbc will pay 100 million dollars to end a u.s. investigation into the rigging of currency rates, part of a probe that led to the conviction of one hsbc trader. that is your bloomberg business flash. alix: thank you. investors pouring money into stocks. saying therica global equity saw massive inflows in the last week, hitting $58 billion. that is a record he at 6.4 billion of that going into the u.s. for more on that, we are joined by lori calvasina, head of u.s. equity xiao jie at rbc capital strategy at rbc

capital. thehe relationship between s&p and the 10 year yield -- it ready much matches up. oh we endve higher, up seeing s&p -- as yields move higher, we end up seeing s&p better. without be the case still? lori: i think so. david: -- lori: you have generally seen equity allocations rise. alix: so what level of the 10 year freaks people out? lori: my threshold is a little higher -- we did a study where we look at how much you need to see the 10 year go up before you see a reaction? maybe around 4%, a high 3%. alix: you would not categorize this as a melt up? lori: i think it is a healthy

rotation. check ownership does not look crazy crowded. david: what are we upsetting to? tech had a great year. lori: this is the year we finally fear -- veer back to values. one of our analysts told us this is the best fundamentals they have seen in years. you are starting to see areas --e consumer discretionary people are finally starting to get interested in those. they are really trying to get away from the secular growth story. and then tax reform. you can look at our earnings revisions for the s&p. jump so for this year. earnings estimates for the s&p over all up by about 10% this year. then 5% the last few weeks. david: what happened the past

few weeks? tax reform to the question is what will companies do with that money? lori: i spent the week before christmas trying to figure that out. we read transcripts from conference calls -- everything from debt paydown to to buybacks to dividends -- pension funding coming up a little among industrial companies. this got ramped -- rammed through at the last minute. a lot of the companies want to do something constructive with the cash, but they are still figuring it out. david: let's go to this chart, which shows the performance of the company they saw whether they invest in or dividend or buybacks. the white line is, which outperforms the blue line, dividend, and yellow, buybacks. i am not sure which causes which. it may be that they are investing in, because they have a this is they believe in. say, and we would

spend a lot of time looking at historical trends. buybacks are still happening. they are down sharply from peak, but they are happening. dividends are stable. capex -- if you look at the year-over-year dollar value, we are negative. david: i thought capex was coming back. lori: it is starting to get nas -- less negative. you are seeing sales rise, but it is still down year-over-year. isx: what is interesting bank of mine in new york said they would spend money investing in their business, and their stock got slammed, versus big banks hinted they will do some kind of share repurchase -- what you make of that? lori: i did not look at that one specifically, but i think in general is something you have to do today competitive. there has been all of this discussion about will tax form get competed away?

no one is -- david: and there be oh why mel and said that. i am worried about the long-term. lori: and will they end up competing away the tax benefit. alix: lori calvasina, you're sticking with us. coming up, the future of the fed. this is bloomberg. ♪

♪ fedd: san francisco resident john williams is said to be in the running to replace stanley fischer as vice-chairman. this puts him alongside lawrence lindsay and mohamed el-erian. joining us now is michael mckee, bloomberg's international politics reporter.

as far as we know, it shocks me that they are all phd economists. how alike are they, how different? michael: they are very much alike in their monetary policy views, except for the political side of it. mohamed el-erian, big finger. comes from a wall street background would bring some of that to the fed. larry lindsey, longtime republican, would bring more of a supply side view of the economy, maybe be a little more others. john williams kind of straight down the center in that he has been a member of the fed since basically 1994. the detour to the council of economic advisers be it has voted along with a chair all the time he has been a member of the open market committee. you probably would not see much difference with mp it where williams might make a difference is in long-term strategy. he has been arguing the fed need to take another look at its 2% inflation target.

let the economy run a little hot for a while. david: and there has been talk about how you form staff. he has the income essentially, staff his entire career. went from being a phd economists straight to the fed. michael: the good thing is jay powell has a good reputation among the staff. but he is not any trained economist by vocation. ringing in someone who has that background is seen as important. williams would be a great bridge to the people who are already there. david: it strikes me that this comes among dovish talk. you had dudley made -- saying 2.5 is better. michael: i think the fed is concerned about the level of asset prices, particularly in the stock i get a they also want to get the level of the fed funds rate higher, so we have we get downturn -- so if

another downturn, they are able to fight it. the question is how they will do it. williams and others are dissipated in an event where ben said he thinks we will be talking about this in 2019, not this year. williams is on record to favoring three moves this year. alix: this harkens back to what we saw yesterday in the auction. crazy strong demand. the rise in yields. inflation moving higher. do you think it is all about oil, that that that looks through that? lori: i would agree with gina, that it is the underlying economic activity beating that. oil or flex not to some extent, so i think people are getting excited, but i would not say it is all about oil. alix: how will the fed look at that? finally, the market is paying attention to inflation. michael: they will say, we are finally right. bere news is we should seeing higher inflation because

unemployment is so low. we are starting to see that come into play. we do not know if that will continue into the first quarter. gdp,tionally, more weekend but because of the tax bill, it will be interesting to see how it plays out. david: the president will say i promised it to you, i am delivering. that is what he has been promising, and now it is coming to play. michael: people do not take polls on the fed, they take polls on the president. alix: so how do you position for higher inflation? lori: it is the value traded as well, so it is things like energy but also financials. trades,for the value there is a lot of reports i am seeing starting to say if you want the inflation hint, that is why you see inflation rallying. lori: i think you do. i would also say about the commodities trade in general, i do not think it is crowded yet.

this was deeply out-of-favor in the market a while ago. you're slowly seeing people get back in. they are nervous on the commodity. i think some of that nervousness is going away. lori calvasina and michael mckee, thank you. and on the brink. where we stand as a government shutdown looms. the dollar index is low, but it is off the lows of the session. aroundyear yield trading 2.6 percent. equities continue to grind higher. crude is off as well, but then i get nonplussed by the shutdown potential. this is bloomberg. ♪

♪ alix: this is "bloomberg daybreak." i am alix steel. global growth trumping a government shutdown, except for when it comes to the dollar. s&p futures are up. european stocks looking at

potentially their highest close since 2015. half of one person can the drama is in the asset class. off the lows of the session, but 90.45 is how we print. we were much lower, but then you had sterling dropped like a stone off of back retail -- bad retail sales. 2.63 on the 10 year -- how much higher can we grind with that disrupting other markets? crude off by 7/10 a 1%. the iea saying explosive growth. it will really be about the yields. a 2014 hi. -- high. david: it is gradual, like grewing a frog. let's take a look at what is going on outside the business world. kailey: the trump administration withnning out of patience

the nafta talks. the u.s. is serious about it threat to pull -- its thread to -- its threat to pull out of talks. talks resume tuesday in montreal. the international energy agency output is setoil for explosive growth. ae iea says there will be steep runoff in production in venezuela. on capitol hill, lawmakers have until midnight to come up with a bill to avert a partial government shutdown. democrats say the votes are not there. last night, the house passed a measure that would keep to the government in business until february 16. is to democrats' goal force republicans to extend reductions for young undocumented immigrants facing deportation. global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries.

i am kailey leinz. this is bloomberg. david: of course we're talking about the shutdown. tonight is the night. midnight is the deadline. congress has to come up with keep in business. michael mckee with us, and joining us, lincoln as close -- lincoln ellis. the latest is it has passed the house, but it will not pass the senate. there are at least for republicans who are either not -- or say john mccain they will vote against it. there are enough democrats to make up the difference. david: they needed nine, now they have 13. michael: or 14. david: if they shut it down, the democrats will get blamed, because they say we have to have daca. cbs did a poll.

87% of americans, both parties, support a daca deal. you have republicans in charge of the senate and house patriot public is believe they will get blamed. david: suppose we get past the deadline and do not have the resolution, what happens saturday, what happens monday? how will our lives be different? it will not be particularly different, and it may not be as different as it was in 2013. the standard thing we do is we send out a camera to the smithsonian and take a picture sign. "closed" there are reports donald trump is considering an order to keep them at least partially open. rangers,guides or park but you will be able to go into the parks, so it will not be as visible. but you have the military on duty, coast guard, border patrol, air traffic control.

david: we talk about very shut through the ages. i think the lord -- longest was in 1995, which was about 21 days. what effect does that have? >> there is a macro and micro affect. the s&p fake aired about $5 billion. it cut maybe a quarter percentage point off of gdp. that has been washed out. you cannot see it anymore on the data. on a micro basis, federal contractors who work for the government -- if you provide lunches for the cafeteria -- those people are out of work and they probably did not get back pay. they lose, or their companies lose, because they have to absorb the hit to them. there are people have economic fallout to this. it on a broad macro scale, is nothing to the economy, unless he goes on long enough to affect confidence. david: lincoln, you advise people on how to invest. is this affecting anybody's

allocation positions at this point? not just the shutdown but the political uncertainty in washington? lincoln: if you look back at 2017, markets did a good job of shrugging off this political uncertainty. given the that drop michael described, it does not seem as if this shutdown will be long term in nature. it is on the immediate radar screen, but for our families, we have a much longer time horizon. so things like this are blips on the radar. david: on the one hand, you have a president who has gotten a tax overhaul through. good news. then there is a lot of uncertainty. typically, investors do not like that much uncertainty. reform, but with tax you have seen more uncertainty, particularly as it pertains to business investment, which is what we wrote about in our letter. market wants to see is

tight. you see the circle between wage gains come into play. that produces another leg to this rally in risk assets and produces a whole host of opportunities for wealthy families and other players and capital markets to put money to work. alix: are you positioning the family office for higher inflation? lincoln: absolutely not. inflation is contained. you see it on the long end of the yield curve. alix: you are seeing inflation expectations, though? you're seeing oil at $70. it isn: to our mind, transient. i think you will see it back off. i think you see more of a move to the back end of the yield curve is it were something more prolonged or sustainable. the technological influences on the inflation question are so dramatic. we have seen them time after time in the post recession global financial.

. -- global financial period. it is not on our later in that way. david: when you talk about a virtual circle, you talk about productivity. which brings the question of how our companies will get the cash it gets. what are you looking at? are three key elements to the tax bill. first, the change in rate. folks in the middle market and lower end of the private company would like to say there are great companies in that neighborhood that terrible tax departments. so make them more attractive -- lack of opened the door to m&a activity and significant amounts yet to be have realized in this part of the cycle. the second part is immediate depreciation. that part of the tax bill expires in five years. a bit of a lighter fluid on the fire to get back kind of investment happening.

the third part is repatriation, which helps reignite this repatriation. an investment in capital has been largely lacking in this post financial crisis recovery period. investorsovides for who own family businesses and things of that nature to get reinvested in these companies or look for other kinds of exit strategies that have been elusive in this stage of the cycle. alix: for the family office, what kind of returns do you target? have seen one family office, you have seen one family office. alix: the reason i am asking is where do you find that return? there is so much money out there trying to chase that return, putting money into private equities, certain areas of the stock market, that i wonder how you find value to deliver the return they are expecting?

lincoln: it has become more difficult pay returns across all asset classes have narrowed. you have to be selective. families have the unique character stick up being much longer in their time horizons, so you can be more on -- opportunistic. in their mind, they can wait out and seek specific opportunities that are either close to the kinds of diseases that helped make them wealthy in the first place or edgy since -- ad jacencies. pretend i own a family office -- where do i put my money the next year? that time say horizon seems short. alix: ok, three years. i am trying to get a strong conviction from you. lincoln: in terms of values for us, we are long risk assets. they continue to be long risk assets for the reasons we have been discussing in the post tax legislation period.

which is business investment is highly creative at the bottom line. that drives capital markets, both public and private. so risk on here. for families, it would probably be much more advantageous for them to be looking at the private parts of those markets than in the liquid markets. david: i have no doubt you will have a family office. alix: thank you. david: lincoln ellis of northern trust will be staying with us. coming up, new york governor andrew cuomo is eyeing how to make up the shortfall in tax revenue. as you commute in today, you can tune in to tom keene and jon ferro. that is on "bloomberg surveillance" on the radio. you can hear it across the united states on sirius xm. this is bloomberg. ♪

kailey: this is "bloomberg daybreak." i am kailey leinz. coming up in the next hour, alan ruskin, deutsche bank's global cohead of fx research. now to your bloomberg business flash it all of those reward points are getting expensive for american express. the cost of paying out rewards

rose 12% to almost $2 billion in the fourth quarter. the company has been spending more to co-sign brand deals. twitter is getting likes from wall street analysts. have revised analysts -- jack turners turnaround effort is now in its third year. a rough holiday for british retailers. u.k. retail sales fell the most by 10 months. is more evidence that inflation and shaky consumer confidence are hitting british stores. that is your bloomberg business flash. alix: thank you. we cover three things wall street is buzzing about -- first up, hedge funds fairness. governor cuomo announcing new legislation to cover the loophole. kushner's property stung by

tenant troubles. and blackstone's mccormick to lead hedge funds. david: still with us is lincoln ellis of northern trust. head of global strategy for family office. and we are joined by jason kelly. the first one up is governor cuomo dealing with the carried interest that they did not deal with. alix: is this that guys -- zei tgeist? [laughter] jason: what is fascinating about this is this has been talked about at the federal level for so long, and it has not come into the state level, even though new york is where the vast majority of the carried interest is earned. this, of course, is profits earned i private equity and hedge funds tax at the capital gains rate. david: i understand what he is saying is we will take care of

that for the entire federal government, and impose a 70% fee. it is a fee on you that will take back whatever that if he got from the capital gains rate. jason: you have to think of all of the offices of kkr, blackstone, all of the hedge funds, especially the private equity firms, they are all going uomo, hee finally -- "c finally figured out he can do this." alix: they have been talking about it for years. jason: 10 years. david: at the same time, is he really going to be able to do it? he says he will not be able to do it unless he gets several other states going along with it. jason: a man alone is a man alone. in this state in particular, it will be meaningful and impactful, not only to executives but for families

trade it impacts the way they are thinking about making investments in private markets or hedge funds. alix: what i am concerned about is what will he do to that taxi cab issue here. and ubers to get a search chart -- surcharge because he wants people to use the trains and mta. jason: this is of less concern to the five equity hedge funds. alix: they take cabs. david: it goes the other way. they will not have as much traffic to contend with in their limos. jason: i think what it speaks to -- and you have been speaking of at this all morning, is the ramifications of this tax plan. cuomo really is stepping forward did you can agree or disagree as

to what the plans are, but the ramifications of the -- of this for everyday living, people watching us and listening to us are real. we do not know exactly how it will play out yet and whether it is talking about how much money are making on your investments or your taxi ride or traffic for your limo. alix: who takes the train here, sides from me? >> i take the train every day. [laughter] david: we would be remiss if we did not say that this was proposed by a man named bloomberg, when he was mayor. --s is an amazing story jared kushner. he bought this building for a lot of money, went through deutsche bank, which is under investigation -- they got a lot of people to pony up money. it does not look like it is going well. jason: it is not going well. an restaurant there. todd english was supposed to have a food hall there. there is some sort of miniature

new york exhibit that costs $36 to look at that. alix: i do not understand. jason: it is not doing great. first of all, this is a real estate deal gone bad -- or a bad real estate that you we care about it because deutsche bank. and kushner, looking at how the kushner's have not done so well, especially in new york. david: i do not understand how they ever thought the deal would go well. the 10 million dollars they thought they would get out of it. in the retail people listed -- none of them were recognized companies. jason: and retail has been a very difficult bet existentially. familiesmany of our are players in the real estate space. this is a meaningful story and

shows the difficulties that retail can bring, particularly if that is the anchor in which you are penciling the back of that investment. alix: how do you look at commercial real estate than? on the one hand, you have amazon, which will build a second headquarters somewhere in the u.s. and you have retail stores closing. lincoln: from a commercial perspective, you have to look a fulfillments it center for amazon? or is it a storefront taking the place of other kinds of advertising? that is what new york city-based real estate has always been, that flagship. this is an investment in our brand, less selling t-shirts or meals or what have you. jason: to be fair, one of the things it felt like they were betting on is experiences people were willing to pay for. tourists especially are willing to pay for experiences. alix: if toys "r" us closes, and they had a ferris wheel in their

store -- come on. give me a break. the last story we want to hit on is mccormick, taking over part of blackstone. i love this story, in part because a really shined a light on one of the most last meeting and, i think, untold parts of blackstone's real rise of the last 10 or 15 years. tom hill is a legendary banker, sort of a client guy. on wall street -- he goes back to the lehman days. he took this business, which is about $1 billion in assets in the late 90's -- it is now $85 billion. cornerstone of the diverse education play that catapulted blackstone -- deyverson vacation -- div

ersification play that catapulted blackstone. tom hill is not going anywhere. it is the story of succession we have been talking about across the alternative assets. lincoln: this is a story you have been covering -- the succession happening across wall street in terms of larger institutions. we are seeing transitional moments from first generation to second-generation entrepreneurs. this is something we will have to deal with, as investors. jason: and this hedge fund business is important for blackstone. they jumped ahead not just in front of traditional counterparts but all of the big investment banks, whether ubs or others, to own this is miss. david: thank you so much to bloomberg's jason kelly and

lincoln ellis of northern trust. coming up, will german chancellor angela merkel finally get her grand coalition, or will we have to go after what is behind door number 2? alix: if you have bloomberg terminal, check out tv . interact with us directly. scroll through and we watch something you may have missed, especially lincoln ellis, who i have not seen him for years. great to see you. this is bloomberg. ♪

♪ david: this is what i have watching. we are talking a lot about yield curves. i am focused on germany. a big event sunday, where we figure out if this second-largest party will go along with angela merkel for this grand coalition. it is really important for angela merkel and germany and, therefore, europe. by is how i am struck much of the markets do not seem

to be responding to that at all. you look at the euro-dollar -- still aroundare the highs we have seen. i am curious as to why. david: and it feels like a binary solutions. grand coalition, that she has to gather with micron. everything looks great. if she does not, then there may be another election, she may have govern as a minority, even talk about her not being chancellor anymore. alix: and what is her mandate -- that is part of her debacle. we will talk about it with alan ruskin. his call on the dollar dropped and the risk in germany. this is bloomberg. ♪ we use our phones and computers the same way these days.

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highest level since 2014 and the dollar can't keep up. t -16 hours until the government inches toward the shutdown. senate democrats are holding out. the future of the fed, the san francisco fred german is running for vice chair. david: i am david westin. at 12 will are here 1 a.m. tonight. the euro dollar is marginally stronger. it is a weaker dollar story. the index is off the low of the session. it is still relatively weaker than the currencies. i am watching the 10 year yield, unchanged on the day and at its highest level since 2014, providing new help for the dollar. we will break down why. crude is off .8%. it's the best start of the year

since 2016. david: you think it has something to do with the yield. alix: a little bit. we are going to be hearing from the new fed vice chair for supervision. he is going to tell us about bank regulations. greek sovereign debt will be rated by s&p. the government will shut down unless the house and senate can come up with a last-minute compromise. with first is here word news. >> time is running out for congress to avert a partial shutdown of the government. the house passed a measure that would keep it in business class tonight and through february 16. they are debating a longer-term spending measure. democrats say they have the votes to block the bill. they are wanting protection for young undocumented immigrants. the trump administration is running out of patience with nafta talks.

if the u.s. is serious about pulling out of negotiations if there is no progress on proposals intended to rebalance trading. talks resume tuesday in montreal. vote sundaylegates on a proposal to start coalition talks with angela merkel. if they reject the negotiations, that could lead to another election. they predict a tight vote. global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries, this is bloomberg. alix: thank you so much. treasuries are under pressure with a three-day selloff unchanged. the 10-year is the highest level since 2014. the dollar doesn't really seem to care. this is the 10 year yield against the dollar index. allen joins us now. allen: i think there are a few

things here. there is a re-rating of the euro. there has been a re-rating of the euro back in may of the french election on the political side. there's been a re-rating of the euro on the growth signed it. i think that when you look at the things in retrospect, you have in germany and europe in particular a large surplus of 450 billion dollars. on the aside it, you have an account deficit. you've got this cap year that is closing in on $1 trillion. they have export capital abroad in the u.s. is a natural importer of capital. that is part of the driving force going on. david: there has been an imbalance for some time. is it worse? what is the change? allen: we look at the forensics

behind all of this. there are a few things we can see. real money just keeps building as far as europe is concerned. of under a case allocation. we don't really see it in the bond data so far. we do see it much more in the equity data with strong inflows into europe. david: what about other currencies? is the dollar not lagging against other currencies? alan: where the euro goes, everything else follows. historically, when euro dollar goes up, you see em go up as well. it follows lock in step unless there is a unique story. if the euro is going to start

going down and we have a change in trend, i would see that once again it all the other currencies will follow suit. alix: year to date in the currency market, you see the pound actually one of the top performers against the dollar. does that continue? once that about by the way? alan: it's about the idea that brexit is quite a pain to go through. we are returning to some economics and valuations. if you look at the pound versus the euro, you find this incredibly static tendency. eurosterling is going nowhere. in some ways, sterling is re-buckling into the euro. it's almost an anti-brexit trade. you've got this very strong difference between eurosterling which is suppressed.

i think that's not going to last. can understand why the euro would appreciate against the dollar because of the balance of trade here it that will supposedly correct itself because as the exports get more expensive from germany, they will go down. that's not true in the u.k. their balance of trade is the other way around. allen: sterling is locked to the euro. that's not that unusual in terms of currencies in europe being locked to the euro. i think people get that. they don't get the earlier message that market currencies get lumped in with the europe. i think in sterling's case, you will find this is a very stable trend since september. alix: is it any yield on the u.s. 10 year that will help

support the dollar? are we just going to be dismissed from yields? work with theme juncture between the yield spread and currencies and how long they can last and how big the gap can get. it, itlast looked at suggested around 125 was the kind of the stork extremes where you wouldn't get much. i think we are frontloading a lot of the euro gains. say let'sof makes you look at 125 and the positioning looks extended. leverage positioning is not extended. the asset market managers, those real money guys do look extended, but they can build and build. the positioning side of things and this detachment from rates will reach a climax in the short

term at least, say 125. alix: do you see a lot of unhedged stocks coming in? alan: we think some of that. we certainly feel that was a big euro recovery story after the french election. we had hard data on this. this is from the japanese insurance companies. they were overheads dawn euro exposure. they were under hedged on dollar exposure. that is going to flip over time. other playerst of are doing the same thing and that hedging is a change in the ratio of the assets. small changes in the hedge ratio under a totally big stock is 10 trillion euros of outstanding foreign assets. when you look at that and change

3%, it has a huge impact on the currency. that could well be the story behind the story. alix: that's great stuff. you will be sticking with us. david: the government could shut down at midnight tonight unless the house and senate can agree on a short-term spending bill. i will be talking to mike rounds next. this is bloomberg. ♪

david: midnight is the deadline for keep in the government open. house passed a continuing

resolution. someone in the middle of the scrum is senator mike rounds of south dakota. he is just come round to supporting it. let's start with your position. if i understand it, you expressed some skepticism. you are promised you would get a vote on some defense spending. >> that is correct. i like continuing resolutions. i don't they give certainty for the federal government or the department of defense. this is been going on for too long. for 44 years we had a budget system and nobody is doing anything about it. i just sibley don't think we can continue to do business in a way that is not functioning correctly. what i asked for was some way to resolve on a short-term basis the issue we've got right now. we want to move back into regular order that both

republicans and democrats can agree to. i asked for a vote on the appropriations bill. that's based upon what we have approved through the senate armed services defense authorization act. it's called the authorized amount. that would allow armed services to move forward with their contracting, their training and modernization programs. we are already four months into the year, that gives us some certainty. even in the following year. david: you have try to get democrats and republicans to come along. you need 60 votes. the counting that we have heard is you need 13 democrats. is there a chance to get them to go along with the resolution? circumstances, i think this will be close to what we call he game of skins and

shirts. we will get that out of our system and then talk about where we go from there. they say they're not going to delete unless daca is brought into the picture. republicans say democrats should be able to fund government. we've got more than a month yet before we run into a serious issue. i think there is a middle ground here. it's going to take the president being actively involved. we really do need some certainty from the president to get the house on board. i think this is a real opportunity for some leadership to show up and make a grand bargain. david: you have a month or a little bit more. march is the deadline for the

dreamers. these are children who were brought into the country. that's not very long in washington. what is your pitch to your democratic colleagues in the senate to say trust us, we will take care of this. david: i think it's more on the line. i think republicans and democrats see this as an opportunity to resolve issues surrounding daca. also to be able to get ahead of the issues on the border security system. we are planning the wall the same way, we have a secure border system and identify the money we need to make that border secure. let's talk about the other things that are part of the immigration system. forasonable opportunity businessmen and women to verify whether or not you are here in the country legally.

something else a lot of people are trying to focus on, the visa system allows people to visit and go home again. that needs to be modernized. theouth dakota, we use visas for tourist season. there will be tourist industry businesses that won't be able to open up if we don't have those people working during the warmer part of the year and then go home. they do that year after year after year. we have a shortage of that today. these are people who work in a golf courses and construction. they work in seasonal industries. they help keep those businesses open for other people to be employed year-round. david: i think most americans agree, this should of been taken years ago. matter, if you

have to get copper has of reform done, are two really saying effectively those dreamers are going to be supported. -- deported. >> we recognize that these people can be very valuable to our economy long-term. there's a reason for us keeping them here. regardlso, challenges in to their relatives, people who illegally brought them into the country. you have to deal with how these young people who would be given a legal status here, one where they are able to stay here and be able to address the issue of citizenship, what happens to their abilities to allow their parents who did violate the law to be brought in his family members legally. that has to be addressed. that's one of the things were

people feel strongly. you cannot incentivize people to get their kids in the same purpose. that's why you've got to be able to upgrade the current process. i think it's doable unfixable. i think the president wants to see it done. when senator mcconnell says her has to be some certainty with what the president would bless, there is no reason to move forward until there is an agreement there. the entire house is up for election this year. it's ok for us to move forward. alix: alan reston is still with us. what should traders care about more? alan: that's a great question. i would say germany.

as we were speaking about the spd somehow says no to negotiations with merkel, that's going to be a bigger shock on the markets. the shutdown, we've been to this movie before. i do think there will be much midnight. alix: are you staying up so midnight? alan: i am not. alix: coming up, the end of the bond buying program is next week. markets will be watching to see what it means for qe and trying to pin mario draghi down it. this is bloomberg. ♪

alix: the end of qe could be sooner than expected. june could be the end date of qe by the ecb. that was 38% that thought december. so us us is allen rest can.

-- ruskin. alan: i think the march meeting will signal the end of qe is coming up. i think that's more a logical approach really then started to accelerate the end date. alix: does that bring a rate hike? alan: i think it's interesting this week we had the hawks talking about a rate hike in the middle of 2019. he felt like market expectations were reasonable. thatis amazing in so much policy is so easy. all of this should be accelerated. central banks are flagging and signaling too far in advance. extent, they are taking themselves off the table as an issue. the market is usually sensitive.

the central bank is serious about hiking in the straits. -- interest rates. david: how much of this is your business? a lot of the things being said are getting the euro too high it? alan: there's a little bit of that. central banks got into this paradox where they think it's good to hold off. the more they hold off, the more the market says is the ecb that is behind the curve. the fed we know about. it's the ecb we are excited about. 122 is bang on. it's very close to fair value. they've got a current account surplus. excited no excuse to be about the euro being too strong. alix: let's talk about the rates.

you can see euro-dollar is the white line. the blue line is the 10 year bond spread. take a look at this. the samee not seen idea of what happening in the rates market in the fx market? markethe way the fx hadslates last year, you effectively the fed delivering the market not believing the fed up until the last moment. they priced in very quickly. the fx market went back to the fed is boring. it seems the same way this time. when you look at what is priced in, it's too hikes and a bit. we believe in for hikes. i believe that is bang on. inflation pressure will work

that direction. i think ultimately that should be dollar positive. if the market prices and quickly. march has aning in 80% probability they will act. then it feels like the market is going to be hiked one more time. alix: do you think is more inclined to pricing with the ecb? alan: absolute. alix: but inflation here is better. alan: the terminal rate on the u.s. side, we can see it on the horizon. the ecb is so far behind, there's so much tightening to come. they are looking much further ahead. alix: great stuff. you will be sticking with us. how is tax reform going to weigh in on financials. we will talk this morning.

in the markets, here is where we land about an hour before the cash open. futures hang on to their gains. you saw selloff yesterday in the market. futures are up by three points. the treasury market is being traded a little bit lower than yields. we are losing that steam to the upside. the euro is grinding higher and the dollar is mostly weaker. oil is getting hit. it just slams the rally. david: that is technical. alix: this is bloomberg. ♪ we use our phones and computers the same way these days.

so why do we pay to have a phone connected when we're already paying for internet? shouldn't it all just be one thing? that's why xfinity mobile comes with your internet. you can get 5 lines of talk and text included at no extra cost. so all you pay for is data. choose by the gig or unlimited.

and ask how to get a $150 prepaid card when you buy a new lg x charge. it's a new kind of network designed to save you money. call, visit, or go to xfinitymobile.com retail. under pressure like never before. and it's connected technology that's moving companies forward fast. e-commerce. real time inventory. virtual changing rooms. that's why retailers rely on comcast business to deliver consistent network speed across multiple locations. every corporate office, warehouse and store near or far covered. leaving every competitor, threat and challenge outmaneuvered. comcast business outmaneuver. alix: one hour before the cash open on a potential government shutdown day. earlier rallyhe after of's selloff yesterday.

a european stock is holding on to gains. we are looking at the highest close since 2015. the dax is maintain the 1% rally. the treasury market is what you will be watching. lower.are now moving nevertheless, we have indicated 2014 high. or, well off weak the low of the session. 9042 is how we are on the index. it feels like a little bit of calm the asset market as we wait for the decision. offe is not participating, 1%. we have seen explosive growth in u.s. production this year. david: let's check in on what is making headlines. kaylee: the international energy agency forecast that oil output

is set for explosive growth. gains in the u.s. and canada will offset the drop in production in venezuela. oil prices are any three-year high. opec is reducing its stockpile. this could neutralize the cuts. the federal reserve will eat up bank leverage. the crisiso relax demands for capital levels big banks. fdic,s opposed by the which has authority over banking rules. lawmakers have until midnight to avoid a government shutdown. the house passed a measure that would keep the government in business through february 16. senate democrats have the votes to block it. global news 24 hours a day powered by more than 2700 journalists and analysts in more than 120 countries, this is bloomberg.

david: we are to check in with washington. tonight is the night at midnight, the government will shutdown unless congress has a way to keep it running. capitol hill scrambling on a compromise. we turn now to kevin cirilli. i just talked to mike rounds. he said we could accommodate the democrats on immigration, but not right now. he thinks they can get that done in six weeks. kevin: that is not realistic. immigration, the american people are behind the democrats on the issue of the dreamers. the business community. the president has said he is going to stay in washington for

as long as the shutdown drama continues. fundraiser marking the one-year anniversary of him becoming president. on hold.ow the vice president still plans to travel abroad. travel, a lot of planning goes into that. the president will be here until this government shutdown gets resolved. they're going to cancel that big party? kevin: he might not be able to go. it's $100,000 a ticket. it is moving so quickly. there are meetings in the senate to prevent what could be the first government shutdown on his tenure. david: the republicans are not going to deal with daca right

now. the democrats say we will not do anything unless you deal with daca right now. is there a third way. jeff flake said maybe we just keep negotiating. kevin: they could do a shorter term short-term deal. they could kick the can a few days. the house version would keep this funded through february 16. daca has gotten so tangled up into all of this because of the additional funds the republicans had along the border. as a result of that, democrats are arguing they should divide the wall. we have daca tied into this as well. president ise the just a couple of weeks ago from the state of the union. he is scheduled to go to davos next week. david: i hope he gets to go to

davos. i would be very concerned if he doesn't get to go there. alix: are you kidding? i'd be upset. ,.in us now is it's great to get your perspective today. you care about the government shutdown? the first is uncertainty is never good. i think that's part of the conversation. bigcould business make investment if they don't know what the policy is going to be? is is this going to derail the markets and be a big issue? i think most market participants think they will figured out. you can see it in all of the asset values you just mentioned. context,oader

dysfunction is not good for the economy. this will have a resolution. the banks must be happy with his ministration. >> there was a recovery that started to build before the election. then there was an acceleration. election, the index is up over 50%. 30%.&p is up the banks of been out performing. there is operating leverage. we think there is going to be some regulatory reform and tax reform. david: tax reform is helping a lot of corporations. what about the regulatory situation? it hasn't kicked in yet. tom: i don't know if you follow the senate bill. this is a bipartisan bill. it's nice to see that there can be some bipartisan approaches.

i think this would be very helpful for the mid and smaller banks. the regulation address the big bank issue that went all the way through the industry. i think the biggest banks are going to need the regulatory .gencies help them there already is talk of possible relaxation of some of the rules it came in after some of the capital ratios. says let's have no regulation. it's been roughly eight years since dodd-frank was passed. should we find out what was too much? i digress a discussion happening now. alix: take a look at the bloomberg. this is the bank index. regional bank indexes the white line. you expect that -- can we play catch up? tom: i think the big banks will

start performing. it's really operating leverage. for the first time in a while, revenues are growing faster than expenditures. get some share purchases in there. i think you will see double-digit earnings out of the biggest banks for the next couple of years. when you look at bank of america, they are at 11% return. our model shows that going to 17% by 2019. that's a dramatic improvement. i think the regional banks will continue to do well. arehink the biggest banks in the best position at the moment. david: that's really wonderful for the big banks. maybe there is an opportunity for the smaller banks. they are not as expensive. is a very good case for the regional banks. if you took the time and went

several years earlier, the money center banks and the universal banks are still playing catch-up. that's how painful the crisis was. why they haves more to run. regional banks are up to 15 times earnings. barriertake away this in the senate bill, you will see more consolidation and more profitability out of the smaller banks. david: it's a ticket from 50 up to 250. tom: they put in to guard rails. billion and some regulation. dodd-frank was passed, how many banks of crossed $50 billion? two. that's it. $50 billion? to

the number has doubled. recently.somebody that's like being on the runway in a rainstorm. it's a traffic jam of $50 billion banks that aren't growing because of the cost of regulation. they didn't cause the problem. at least congress can help. jonathan: let's take a look let's happening with the yield curve. alix: take a look at the bloomberg. financials are outperforming. you have the two tend -- 210 curve going lower. what is going to wind up hurting banks is the flat yield curve and the deposit data. tom: you hit the fundamental issue on the head. ist interest margin inflected in 2017.

that is powerful. margins willgests get better, which helps earnings for banks. a flat yield curve slows it down. deposit data is how fast are banks required to share rate increases? we see the rate continuing to grow. we think it's going to double from 17 it. increase of the rate went to depositors. it will keep building. we've done a lot of work on this. if the fed does three increases, we think the banks will need more hurry up. we will still get double-digit earnings for share growth on an operating basis. david: we are getting money out

of our deposits again. alix: more than three cents? david: we can go to europe. alix: tom is going to be sticking with us. coming up, the elite is heading to davos. david and i decided to stay in new york. you content into our coverage. tom keene and jonathan ferro until 9:00. that's every day on bloomberg surveillance radio. you can hear them all across united states on serious xm radio. live from new york, this is bloomberg. ♪

>> we are in the hewlett-packard enterprise greenroom. coming up, the chief equity strategist. alix: next week, they will be catherine in davos for the world economic forum. they will discuss global growth and risks facing the world. we will take a look at where things stand this year versus last year. lisa abramowicz joins us.

where are we now? what the conversation today? alan: i feel pretty optimistic. when you look at the developed world, there is a significant acceleration in growth across the board. half decent as well. growth is approaching 1.5%. the u.s. is accelerated a little bit of late. the equity markets are reflecting that. in the developing markets, chinese growth is decelerating a sense bit, you do see a that there is less underlying risk in terms of growth falling off a cliff. even in the developing world, you see some improvement. lisa: last year, rates were never going to rise. central banks would try to raise rates but not get beyond 1%.

what is the new neutral? what is the world of investing? you had all of these really wealthy people flying in private jets talk that income inequality. the question is how high could rates go? how disruptive could that be? could we undermine the asset values we see right now because rates are going up. tom: i think it's the removal in the prospect of the removal of negative interest rates. that has caused damage to the bank earnings. i think as that get removes, that is a positive. i that people will want to know are there any changes to that plan? europe still hasn't had final resolution of assets. the mechanism for getting rid of

bad loans in europe is much different than the united states. it shocking to believe we are this far from a crisis and still talking about it. banks will not move forward until there is a complete repair to how that happens. that has not been completed. david: if they make more money, they can clean up. tom: some of it is just a legal problem, the way the legal systems are set up. it's hard to move bad assets off your balance sheet or two for close. alan: growth masks a lot of things. i think it's less of a problem now. heaven help us if we have a quick slowdown. when i listen to people talking, the commonality is one of rates normalizing and moving away from the emergency policies. hadral bankers have post-traumatic stress syndrome.

they are so scared of tightening. i think they are overly scared and have been. the u.s. is not tightening financial conditions. the theme of central banks getting the message that they can tighten without going into a tailspin is a big thing. the conversation is removing emergency measures. this is removing emergency measures. it's unusual the places we were with interest rates. when we get back to a more typical platform, that will be a good thing. lisa: are these going to be the headlines? will it be president trump snubbed by so-and-so? he awkwardly fits in a conversation. he tries to meet with somebody from russia.

how much does that suck the oxygen out of the room? he is setting himself up with a contrast. president she went last year. it was a triumph. not, hethat's true or came across very well. people are going to be contrasting them. alix: i brought up the bloomberg financial conditions on the terminal. now we are almost at 1. lasta 6500% rise over the year. conditions are that much easier. we expected, and did not get it. the: the bigger element is backend of the curve. that's what counts. if mortgage rates were moving up, people would talk about higher ratio. short-term rates are going up and that is relatively well behaved.

mortgage rates aren't really moving. if you saw the back and starting to maneuver more sharply, that could be more distracting. that could be a different angle to the story. david: we still don't know what will happen. we don't know. that point, we are moving from central bankers adding to the balance sheets $2 trillion to when you take in the ecb and the fed and what the boj is doing, it's going down to zero by the end of 2018. you have had a massive tailwind. it's not a tailwind anymore. alix: it's great to see you guys. thank you very much. we are out of it. bloomberg will be there. we will bring you live to the world economic forum.

we have just a few of the headlining names will join us. i am looking forward. gathering, the davos what has president trump been tweeting about? this is bloomberg.

alix: i'm really fascinated by what president g's in thing said last year. this is what he said. protectionism is just like locking oneself in a dark room. rain may bend outside, so are light and air. emerge as a winner

in a trade war. alix: he was waxing very poetic. contrasting with some tweets from president trump. here's one. it's hard to believe he will change his tune when he goes over there. alix: definitely not. it's not just germany. it's canada. david: soft lumber. of things.ll sorts how is america first going to play in davos? those guys also you very different tune. they are all billionaire buddies. mexico is one of the highest crime nations in the world. we must have the wall. today and a between year ago is so stark.

would we have ever thought china would be there and be so globalization friendly and the u.s. being so localization unfriendly. david: why is he going? this is not the normal form for him. there are a lot of intellectuals who believe in globalization. he tends not to like that. i don't know. i would not be surprise if he thinks he can persuade them. alix: coming up, barry bannister will be joining jonathan ferro on the market open. that does it for bloomberg daybreak americas. this is bloomberg. ♪ . .

jonathan: this is the countdown to the open. and jonathan ferro. ♪

emily: coming up --jonathan: coming up, the senate gives away. the slow motion selloff continues, benchmarks 10 year yield to the highest level in more than three years, it is the end in sight? economists bring for their estimates of when the ecb will send it in date for qe. 30 minutes away from the opening , futures just obsession highs, still firmer, up by four points. earlyollar retracing an move higher, lower, now flat on the day. defense strength in the -- in the g10 you yields are now sound by a basis point at $2.61. in less than 15 hours, the u.s. government could be closed for business in the house passing a spendi b