♪ francine: european indices dip. the dollar drifts. the boe is an eight bind. mark carney deals with inflation and brexit. china's currency thinks the most since 2015. stefansson -- stepan -- step in soon? ♪ francine: good morning, everyone and welcome to "bloomberg surveillance." these are your markets. i'm looking at the stoxx 600,

currently down. we are still trying to figure out what the next leg for a lot of these markets is. industrials are under pressure today. we are still trying to figure out the aftershock from the global selloff that we saw on tuesday and wednesday. the other thing that i am looking out for is the yuan, dropping the most since august of 2015. some trade figures in china disappointed and of course it is boe day. "bloomberglso on to a fewnce.," we speak guests. kaplan of the federal reserve bank of dallas joins us in an hour.

a little bit later on we will be axeld by axa labor -- weber. let's get straight to the bloomberg first word news. >> societe generale has the estimates -- has beat estimates. it was expected to post a loss. the ceo of france's second-biggest lender is upbeat. >> first of all, fourth quarter we did better. decline.very modest >> u.s. senate leaders have announced a budget agreement that would provide nearly $300 billion in additional funding.

extend- the plan would the national debt to 2019. the dollar rose on the news about the deal as did yields on the 10 year u.s. treasury. senior white house aides have violencedomestic allegations against president -- against -- before his resignation. it was not clear who knew of his history with his ex-wives or how much they knew. 2 officials say that trump himself was unaware of the allegations. china's overseas at have held up, despite the strong you -- the strong yuan and higher trading tensions with the u.s. imports increased 36.9%.

there was a trade surplus of $20.34 billion. global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. i am edward ludlow, this is bloomberg. francine: thank you so much. markets have remained on unsteady footing after volatility persisted. this amid signs that the rise in trade yields has yet to run its course. 4 yeare is towards the height that sparked the biggest equity selloff in years. is volatility back in a big way and what is next for the markets? joining us now is chief investment officer of london and and the chief european economist at hsbc. we will get to the volatility

shortly, but we have had an incredible week on the markets. are we going to see more of the volatility come through? >> you will see a little bit more volatility. we have two structural issues. we have an economy in the u.s. which continues to leverage and becomes much more sensitive to concerns about future higher rates. on the other side you have a lot of momentum and risk parity funds that have been exacerbating this trend. this is a taste of what is to come and a system -- symptom of all of these structural problems that we have. erodenflation begins to profit margins and you will begin to see some earnings difficulties over there and of course, when you have refinancing of corporate debt at much higher rates, it is very

much a preview of what is to come in the next 18 months. have a chart of the s&p 500 and i will bring it back from like 4-5 years. is this pent-up, suppressed volatility? next time could it come from europe? there was a huge difference between what vix was doing in the u.s. and in europe. that theraph shows markets have not had the ability to let some steam go. you have had such a change in the fabric of markets. you have gone from active investors moving the needle to passive investors moving the needle, to rowboat -- robo -investors. when you have momentum exacerbating this trend, you have a situation where the

technicals are not supporting the gains. what you will see is probably the market staging some sort of --. i would be surprised. ies areely the econom synchronizing, in terms of growth. there is so much leverage in the system and there is so much concern about when profits begin to erode. the valuations are very high and i would think that the kind of -- we- moves we are think are seeing will be nothing compared to those that we will see. francine: what does it mean for central-bank policy? it was also the first day for jerome powell at the fed. do you start questioning your interest-rate hikes? >> i think it was ridiculous come markets got complacent. it was ridiculous to think that

inflation and wage growth was debt forever -- dead forever. thinka bit ridiculous to that we get one u.s. labor market print and we're really playing catch-up. withoutpay more actually raising prices. you mentioned europe, in the eurozone, we're starting to see some productivity. if you pay people more and they are being more productive, your unit labor costs are not rising. i still think they will move pretty gradually, but it is a wake-up call. francine: can central banks do anything to placate these markets? bankst point do central need to let the markets be in focus only on inflation? >> from a european perspective, ofn i looked at the bank

england, when i worked there, we did not focus on equity markets at all. clearly it is unimportant into the inflation outlook -- it is an input into the inflation outlook. going toanks are not be too worried about the correction that we have seen thus far. francine: i have the same question for both of you. big,u worry about a violence repricing in german bonds? and what does that mean for the rest of the market? >> not yet. certainly there is a repricing going on in government markets, alike in equity markets. i would be surprised. i think the era of extreme lows and very low rates is over. i would be really surprised. you still have obviously, german within a continent that has structural issues. it was suggest that you will not

, whichudden repricing would of course be more dramatic for bond markets and equity markets in europe. francine: what would be the trigger of something like that? >> i am want to pick up on what powell said. rate is pretty low due to demographics, for whatever reason, we are not going to see long-term rates rise by a huge amount. as the economy recovers, it's equilibrium rate picks up, and there will be eight gradual rice -- a gradual rise. francine: thank you so much. both of them stay with us and up next we will talk about the boe. catch, the bank of england governor deals with inflationary pressures and brexit uncertainty.

stay with us, a little bit later we talk to the dallas fed president, he is robert kaplan. this is bloomberg. ♪

♪ economics, finance, politics, this is "bloomberg surveillance." i am francine lacqua here in london. it is super thursday and the bank of england gives its policy decision in just a few hours. the central bank finds itself in a tricky position. inflationary pressure could require policy tightening. according to bloomberg economic said a rate hike

could come this year if the economy remains on its current trajectory. joining us now is nejra cehic. good morning to you. what is the biggest concern for carney? inflation or brexit? juliette: that is a great question -- nejra: that is a great question, francine. it looks like he is making a shift, saying that the bank of england is moving away from thinking primarily about brexit. the expectation, the consensus view is that it is going to be a unanimous vote to keep rates on hold. there might be an upgrade to the economic forecast. bloomberg economics is predicting that it will be eight vote to keep rates on hold.

what will be interesting is what mark carney says in his news conference about future expectations, basically, the forward guidance. we have seen the markets start to price in a more aggressive hiking price from the bank of england. previously the market was pricing in another rate hike in the final quarter of 2018. now, august is in play. the market has started pricing in about even odds of a rate hike in may. it has come down with all the market turbulence in the past few days. it will be interesting to see how mark carney deals with those market expectations. he is bound to get questions on sterling and how that feeds into inflation. of course there will be the questions around brexit. h earliero john wrait

and she is predicting that we will get it rate hike in may only if a transition deal is reached by the end of march. francine: thanks so much. what check mark mark carney do and how should investors be positioning and the u.k. ahead of today's decision -- in the u.k. ahead of today's decision? you are an economist for 12 years, do you think it is harder and set interest rates than it was back then? >> i think today it is particularly tough to call. it is not clear what the communication is going to be. i think the unanimous vote is consensus, but clearly, you had a bit of upside news on employment, upside surprise for

gdp. 7-2 is a possibility. the first thing to look at is the folks, that is -- the vote, that is the most important thing. second, what is the long-term inflation forecast? they were at 2.2 at the end of the forecast last time. will it go down? francine: so i will ask you about the pound in just a second. can the u.k. economy currently withstand a rate hike this year? or will actually hurt consumers too much -- well it actually hurt consumers to much -- will it actually hurt consumers too uc much? >> effective rates have fallen

over the next few years. rates are so low that even though borrowing relative to income is high, interest payments and the coverage of that still is not. francine: where do you see pound? i have a pound chart. 150?it touch >> i don't think so. this is a very useful graph and certainly you might think there is going to be some reversion to the mean. there is something behind all of this. this country needs capital to finance the huge deficit. when you have brexit, you have the worst of both worlds. you have the need for capital and uncertainty, which will probably scare capital away unless you make it attractive. a big factor that will drive and make this country more attractive, certainly before you have certainty as far as rule of law, will be a cheap pound.

i would be very much shocked if you do not see reactionary reversal. i would be very shocked if that was not the case. francine: where do you see the pound? >> i still see every reason to see it going down. the structural site has been mentioned, but if you look at the politics as well, you think that the risk for that would be skewed towards bad news for sterling over the next year. markets in the doldrums, consumer confidence, pmi's come off a little bit. all of the signs point to the economy not maintaining its current pace of growth. francine: you can see the u.k. inflation expectation fading from that 2017 peak. >> yeah.

u.k.nk the thing about inflation is that so much of it has been about the currency lately. in cpi terms, almost all of the overshoot is entirely due to the currency. where sterling goes from here on in is going to have a huge effect on what happens with market expectations as well. if you look at inflation expectations over the past 10 years, it has been remarkably stable. when i worked there, they used to say that inflation credibility was hard to win and easily lost. francine: thank you so much. let's get to one of our top stories. societe generale has beat estimates and the bank chief executive spoke to our reporter in paris. >> first of all, fourth-quarter we do better than appears.

it is a very modest decline. i will let you know when i look at the full year. we have been doing better. it means that we are gaining. it seems to me at the beginning of this year that, at least when i look at the markets, we are getting out of these extraordinary monetary policies, which probably also meant low volatility. that --tty confident with our capacity to deliver our business plan. francine: you expect the volatility -- >> you expect the volatility to really benefit socgen for 2018? >> yes, i am positive overall. i am pretty confident.

prospects,d growth in particular in europe, and overall, but yes we see signs of exiting this monetary policy, which helps both the retail banking activity and the capital market activity. volatility increases in 2018, as we have seen over the past few weeks, does that mean that you make reached some of your targets quicker than expected? >> it would be too soon. the targets do not just depend on the environment. we released targets three months ago and we are committed to deliver in the first year. socgen been structuring or selling some of its products linked to volatility index that has been collapsing over the past few days? >> know, we did not have to

suffer those kinds of , we didnces -- no not have to suffer those kinds of consequences. >> is your bonus pool going to be stabilizing or increasing? followingus pool is --, so actually it will go down. terms, we are very --.onsible in terms of our people look at the potential of the group, our ambition, they know we want to invest. the prospects are positive for our capital markets and more generally, all of our activity. francine: that was the chief executive officer at society e -- societe generale.

of course, monetary policy and banks go hand-in-hand. are you long financials? do like them at the moment? >> we do. we prefer to play them through the debt side. it still offers the best of both worlds. it is part of a fabric of a system that is designed to protect them. of clearly have the trend this european financial --titutions beginning to be these european financial institutions to be less --. you have these capital requirements which are forcing them to become safer entities. that has never been good news for equity holders. having said that, certainly you might see a cycle whereby some european countries are beginning to do a little bit better.

flow ony lending will the back of that and banks will make a little bit more money. still, very much lagging the u.s. space. the u.s. banks are think a much better opportunity -- are saying -- seeing a much better opportunity. francine: he sees further labor market tightening between 18 -- in 2018. will we get one? >> if we do it is going to be because it is 2 or 4. if you look at unit labor costs in europe, the domestic driven part of inflation is still --. there is no need for the ecb to hurry. the u.k. faces some unique situations in the supply side of the economy, it is weaker there. i think the boe forecast is a

little bit bullish. are you going to be thanked for tightening too early or be thanked for doing it gradually? francine: thank you so much for joining us. coming up, we have a packed show. the italian bank wraps up the amount it intends to return to investors. we will ask him about some of the bearish bets ahead of the italian election. today the markets seem a little bit more tranquil. we expect the bank of england forecast a little bit later. this is bloomberg. ♪

♪ francine: economics, finance, politics, this is "bloomberg surveillance." i am francine lacqua here in london. bankinga great

interview, but first let's get straight to the bloomberg first word news. has beatengenerale estimates with fourth-quarter net income of 69 million euros. in an exclusive interview with bloomberg, the ceo said he is upbeat about his investment bank. >> first of all, fourth-quarter we did better than appeared. it is a very modest decline in a volatile environment. figures, we have been doing better. the decrease is lower than the others. >> u.s. senate leaders have announced the bipartisan budget agreement that would provide nearly $300 billion in additional funding. it would suspend the federal debt ceiling until march of 2019. a senate vote is expected today,

followed by the house. the dollar rose on the news about the deal, as did yields on the u.s. 10 year treasury. he said he is cautiously optimistic about negotiations with the eu. he made his comments in an interview. >> the reason that i was for ofxit, was because sovereignty. that is moving forward. it is a very tough job. nothing is ever >>, but i think it seems to be moving forward -- nothing is ever quick, but i think it seems to be moving forward. ed: global news 24 hours a day, powered by more than 2700 journalists and analysts in more than 120 countries. this is bloomberg. week, theearlier this

bank said it aims to pay out 85% of this year's earnings to shareholders as part of wide ranging reforms. the timing of the announcement to reveal if the lender held its own. what is the thinking behind the new strategy? joining us for an exclusive interview is the chiefs -- the banks chief operating officer. thank you for your time. you're going to be handing out very generous payments. how do you drive profitability? >> you can pay significant dividends, because you have significant capital. that is the first point on our story. risk,cond point is the reinforcing nonperforming loans, now becoming the number one bank in europe.

it is possible to use profitability in order to pay dividends. profitability is the result of our very strong business model, what management, and now wealth management protection. francine: you are focusing on the more lucrative sections. you have not ruled out teaming up with someone to become stronger in those sectors. >> on private banking we think we can continue to be a leader without any kind of a competitor. want to reinforce our own factory -- we want to reinforce our own factory and the work that they are doing with their distribution network -- doing with our distribution network. we think that scale is very important. francine: is there a country or region where you think it could strengthen the asset management?

>> in the future it will be a business in which you need to have scale. other players in europe are considering making alliances. we can be a player that can consolidate alliances with other players. to do this we need to reinforce our credibility and we are looking for partnerships with some very important global asset management players. francine: the big, international, well-known players? >> that's right, to put a stamp of quality on our asset management. create a $1 trillion company in europe. francine: have you spoken to anyone? >> we are starting the conversation, because it is not our number one priority. , butll continue to deliver this part of the story, i would

try to give some more details later this year. francine: would you buy any more of those smaller once? -- smaller ones? i can also consider this point, but without being a good significant on capital -- input on capital. francine: what is the biggest challenge to deliver your plan? investors actually took up your plan and the share price increase. -- in the plan we considered is zero rate environment. it is really conservative, because in reality we will have potentially an increase.

for each one of the basis points increase, we can add 1.6 million euro increase. on the other side, the real complexity of the plan is that we will have 9000 people leaving the organization during the next few years. anotherto redeployed 5000 -- redeploy another 5000 people. that is the challenge. i think we will deliver. francine: how are the talks going about the sale of the bad loan platform? 13on bad loans, we delivered billion euros in two years time due to our very strong performance. it is achievable. if we can improve our ability to make recovery, to a strategic alliance, we're ready to do this.

i think they are a very good player in the market so it is one of the possibilities that we are considering in the plan. that is something, again, that we will assess during 2018. 10% inget is to go below 2018. francine: have you spoken to ray leo -- rayradel dalio recently? >> [laughter] think you lost money on our position. again, increasing the position, i think that it is losing money again. billion short of the italian banks, saying that the election will be disruptive, and you are his biggest short. has he called you at anytime? >> no.

i think it is typical of these big players in the market. in italy there could be some volatility, so it is understandable that you can take this position. in the end we are so strong in fundamentals that it is difficult that you can have an impact in the short-term and the businessng plan, we are in a position where we can probably win this competition. francine: the fact that you call this a competition is quite good. do you believe that the italian elections will be disruptive? >> i don't think at all that there can be any type of disruption, because at the end be to reduceshould youth unemployment and to reduce public debt. in the end, my expectation is that the governor will be

absolutely -- the government will be absolutely in a position to reduce this weakness. also, the president of the country is such a strong and reputational guy. we will for sure deliver the best solution for the country. francine: how do you explain this short? iknow it is difficult, but keep hearing from italian ceos and people pushing reform and italy that the banking system is stronger than it has been in the last 5-6 years. put in thataklio position? >> it is probably looking at the populist approach in italy. you can have the difficult situation deriving from some points, that some parties decided to take in the past, but now they have changed their minds, because if they want to -- against theh

euro --, but it is understandable. what should the new government, whoever that may be, actually due to try and phil's -- try and facilitate the sale npl's?peace -- sale of >> i think it will be very positive and i think that a bank should do the job without there being any kind of expectation of improvement from government. you have to deliver on your strength and that is what we are doing and what we will do in delivering this plan. thatine: are your worried your bank gets infected by the share price? i know that --. >> in my view, all other players

in italy are doing their right job. we are in a very good position, agouse we started two years with a stronger internal recovery mission. other banks are doing the right job in the country, so i'm really confident that this will be assessed during 2018. isncine: i guess this week different, because as you are about to present your plan, the markets were going haywire. had you explain this -- how do you explain this sudden volatility angst? >> the real point is that you cannot have forever a bullish market. that is the point. 5%-10%, is of absolutely --.

the real economy is much stronger in europe probably been other parts of the world, and also in italy, fundamentals are strong. investments are recovering, so that is the story of fundamentals that are strong. it is clear from a financial point of view that you cannot have every day an increase in price of the company. francine: do you worry about market volatility or do you worry more about the date when the ecb starts tapering some of the qe? to tell you what i consider important for europe, it is the exchange rate, so currency, more than the interest rate or volatility. in any case, i think in the end

with the reduction of quantitative easing, and the impact, especially on italy, when not be so significant -- will not be so significant. the speed to increae of growth in our country, we have to reduce the debt. we have to try to reduce unemployment in the country. francine: if you look at italy, italian reforms, politics, you'd think that a higher euro strength is its main concern right now? >> it is probably a concern, yes, that is a point. that would be a concern, but looking at the italian situation, also the currency is very important. it is a strong country devoted to -- explorer tate of country. francine: thank you so much for

joining us today. that was the chief executive inte -- ceo of intesa sao paulo. this is bloomberg. ♪

♪ francine: economics, finance, politics, this is "bloomberg surveillance." i am francine lacqua your london. let's get straight to the bloomberg business flash. >> a year into the sleeping restructuring to cut costs and risks, unicredit starting to get help. income climbed from one year earlier, while revenue climbed by 12%. as much could purchase as one third of one of the world's largest insurers. the transaction could be valued at more than $10 billion. the talks are at a very early stage. commerzbank has reported better-than-expected revenue and

growth for this year. fourth-quarter revenue came in a 2.1 9 billion euros while net income fell to 90 million euros. that comes less than a week that deutsche bank posted its lowest revenue and seven years. commerzbank ceo joins us for an exclusive interview at 11:00 a.m. u.k. time. zurich insurance group has overcome a record year for natural disaster claims in the industry. 6% tosed its dividend by 18 swiss francs per share. the company also announced a share buyback of roughly $1 billion. tesla has put to rest concerned that it was going to need to raise more money soon, thanks in part to the salesmanship of its ceo. the company's cash balance barely budged last quarter.

thanhave put down more $850 million in deposits. long-term cryptocurrency bulls have said they do not fear regulation, they embrace it. they founded gemini. likely helped them elevate to the billionaires club for a bit. >> with our long -- we are long. we are in this for the long call, whether it is for one decade or many tickets. we remember when bitcoin was eight dollars. >> that is your bloomberg

business flash. francine: aftershocks from the global stock selloff are continuing to reverberate today. cqsceo of seek u.s. -- spoke to bloomberg. >> it has been an opportunity for us, clearly we can to be long and short. the reality is that it was bound to happen. havearkets at the moment got a lot more quantitative models and algorithms behind them. it is not surprising. ath that said, i think it is benign environment. >> when you look at what happened on monday, you think that was quantitatively driven? >> i believe so. look, the reality is that you never know. the point is that i think the move was exacerbated by that.

we do a lot of fundamental work. we have to because shifts. fundamentalsd, the are still fine. there is money on the sidelines. not a bad situation. >> when you look at the rise of systematic trading, how has that impacted your style of investment? we think about things systematically, but we do not necessarily behave that way on an ongoing basis. that is not our business, our business is fundamental credit work across the capital structure. you have to be careful about come if you're running a fund --.out leverage,

you have to make sure you have enough exit margin and positions to make sure you don't get smashed about. he spoke to bloomberg and an exclusive interview this morning. let's get to another top story. has sunk the uan has sunka's y the most since 2015 after markets missed estimates. let's get to our chief agent economics correspondent joining us from hong kong. you wrote a wonderful piece. congratulations on that. i want to ask you about the article, but first the trade

figures. what do these numbers tell us about global trade? >> good morning and thank you. these are big numbers. experts going down, imports really surging over 30%. it speaks to a good global demand growth story. we are comparing the china numbers to a very slow period one year ago. we are coming off of a very low base. you can say that at the very least it is a good start to the year, but we will probably have to wait until the end of february to get it will handle of where china's trade is going -- to get a real handle of where china's trade is going. francine: what is behind the big jump in imports? >> i think what is going on there, especially if you look at standro, china should

very much for a lunar new year. last year it was in january. china's manufacturing sector shut its factory gates. that is why imports fell the way that they did. you can argue that the economy is in better order and demand is picking up. that is probably part of the mix. the real story was probably more the euro. likelihoodhat is the of a trade war? >> it is one of the biggest issues. it has been talked about a lot and davos -- in davos. the steps have been incremental so far in terms of the u.s.-china trade relations. there are plenty of steps that the u.s. could take.

china has made clear that they are willing to counter an attack necessary. we are not in a trade war stage, but we're kind of in a skirmish stage. it would have a damaging effect come not just for the china and world==== -- china and world economy -- china and u.s. economy, but for the world economy also. francine: if you are in china or beijing, you're much more positive than being further away. what do people not understand about china? >> everyone is entitled to their views. both views are very valid. we have consistently noted in the fartherg that away from china you are, the more bearish you get. the sentiment in hong kong is very different than other places.

the services side of things is making progress. of course, above all, it is the political economy. china is in no mood to let go of its economy or currency. play a is continuing to soe is continuing to play a major role. francine: thank you so much. coming up, we speak to the fed the fed,-- we speak to robert kaplan. ♪

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the dollar drifts. mark carney confronts inflation and brexit. turbulent andes we speak live with the dallas fed president about volatility, policy, and the new era at the central bank. this is bloomberg surveillance. i am francine lacqua in london. tom keene is in new york. new forecastds the of inflation and growth from the bank of england and speak about the fed and rate hikes. tom: a day to get halfway back to normal. i am watching the bond market. i want to emphasize that our team has lined up three great interviews that have to do with the linkage of the volatility into the real world. the ceo of commerzbank, robert

kaplan, and the guy from germany? francine: the difference between the europe and u.s.. big move on the chinese yuan. let's get to the first word news with taylor riggs. votes today on a two-year spending plan that would avert a government shutdown, the senate proposal would provide $300 million for defense and domestic spending. members of both parties get something they had wanted. mike pence says we will see when it comes to a meeting with north korea. he is in south korea for the opening ceremony of the winter olympics and says there may be a chance for an encounter with north korean officials. today lays england out how it expects the economy to perform over the next three years. it is the central banks job of predicting the future is getting

harder with two thirds of the forecasting time comes after the u.k. exits from the european union and it is unclear what that relationship would look like. turkey's deputy prime minister says they are not pulling away from the u.s. and europe, he spoke to bloomberg in london. away, notis not going breaking up with the west. >> relations with the u.s. are possible? >> we had a rough patch. turkey is in a relationship with europe that is on the mend. the relationship with the u.s., we have big disagreements for what they are doing in syria. >> the u.s. is providing weapons to kurdish forces. turkey regards the kurds as enemies. global news 24 hours a day, powered by more than 2700 journalist and analysts in more than 120 countries. i am taylor riggs.

this is bloomberg. tom: thank you. we will get to robert kaplan and a moment but a data check to set where the market is. features unchanged. .ow futures up a fraction euro-dollar pulls back on stronger dollar. next screen. the -- what am i watching? , 30ear bond, 30 year bond year bond, 3.13%, that should be green, up in yield in the 30 year bond. we will talk a lot about that this morning. francine: are you watching the bond?r bond -- 30 year i am watching aftershocks from the global selloff and it continues across the markets.

i want to look at the chinese currency's, yuan drop in most since august of 0215 has speculation -- 2015. tom: we have had a wonderful set of interviews on bloomberg surveillance to give you the conversation around the market turmoil and perhaps the central banks are heading. we had the former governor yesterday of the bank of england. frederick mishkin of columbia. the monetary. . -- the monetary theorist. right now, the most original president of the 12 banks of the federal reserve system, robert kaplan of goldman sachs and a great teacher at harvard is the school with three important books of leadership feared -- leadership. he is with us in germany. >> good morning to you, tom. the president of the dallas fed

says good morning. very elegant words from tom keene. , or what hasou been the most disconcerting part of the market velocity, the changes in markets in the past six days? >> let me step back. what i take note of is more the time that preceded it. we have gone for 15 months without a correction, that is a starkly unusual. -- historically unusual. that is an abnormal time. there is some market mechanisms that probably need to be looked at in hindsight. more volatility in the markets, and maybe addressing the excesses and imbalances in the market by having more volatility is maybe a healthy thing. i will watch carefully to make sure it does not transmit to tighter financial conditions. at this point, i am optimistic

it will not. >> we chatted before we did this interview, to push you on the transmission of fact. were and how quickly may that manifests itself? investors say, financial conditions are loose and the fed has a loose backdrop and can afford to tighten. >> but i watch his credit spreads. and bressman grade credit spreads and high -- investment grade credit spreads and high-yield credit spreads to see or is therewidening other volatility in other markets? it isot see that but something i am watching for and have been watching for the effect i have not seen it is notable. volatility,fx relative to the equity index, has not shown anything, despite the four-year high in yields. >> that tells you something.

this may be aat stock market event. it may have been accentuated by structural issues in the market, which need to be looked at. this is six days in and in my experience it pays to take more time and be vigilant. >> neel kashkari talked about the data, people talked about friday and monday, friday was a data market event on wages at 2.9%. the data suites of 2007 and 2008 when raises last wages rose, should i really get that disturbed by 2.9% off on wages? >> when markets go for a long time without a correction, and they eventually do the correction, whatever news around the correction, people will attribute to that. it is normally much more complicated. , we know laborue

markets are tightening in the united states. wehink we will overshoot, will overshoot for employment. .- full employment the issue is the transition from wages to prices is more muted than we are used to. usually, wages went up and prices were -- it was passed onto pricing, pricing power by businesses is more muted than it was five or 10 years ago. i will be watching to see, does wage increases lower margins and how much gets past off in prices? the jury is out on that. , we will listen to axel weber after you and you use gradual, patients, deliberate, we have williams and deadly, the language is clear. last week, you almost intimated you could be brought to the

valley of four hikes. has anything changed? me, i sayue for gradual, patient, and deliberate, here is what i mean, the best chance to extend this expansion is for us to be removing accommodation. because history has shown, if we remove it gradually and patiently, the economy can adapt to it. if we get behind the curve and move abruptly, that is when we find weekend tip the economy into a recession and i want to avoid that by moving deliberately and gradually, but still deliberately during this year. the only comment i would make about more or less than the base case, this is not a static process and when i say my base case is three, it is dynamic. we are watching the economy, labor markets, inflation. part of the job is the fed, the

most important part of my job is to be open to learning and adapting. and my best judgment is three is appropriate for this year. >> can i ask you about some point with a 10 year auction last night. we had supply last night and more supply tonight. more supply is coming. eras $1 trillion of supply coming. is that, from a market perspective, a flashing light? >> three big structural drivers, cyclical factors, aging demographics, technology enabled destruction, and high levels of government debt to gdp. the household sector is the leverage, consumers are strong and the government is much more leveraged. i think there is a question about the sustainability of high levels of debt to gdp. one of the parts that comes out of that is more debt to offer and to sell. goodnk that when times are

, we would be wise to find ways to moderate debt growth and moderate growth of debt to gdp. that is something we need to look at. into had the debt extended -- and it got lost in the weeds. i want to go back to the risks. last year, we spent a lot of time talking about north korea and china and relationships with the u.s. and china. the trade relationships for the united states, you said my state is the biggest exporting state in the united states. how much vigilance to you pay to the trade relationships and the febrile nature of them? >> a lot, and i u.s.-mexico is a good example, 70% of the imports to the united states from mexico are intermediate goods. not final goods. that means their goods going

back and forth across the border as part of integrated supply chain that have allowed u.s. firms to become competitive globally and add jobs in the united states, yes, the trading relationship with the united states and mexico should be updated but the trading relationship is an opportunity for the u.s. and north america to be more competitive, if we did not have the trading relationship and the intermediate goods, we will likely lose jobs to other parts of the world. probably asia. we need to make sure we diagnose this correctly. to theircircle back bread and butter of your job, running the fed, run is in -- running policy for the united states. as you zoom out of political hubris over their ability to do qe.

how we benchmark, you and your cohorts, it is about the symmetric rate of 2%. data out there whether you need to reform and that as a mandate. do you think you do, jerome powell has an opportunity to perhaps address it. >> i have a business background, my experience is, great organizations always reviewed their frameworks and targets and the way they operate. we should do that and seeing doing that. having said that, this inflation , whether price targeting or other ways to look at it, i am not let convinced we should change, but having the debate is important. is, one ofi say this the reasons we are not meeting our 2% target i think is structural. a structured economy is changing. monetary policy therefore, we

need to be balanced. we need to balance the degree of full employment overshoot, increasing, the fact we are undershooting the 2% target, but undershooting by some and firming. i think we should be removing accommodation, even though we do not meet the target because the impact of overshooting full employment and the excesses and imbalances it creates have to be taken into account. >> the overshoot in unemployment three, hard, is that 2.5%, where is that for you? arey judgment is, we already near or at full employment and we may have already overshot it. threes would be overshooting it. >> 2018 started out to be the ,ear of global normalization perhaps for the bank of japan and u.k., mark carney, when i

look at negative real rates, fed funds are dying at one .25%, flaky -- you are still not a normal. what is your achievement for 2018? to get to zero or normalized? >> i have said before, why did i join the fed? because i think the so-called normalization will be very challenging. as tough as the crisis was and the extraordinary steps the government and fed had to take, normalization will be just as challenging. weaning the economy off the stimulus, getting the balance sheet to run down. getting rates at more normal levels. some of the episodes we see, including the one last week show you the ups and downs we will go through as part of normalization. i think having removed accommodation three times last year and begun the process of running down the balance sheet

were achievements, but the next few years will be very challenging and normalization in a more stable time and the economy is good, we should not underestimate, normalization is challenging and should not be underestimated. >> we have not talked about running down, you mentioned, running down the balance sheet or stocking reinvestment. you are very deliberate and what you said. -- what timestamp did that begin to change, what could change with policy over time? >> i think the policy of letting the balance sheet run office working effectively because it is gradual and a relatively small percentage of daily volume. i am very optimistic that this will be successful. i have said that sometimes slower is faster. if you want to get the balance sheet run down, be patient and do it gradually and that will

get us there faster than trying to expedite it and having to work backwards. you do not want to have stops and starts. the process is working effectively right now. conversation, we have had tax reform which makes confidence and the repatriation everybody set i bought this amount of jobs in the united states, a turnkey moment in the united states? drivers, agingal demographics, productivity challenges, high levels of debt to gdp are with us. part of the tax reform bill will help sustainable growth, but a big part of the legislation was a tax cut financed by increasing the debt, which will cause a short-term bump, which we think is causing the short-term bump, we will bend trend back down the trend growth which is closer due to present except we are more leveraged. -- closer to 2%, except we are

more leveraged. this is a late cycle -- part of the bill is a late cycle stimulus where we are at or near full employment, that may create challenges for us in terms of increasing further debt to gdp. >> thank you for taking the time to be with bloomberg. tom, i leave it with you, a relaxed atmosphere here in germany. tom: always relaxed when the president is managing the message. he is very good at that. what i got out of that, was early in the interview where the gentle man from harvard and goldman sachs says he is watching the spread market. that is a major theme today, we have heard it in interview after interview. income, that seems to be what president kaplan is doing. francine: yes, watch fixed

income and we have heard it back in november by someone from deutsche bank. what robert kaplan was saying is the u.s. will likely overshoot for employment. he said normalization will be very challenging. that is a theme for this week, the markets were not seen yet. -- seeing it. tom: we will give you continued coverage of this folks with futures negative four in the united states. you just heard from president kaplan of the dallas fed. coming up, he is the chairman of ubs, always the chairman of the bundesbank, an important and timely conversation with him on market volatility. stay with us. this is bloomberg. ♪

♪ tom: francine lacqua in london and i am tom keene a new york. bondlooking at the 30 year at a price of the 30 year bond is one indicator and extent is also its of news, we go from 105 on price down to 97 after a higher yield to 3.12%. it is a budget deficit but i wonder, the mystery of why we are seeing a higher yields right now. robert kaplan spoke about this. this is the single most

important equity market chart. francine: i agree but not sure what it means for how the fed is doing market reaction. let's get to our guests. ted and jeremy. let me start with you. a great interview, talking about the fed conundrum, what they do with further market moves. do you want to figure out inflation or something else? >> the thing i took from the interview was, you talked about the challenges of normalization but remarkably explicit on how the administration is not helping them in the process. he said the challenges of higher debt on the government balance sheet and he said explicitly that when times are good, bring that down. what is happening is the opposite, normalizing the balance sheet is a priority at the fed and weaning us off. that will be much more

challenging in the environment of more stimulative fiscal policy. francine: jeremy, what is going on with the 30 year bond? >> some evidence of the impact of the presumption of a higher inflation. .his fiscal story is relevant it is interesting in terms of the deal on capitol hill overnight in terms of the increasing the debt. we have seen the tax package. we understand how important that will be in terms of driving the fiscal deficit over the longer run. obvious implications for the euro market. fedcine: do you think the will hike less than expected if there is more market volatility? >> i think the fed will probably try to stay the course in terms of the way they projected the course of this year and not wish to be blown around by market volatility. as long as they can communicate to the market clearly that the fundamental story is constructive, and they lay out a clear line of communication, i

suspect the fed can look through the volatility. the markets will be influenced by short-term moves. francine: more volatility to come on the markets? >> i do not think so, at the end of last year the bond market had a peculiar depressed term and in the bond market in the 30 year chart to is interested inm, is normalization. what is happening is a more natural balance of risk and inflation. that is a normalization, nothing to worry about. francine: karen and jeremy are back with us and we will look at 10 year yields. ♪

♪ the tom: bloomberg surveillance. francine lacqua and tom keene. a current they may need in washington. karen ward just mentioned it,

the deficit of the united states , a little bit of a clinton surplus. there is world war ii, i will put this out on twitter. trillion dollar deficits during the crisis. here is where we are migrating greaterquence of 1.1 or trillion dollar deficits. at some point, this moves the needle on the markets, doesn't it? >> there is a risk of that. as robert kaplan said, the economy is at full employment. the economy wants to grow where do we facilitate that growth? we probably will see pickup and productivity and that will help. we have to see the fiscal stimulus turning into growth with no inflation for this to end as a positive story. tom: you have been in the meetings with the chancellor where you have a promise growth with your fiscal buildup.

can you do that? can you go into the meeting and say, yes, we will see growth? in regard tonge is government debt, politicians talking about it, the threat, the reason we had to worry about government debt discuss the worried about interest rates pricing -- interest rates spiking. we would say we cannot spend all the money and do what you want because interest rates are spiking it will be counterproductive. last year, deficits large and interest rates are low. we are complacent about how large and how sustainable we can run these deficits. that is a risky strategy. francine: what is your take on euro-dollar, jeremy? significant,akens what does that do to fed policy? >> you have to think about how much of an impact is the move in euro zone going to be in terms of inflation cycle and how much

it will impact the that psychology. --the fed psychology, not in as much as other central banks but in the bigger picture and beyond the fed, to the political dynamics in the u.s., despite the white house or treasury what they might say, facilitating a weaker dollar will be beneficial to the trade strategy, in terms of facilitating a more competitive u.s. environment here in the context of the dollar, they would not be overly concerned if the euro-dollar continues to go higher throughout the year. will be joined by kevin cirilli on the follies in washington. >> some republicans on capitol hill have embraced the idea of big spending, congress votes today on a two-year budget deal that includes almost $300 billion in additional funding. it would avert a government shutdown at midnight.

republicans would get the extra money they have the metaphor defense what democrats would get more money for domestic matters. in china, exports held up last month yuan despite a stronger and trade tensions with the u.s. will oversee shipments grew 11% in dollar terms from one year 37%and chinese imports rose . some may have to do with the later start to the lunar new year holiday compared with last year. it may be a tough year for american farmers as the agriculture department income will fall almost 7% to a 12 year low. the global grain flood has caused crop prices to plunge. tenants and manhattan are getting a break, last month the medium fell 4%, the biggest drop since 2011. , it isng to an appraiser now a little more than $3100 and landlords are making concessions because the market is overflowing with new supply.

global news 24 hours a day, powered by more than 2700 journalist and analysts in more than 120 countries. i am taylor riggs. this is bloomberg. francine: thank you so much. super thursday on threadneedle street and the bank of england gets its rate decision. the central bank is in a tricky position with inflationary pressure could require policy tightening and little clarity around a person's future relationship with the eu. we will bring you the policy decision from the bank of england. and we will hear from mark carney. let's get back to karen ward at jpmorgan asset management and jeremy stretch of cibc. jeremy, the biggest concern of the bank of england as what the pound does, that will move inflation in one direction or the other. does ago two 1 -- does it go to 150. upi do not think so, we end

moderately higher than now but the pattern is volatile because the value of the currency is susceptible to political dynamics and those will remain remarkably uncertain to the foreseeable future. i would not be surprised to see a correction and then go back to the low to mid 140's. that the do you think u.k. economy and u.k. assets can handle one or two hikes? >> certainly, one, the global backdrop remains strong, still a trading economy, and the rising tide will lift the boat. another rate hike is manageable. the bank is in a difficult position. i do not think they will signal today that it is absolutely coming. tom: uncomfortable questions for governor carney about market volatility. how will he answer the question that has to be asked about, can

equity market volatility creep over into the derivative structures of fixed income in your foreign exchange? he will get the question, how will he respond? >> it is inevitable that in the context of the all ability we have seen, he will be asked that. he will underline the fact that volatility in financial markets are unnecessarily or -- or in a green markets are not reflectively of a sea change in terms of the underlying fundamentals. that thereach the fact backdrop remains reasonably constructive in the context of the brexit uncertainty regarding the u.k. and the global synchronized , thatry, which is in play will be the message he will preach and argue that we should not -- central-bank policy should not be blown off course by market volatility, something similar to the question and answers asked him mr. kaplan. kingdomthe united

synchronized with the rest of the global economy, or is it freestanding because of brexit? toit is still synchronized an extent but the problem for the u.k. is that the civilization is seeing a challenge in the context of the brexit uncertainty. you can argue that as the rising tide continues to grow and advance the global growth trajectory, the u.k. is somewhat left behind but still synchronized. we still see improving trade components. the weaker value of sterling post-brexit and enhances that. it is the case that the brexit uncertainty suggests the synchronization is not quite as direct or causal as would normally be the case. francine: with this uncertainty, what does it mean for u.k. assets? , if wee have alluded to are able to resolve the brexit uncertainty with a transition

deal, and a clear agreement that we are moving in the right direction on the terms agreement , that results a lot of the uncertainty that is weighing on business spending, further appreciation on the pound, that takes the stress off the u.k. consumer. in the second half of the year, we could be in a better place in the u.k. and if the global economy is moving in that direction, perhaps the break we have seen between the u.k. and elsewhere in the world, the economy and asset markets, starts to close. francine: that me bring you to my chart which looks at one year inflation swap, this is the case that market expectations one year from now. they are down from this year's peak. i will put this on social media for our radio listeners. three previous occasions, my yellow circles, that have been a sign of the retail price index was about to turn lower. >> we have seen influences in

terms of the best sterling in terms of retail prices. that is showing signs of diminishing, an uptick in oil prices which will impact our pi in the short-term, the worst are generally behind us. that is something moderately encouraging for the bank. they will be focused on such criteria. or isne: do you agree there too much complacency in the market that we will have an exitly or soft and harmful -- not harmful brexit? >> eu, moving quite constructively, they have been mistreated a willingness to appraise transition constructively. the eu strategy towards brexit in my view appears to have changed. previously, punishing the u.k. was the best strategy, i think now preserving the strength of their own internal recovery is

their priority. they have come at this very constructively. as long as we within the u.k. can find a -- i think we will be in a good place in the next couple of months. tom: was a love of this volatility triggered by steven mnuchin's comments on a weak dollar policy? us that a whisper that got to the joint we have seen the last 3, 4, 5 days? >> i think it was interesting, the comments did -- the comments. that underlines the state of play comment terms of the u.s. administration, in terms of the currency question. about the dollar, we are in a mirror image of what we saw this time last year when many people in the market were balled up with trump reflation trades and it would appreciate significant. this year, a reverse scenario

and a necessary correction. false in the dollar selloff. through the case of the next year or two, the underlying dynamic, the fiscal headwinds, they will underline the structural down terms in the dollar and that will remain in play. tom: jeremy stretch, thank you so much, you will continue with us with karen ward. we have interviews coming up, axel weber will join us. he is the chief financial officer of germany's commerzbank , he will join us in a bit. stay with us in london and new york. this is bloomberg. ♪

♪

francine: this is bloomberg surveillance. francie from new york and london. china's yuan has dropped the most since the aftermath of the shock of valuation of the currency in august of 2015 after trade surplus figures missed estimates and speculation that policymakers will step up efforts to rein in games. joining us is our chief asia correspondent. you wrote a great article looking at the site guys for investors -- zeitgeist for investors. what is going on in the figures today? >> bumper trade numbers out of china. a bellwether for the world economy with good exports and imports. issue, aa comparison

year ago china was shut down for the holiday and that is why one year later the trade numbers are different. the global backdrop is positive and the global economy is doing well. going forward, it will take us a while, we have to get over the chinese new year which charts next week and ongoing trade tensions. too early to tell how the china trade story is playing out. tom: where does the government want renminbi to be? >> it is an interesting question. they certainly seem to be allowing it to appreciate in recent months. there does not seem to be outward pain on exports, the trade data holds up. helping their international reserves, they have not spoken publicly about where they want to be but they have a feeling that as the year goes on, exporters are feeling the pain, there may be pressure on authorities to let steam out of the currency. tom: what are you seeing in food

inflation, the tendency for economists to look at pork. thee are heading into primetime season for that with the chinese new year next week. we will have a spike investable prices and pork prices. throw cold weather and we will have a seasonal spike in the hearty foods. generally speaking, food makes up a big part of the balance in china but policymakers will are watching impacts on imported oil, oil prices have risen in recent months. no sign of a runaway in inflation in china anytime soon. talk to me about the story you wrote for bloomberg markets, calling it the china syndrome, the further away you are from china, the more bearish the viewpoint. does it mean that our analysis of china is skewed? >> an important thing to say to start is that nobody is --

nobody's views do not count, the issue we pick up in our discussions with investors and officials, here and around the world, literally the further away from china you are, lee -- the less you understand the nuance that is happening there. china's economy is transition on the one hand with a services, tech common conception story, not enough pace to fill the gap in the oil economy. on the other side, a political aspect which has not been fully appreciated on the economy, when they shut the borders, they do and when they say they will not let go of the exchange rate, that is what they mean. they steer credit and control the banks and big companies. it is not about making a judgment on whether the bears or bulls are right, but some new wants and understanding of the debate gets lost. francine: thank you so much. our chief asia correspondent.

let's get back to our guests, karen ward of jc morgan -- jpmorgan asset management and jeremy stretch. do you agree with that? some -- are some of the views distorted by international investors based in the u.s.? >> he picked up on the good things we struggle to understand, the nature of the economy in china. we tend to get completely wrong is that we forget that china is a lowly developed economy. take one of the pertinent bearish views that china has had a construction boom with a debt bubble and will have its subprime crisis. we experienced that in the u.s. and we think we understand how it plays out. china has 55% of its population in rural areas and it is constructing towns and cities because it needs them, less than 9% of the population have a mortgage. completely agree that there are huge amounts of misunderstanding about the chinese economy. francine: when it comes to the chinese renminbi, what would be

c doc do next -- the pvo next? >> in the context of the bigger relativelyey will be happy to allow the currency to appreciate gradually over time against what is continuing to be an appreciating u.s. dollar. we have seen a significant move over the last month and it may be the case it has come to aggressively. -- too aggressively but we will see the chinese currency appreciate this year. i am so excited about the vix. karen ward and jeremy stretch, thank you. let me show you the markets, the 30 euros bond, everett -- 30 year bond, watching me vi -- the vix. up to

50, i am going to die. a better vix been a few days ago. stay with us for more fancy charts and karen ward and jeremy stretch. ♪

♪ tom: bloomberg surveillance. francine lacqua and tom keene. for --ranny is an frank frankfurt. andn ward of jpmorgan jeremy stretch of cibc are with us. i want to bring up a chart and start with jeremy on the world price to perfection, this chart was brought up by a guest, the spread to industrials which picks robert kaplan's point of we have spread market is price -- markets price to perfection. when i hear people say the phrase priced to perfection, will this revert like we saw the vix revert? >> i can understand your

reticence to follow through on the perfection argument because nothing is ever perfect. everything is also transitory. always in a state of flux. in the global perspective, be mindful of the uncertainties that are large in a number of there is, whether geopolitical or the policy outlook. looking at that chart, it looks as if that process does look likely to reverse overtime. problem thates the policymakers will have. that is the issue we will go back to .rock robert -- robert kaplan talked about weaning markets off a policy perspective. tom: what do you do to observe and foreign-exchange the dynamics of the other markets? how to use jeremy stretch's world of foreign-exchange?

>> it is important to remember in you spoke -- it is a port to remember, you spoke about steven mnuchin's comments, everybody wants to be germany, everybody wants to be an export driven economy and everybody wants the weakest currency. that is still in play. and we think about how that translates to central-bank policy and broader macro and broader asset pricing, i do not think we should forget that fact . central banks are watching the currencies. they will not tolerate significant appreciations. they will fight against that. we need to build that in continually to our forecast of how the central bank will behave. francine: does that mean a risk? is a currency wars? ,> it is a long going battle central banks never said qe was trying to depress the currency, not friendly and not a big part of the mechanism. of course it is, everybody wants to be germany. francine: there you go, you

heard it on bloomberg surveillance first. tom: i like it. manus cranny wants to be germany. he is there. karen ward, thank you so much, of jpmorgan asset management. jeremy stretch, thank you for stopping by. much more to come on a different day in the markets. michael wilson will join us on an important perspective, particularly on equities to other assets. axel weber in the next hour. stay with us, worldwide, this is bloomberg. ♪

tom: this morning, remain calm. records stock market volatility.

all eyes upon the bond market. in search of the old days. president trump says market dissonance are committing one big mistake. -- june 23.it that this morning, remain calm. axel weber on leveraging hedge bets hiding in the shadows and remain calm. how to not shut down a government. spend money. the gop, the democrats agreed to spend your new billions on your guns and butter. good morning. this is "bloomberg surveillance." i am tom keene in london. francine lacqua, this will be something with axel weber. francine: looking forward to that interview. he is one of these rare bank chairman. he was the head of the bundesbank semicustom between monetary policy and banking.

every time we talk about german banking or european banking, you ask when are we going to consolidation. regulators have not had the appetite for cross-border merger. that is what we will ask. tom: we saw the bid on deutsche bank drift away yesterday. francine: let's get to that. here is taylor riggs. taylor: congress votes on a two-year spending plan that would avert a government shutdown at midnight. senate proposal would provide $300 billion in funding for both defense and domestic matters. they gives members something they wanted. vice president mike pence says we will see on it comes to a meeting with north korea. -- mike in south korea pence is in south korea tomorrow's winter olympic open. lays out howngland

it expects the economy to perform over the next three years but the central banks job of predicting the future is getting harder. two thirds of the forecast period comes after the u.k. exits from the european union and it is unclear what the relationship would look like. turkey's deputy prime minister says the company is not pulling away from the u.s. and europe. he spoke to bloomberg in london. >> turkey is not drifting away. turkey is not breaking up with the u.s.. ultimate that clear. -- with the u.s. i want to make that clear. we had the rough patch. turkey is now and a relationship with europe are back on. with u.s. we have huge disagreements with what they are doing in syria.

taylor: the u.s. is providing weapons to kurdish forces. global news, 24 hours a day, powered by 2700 journalists and analysts in more than 120 countries. i am taylor riggs. this is bloomberg. tom: let's do a data check. equities on currencies and commodities. hysteria the last few days. dow futures are -80. euro-dollar weaker. fixed income markets, we are looking to 30 year bond yields. that should be green on the screen. that is higher in yield, lower in 30 year on price. the vix, 31 down to 27 over the last 24 hours. francine? francine: european shares are falling again. asian equities rising. u.s. swinging from a loss to again. china currency at one point dropped the most since 2015.

what will the pboc do? treasuries setting after a -- pushed the yield back. tom: we have heard in every interview, look at the bond market, what am i looking at this morning? is there a reason for this price down/yield up? down we go, lower price and we break to new lows over the last three trading sessions and a higher 30 year bond yield. francine: i am looking at my chart. it is something related to the brexit. well u.k. inflation picked up in may, investors have been trying to figure out the on the data what it means for higher prices. what i did was the u.k. when year inflation swap, and on three peers occasions where you see yellow circle, i will push it out. you. it is a sign that the retail

price is about to turn lower. maybe we should not worry too much about retail inflation. tom: very good. we have been trying to drag him on the set. michael wilson has been with morgan stanley for three decades at what is great is a "cheap u.s. strategist" is he has done other things at the firm. he understands it is not a power game. let me play for you robert kaplan talking about your world. robert go what i watch -- robert: would i watch credit spreads? seer financial products to whether credit spreads widening or capping out. is there other volatility and other markets? so far i don't see that but it is something i am watching for. the fact that i have not seen it is notable.

tom: mike wilson, if you go out to morgan stanley and you are ann arbor michigan, where you you've got to discern between the single bond prices and spreads. why do sprints studies matter now? mike: we have been in a world where financial conditions have been too loose. the biggest surprise last year to markets was the dollar weakening. that offset any tightening the fed was doing. that is why financial conditions loosened so much. if they had known we were going to get a 21% tax rate this year they would have taken a different path. monetary policy works with a lag. , butare not seeing it yet you never see it until it smacks you in the face. that is the problem. tom: if you -- have you changed morgan stanley allocation given the turmoil?

mike: we have been changing our strategy in the last couple of months. we sold our technology overweight and we bought utilities. tom: you go into a yield thing. let me translate this for all of you see a phase. morgan stanley is buying the yield on the debt. mike: the one sector that has priced in reflation and rates getting out of control is utilities and the bond proxies. they have underperformed dramatically. technology stocks have outperformed which it makes sense. if you think rates are blowing through 3% on a 10 year, at some point that is going to have a gating factor on the high multiple areas. our downgrade was predicated on semiconductors than the big cap grow stocks. -- gross stocks. francine: windy by the vix? -- when do you buy the vix?

mike: we want to be patient. we are not in a rush to buy this particular debt. we said that because first, the volatility that picked up on thursday and friday was a result of the rate move reaching a point where it was having a gating factor. we saw throughout work that was going to create pressure on monday and tuesday. we saw the implications of that overnight on monday was some of those strategies liquidated or moved toward liquidation which caused selling. there is a bit of a regime shift going on p we call it reflation to inflation -- going on. we call it reflation to inflation. the market is trying to adjust to that. we are going to get some retest on this level. over the next week or two we will get an opportunity to add to that.

that is not rushing back in. francine: could we have predicted or tanks have predicted the selloff? was it rational? it was basically a big vix move that triggered everything. it may have been correlated to the inflation figures on friday. michael our strategy is based on fundamentals -- mike: our strategy is based on fundamentals. everything was massively overbought. there was no protection on the customer base. people were buying calls. we did put a call out saying, this thing is ready to go. it just needed a catalyst. rates finally got on a level and there is a correction looking for a catalyst. tom: we have been thrilled to have mervyn king with us, robert kaplan, axel weber coming up. let's look at the trenches where

mike wilson deals. let's bring up the chart. this is a moody's old folkie chart. you've got to the ancient. we are back to where we were in 2006, the spread here. the high-yield comes in, the full facing credit comes in and squeeze down prices to perfection. what do you do as an active person if that is your bottom reality? mike: our whole construct has been predicated on the spread. we've been saying, we took the market was undervalued last year. spreads were so tight. stocks were too cheap relative to where bonds were pricing. we cross over that threshold were equities are making in that low spread. we are now underweight corporate . we have been selling corporate credit. , assettwo jobs allocation and u.s. strategist.

we are moving away from corporate credit. tom: i have two jobs, put on a bowtie and tell you to go to break. we will continue. coming up, a conversation with axel weber with maxis -- with manus cranny. look for that here in one bit. stay with us. this is bloomberg. ♪

>> this is bloomberg surveillance. let's get to the bloomberg is a splash. shares of deutsche bank have fallen to the lowest level since their crisis of confidence in 2016. germany's largest bank had a earnings lost that public analysts to downgrade. but to bank stock has fallen by

double digits when it reported revenue hit a seven-year low. japan's softbank made by a third of one of the world's largest ranches. according to people familiar, the deal could be valued at more than $10 billion. softbank ceo has been looking to diversify his business entire. that is your bloomberg is this flash. extraordinary with our distraction of the markets what is going on in washington. great some was done in the washington post last night. let me bring it out here. these are some choice morsels as look at the fiscal ballet that kevin cirilli has to deal with. "i am not only you know, i am a hell no. it is difficult to have a big increase in budget --

we go to the kevin cirilli. i am dumbfounded at the lack of pushback on $500 billion over two years. where are the deficit blocks in washington? kevin: you are going to be hearing from the forces yesterday who are aimed to members of the house freedom caucus that said this plan is fiscally irresponsible. in addition to that, the 25 toty of their caucus, 30 members of the republican party in the house, would have a difficult time getting on board. i spoke to representative gary mendy who democrats say he was one of the 17 members who voted for the original house version of this and this person coming back from the senate is

something he is going to like even more. for the first time, centrist democrats may have leverage in this debate in the house. chart justp this bring up this chart. here is the clinton surplus and down here is kevin cirilli's multiple trillion dollar budget deficit. when you look at this and the ceo does their work, how will the politicians respond? do they ignore the fiscal industry? kevin: what is interesting is it raised the debt limit in march of 2019. there's a lot of economics and -- economic uncertainty. we just don't know right now. this, thisthe map of is where things like the -- speaker ryan is going to have a majority of the vulcans getting on board with this type of

legislation -- majority of the republicans getting on board with this type of legislation. watch the developments to see if republicans are going to rally behind this. the rank-and-file are frustrated with the senate leadership because they have been going along to get along in the house because of the upper chamber leadership. --ncine: what do we find out good morning, kevin, first of all -- when do we find a better about the mood? kevin: the mood of washington is always crazy. we won't know the precise timing. this is one of those things where they will be meetings around the clock in the morning. we just don't know right now. francine: there is a direct impact on the congressional elections coming in november. kevin: the time runs out tonight. we go right through the same

process where folks serving overseas are going to have to be on back pay. second time that happens, uncertainty in washington. uncertainty for the number one industry and the dmv area. it is insane. if there is a second government shutdown, it doesn't help anyone who is elected in office. the president says market dynamics have been a big mistake. i hear he is taking level one cfa june 23 somewhere. advise on market dynamics for the president? kevin: no, but i can tell you that the white house is pushing back against whether or not the stock market -- the volatility has anything to do with them. there's been chatter about regulated volatility.

he said, no, that talk is way too premature. cirilli, chief washington correspondent, joining us after an 18 hour day to gears, shares and commerzbank are trading to the upside this morning after the group reported fourth-quarter net income of 19 million euros. the german lender says it may resume for the first time in two years. let's get to matt miller who is at commerzbank headquarters joined by the chief financial officer. matt: i'm here with stefan ingles. really this is one of the stock stories of the day. your stock is on fire now. it is a 6570% for the last 12 months the market is excited to hear you are good to pay a dividend the day -- dividend again.

deal in a wayd a to be billed fund according to our strategy. we have increased successful there. we have overachieved at some of our targets that gives us the confidence that we want to resume dividend payments. matt: by the end of year, you will resume dividend payments. stephen: it is decided that our agm. the agm will decide finally spring. matt: what kind of payout ratio are you looking to give? stephen: the year has just started but there is a clear intention to resume dividend payment long-term. i would presume it would be somewhere between 30% to 40%. been your strategy has proven successful. the added a ton of clients.

was really thinking of the numbers until this last quarter. it slowed to a stop. what happened? >> what we did starting with our strategy of having 643 -- it was theed exact goal that we achieve for 2017 with is 500,000 clients and we are pretty optimistic and was sure -- ensure that we will achieve the one million goal two years with the custom acquisitions. matt: is it expensive. 1.2%.venue is up what is causing so much. generated 150 million in additional revenues by the customers and the associated assets which grew by 30% in 2017.

any driven by investment in digitization the i.t. and in certain regulatory burdens. matt: let's start with the negative interest rates environment. how much is it costing you. i know it is hurting commerzbank than most european banks. stephan: in civil terms, we stopped the burden for corporate clients in adjusting the deposit ratio. in the private client segment, we will see a favorable deposits do we have, it is about 130 million for 2017. matt: when do you expect that to turn around? i was expecting -- i was speaking to board members. looks like they may and their quantitative easing that purchases of bonds but they are still going to be in negative rates. when the you expected to turn around? stephan: on the moore company

specific part, we expect the burden which was 130 for 2017 to be below $100 million in 2018 and without any changes to the inches rate environment we have. what do we see in expect? we have seen a little bit of a move on the long end of the curve. i will -- our expectation is we will see no movement at the short end of the curve before 2018 and parts of 2019. matt: do you expect any inflation? are you causing any inflation? stephan: if you look around the germany, you have seen some weights inflation. in general, the inflation in germany is around the 1% mark. m&a andt's talk about discuss some of that. i want to ask about the equity markets first. it has been the subject -- a lot

of suitors have lined up. goldman sachs is looking at it. what is the bidding look like? stephan: i am not going to add to any rumor speculations. the plan is pretty much the same as it was announced at the end of 2016. we are doing the necessary thanks to separate the unit and that will bring it -- and then we will bring it to the market. matt: we will wait for those answers to come. bank, theree large was a lot of speculation last year, bnp paribas, unicredit getting into the mix. are you in talks with any of your shareholders about the possibility of a sale? stephan: let me put it this way, this conversation is a bit overhyped.

yes, in a general conceptual way, it seems to be clear that europe in total is probably over .ank in germany as well the concept of consolidation is something we have to look for in a strategic dimension. if you look the moment at what it will require to be happening now, let's be honest, combining that produces even higher capital requirements than before. then you have to think the resolution board that once you to do -- you can be unzipping the new merged unit over the weekend which is not necessarily very supportive for the economy. believewhy we cross-border mergers will come, but it is a while away.

matt: it is going to take some time. we hear so much about taking union in europe -- about banking union in europe. stephan: that is ecb's political agenda. there has been some progress over the last year but judging, it will take a while. matt: speaking of politics, we had a government permission, we are almost there with an agreement in berlin. it made very little news. has the lack of permanent government affected your business here in germany? stephan: germany is a very stable country. it is a pro economic environment so it is not really affected a day-to-day process. that is indeed very good news. a new government wants the almost part is

finished as well. our hope is that will be finished pretty soon. matt: thank you for joining us. cheap -- stefan angles, chief financial officer. tom: let me turn to the terminal with the vix. mike wilson with us. this is an important chart. this the first chart i showed 1998, 2007,th lehman low. 2008 and here is where we were in the heat 40's ago. mike wilson, we have really improved. but the 14 day rate of change. how long does it take typically given -- to get back to normal given a big event like that? mike: what is normal?

we have been way below normal. we are going to come in but not anywhere near where we have been. it could take several weeks. we are not in a rush to drive or pile in here. we thought this could take a couple of weeks. tom: i want you to take in all the research capabilities, the idea that we had an equity upset . the answer is that is all that. over here is another shadow derivative structure of fixed income and foreign exchange where we are doing risk parity bets. is there more to come? mike: the last part you mentioned, risk parity strategies, those will become a source of supply if the vix doesn't calm down. the vix and volatility needs to

stay elevated for the strategies to be for sellers. before selling that happened on monday and tuesday was linked to annuity strategies. that cleared out. we cleared up the majority of the for selling we expect, less there's another shock to come. there is the degrees of freedom we got given where the fed is mike wilson is with morgan stanley. we have spoken with governor king and rick michigan of columbia and robert kaplan, we do now with axel weber. he was the leader of the bundesbank, the german central bank. he is at a tenure of duty with ubs. manus cranny with axel weber. manus: thank you very much. a good morning, mr. bever. tom keene you the buildup. we are here debating policy.

fed.t volatility, cap and were we complacent? good -- axel: that is a desk that is exactly what i said in davos. so, a correction was waiting to happen. i also said, don't assume that volatility will creep back into the system and volatility comes back. i didn't expect it to happen so soon that it did. it really shows that many people were wrongfooted. if you have a strategy where you had low volatility, that billy kept it on -- that really kept it on. the markets were really complacent. there is a disconnect between sentiment and hard data. it is a good year. matt: we need to reprice our risk models. they are good numbers that stand

out. trillionon and $2.2 against morgan banks -- mortgage backed securities. it is a spillover effect that we should be more concerned about. it is that what you are going to be watching? axel: i am watching with the new federal reserve president, the 10 year treasury is going to be price. that is going to be a big driver for what we are doing is a business, wealth management. we believe the u.s. has some momentum to go. we think markets have some momentum to go. this correction is a transitory correction. it was a healthy correction. we shouldn't take it too seriously. what was surprising, after several rate hikes, the only thing that moved in the u.s. was the short end of the market. what has moved now is the 10 year. almost every pricing of two rate

moves but it didn't affect the short term as much. when markets tighten at the longer end, that is more healthy for the pricing. it is a better alignment. get a better price from this. whack for was out of the last few years because it did move. matt: we have had this steepening. at one point -- i am trying to get a level of you -- is it really a slight panic mode at 3%? where do you see 10 years peaking? meeting,t i said in a they look at 3% as something that is their medium-term expectation. i wouldn't be too good -- too worried. it is not something where monetary policy should react to what is happening in the market. the market is repressing but when everyone in the market is -- there was a big agreement -- almost no disagreement.

if you get any move in market prices, everyone has to change position and then moves markets a lot more. i think it is healthy. it will produce a more two-sided expectation in the market. it is a good development. manus: we are going to spend 30 minutes later on in the day and speak regulation. mervyn king was with tom yesterday. ofmust be aware the mistakes 2007 and 2008. we must be aware the set of challenges have changed. you were in charge of the bundesbank at the time. what is different now to then? mexico around 2007 what kept us busy was stimuli zynga the banking desk stabilizing the axel: aroundm -- two dozen seven what kept us busy was stabilizing the banking system. we have moved toward being more

soluble. this is not an amount that we saw in 2007 period. the banking system is more resilient, more result. what we really haven't made progress is market based analysis. we castrated in -- we concentrated in -- what is fragile is shadow banking. there is a lot of activities out there that have been banking activities but they have moved to markets. everything that uses leverage, that is credit origination and uses maturity transmission is a bank like activity. we need to watch it there. are no new agility's building up -- no new agility's are building up. -- banks mightre be more resilient. matt -- manus: 2018, as he

started out on the journey was the year of normalization where carney is going to be able to our -- normalize. the ecb was in that mode of moving toward the exit door. we'll 2018 still be normalizing, given what we heard? axel: absolutely. ecb is exiting the purchase program by september. mario draghi will be around for another year. i think he will take back rates to slightly positive. ecb will normalize. the fed is on a path. the market is expecting three to four rate hikes. the start of the year, it was only two. the market has been getting more signals that u.s. economy is stronger. wage growth is picking up. inflection point when the economy will produce struggle wages.

we will see that coming. manus: i would squeeze lot into the last couple of minutes. i know it is dollar weakness of this seems to be this flood of sterling. do you share that? what does that mean for mark carney? his job might get back to the day job which has to do with raising rates. how do you see the u.k. risk profile? stage aey are going to big shock and in the first quarter next year. monetary policy is still low. rates are very low. equity has fallen quite strongly after the brexit debate. i don't think it is a big risk for the u.k. to let that continue to recover and to do one or two rate hikes so they are in better conditions -- better condition early next year. they can respond to any turbulence around brexit. i think the u.k. monetary policy is one that will continue to

normalize and move away from the zero bound. they will be back to on orthodox monetary policy also they want after brexit. unorthodox monetary policy after day one of brexit. regimeill be a change in so we will have some more time than initially thought to adjust for equilibrium. i am not sure the new equilibrium will be similar to the status quo. there are some hard negotiations going on and we must prepare for the worst. apparently the worst means markets could move a lot. we need clarity as soon as possible and so far, as far as the u.k. is concerned, we have been given some clarity. speeches on what regulatory regime they are going to adopt in the u.k. we haven't heard that much of the continent except empty shells that is risk control and market access for the k will not

be the modus operandi. we at ubs really want to keep as many people in london as we can because of the talent pool. it depends on conditions in the market. we need clarity and that clarity is missing. every time when there is uncertainty and a clarity, the market will react with volatility. manus: is it taking up a great deal of time? awayuch time is it taking from your other job which is making money for shareholders? time we spend the appropriate lead someone to go because of optionality. you see the ubs logo. we got a big building here. we got full banking license on the continent. having that optionality, we could wait for it to unfold.

if you're sold banking license in europe is a london license, you need to create a lot -- you need to create optionality. the sooner we would have clarity, the sooner we could give our people and reliable indication on how are -- how our operations will be. it is hard to really expect it to come. manus: with 340,000 bloomberg terminals in the market and from the chairman of ubs, how did you fair relative to expectations of the market question mark -- of the market? we had a good year. it should be a good year for shareholders. manus: you and i are about to embark on a 30 minute conversation about regulation. i know what you're doing in china, going hard and heavy.

where's the next big opportunity? i'm looking at the stock price of deutsche bank this morning. are we facing a cliff edge moment for some of the german banks? axel: we are facing some turbulence on the european banking side. u.s. banks are in a new environment, very solid and very stable. we at swiss banks are more advanced in our normalization. we did our homework. we are looking at opportunity in the market. we have a strategy that focuses on the opportunity in the u.s. it is the most resilient and dynamic of the mature economies. we're looking at asia-pacific because emerging markets have come back. oil has mobilized. there is huge opportunity in asia-pacific. the mood is good. china is going to an orderly correction.

we play the market in europe as we can. market dynamics in europe is much less pronounced. for us, it is keeping the level of exposure in business up in europe. believe growing our business. manus: i don't normally do this, would you have any appetite to buy german given some of the stress banks under? axel: is too early to say that. one of the implications of a huge exposure on the legal side, very hard to judge, but we will have to wait for some homework to be done by each bank so that shareholders will get a lot more clarity. at the moment, there is quite a lot of uncertainty around banks balance sheets, liquidation portfolios, capital requirement. it is a bit too early. european deal thed banks and who will be

first european jpmorgan? who will be the first european bank -- pan-european bank? we are outside the you but i see -- outside the eu but i see larger players looking at how they can diversify. that will be the next stage. i don't think the year 2018 is going to be the year will receive a lot. profile, theytion will have to reduce risks a lot. moment, risk in the banking industry in europe are still not managed well. peoplet play out and let do their homework and reduce the balance sheet. this is what we have done. once they are there, they can talk about joining forces. manus: you are always clear and a good sport. the chairman of ubs. axel weber and frank fort.

-- in frankfurt. tom: that was an exceptionally important interview. mr. cranny talking to mr. weber. i also pointed out the idea of 2007 to 2018 and market-based finance. maybe that is a phrase will hear. right now you need a bloomberg business flash. taylor: the head of the world bank is the latest to raise questions about currencies -- about cryptocurrencies. he is comparing cryptocurrencies the ponzi schemes. he says it is still not clear how they will work. -- has returned to traditional strength. the french bank posted quarterly equities incomes. bloomberg spoke to the ceo. >> i know when i look at the

full-year, compared to the banks which have already released figures, we have decreased lower. we are gaining market share. taylor: he says the prospects are positive for socgen's capital market and wholesale activity. commuter-based insurer xl group -- according to people familiar, germany's allianz is one of those two make a by toward xl. it has been hard hit in recent years for the cost of natural disasters. that is your bloomberg business flash. to: taylor riggs, listening all of our efforts, axel weber and the gentleman from commerzbank as well as mike wilson. someone fascinating in all of this responsible to his. -- responsible to his periodic to bring up a chart --

responsibilities. i want to bring up a chart. every single viewer has to do with. rateis a fed funds target adjusted for inflation. i would suggest the yellow circle is stanley fischer telling us that we are altra accommodative. we are nowhere near in normal price of money. mike: we haven't been for 10 years. tom: when we get there? mike: we are getting there. it normalizes in different stages. now we have global reflation peers central banks are moving in the right direction to normalize policy. markets are now normalizing. we saw that positively last year. you mentioned for be delay spreads. the cost of money is what to reach the natural rate of inflation where the economy can overgrow freely.

we don't know what that level is but it is probably not 2% of the percent. it is probably somewhere -- 2% or 3%. it is probably somewhere below 2%. we are getting closer. francine: mike, and what point does eu money become a danger? you could argue signs of overheating in the u.s. economy. fed ishe surprise to the how fast the tax cuts came in the size of them. this price us as well with the 21%. as i said earlier, the fed and other such a banks had known it was coming, there may -- they may have acted differently. monetary policy act with the lack. the boom is happening. we are blooming in global economy. that leads to -- that leads to a bust.

that is what the markets are starting to think about now. when is that next deceleration? we are going to die because the economy overeats and we have to slow. francine: does the bust look like a financial crisis? what is the timetable? what would generate it? mike: we are confident it is within 18 months. it is not going to be a full 18 months. we think that the markets already starting to think about that is why today, the markets are looking for new leadership. in this correction, it is the first time we have not seen real leadership emerge. we are going to see new leadership and skew more defensively as the market appears for growth deceleration in 2019. the back half of this year is going to be a lot tougher. now your question around for us

crisis important. we don't think we are going to have another financial crisis. we think this is going to be a much more garden-variety deceleration. tom: 25% correction in the markets. is morgan stanley telling us we are going to have a bear market? mike: i think it is more likely to that risk goes up. the risk reward today is better than it was a year ago. tom: got an email from francine in london said, you got to show us this chart. looks like something, close encounters of the third kyle -- third kind. here's the vix come up we go, up to 50. two standard deviations, three standard deviations. four plus standard deviations. look at how we come down. all is quiet. mike wilson says we will make it

to 10, 11, 12. francine brought to tears. this is bloomberg. ♪

tom: more market checks across bloomberg surveillance. features negative six. 28 and change right now. some stability. i am tom keene in new york. a massive thank you to manus cranny for a very important interview. how about a single best chart. fancy math, standard deviation. up.jones dow jones down. we are back to january 3. that is like want to buy the dip? how do you buy the dip if you're thinking about i'm catching a knife with a dart? mike: this is going to be another dip to buy or a final lunch in this market.

there has been noise about why markets are not going up on good news. tom: i believe the president did that. he is sitting for cfa level one. mike: the markets anticipate good news. we've had a lot of good news. didn't put it in the opening script when i was make fun of the president but the heart of the matter is equity markets look forward. they look forward. data i want to look at one , when the senate passed the tax bill on the summer 19th, we made a call it correctly that the market would take a also then. it didn't. -- take a paul's then. it didn't. exhibitthing topped on 19th, bitcoin. just another thing topped on december 19, bitcoin. speculation.of

i would argue that the day the tax bill passed was the peak in speculation. reflected itself quickly and things like bitcoin and price-earnings multiples. this market -- the market has a way of kicking us. -- of tricking us. it did to buy but it takes a little time to figure out what is going on. we need new leadership to emerge. mike, talking about speculation, does the move we saw in vix have anything to do with hedge funds? mike: in terms of regulation? i mr. question. -- i missed your question. francine: the role that hedge funds are playing in this market? mike: all of us are playing a role. i don't think they are the main cause of this correction. -- we saw aor class

big money flows from retail, pension funds and hedge funds picking their growth exposure to recognize. they were playing with both hands. you have a catalyst like rates going through. we are having a cleanse and it is long overdue. cash is an asset class that people forgot about. guess what, on a two-year treasury, you get north of 2%. we made a call on this a couple of weeks ago. this is the first time that the 2-year note has been greater s&p for dividend on the the first time in eight years. that is not a bad thing to think about. tom: what kind of utilities do you buy? utilities areated not going to see the drop-down -- the regulated utilities are not going to see the drop-down.

that is an area to look for value. the are clearly opportunities in the unrelated parts as well because they are going to benefit from things like bitcoin. tom: you are tying bitcoin into utilities.dma's the general counsel at morgan stanley just fell off his chair. maybe we will continue this with john farrell. much.you so thank you, manus cranny it stay with us through the day. -- manus cranny. stay with us through the day. this is bloomberg. ♪

alix: super tuesday bank of england released its latest

inflation -- mark carney is in the hot seat. the good and bad, european banks shine why deutsche bank fall to the lowest level since 2016. warns of a- socgen potential budget deal that would add $20 billion to the u.s. budget deficit. we do have the bank of england rate decision coming in. no change to the rate outlook. they're holding at 50 basis points. they didn't live their growth forecast -- they did lift their growth forecast. the boe did say they may need to rise earlier, faster than they see in november. rates may need to rise earlier, faster than that thought in november. knows apprise here. sterling -- no surprise here at sterling popping. yields popping. a big jump happening in the 10 year.