fed talks restricted, markets take that as a hawkish sign. china dodges a bullet. the u.s. does not label china as a currency manipulator. brexit backstop, theresa may contemplates extending the transition leaving the eu. hardliners call it completely nuts. david: welcome to "bloomberg daybreak." we have earnings coming out. blackstone the expectations on eps, $.76 as opposed to $.74. assets under management were $457 billion, so the rich get richer. alix: that was a record. it was up 18%. i am looking at phillip morris. that company is cutting its full-year earnings forecast. they now see the high in

the full-year earnings at $5.02, the low end of what they had seen before. it looks like shipment volume is down, latin america, canada. you name it. again, the pressure as we talk about what it means when you have bad press, movement into pot and cannabis stocks. david: it is a challenging industry. they made more money. $1.44 as opposed to $1.28. alix: that seems to be what the market is looking at come up 3%. in the market, for risk appetite. s&p futures down 10 points. up, a broadly weaker dollar story.

hitting the lowest level in two years. the shanghai composite is down -year low. we are near a one-month low. it is an inventory story in the u.s., a far cry from the geopolitical conversation on monday. david: at 8:30 a.m., weekly jobless claims. the fed speaking at the harvard club. after the bell, earnings season continues with paypal and amex reporting third-quarter figures. now it is time for the bloomberg first day. by our chief equity strategist and a former trader and macro strategist for bloomberg. let's start with the fed. they came out with their minutes. we can look at the yield on the 10 year. it reacted fright away.

why? >> you have a fed talking about moving rates passed neutral. williams what to you we don't know where neutral is, but the best guess is 3%. when you have a 10 year yield at 3.2 5% and fed funds a 2.25 percent, that leaves 100 basis points of room. we crossed the 3.17 mark, quickly bounced to the 3.21% level. that is where we sent now. that is where we sent now. david: why are they doing that? why do they want to go past neutral? >> they are trying to balance inflation and growth. they are seeing strong growth in the u.s. economy. there are signs of inflation. while cpi and ppi numbers and the like are not particularly areng, companies themselves contending with margin pressure and importing more inflation.

were seeing commodity prices move higher, and the fed is a knology asset prices present a risk as well. to the extent they can prevent asset levels from starting to form, they are acknowledging that with policy. alix: they did say they heard the trade policy is disrupting business plan investments. they mentioned emerging markets, leverage loans. >> i think gina is banged on. -- bang on. yet in theseeing it cpi and ppi. you see real earnings up for the first time in 2018 because inflation is down, not because wages are up. all the fed is seeing is this anecdotal evidence that inflation may pick up in the next few months to a year and they want to stay ahead of it, so they would rather be more aggressive or standby to be more aggressive than to be sitting

back and waiting as the doves on the panel are suggesting. alix: if you look at what is happening in the cable rate, the cable rate is higher, even though you have theresa may warning to extend the interim deal past 21 months, which feels like no end in sight. i don't understand. there is nothing to put anyone's feet to the fire. >> this is the eu negotiations at their best. alix: we have no idea. >> we can't agree right now. we will get around to it tomorrow. the reason why cable is steady is because no one knows what to do with this. the reaction we would want to get is from the tories within party and how may presents this to them. if this is a deal or no deal situation, take it or leave it, there is a potential for a

fraction of the tories and her party break away and we could see snap elections in the u.k. david: is it that markets don't know what to do, or there is a creeping new referendum. they keep putting this date off. she may end up with effectively and the referendum. >> it is a good question. i don't know if i want to answer that. thank you very much. it has become hard to predict. it is a little of both. markets don't know what to do and we will keep pushing this off until something forces their hand. the equity markets at large, the risk premium embedded in european equities is extremely high relative to the rest of the world. there is some acknowledgment in asset prices. you see it in relative terms more so than absolute terms. alix: let's move to another currency cross. take a look at the dollar-yuan. you had china dodging a bullet.

we kind of knew that would happen. seven-lineean the will be crossed and we are in for a weaker yuan? >> we probably are, but not because china will be devaluing the currency. if you think about what is going on, the chinese economy is slowing. the u.s. administration is taking these little cuts at their economy. exports to china, and now the postal situation in which is a big deal. if you think about how companies in china exporting to the u.s. and moving it through small businesses to avoid that extra postal rate, watch amazon and what happens to the u.s. economy. i will confess i did not know about this treaty. alix: you didn't know about this? a 144-year-old postal

treaty with 92 countries. they treat china, it was done when we had letters, before packages from amazon and alibaba. i wonder how clever this might be on president trump's part. it is unfair for china to get a break on shipping stuff. >> it is a shot across the bow on trade and trying to force china to renegotiate our relationship. it is one of many in my opinion. this is creating some inflation pressure that u.s. companies at large are having to contend with come and u.s. consumers will have to contend with. you will see prices rising. whether it results in inflationary or deflationary pressure is still a concern. this only adds to that. if the import price index starts to get painful, u.s. corporations will have no choice

but to pass those costs along, then you will see the wage pressure,. you will see the whole dynamic of inflation come into play. idea. this is a great >> i think -- i want to jump in. that is part of the problem. some of the things from china, the small package goods, are not produced in the united states anymore. i understand the dynamic of manufacturing in the u.s., but considering what we produce in the u.s., it is very little of the small goods the chinese are sending to the u.s. there is not an alternative here at home. not know what the dynamic of that alternative would be. it could potentially cost more to start that up again. there is a reason we import from china, because it is too expensive to make in the united states. alix: when was the last time you

wrote and sent a letter? david: i actually do write letters. >> we suspected that. alix: what? thanks very much. you can find all the charts we use on gtv on your terminal and browse through features and save our charts, gtv . coming up, more on the hawkish september minutes. was the market interpretation accurate? this is bloomberg. ♪

hike?should we

that was the question for fed officials at the september meeting. thew participants expected policy would need to become modestly restrictive for a time and necessary to simply raise the federal funds rate above their assessment of its longer run level. joining us now is the credit suisse head of global strategy. if you just look at the 10 year, it feels like that was a hawkish move. is that the right interpretation? >> what we are seeing at this point in time is an eight knowledge meant that rates could move above the neutral rate, but secondly, the market is beginning to debate where neutral is. it could be higher than what we think right now. the sense that rates in the u.s. can still go higher from where they are now. david: i wonder if we are in a regime change here. i want to put up a chart that shows how we are coming close to

the neutral rate. the blue line is where we are, and the white is 2.6%, something like that. the new fed chair is saying we don't know where the neutral rate is. i wonder if we are holding him to a standard his predecessor had. >> from the markets perspective, for a longs that time the neutral rate is something shy of 3%, but now there is uncertainty around that and leading the curve to push to steepen again, with long rates going up. that is a new dynamic. for a long time we had a relatively stable rate in the u.s. this could the another reason to break out of the range we have had. alix: i'm glad you brought that up. it is what they don't say.

every time the fed chooses not to douse down the possibility, we can expect bond yields to rise. do you agree that has to be to the upside if we don't hear anything? >> yes, i would agree with that. especially other banks in the g10 space, the ecb, the boj. they put a lot of effort into making sure the market does not worry about things like a taper tantrum. you have seen this diversion in -- diversions in yields, and there is no sign of that not persisting. the fed even said one of the risks to their view in the long run is that diversions keeps persisting in the dollar keep strengthening. the market is taking this to

suggest the dollar keeps going higher. david: the dollar has been pretty much range bound going back to june 2015 or so. this divert and's is not a new thing in terms of rates. will he keep going up? >> the market is taking it into account. u.s. rates are higher. the other problem has been other issues like trade wars, like emerging-market crises, problems with china, and some of these other factors have not been as bad recently. eu-u.s. we had the trade war tension come lower. that could flare up again soon. the point is you have had actual good news from other parts of the world the past couple of months relative to earlier expectations. once the market starts to refocus on rate differentials, you could see a readmission

mission of the dollar uptrend. alix: is president trump right? that the fed shouldn't be hiking if you don't see rates above that 2% level? >> the question from the fed's perspective issue have this economy which is obviously hot. you have a lot of fiscal impetus, and yet you still operates that are very low i historical standards. any kind of prudent risk management approach argues for higher rates. inflation does not take off or not, that is another issue, but given the current economic conditions, it is rational to be looking in the direction they are. david: you are staying with us. coming up, alcoa posted earnings they say some of the tariffs have not shielded them from china's glut. this is bloomberg. ♪ his is bloomberg.

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alix: alcoa surprises with third-quarter earnings almost double estimates. also announcing a $200 million share buyback, the first since the company split. thank you higher aluminum prices. how have tariffs hurt the company? what did they say about china, trade, and the tariffs? in theeems they have put forefront what they have been saying for a while. china overcapacity is still the problem. china is overproducing, spreading their aluminum throughout the world them and that is making 50% of smelters unprofitable or cash negative. they are saying more plants will have to shut down at these levels. donald trump tariffs on imports in the united states don't address this issue, and this is

what they have been saying constantly. alix: meaning it is not necessarily the price. it is overcapacity. you can relegate imports all you want, but that is not the problem is domestic premiums go up. >> if you keep imports from coming onshore in the u.s., it doesn't mean they will stop reducing. they will send it elsewhere. they will send it to the middle east, europe, asia. that metal is still there. it is a globally traded price. whether in the middle of the ocean or the u.s., it is just there. david: that means presumably prices are going down overseas. for aluminuming companies in the u.s.? nethey said we are a benefactor of prices going up in the u.s.. it is about this shipping cost, this premium. $.20 per pound.

top ofy have to pay on oil is there, but yes, they said we are making money in the u.s., but that is a problem because they produce more in canada than the u.s. toy are shipping from canada the u.s. and paying taxes to buy their own metal right now. alix: did you follow? david: yeah. not like you did. you know that stuff. alix: thank you very much. down ate will break it 1:00 p.m. eastern time. david: i will watch, but probably not follow. the trump administration ramps up pressure on tariffs, but did not add currency manipulator to the next. wendy cutler terms it as dodging the bullet. >> i don't think anyone expected china to be named, particularly

given the strict criteria in the statute for naming any country, but that does not mean there are no trade tensions between the u.s. and china. in some ways, china dodged a bullet with this report. , woulddodging a bullet you characterize it that way? what are the ramifications for the dollar-yuan exchange? , itased on the 2015 act would have been difficult to name china a manipulator. is a 1988 act that is much more vague. it would have been possible potentially in the context of that one to call china a manipulator because that when is so vague, but that would have been seen for another escalation , maybe unwarranted escalation, in terms of u.s. pressure on china at a time when everyone is

waiting for the g20 meetings in argentina at the end of november, where there are some hopes of a trump-xi meeting. it is prudent the u.s. did not take this step and leave it is something down the line, if necessary. david: where is the yuan going? >> the renminbi has not strengthened on the back of china not been called a currency manipulator. you have seen china's equities trade poorly overnight. we are in an environment where the domestic environment is not great given they are not andared to turn on the taps offset any proms externally from the u.s. side. you are seeing a market that is conservative about things like where investment onshore in china is going. we have key gdp numbers ahead for china.

the fact is that the local conditions in china combined with the uncertain environment externally the u.s. is creating is still enough at this point to keep the currency under pressure . surprised it was lower. there is a narrative in the market that because they were not labeled the manipulator, they can let it freefall little bit. is that part of the story? >> it could be. this report, although it is interesting and some of the issues around it have been overplayed, clearly the more important issue from my perspective is what happens to u.s. equities every day the chinese equities go down. they just keep going lower. thee that is the case, market will perceive the

currency in china at something that has to keep falling. of thethis issue manipulation report was something to talk about, but i don't think the underlying trend is being determined i these issues. ultimately we have to look at what onshore conditions are doing, and this is pointing to a weaker economy. alix: you will be sticking with this. i think we get gdp tomorrow. that will be interesting to break it down. coming up, the brexit bottleneck, theresa may weighing extending the transition leaving the eu. we will break it down. who now has the upper hand? this is bloomberg. ♪

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out a gain. stronger earnings as the season kicks off. italian banks not faring as well, off by over 1%. widens deficit could further if rates rise, and rates are rising. yields are up by about three basis points. the euro taking it in stride. it is a broadly weaker dollar story. steady after the hoggish interpretation from the fed minutes yesterday. crude off by 1%. geopolitical risk. president trump does not want to fight with saudi arabia. he is like business ties are really important. that is taking a little bit of the risk premium out as well. david: now an update on what's making headlines. taylor riggs has first word news .

taylor: starting in china, the yuan has fallen to its lowest of 2017nce january after the u.s. treasury averted an escalation in the trade fight and stopped short of declaring them a currency manipulator. steve mnuchin made it clear the west will be watching closely. trump is wanting against putting the u.s.-saudi relationship at risk over the disappearance of jamal khashoggi . the president says he hopes to have results of the saudi investigation by the end of the week. turkish officials said if a saudi team killed -- said a saudi team killed khashoggi inside the saudi consulate. an antiviral pill has led to an -- presented unprecedented reduction in hiv in australia.

oftudy measure the impact the pill on reducing the aids highs -- a-causing virus in the larger population. global news 20 hours a day on-air and a tictoc on twitter powered by more than 2700 analysts and analysts in more than 120 countries. i am taylor riggs. this is bloomberg. raised theesa may possibility of extending the brexit transition period to avoid reaching an impasse with her european counterparts. it was not clear how firm the various european leaders are on the march deadline. >> we are working the european union to deal with the issue of ensuring if there is a gap between the end of the inflection period and where the future relationship comes in, down expect a gap to exist but we want to make sure that is no hard border between europe

and ireland. have a dealo before. we did not fix the date. behindall united michelle. >> i want to be optimistic. march.e is more or less withoutvote in favor, this third point is impossible to pass in favor of the agreement. now need to work in the next week. david: welcoming jacob kirkegaard, peterson institute for international economics senior fellow. let me start with you. are we going to have a delay the on the march deadline? jacob: i think the real question is, did theresa may just cancel christmas?

at least for the british parliament. clearly the now is setting up of the next eu council summit in mid-december as the final, final deadline for the deal to be struck. timeline fora parliamentary passage in london that is extremely tight, in my opinion, and could involve working over christmas. yes, i think we will have a delay. the real question to me is whether or not theresa may can hold her coalition together until that point and strike a deal. david: to that point, her chief you can'tthe reporter even get the votes right now for the deal you got. to get as saying maybe

deal done i will make a concession and go more than 21 months in the transition. is she caught between a rock hard place? jacob: i think she is betting on basically that the likely increased economic and financial pressure on the u.k. come december is likely to focus the minds of at least some. not just labor -- conservative mp's, of potentially open up for some labour mp's to support her. then she put up this political of aly -- fig leaf one-year extension of the transition period so she probably feels she is able to say, well, don't worry. the infamous irish backstop will never be implement it because we have three instead of two years to negotiate a new trade deal with the eu. i think that is hopelessly optimistic. i don't think it is very

credible. that is the case she is going to make the british mp's. if you want to go home for christmas, you have to vote for this. alix: for an economic and market point of view we have not seen that pressure. wages are better and inflation is coming down a little bit. the one-year in-flight vol is nowhere. where is the pressure? >> whether you look at the level of sterling, which is decently ,table, or implied volatility implied volatility is low everywhere. it ise the low level, still the highest sterling volatility among the g10. there is a degree of concern but i think the markets are conscious of the fact we don't only have downside. there is a possibility these talks continue and effectively

forget an extra year of talks added on. as long as you keep the ideas out there, the market has the capacity to hope. circleu get this vicious depending on what you want to see happen in the next couple of months. alix: i look forward for this conversation for the next two years. there is a general election in 2022. if we postpone any real decision and it gets extended, are we going to have another referendum in 2022? jacob: i think that is highly likely. i think that is one of the reasons why the brexiteers part of the conservative party are going to hate this idea. they know two things might happen. you will have three years of the u.k. being overruled take her -- r froma rule take

taking rules from brussels with no said. you will have an election where the labour party may promise a lot of things to get into power. yes, it will likely be another referendum on this entire idea of not just brexit itself, but what kind of brexit you are going to have. they won out as soon as possible -- want out as soon as possible. david: this may in some ways be the best result. if they drag it out, all the companies can make adjustments over time. there is no abrupt change. i agree. i think the longer you delay this, a longer to maintain the status quo, the further into the past does the political power of the referendum itself pass.

it loses its potency to dictate british politics forever. or increasesmotion the likelihood that britain actually ends up being in the softest possible brexit, meeting the member of the economic -- european economic area, for the norway option, and that is indeed from a market point of view quite benign. david: let's talk about italy's position. they submitted their budget. we will put one quota from mr. muscovici. they have many questions on the government's budget goals. one report said they think the eu will reject that budget. what will happen if the eu did reject the italian budget? jacob: well, if they simply reject it out of hand, you have

precisely the kind of political fight the current italian government wants with brussels. they feel it gains the political points in italy. the last couple of months proved them right. since this will happen only a few months before the european parliamentary elections in may this is good news for them. any excessive deficit procedure, etc., against italy would be a very lengthy process. they can go ahead with this and have this fight play out in the media, the news headlines, until the european election. that is probably what they would like. i hope the european commission takes a much more cautious approach and perhaps avoids taking an overt fight, even if they cannot accept the italian budget as it's written today.

alix: is the same question as brexit for me. not necessarily reflecting the kind of financial pressure that will put the italian government's feet to the fire. shahab: if you look at their projections for italy, you are not looking get some kind of a fiscal cliff edge. you don't have the pressure that argentina or turkey has. that gives the italian government room to play a longer game. the way that plays out for the europeans is it puts the inputsy -- for the euro, the currency under pressure. see is highly realized volatility. the day today reaction of various headlines -- day-to-day reaction of various headlines is not that extreme.

alix: on the flip side, even though the spread is only like 312 basis points, you are still seeing rates increase in italy. their budget deficit will widen. how do they deal with that dilemma? run they the short don't. theybasically help one, don't get downgraded, which i'm pretty sure they will. that will have a negative affect on the capital position of at least some of italy's thanks. -- banks.

head of the european election in the short run outweighs those concerns. they are simply willing to gamble with the fiscal future, something they may regret soon thereafter. , thankjacob kirkegaard you both very much for being with us today. coming up, financiers bailout the saudi investment conference, but behind closed doors bankers are working the way. we will talk about that next. this is bloomberg. ♪

alix: this is "bloomberg daybreak." hour, jimin the next smith, former u.s. ambassador to saudi arabia. ♪

taylor: invesco has agreed to by oppenheimer funds. as more actively managed products at one of the largest managers of exchange traded funds. invesco will pay $5.7 billion in stock, most of the preferred shares. ebay is accusing amazon of infiltrating gets enough system to poach high-value sellers. in a lawsuit filed in california, ebay claims the tactics are part of a larger pattern of aggressive, unscrupulous conduct. amazon is not commenting but the company previously said it was investigating ebay's allegations. europe's biggest technology company is raising its forecast for the year. sap sees momentum for us cloud business taking off. new client bookings rose 37% in the third quarter.

s.a.p.'s profits missed estimates. that is your bloomberg business flash. alix: we turn now to wall street beat. first, bankers walking the saudi tight rope. they publicly rail on the conference, but behind closed doors bankers are working away. uber hails debt investors. they bypassed the broader bond market, selling $2 billion worth of debt. it faces an onslaught of rivals. they face an influx of competitors as direct lending becomes the hottest business on wall street. david: we are pleased to have lisa abramowicz to go over this. issue not be a big surprise. we have ceos saying i'm not going to saudi arabia, but it turns out the executives will show up. lisa: saudi arabia is one of the richest countries per capita in the world here in the have the saudi aramco ipo and now it

seems to be on again and could produce $1 billion in just fees a loan for the banks underwriting this initial public offering. even if they don't go ahead with this, they could underwrite more debt, which will also give fees to the bankers. this is a cash cow for not only the big banks, all of which may still send representatives, but also the actual companies that want to do business there. president trump he wants to continue to sell things. they buy stuff from us. we want their money. how much they can gloss over versus going ahead with the business. david: maybe some of these officials will not be with them, but people will show up. the germans. deutsche bank is showing up. the ceo said i'm going but i will raise it with them. lisa: that will be interesting to see what kind of backlash you get from these executives and bankers that end up going and

whether it will actually make a difference. countries, these companies have bad stuff that happens and they still do business with them. just now we decided this was a tipping point after all of this stuff. david: he wants my people to know i will stand up and speak my mind. we will see what happens. lisa: i love this story that will not die. boosted how much they will sell in the bond market to $2 billion without a major bank. they went directly and hired ex goldman bankers. is yet another cash burning company that has a lot of hair around it, whether the management, the legal woes. it wants to raise debt. it will do this ahead of an initial public offering. they got $3 billion in officer up on sale that was initially $1.5 billion. in hired goldman sachs bankers

to call investors. do you want to buy $1 billion of uber debt? you have to sign all these disclosures. you can't reveal any information about the debt offering to the public in about the financials of the company, but the you wanted? the answer came back a resounding yes. what this highlights is how much money has gone into strategies that can access private debt. two, the shortage of high-yield bonds right now. there is the biggest shortage of u.s. junk bonds in 10 years. this is the amount of money people are getting back from coupon payments and bond repayments versus the amount being issued. that disparity has gone fully out of whack, which is creating a lot of demand. david: direct lending. how well theyres, have done. everyone else is trying to cram into that space.

lisa: direct lending strategies have gotten a record amount of money flowing in. aeres is one of the forerunners in this space. they are saying just because this is a business for us does not mean it will be for everyone. their returns in the u.s. ever turned 14% annually since 2004. it's a good business. will veto be so going forward given how much composition there is that competition there is an companies that are more precarious are turning to the market? david: they said we are worried about leveraged lending. alix: in some areas using pushback. triton wanted to borrow to buy a company and investors were not interested. the bank said they were on the hook for that. lisa: howard marks said not everyone is equal. when the tide rolls out, you will see a lot of people who are

naked. same thing for ares. david: quoting warren buffett. lisa abramowicz, it is great to have you. the trump administration pursued -- pushed for iraq to sign a deal. this is bloomberg. ♪

david: we are watching the peso against the dollar. this is on the back of president trump tweeting this morning. the assault on our country and our southern border, including the criminal elements and drugs pouring in is far more important to me as president and trade. hopefully mexico will stop this onslaught at the northern border. all democrats fault for weak laws. he was to send the military to shut down the border. it is interesting having done that deal with mexico, breathing

a sigh of relief, he said it is more important for me to shut down the border. alix: because you have two weeks before the midterm. i have not had my third cup of coffee at. -- yet. jobs in america and businesses doing well. . full stop. david: and he does not talk about the dreamers at all. i'm watching this extraordinary development with the trump administration, a huge contract in iraq. it will go to the siemens. -- it went tot ge. alix: i wonder what that conversation looks like. david: the national security front. was up he said this is part of a strong campaign of engagement with the

iraqi government formation and supporting the iraqi government. it is part of our overall effort to evict the iranians. they think the iranians would have benefited by them getting the contract. alix: is shift light on to white u.s.-saudi relations are important. they team up against iran. it is important not to disrupt that in a geopolitical sense. david: iran was the big winner in the iraq war. that is a big geopolitical issue. you can't just dump saudi arabia over the side of the boat. alix: have we reached a peak earnings? coming ask mona mahajan up next. this is bloomberg. ♪

alix: said talk to alix: said talk to restricted. they debated hiking rates above neutral. they debated hiking rates above neutral. china dodges a bullet. yuan has fallen to an almost two-year low. theresa may contemplates extended the 21-month transition. hardliners call it completely nuts. david: welcome to "bloomberg daybreak." a lot of geopolitics today. alix: someone calls you completely nuts. david: i think they are making really good progress. alix: it will be solved, no problemo. s&p futures are down by 13 points. the dollar was broadly weaker and now it is a little next. -- mixed. if you get a boost against the mexican peso. in the u.s. a touch of buying

long. over continues to roll capacity. short-term time spreads. so much for that saudi crisis. alix: so much for that geopolitical tension. at least they are worried about some oversupply problems. david: in under half in our from right now we will get weekly jobless claims. speaking fed will be at the harvard club. fed james bullard will speak. and next reporting third-quarter figures. let's turn to taylor riggs with first word news. taylor: president trump is standing -- stepping up his twitter attack on illegal immigration. he threatened to call it the military to close the border.

he said leaders of water moller and elemala, honduras salvador are doing little to stop people from coming to the u.s. president trump is warning about putting the u.s.-saudi relationship at risk over the disappearance of jamal khashoggi . he hopes to have the saudi investigation results by the end of the week. president trump said the crown prince's government is an ally who has promised to buy billions in u.s. weapons. british prime minister theresa may says she is not expecting to use one of the options being floated for brexit to extend the limitation period for a matter of months. a future she expects relationship to be in place as scheduled at the end of 2020. global news 20 hours a day on-air and a tictoc on twitter powered by more than 2700 analysts and analysts in more than 120 countries. i am taylor riggs. this is bloomberg.

alix: thank you so much. should we hiked into restricted territory? that was on the table at the fed september meeting. a few participants expected the policy would need to become monetarily restrictive. a numbers judge will temporarily need to raise the funds above the longer run level, above neutral. joining us is mona mahajan, investmentallianz strategist. carl, the markets took that as a hawkish figure. was that the right thing to do? carl: thanks for the most can -- the most confusing sentence given i'm not entirely sure what the difference is in that statement. we know a couple were not in favor of going into restricted territory. it,nly two where against

the fed is willing to push above that 3% range on the fed funds rate. this is a fed moving very gingerly towards less accommodative policy. they are very attentive to potential signs of either economic or financial markets strain. david: whether we understand it or not, the markets understand. do investors understand with the fed is doing? mona: when the fed met in september the markets had recently reached new all-time highs. the dow and s&p had fresh all-time highs. since then we have actually seen a little bit of softening in the economy. housing, retail sales came in soft. inflation did not meet expectations. ist the market has to invest if the fed is on autopilot or will they be data dependent. perhaps december is baked in, but today look at the economy and in the first quarter in the

second quarter? alix: what is neutral? it is hard to make an investment thesis. david: jay powell says he does not know. carl: you get a sense of neutral when you go past it. is like how much poison is a safe amount. this was an interesting angle of the discussion. they took out the accommodative language in describing rates. they did it well before rates were anywhere close to the neutral ban. part of that was to avoid conflict of debating. reallyo that was done to emphasize this notion that we heard from jay powell in jackson hole and john williams were recently. we don't know where neutral is. we should not pretend we have a lot of precision. these exercises are all very valuable academic exercises, but this fed does note to become overly wedded to the special constructs.

they really value human discretion. they are taking a step back. one we see days like we saw last week in the equity markets, that tells them what you're starting to get traction with the tightening of monetary policy. it might it possible not be the same david chairman powell is looking at? when you see a crisis, it usually becomes the cause of excesses in financial markets. not because of inflation directly. is he really saying and the fed indicating we have to worry about that, excesses over there, not necessarily pbi? --ppi? mona: he understands for the cautions and concerns are. he is probably more than chairwoman yellen was watching the financial market. what he saw over the last week may have given them a little bit of pause. we are seeing what's happening internationally. thatnk he is looking at

and seeing if that can impact our markets. they will be focused on the economic data but he will be a little bit more balanced. carl: he better not be ignoring the economic data because we have seen a string of soft inflations in the last seven or eight inflation indicators. inflation expectations, all of these have come in cool. if you continue to tighten, it is starting to drift lower. it will not just be president trump saying this is inappropriate to tighten policy. david: the president has a point. alix: the market reaction function is understatement. financial pressures in emerging markets weighed on risk sentiments. other countries with similar macroeconomic vulnerabilities came under pressure. where is the vulnerability? mona: chair powell in the fed is

focused on the u.s. economy. they do have a mandate on employment and inflation. pointeing said, at some the fed is looking at the u.s. outperforming the rest of the world. yet, the rest of the world is softening a little bit. does that eventually come back to the u.s. economy and the u.s. markets? i think they are keeping an ionic this tale risks do eventually hurt the u.s. if we start to see the softening continue, that's when a think the fed steps in. david: they are paying attention to the dollar? carl: the dollar was mentioned more in the september meeting that either the prior to meetings. -- two meetings. they are paying attention to the impact on inflation and driving down import prices, the potential breaking affect on the economy. e.m. and fax from

external growth slowdown looking dampen exports. we have a strong dollar that could further depress exports. these are all signs if you simply look at what's happening now, we have an economy juiced up on fiscal stimulus and tax cuts. if resetting policy on a 3% economy or a 4.2% as we saw in the second quarter -- we will give more information in a week will be pulled out from under you and 2019 and 2020 when we see much more response to a a stronger dollar and a slower global growth. you may very well have over dependent on rates -- overde pended on rates. alix: earnings season underway. some investors wonder if we have reached the peak. what it means for volatility.

this is bloomberg. ♪

alix: this is "bloomberg daybreak." invesco has agreed to buy oppenheimer funds. the asset manager is owned by massmutual. actively managed products at one of the largest managers have extremes traded funds. invesco -- exchange traded funds. most of it will be in preferred shares. the largest alternative asset manager, blackstone group, posted a third-quarter profit that beat estimates. $24 billion in new capital. their bedrock i would equity was

the biggest contributor to income. the trump administration persuaded iraq to sign a general electric $50 billion power deal and said of germany's siemens. senior u.s. officials warned the prime minister that going with siemens could put the u.s.-iraq relationship at risk. iraq signed a memo of understanding the ge in recent days. that is your bloomberg business flash. alix: earnings season kicked off last week. afterlast quarter's record reporting, are we at peak earnings? profits rolled over the next six quarters. joining the is romaine bostick. has that been the reality? romaine: we are still at a peak or rising. 20 look at profit margins -- when you look at profit margins, for something like 9.8% on a trailing 12-month basis.

that is taking into account the 56 plus companies with a report out of the s&p 500. there is some sustainability but when you look at estimates going forward for the forward 12 months, d.c. the estimates ratcheting down. that is where the concern is coming from. -- areour you t you talking about operating margins? romaine: it's a little dicier than the profit picture. you are talking about an elevated level that is still climbing. we did see the operating margins fall off after the first quarter reporting. . littt is coming back a -- coming back up a little bit. it's above what we were in 2017 and 2016. alix: are you getting rewarded for those beats? romaine: now.

-- no. lower macroll have correlation so you could see less volatility and some kind of a reward, like goldman sachs were netflix. romaine: let's take netflix. you have the 5% rally. the stock was up about 9% or 10% of one point and it came back down. it did not have a broader market affect. you only had a couple of stocks ever higher. they were up less than 1%. it did not have the broader market affect. you saw something similar in the financials, and other companies in the industrial space reported good earnings that there is a sense now amongst investors we have reached the top. why do you want to be out of the cliff? alix: that's an excellent question. thank you very much. david: i will pose it if you insist. corporate earnings season, expectation of continued growth.

we talked to a range of people about what they expected this time and going forward. >> earnings growth in revenue growth are slow. they are strong but slower than what we saw the second quarter. >> i don't know if we are at a peak and earnings. we might get to a peak in operating. you have good growth this year and we think it continues in the next year. >> first round effects of the tariffs are not that significant. the second-round effects, retaliation, and what china does on the borders. bureaucracy trying to increase red tape and make it more difficult for companies. >> with the fiscal stimulus has done has mass a lot of pressures started to build for corporate margins. >> investors have been far too complacent about corporate profitability. this quarter it will start to show up. david: still with us is mona mahajan from allianz global investors. what is coming down the

pipeline? mona: this year we are looking at a robust earnings picture in the s&p. for 2018, 20% year on year growth. over the last five years, averaging 5%. where the softness starts to emerge is 2019. estimates are for 10% year on year earnings growth for 2019. the question is if there is a downside to that. we think it can percent number would be pretty healthy despite this being a peak year. another 10% growth next year would be great. will trade and tariffs impact margins downward? will the rising fed rates impact the broader economy and slow earnings growth? there are question marks about next year's earnings. what we are watching for is what people say about 2019. alix: you can see that reflected in the chart. sales and earnings growth are

rolling over in 2019, particularly when it comes to sales. jpmorgan said he will see higher stock dispersion. if you pick a winner on earnings, you can really win it and that is less volatility? mona: we think the environment for active management becomes pretty strong. being able to pick winners and losers, this is an environment were active managers should shine. if you're playing a passive index, when the index is going down you don't want to be in line with the index. you want to be outperforming the index. to differentiate the earnings winners, there will be some companies that will be able to navigate the trade barriers, navigate the rising rate environment. financials come to mind. david: if it going to pick winners and losers, what do you do? is at the quality of earnings, the balance sheet, the cash flow? mona: certainly cash flow is king and will become king.

you want companies that are not highly leveraged. that can sustain if they have to or refinance at any point. we arely speaking thinking about a barbell approach. a little bit of offense, a little bit of defense. we like some technology names. we also like more defensive sectors like staples and health care. alix: what is defensive? it used to be telecom. you have consumer staples maybe but that has amazon and it. how do you factor this in? mona: being defensive means finding companies that even in a slowing economy can maintain healthy earnings, sales growth, margins, etc. we think of that as consumer-based staples. costco. their growth rates continue to buy essentials. health care is another one.

david: people are always going to get sick. mona: as market volatility rises, health issues also rise. alix: he never gets sick. david: i never admit it. mona mahajan will be staying with us. president trump says the u.s. will withdraw from the global postal treaty. we will look at the winners and losers next. this is bloomberg. ♪

david: time for the bottom line are we look at three companies that are worth watching. i will take nestle. they had earnings out this morning. you can see it is trading up a bit. initially they were down because their senior person in asia is leaving the company. the thoughtless you might be eligible to go run unilever. alix: interesting.

david: there might be a revolving door there. alix: this is an equipment rental company, united rentals. it is for the construction industry. they had a great quarter. volumes were good. rentals were good in the stock is getting totally -- industrial companies are reporting and getting hammered. what that means for the economy, for trade -- david: it goes the other way. markets are nervous about industrials. alix: rental revenue is up 21%. you report something and you get hammered. david: will it keep going? ooke is nodding. we will bring in brooke sutherland to talk about the postal service. president trump said he will pull out of the international

postal agreement which is been around for 142 years because china is getting too good a deal. what companies are affected by this? brooke: this is fascinating. there is a governing body in switzerland known as the universal posted union. the basic idea is to make international mail flow more efficiently and cost-effectively. the body sets the rates at which countries reimburse each other. if i know you a package from collects thee u.s. postage and reimburses france for its share of the work. those rates favored developing countries like china as a means to stabilize the postal system. the u.s. is saying this is not as eckley a for the economies we live in today. china is no longer a developing country. it is taking an outside advantage to capitalize on the boom in e-commerce.

inis probably pretty logical a trade war that's been characterized by illogical moves. in terms of companies affected, big winners here are amazon, ebay, sellers that take in a lot of revenue from chinese third-party sellers. they would prefer to have a more balanced pricing system because that benefits everybody in general. you want to look at fedex, ups. david: the u.s. postal service. alix: fedex and ups are not governed under the same rules. you have an increase in international postal rates, that includes pricing power. fedex and ups are somewhat limited in how much they can charge depending on what the postal service is. this may send more business their way. david: and not good for all the obama? -- alibaba?

they thought they might squeeze margins to make it more expensive to ship it. brooke: this should help retailers biggest part of the issue is you have a chinese product that is cheaper to make and cheaper to ship. that will shift the customer towards that product. side, the exporters could be affected if you get rid of the system entirely. there are standards in place they could push up postal rates for u.s. companies that ship to europe. alix: from sutherland, good to see you. the brexit bottleneck. theresa may weighing extending to 21-month transition period before leaving. this is bloomberg. ♪ ♪

comcast business built the nation's largest gig-speed network. then went beyond. beyond chasing down network problems. to knowing when and where there's an issue. beyond network complexity. to a zero-touch, one-box world. optimizing performance and budget. beyond having questions.

to getting answers. "activecore, how's my network?" "all sites are green." all of which helps you do more than your customers thought possible. comcast business. beyond fast. alix: a few seconds away from the latest initial jobless claims. you have s&p futures off by 10.

italian banks continuing to get hit. and other asset classes, up by about 4%. yield five basis points. it is a mixed dollar story. nowhere. certain commodities like oil continue to get hit. the numbers are dropping right now. jobless claims coming at 210,000 . we continue to have the conversation of record low employment. the on employment rate at a five or six-decade low. david: this job machine just keeps humming along. we were having troubles with jobs but not anymore. alix: where are all these jobs coming from? the philly fed factory index came in much stronger than expected. it is a little bit much. a stronger than expected, coming in at 22.2.

prices paid was a little lighter. the new orders index is a little lighter. always good to get that read as well. david: the u.s. economy is strong, no question about it. the problem is the emergence. let's go back to brexit. theresa may ways the possibility of extending the transition period to avoid reaching an impasse with the european counterparts. it is not clear where exactly the other european leaders are. working with european union to deal with this issue of ensuring if there is a gap between the end of implementation and the point at which the future of a ship -- relationship comes in, don't expect a gap to exist. >> on the 29th of march, it is game over. when theylast day

will be a member of the european union. we have to get a deal before. we did not fix the date. we are all united. michelle. united by lessr votes are more or march. we will vote in favor without the third point, it is impossible to vote in favor of the agreement. now we need to work a lot in the next few weeks. david: welcoming maria. one person said it is more or less march. theresa may says there is an extension. where are we? maria: here at it from theresa may herself. this is big news. she said she could consider

keeping the u.k. close to the european union after brexit. just to put it in very simple terms for the global audience, this means the u.k. would continue to follow eu rules until 2020 and perhaps now beyond that. may said she is considering this, but it would only be a few months and it may not be necessary. she isey take away is ready to make concessions to get the deal. two, with a pressure is the irish border and the u.k. is struggling to find a solution to this. the eu has said from day one there is no irish backstop, no brexit deal. david: i understand by the european leaders might be open to this. the u.k. would say we will abide by your rules without having any say in making the rules. sounds like a good deal from your point of view. why does that help theresa may? maria: because she thinks she is

going to get more time and the backstop main of the needed. we heard from european leaders who said what is that exclude the other. point,t touch the great which is this is going to be a political headache for theresa may and london for a number of reasons. brexiteers will say what is the point of this? we have to pay into the eu potentially. how do you abide by the rules not to be able to get around trade deals? by definition this is not brexit. willow the remainders argue this shows the best deal is to stay and not leave. it shows theresa may is preparing to make concessions in brussels. it will come at a very high cost in london. david: thank you so much for your terrific reporting from brussels and the european council building. jonathan:'s -- alix: still with us is allianz

-- still with us is mona mahajan . near where wee saw in 2016. mona: there is a great amount of uncertainty around brexit. theresa may is balancing this fine line to try to appease hard court brexiteers but in a way that doesn't impact the economy, that is beneficial to the entire country and appeals are other side of the base. speaking, it is a no-win situation for her. ultimately this will get resolved that we see market volatility and continued uncertainty and it is weighing down other parts of europe as well. alix: how do you want to play it? mona: generally speaking we can see why u.s. assets were the ones to be in this year. and treasuries do pretty well. we saw the dollar do pretty well

and u.s. high-yield do pretty well. part of that is reflective of europe softening. the asian economies are now softening because of china and trade. he have situations like italy flaring up. it is pretty much the u.s. seeming like stronger footing. we are talking about it that softens next year or not. that the way to play is u.s.-focused. david: i don't understand the argument for investing in europe right now. we have all these distractions. go back before. everyone agreed he needed fundamental economic reform in europe and none of that is getting done. the italian budget, brexit, trade. they are not moving forward in the affirmative sense. mona: the case for europe is valuations are more attractive. there is some yields.

if you want to look at value dividends, europe is that -- is an interesting place to go. is a cheaper reason? people still remain cautious. you see that coming out in the yields moving upwards a little bit. better market is down over 10.5% already. -- there market is down over 10.5% already. come inside the bloomberg. 312 basis points. it is not feeling of risk premium is being put in an inappropriate way. do you want to be shorting btp's? have you interpret that? -- how do you interpret that? mona: where can we get 3% yields? you can go to italy or greece and you know what the risk

profiles are. or come to the u.s. for your getting a nice 3.2%. if you want safer economies, germany or japan. globe whereund the you can get a return with a strong government-backed guarantee. it comes down to treasuries being the only game in town. it is helping to keep a little bit of a lid on u.s. treasuries going forward. david: there is currency risk as well. if you had, what happens -- hedge, what happens? bund was more attractive because the currency costs. mona: that is why we had not seen some buyers coming into the u.s. market. the hedging costs is moving upwards. there are multiple factors that play. some of that willow bay overtime. will abateate --

overtime. there are some near-term volatility. those factors do abate any good at fundamentals. alix: a keeps climbing. you are laughing because every fall-winter we see this because he have the dollar squeeze. what part of that technical is fundamental? mona: there has always been interplay here. it makes sense in the context of the global central bank tightening, particularly driven by the fed. it is making sense for short-term rates to start climbing here. whether it is moved a little bit ahead of itself, pricing and a lot more than what we are actually seeing from the fed in the marketplace, that remains to be seen. at some point it is probably going to level off.

we don't see it continuing to move up. alix: thank you for coming. mona mahajan. david: time to find out what's going on outside the business world. taylor riggs has first word news. taylor: starting in china, the yuans false to his lowest level since january of 2016 after the u.s. treasuries stopped short of declaring china a currency manipulator. steve mnuchin made it clear the u.s. will be watching closely after the yuan's recent slide. john mcgann has left the trump administration. is last day was yesterday. he let the process that confirmed president trump tohe t confirmed president trump to --trump's two supreme court court picks.eme this congressional campaign is expected to be the most expensive in history.

spend $5s will billion. there have been a flood of donations to democratic candidates in competitive races where the party hopes to pick up how seats. global news 20 hours a day on-air and a tictoc on twitter powered by more than 2700 analysts and analysts in more than 120 countries. i'm taylor riggs. this is bloomberg. u.s. companiesp, face a difficult decision on doing business and saudi arabia. we will discuss how it may affect future deals with jim smith, former ambassador to saudi arabia. this is bloomberg.

all this potential projects have . level playing field taylor: this is bloomberg a break. coming up later today, jane

hartley, former u.s. ambassador to france. ♪ let's get your bloomberg business flash. novartis is expanding further into lucrative fields of oncology. the company has agreed to buy endocyte for $2.1 billion. that represents a 54% premium and endocyte's closing price yesterday. new drug shows promise in treating prostate cancer. ebay is accusing amazon of poaching high-value sellers. tacticsims amazon's appear to be part of a larger pattern of aggressive, unscrupulous conduct. amazon is not commenting that the company said previously they are investigating the allegations. renters have something to celebrate. their housing costs dropped last

month for the first time in six years. , he wasg to the zillow $1440, down 20%. in moreays rents fell than half of the 35 largest markets. that is your bloomberg business flash. david: the drama over the disappearance of journalists jamal khashoggi continues to play out. u.s. companies are facing difficult decisions about their business dealings with the kingdom. someone who has dealt extensively with companies doing business in saudi arabia as an air force officer, raytheon executive and as u.s. ambassador under president obama. ambassador jim smith joins us today from washington. thank you for being back with us. let's talk about this. what dore at raytheon, you do because there is a long-standing relationship

between raytheon and saudi arabia? amb. smith: raytheon and all the defense companies have been there for over 60 years. it started with a hawk system. now with patriot. the defense companies are largely going to try to stay out of the frying pan. while defense sales are important, they will not be directly involved and will want to stay out of the discussion between the government's. expect the defense firms to be quite. david: it is very much on president trump's mind, specifically arms sales. we go to a chart indicates that saudi arabia is a pretty big purchaser of arms from the united states. but theth: it is, defense sale issue is a red herring.

it is quoted over $100 million. if you look at the last two years, they thought $4 billion -- bought $4 billion of defense a quote from the u.s. they never buy all of that. of the business conversation is not sales. the centerpiece of the business joint visionis 2030 is focused primarily on moving to a private sector economy. in order to do that, the saudis have to get more investment and business relationships. what is happening over the last couple of weeks has undermined the ability to attract foreign investors and for business relationships. it has less to do with what the defense firms are doing, but his

ability to attract individual investors. david: that goes to the heart of the matter. joint vision 2030 is very important to the kingdom financially. can they attract foreign investment, liberalize the economy and have what is it very conservative or repressive regime? is not just mr. khashoggi. you can't look at 's assassination in isolation. there has been a steady stream of arrests that would indicate a move towards a more repressive government. a move back to a kingdom for people are seeing as subjects, not citizens. the impact on the development will be significant. wall street journal this morning just published the article. $68saudi's have borrowed

billion in the last two years. the risk to that has increased 32% in the last two weeks. ift you will probably see the saudi's anderson administration get their way, they will find a way to move past this politically. there are moral and legal issues, but on the business side what is likely to happen is there will be a period of vindictiveness for those that did not come to davos an it does it will be penalized because they are not true friends of saudi arabia. what this will do is highlight to the business community the reality that there is no transparency and the government, that there is no written rule of law, and there is an arbitrary and is him about the government ism in therian government that will create real

risk. that will undermine his his ability to move to a private sector economy. has action, i believe, significantly hurt his ability to execute the strategy he has public be stated. david: there is a real risk because of a lack of transparency. is there also a reputational risk? we have seen a lot of people pulled out of the so-called davos in the desert. they think they could be heard elsewhere in the world if they show up. -- hurt elsewhere in the world if they show up. amb. smith: individual companies do not respond to government edicts. they respond to the needs of the shareholders. the boards of directors and the shareholders are going to be probably voicing opinions about their investment in a country that has shown such a disrespect for human rights.

it will be a real challenge for those companies, even those that want to invest there because they are following the money. they will be a serious impediment. david: many thanks, mr. ambassador. jim smith from washington. alix: when you have a huge sovereign wealth fund like in saudi arabia that is made many investments overseas, how does it affect those investments? we are joined by michael madden michael maduell. the company has to say no thanks? michael: that has definitely increased in the past few weeks here in i think there is a lot of demand for these startups to receive investor capital. china has definitely slowed down on venture capital funding. saudi arabia has been in the tail wind on that gap.

if they were to pull back more investments, it will have a major impact with that funding scene. it was also about the u.s. businesses getting into saudi arabia. is that tit-for-tat starting to deteriorate? i think there are definitely a lot of issues going on right now. people are calculating on what repercussions are going to be. this tit-for-tat thing is definitely translating to the u.s.-china trade war. we will have a lot more information after this davos of the desert conference. we will see which investment percolates through. there will be a lot of announcements at this event with the engagement and select industries. alix: and specific countries.

there is renewed friction with the u.s. and saudi arabia. does this create opportunities for other countries to say, we will take your money. michael: russia and china are very eager if relations with the u.s. appear to worsen. they are very happy to step in. you have the russia direct investment fund. they are looking for deals. you have china. a have a lot of oil connections and china is it major buyer of saudi arabia and oil. n oil.di arabia russia, china, india. there are a lot of countries for the have options to choose from. 2030, this saudi arabia economy moving away from oil. is that thesis still up for grabs are getting it harder? michael: this is one of those storms.

they are long-term investors and they will look past this. yes, there will be friction. did,f the last surveys we geopolitical risks was one of the biggest concerns for regional investors and sovereign wealth funds. factoring geopolitical risk more into their investment considerations. alix: is there a market reaction to that? if you see a change of flows ar, get has qut been a huge provider of liquidity globally. if that changes, what is the implication? michael: you can see a lot of money dry up in the venture capital. very large investors, a lot of startups are -- it is harder for people to find deals.

if there was a much larger pullout, that will have an effect on valuations, on how easy it is to source capital. on the fixed income side, who is the buyer? we've had a weak treasury options. the u.s. east the court a lot of countries with sovereign wealth funds and try to court that as treasury investors. that's what you the u.s. treasury secretary coming up to the conference. alix: really appreciate it. michael maduell. thank you very much. i will be covering this angle on commodities at later. particularly the oil angle. we are not that, dependent on oil economy revenue, i don't know how much water that will hold. david: where does ago? nothing just appears.

alix: also the relevance of saudi arabia when it comes to oil when you have continued record highs in the u.s. it will take up some of the heat you might have seen otherwise for the weaponization of oil. david: is at the focus today? alix: part of it. we have got you covered. that is all coming up today on commodities average -- commodities edge. i will be joined by jpmorgan's nana adae. we will talk about earnings, the market in the fed. this is bloomberg. ♪

comcast business built the nation's largest gig-speed network. then went beyond. beyond chasing down network problems. to knowing when and where there's an issue. beyond network complexity. to a zero-touch, one-box world. optimizing performance and budget. beyond having questions. to getting answers. "activecore, how's my network?" "all sites are green." all of which helps you do more than your customers thought possible. comcast business. beyond fast. ♪ alix: from new york city, 30 minutes to the start of trading. this is the countdown to the "open."

alix: coming up, fed restricted. hiking rates above neutral, markets take that as hawkish. china. is a bullet. the u.s. does not label them as a currency manipulator. homebuilders on shaky ground. sentiment continuing to sour on wall street as the bears calls keep piling up on rising rates. risk trading poorly, s&p futures off by 11, off the lows of the session, not helped by shanghai. euro-dollar flat. treasuries, flat. crude continues to roll over geopolitical risk premium, hitting a one-month low. officials deeper into a t debate.