♪ matt: stocks at drop globally as trade worries and earnings gloom hits of the markets. ray dalio says it is time to buy gold. and tech is in trouble, netflix punches -- plunges. german software giant sap tumbles on slower growth in cloud computing. plus, iran's foreign minister tells bloomberg that europe needs to live by its commitments to the nuclear deal. he offers a slim hope of a

breakthrough with the u.s.. you don't get security by praying for it. you must invest, you must do what is necessary. and the europeans need to take the necessary action. the united states has, in my view, shot itself in the foot by withdrawing. matt: welcome to "bloomberg: surveillance." let's check in on the markets right now. here in europe, we see drops across the board. not as steep as they were at the , but you can still see the stoxx 600 is down .3%. and some of the individual or regional indexes are down further. the dax, for example, down .6%. down, as yous are would expect, with a big drop in netflix in overnight trading.

netflix said u.s. users actually shrunk, shocking the market. dragging on and adding to an already bad earnings picture. the u.s. dollar is down. 1193.55 and other currencies, especially the yen, are getting momentum. coming up, we speak to the chief officer of a lecture looks -- electrolux. there are a slew of earnings coming out and it is moving the needle. let's get some bloomberg first word news. >> the u.s. and china are struggling to find a path forward in trade talks. there has been slow progress on key initial demands. donald trump has complained china is not buying the large amounts of american farm goods

he claims president xi jinping promised to purchase. the u.s. is not improve its treatment of huawei, a key demand. a key deal between the u.s. and u.k. will not be forged quickly, according to boris johnson. he predicts discussions will be quote. tough and robust he said. president trump wants more details about a cloud computing contract the pentagon is set to award amazon or microsoft. the deal is worth $10 billion over a decade. the president has reportedly been told of complaints that companies, including oracle, were frozen out of the bidding. as the era of low rates and quantitative easing come to an end to my gold maybe key, according to ray dalio. linkedin,y posted on he said it would be both risk reducing and return enhancing to

consider adding gold to your portfolio. the second deadliest outbreak of the ebola virus has become a global health. -- health emergency. there are concerns the virus could spread out of the democratic republic of the congo. the outbreak has already killed more than 1500 people. global news, 24 hours a day on air, on tictoc, and on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. this is bloomberg. matt: netflixes results could have cast a dark cloud over earnings season. i would say they probably did. reported ang giants drop in u.s. customers following price hikes and a weak slate of tv shows. growth overseas was also much slower than anticipated. it sent to the shares plunging in overnight trading.

right now, down more than 11%. in europe, sap disappointed with a key cloud metric. its shares, at one point, were absolutely decimated them down 10%. joining us from abu dhabi is the founder of radio free mobile. >> good morning. matt: let me first ask you about netflix. why disappointment? there are a couple of things going on. the first thing that has happened is netflix, because it is spending money on content, is being forced to put pricing up. are seeing the beginning of people starting to think about other solutions. that goes hand-in-hand with the other problems which is that the other guys with content has said maybe we can go direct to customers ourselves. they are pulling their content

off netflix and putting it on their own platforms. so what can netflix due to turn this around? obviously, if they get another huge hit, that would be great. but i think a lot of investors are concerned that there is so much on netflix that you don't want to watch, they seem to be focused more on quantity than quality. richard: the key here is content. what they need to do is come up with a series of shows that are as popular as game of thrones or chernobyl. what that will do is keep people sticky to the platform. advantage they have is they have 156 million paid subscribers. it means that as long as they can tell up with good content and get it on, it has got a good chance of hanging on. the problem is that this kind of content game is really hit and miss. that really increases the risk.

matt: cap has had a tough time of it, even before -- tech has had a tough time of it, even before netflix, especially facebook. i wonder what you make of the congressional fear when it comes to a libra. is this really an issue for facebook or have they even put this out there to get people to stop looking at antitrust issues and focus on what may be a red herring. richard: this is a definite move by facebook to create its alternative currency, without any shadow of doubt. all you have to look at what alibaba has done or we checked, you can see where -- wechat, you can see where facebook needs to go. to the other thing they need do what it comes to earnings is separated the two. i suspect facebook's underlying numbers will be ok but you will have these overriding concerns.

i think there is a good chance there will be heavy regulatory oversight. and facebook has said they will not launch it unless regulators are ok. what that means is that the whole thing to take a lot longer than perhaps they originally envisioned. matt: i wonder if you expect any of the big platforms, amazon and facebook included, to actually face antitrust issues serious enough to break up the companies. they're facing issues in europe as well as the u.s.. richard: absolutely. and sometimes you do find it is the eu that has got more teeth than anyone else. is, these homegrown monopolies are much more difficult to break up. microsoft was a fairly straightforward case. it's much, much more difficult because the services are intertwined. and at the end of the day, it is

also time that users -- this facebook you have is that you about facebook to user data in return for your service. if you don't like it, don't use facebook, you something else. -- use something else. it will be difficult to break these companies up. matt: richard, thanks for your time. , founder ofsor radio free mobile, an independent researcher. up next, europe reports. we look at corporate earnings so far. how will a gloomy start to the season affect investor sentiment? it certainly has not helped stocks today. this is bloomberg. ♪

matt: economics, finance, politics, this is "bloomberg: surveillance." let's focus in on tax and the g7. the eu economics affairs commissioner told bloomberg that coordinated fiscal policies are needed to respond to an economic slowdown. she spoke to us following the finance chiefs meeting and friends. -- in france. >> monetary policy is one thing, but we have to reflect on fiscal policy. it is high time we build the right policy mix because what we see today is a slowdown everywhere. also, the need to address various risks that could come

together. matt: bloomberg's maria tadeo did the interview and joins us now from g7. issue, whichat tax is always an issue, they are concerned about libra as well. what were they talking about and did they come to any conclusions? maria: that's right, matt. happening today and there are many areas in which nobody seems to agree on any. that isn't the digital tax, the strong dollar, fiscal policy, but one thing they all agree on is they do not like libra. they are concerned about the concept. many officials have told me they do not know what the endgame of libra is. and if this is something that could compete with the euro or dollar, frankly, it will not happen. you are looking at privacy

issues, data, the sovereignty of countries. and we understand there may be such a level of agreement that there could be a joint statement that says there is a long way to go for facebook to get to the criteria we would be ok with. there are many questions over whether or not libra can take off. when we understand is that there is a big consensus on the fact that facebook is not there yet. many, many issues when comes the future of crypto. matt: what about the future of the digital tax? are we getting any agreement from them on that? maria: that is a big question. speaking later on on bloomberg television, we know this is a big sticking point. the french will tell you they are going ahead with this tax unless the g7 can agree on one. but we need to make sure everyone understands, we need to

tax tech companies differently. the problem here is that the americans are not playing ball. you thereey will tell is not a political aspect to this. the europeans do not have a facebook or google, they cannot compete on innovation compete on taxation. we understand it is still a rocky area and it is not clear if the statement will lead to any agreement. know the u.s. is very serious about that investigation on french goods. it could lead to retaliation. very much, maria tadeo from the g7 in france. let's get the bloomberg business flash. >> for the second time this year, swiss drugmaker novartis is raising profit forecasts. profits are expected to raise as mid-teen percentages, boosted by

new drugs for heart ailments and psoriasis. investors may have to wait until the briefing for insight into how red hat will help growth. are beingives tightlipped about the $34 billion acquisition. the tech firm saw revenue fall over 4%, the fourth consecutive quarter of decline. asking boeings is for details on a proposed new jet liner. this is as the plane maker races to get its workhorse 737 max 8 back into the skies. as they decide whether to build the midmarket airplane, competitor airbus is plowing ahead with its rival offering. that is your bloomberg business flash. matt: thanks very much. let's focus back in on earnings season. stocks in europe and asia are down today on deepening concerns on a week corporate earnings growth.

corporaten weak earnings growth. adding to the gloom is nordea bank, reporting operating income of that missed the lowest estimates. the bank says it needs to review dividend targets. let's go to the chief economist at bm oh global asset management, joining us on set in bmo global asset management, joining us on set in london. what do you think of the earnings? analysts have not been able to keep up with the warnings. is this all part of the slowdown in the global economy? >> yes. i think the earnings misses have been fairly broad actually. but if you look at the economy, it is the manufacturing sector heard the most. most. hurting the

the overall economy in the united states is pretty strong. europe is just chugging along and there is all the uncertainty created around the tariff issues. tomorrow,ay, tweeted you never know what donald trump will do or threaten. reasonse broad-based for feeling more cautious about the earnings outlook. investors punish companies quite hard when they miss. matt: there seems to be a disconnect. when i look at, for example, u.k. unemployment and earnings week. was great this it was twice core inflation, the same is true in the u.s.. earnings growth is at least 50% more than the core. and retail sales have been off the hook!

we are getting ready for a back-to-school season that will be at a record. at the other hand, companies are invented -- hoarding cash, slowing down share buybacks. why is there this disconnect? steven: the first thing, the economy in the united states and the u.k., is in very good straight. confident about their jobs, wealth is going up, there is no reason for them not to spend, and spend they have. corporate's have seen a significant slowdown in earnings and they have responded with the uncertainty i mentioned earlier by a restraining investment. but i don't think there is a recession risk. the other point is that the stock market is coming off record highs. the earnings barth was set relatively high and earnings growth has slowed. analysts are taking time to adjust. ,f you look at domestic profits

they are being squeezed by these higher wage rises. in earnings has predominantly been from the international operations. there it are a number -- there are a number of crosscurrents, but the fear of recession is over done. and while the data will come up, go down, and fluctuate, the broader background for the united states is very positive. the big question is whether we get a little more inflation. the market has been powered by yield on theer protected bonds. if that starts to retrace, that is a much bigger threat than earnings. it is a positive risk-on environment, despite the walls -- wobbles.

fedif people think the won't cut this year but will next year, that would produce a challenge. , you willhen, thanks stay with us for the hour. coming up, we speak to one manufacturer that is doing quite well, actually. meeting estimates in terms of sales, blowing away the eps numbers from the same quarter last year. from samuelsson joins us electrolux. don't miss that interview after 9:30 a.m. london time. this is bloomberg. ♪

matt: you are watching "bloomberg: surveillance." i'm matt miller in berlin for francine lacqua. less than one week until the u.k. has a new prime minister. boris johnson, the favorite to succeed, says a u.s. trade deal will not be reached soon after brexit. he says discussions will be tough and robust, which is certainly to be expected watching how long trade deals normally take and have president trump negotiates. beel -- bell.teven what is your expectation that brexit will happen in october? and what do you see with the pound? steven: i find it impossible to see any resolution to our brexit

issue. parliament will stop a no-deal brexit. boris johnson is not apparently interested in tinkering with the deal we have. and even if he did tinker with it, parliament would not pass it. so we have a complete impasse. we were discussing this at length yesterday evening in the office, we will have to have a general election and it will have to be a general election with boris johnson saying i want to take us out. matt: and that to be one of the reasons we see the pound under pressure. steven bell, you will stay with us. this is bloomberg. ♪

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tech in trouble? netflix. plunges as it shops investors with a drop in u.s. customers. european software giant. -- tumbless as well as well on slower global growth. and an investor tells bloomberg live by hisneeds to commitment to the nuclear deal. >> you just don't get security by praying for it, you must invest. you must do what is necessary. and the europeans need to take necessary action. basically states has in my view shot itself in the foot by withdrawing from this agreement. matt: we are getting breaking news on u.k. retail sales, just as positive as the u.s. figures, it looks. retail sales excluding autos year-over-year up 3.6% in the u.k.

the street was looking for 2.6%. if you look at retail sales including fuel, it is up 3.8%. the street was only looking for 2.6%. so glowing that metric away. way,owing the much of the and as you can see, the market reacts. 1.2480 is the level in dollar terms for the pound. i am matt miller here in berlin. let's check what is going on in the markets with annmarie hordern. this company is surging this morning after , thermation that luxottica parent company, is in talks for a 77% stake to buy the company. s.a.p. plunging, down almost 6% at the moment. out.is because of earnings and the key focus is the cloud business. new orders came in at 15%, a

decline from the first three months of this year at 26%. asos plunging this morning, down nearly 14%, their third profit warning since december. they expect as much as 5 million pounds of below what their previous guidance was. they are blaming this on distribution problems. matt: annemarie, thanks very much. annmarie hordern looking at some of the big movers in today's markets. big news from iran's foreign minister. he said the country is capable of shutting the strait of hormuz, a crucial chokepoint for oil flows, but that it doesn't want to. spoke withvad zarif our editor in chief john micklethwait in new york. he started by asking him where an oil tanker was headed when it was seized by u.s. forces earlier this month. the u.k. said it was going to syria. >> we certainly said that the

boat was not going to syria. we cannot tell you where it was going because of the united states, with its policy of zero oil sales by iran would prevent oil.om selling that the united states is preventing us from doing transparent oil sales. >> you see that with the united states directing britain to seize. exactly. there are note you sanctions applicable to none e.u. member states. e.u. i like the united states does not impose its sanctions on third parties -- unlike the united states. the e.u. has objected to that all along. the united kingdom was not in a position to seize the ship that -- it was not our ship. and it was not destined for syria. but it is immaterial where it was destined. immaterial. none of their business. we were selling our oil. there are no sanctions on

iranian oil. no you and sanctions on iranian oil. nobody has the right to confiscate the ship. it is piracy, pure and simple. denied: you have being behind the attacks on the tankers. who did them then? if: unfortunately, the united states and its allies have made dangerousof water because it is right next to our coastline. we have 1500 miles of coastline on the persian gulf, so it is right there. and we are right there. it is a very clouded place. it is dangerous because it is so crowded? asyes, and last time it was crowded as it was now, the u.s. navy shut down an iranian civilian plane 290 passengers. so it is very dangerous. . we understand and we feel the

danger. that is what we want to avoid, a dangerous escalation. but we can't give up defending our country. >> the revolutionary guard has said that it can close the strait of hormuz. what would be the situation when wewould do that? >> certainly have the ability to do it, but we don't want to do it because it is a pipeline. it has to be secure. we play a major role in securing it, but it has to be secure for everybody. >> do you think you can control your laroche and i -- your revolutionary guard? i don't need to iran.l anybody in but iran has a sophisticated system of governance where everybody does what they are supposed to do and we are not supposed to take measures that undermine our security. matt: that was iranian foreign minister javad zarif talking to bloomberg's editor in chief john

micklethwait. stay with us -- still with us is steven bell. steve, i wonder how much the iran situation concerns you as an economist, tensions really seem to flare up a couple of weeks ago. i guess we are getting back to the normal bad levels of relationships between the u.s. and iran. but now, europe is getting thrown into the ring as well. how much of a problem is this for global growth? jonas: it transmits itself through the oil price. the oil price is higher as a result of the increased u.s. sanctions, which are very powerful, and its transmits itself to the oil price, which is negative use for europe. more of a neutral influence on the u.s. market because of shale oil, but it is just a bit of negative stuff in what is a relatively quiet market.

not --o the oil price is has not been a problem at all, it would seem. we are looking at one year here 63.56.t crude trading at is this having any effect on earnings? it has been changing, obviously. there hasn't been a lack of volatility. steven: i don't think it is the big issue it has been in previous cycles. i think the issue for investors is what is the outlet for earnings? you have mentioned already on this program this morning, companies saying that things aren't going so well, and their share prices are being hit hard. because people are sensitive to earnings. aat's been driving of significant rally in the stock market this year is the fall in interest rate. we have this extraordinary situation where a huge chunk of

government bonds have a negative yield. that obviously drives money into assets that provide a yield -- equities benefit from that. i think that has been a powerful influence. the fact that interest rates went up in 2019 explains why stock markets didn't do well even though earnings grew strongly. so you have to balance the outlook for earnings against the movements in interest rates. so far, the interest rate movements have been very supportive, with the fed tanning dervish, the ecb -- the fed turning dovish as well as the ecb. the move has gone from interest rates going down to interest is going up. matt: everyone is turning dovish. rates continue to go down and there are calls for more quantitative easing that have been going out from more than one central bank. ray dalio was out overnight. saying he thinks the current era of low interest rates and

quantitative easing may be coming to an end. can you understand that view? must be a fairly long-term view. steven: the first thing we have to accept is that we are at this new normal. interest rates are going up from extraordinary levels. interest rates in large chunks of the world -- europe, switzerland, japan, art negative. the idea the interest rates could ever go negative was something i never thought i could see. the idea that they could be sustained negative is even more extraordinary. so we have to accept. that interest rates are in this permanently low environment. that doesn't mean they can't go levels. these my personal opinion is that the u.s. will deliver the 50 basis points of cuts that they promised us. but if the economy continues to be ok in europe -- in the united states, and if inflation picks up a bit i think we will be on

hold for some time. because inflation is a little below target, it has been below target for a while. so they would be happy with a cut from here. but if the trend continues, by 2020, -- europe seems a long way away from raising interest rates. matt: absolutely. steven bell, thank you so much for spending time with us, chief economist at bm oh global asset globalent, -- at bmo asset management. he is staying with us for the hour. next, electrolux ceo jonas samuelson joins us next. don't pass go -- congress slams facebook's libra, is one lawmaker brands it monopoly money. we hear from the top financial chairwoman in the house, maxine waters. this is bloomberg. ♪

matt: you're watching "bloomberg surveillance" i am matt miller in berlin. this up plans maker put operating profit in line with estimates. it highlighted southeast asia as a bright spot, seeing demand was positive. joining us from stockholm to discuss this further is jonas samuelsson, ceo at electrolux. kind of bucking the trend here of bad earnings. you have the positive effects of falling room materials prices. i wonder about your pricing power. can you raise prices further? yes.: we have significant headwinds from both raw materials and tariffs.

for the second quarter in a row we have been able to fully offset those headwinds through pricing. on top of that, we have been successful in driving sales, meaning we are selling more of our innovative, higher-margin, featured projec products in the market. that is pushing our profit margins up in the face of a tougher market condition. recently much have the increased tariffs in the u.s. affected your business? been: i think we have successful in passing on those tariffs in terms of pricing. but that pricing in turn has a dampening effect on overall market demand. we are seeing. -- we are getting the pricing but demand is a little soft as a result in north america. matt: are you saying then that you pricing power has been there but it is weakening as you continue to raise prices? is it becoming a problem? will he difficulty raising prices going forward? jonas: there is price elasticity in the market.

when prices go up, volume goes down. strong.pricing power is our ability to raise prices and at the same time they'll more of our more premium, highly featured products, speaks to the effect that we have significant pricing power and innovation power in the market. matt: what are the products that you think are the strongest right now for electrolux? >what are your rising stars? jonas: the arbor lake -- we are rolling out a large capacity fridge that is doing really well. we are launching a new kitchen range under the electrolux brand globally, starting in australia and asia pacific that is doing well. we are rolling it out heavily in europe now in the third quarter. that is probably our biggest launch of the year and really exciting. also, we are relaunching our vacuum cleaner range with a full-sized, cordless vacuum

cleaner that is doing it fairly well. lots of exciting launches. matt: do you see an effect -- and i am looking at small, portable air-conditioning units. i live in berlin. the germans haven't really heard of air-conditioning. obviously, climate change is forcing many to actually look at it as an option. are you seeing any effects of climate change on your business globally? jonas: i would say, structurally, overtime more and more markets are buying air-conditioners. that is definitely a factor. this year in particular, our biggest aircon market has been in north america, but it has been slow this year. but overall. demand for air conditioning is increasing globally, mainly in asia, but globally. matt: what is your outlook for raw materials? you said they have been an -- a headwind. the dallas fed outlook for prices has actually come down.

but you are a much more global business, not just worried about what is going on in the u.s.. what is your outlook for prices for the rest of the year? jonas: sequentially, prices are coming down. but year-over-year, contractor contract, if you will, we still see headwinds in the second half of the year. but as you say, the trend rate now seems to be clearly in a sequentially downward trend? jonas: finally, the markets. you are planning to spin off your professional products unit. what is the progress of that spinoff right now? can you give us any updates? geraldine:? jonas: the preparation work is going well -- the board confirmed the plan to spin off? business, operational we are targeting first quarter of 2020 for the public lunch launch of the company -- for the public launch of the company. matt: on the interest rates

side, it is in credit be easy, you can borrow at incredibly now. rates right on the equities side, things seem to be at a standstill, maybe at an apex. how do you see it? jonas: i actually don't really have a strong view on that. for sure, when it comes to our spinoff of the professional business, there are clear value creation opportunities there. the business professor different, the valuation profiles are different. it makes sense for our shareholders for us to be will to access the value opportunities separately. we see a lot of benefits regardless of the market trends . matt: thank you so much. really appreciate your time this morning. jonas samuelson is ceo at electrolux. up next, do not ask go. libra,s slams facebook's as one lawmaker burns it monopoly money. we hear from u.s. house

financial committee chairwoman, maxine waters. this is bloomberg. ♪

♪

>> economics, finance, politics. this is bloomberg surveillance, i am matt miller in berlin. facebook shears took a beating for the second day on is cryptocurrency plans. democrats in congress argued the proposal poses vast privacy and national security risks. u.s. financial committee chairwoman maxine waters says the tech firm needs to explain much more about libra. take a listen. rep. waters: it was not good enough. not only did he scored the question about the moratorium, we specifically asked about regulation and what regulators does he think should oversee them. i specifically asked about epso c. he skirted that. >> earlier this week i was at the white house attending the press briefing with treasury secretary steven mnuchin. you might be surprised, they're actually seems to be some

agreement at least in the skepticism that the white house has that you have with these digital currencies. oc. mentioned fs which regulator will be taking the lead on these digital currencies? rep. waters: at this time, we don't know. as i understand, the feds have an advisory committee. there may be another committee over at fintech. i don't know. however, one of the things we have to know and understand is, what is it? >> what is it? is it aers: what is it? payment system? what do they do and how do they do it? you can't even decide what regulator would oversee them without understanding what it really is. >> so what is the next step? that is the number one question i get when reporting on this, people don't know what these digital currencies are or how they will use them. so,, you as chairwoman of this committee what is the next step?

rep. waters: as you know, we have a lot of investigation to do. with are going to have more hearings. we will talk with all the experts out there who know a lot about cryptocurrency and can tell us about the history of bitcoin and blockchain, and how it all works. we will be learning and having more hearings. it was requested today by one of our members that we get mark zuckerberg here. >> so you are calling on mark zuckerberg to come and talk about libra and kylcalibra? rep. waters: he has to do it. it is a big idea born out of facebook. he should be big enough to talk to us about it if he is big enough to grade it. matt: that was maxine waters, house financial committee chairwoman on libra. let's get to the bloomberg business flash with billion hour tanto. viviana: netflix is reporting a drop in u.s. customers and much

growth, losing momentum just as competitors look set to pounce. it marks the biggest hiccup for netflix since 2011 when the splity plans to, strip= it's a dvd and streaming business=. in germany, shares of sap fell the most in almost four years. in the second quarter, the software makers cloud looking slowed after a 20% gain in the last three months of the year. as if he has spent more than $10 billion to buy u.s. based club startups. this bank says it needs to review capital expenditure after it says assets are not satisfactory. the bank is under pressure to improve revenue after years of cost cuts. we spoke to the company's chief executive. >> negative rates actually do and bank business models

as such, in an industry or in a market like europe, where we have overcapacity, consolidation would be natural, particularly domestic consolidation, but also cross-border consolidation. viviana: that is your bloomberg business flash. viviana:. matt: thanks very much. we continue in the next hour with tom keene. a frenche talking to finance minister bruno le maire from the g7 in chantilly. this is bloomberg. ♪

♪ tom: this morning, it is an

inflation experiment that once again fails. at this hour, geraldine sundstrom, on low yield forever. brexit forever, or at least until october 31. will do whatever they can take to keep the government running. the president speaks to the converted and suggests the congresswoman should go back to mogadishu, or maybe the swamp call the university of minnesota. good morning, everyone. keene, and nejra cehic is in london. france the luck what is off. -- francine lacqua is off. earlier in the week, we saw the pound lower on increased low yield risk as we got comments from the jeremy hunt and borris johnson. oneel barnier was another

talking about the fact that he is ready to work along alternative arrangements for the irish border. it raised hopes for a brexit compromise. the shot done parliament is an ongoing discussion. . but that is the way the pound is moving? tom: later, how this will end on october 31. to get to the first word news, . .ere is our correspondent >> at least 20 people are expected to have died at a suspected arson in an animation studio. survivor say a man burst into the studio yelling "you die," then set it on fire. he was arrested. . the trump administration is sending more troops to the border with mexico. they are already 4000 there. . the duties include being stationed at ports of entry and working at migrant holding camps. iran's foreign minister offering a grim outlook for the chance of opening talks with president donald trump. javad zarif telling bloomberg

tv, the u.s. caused a problem by pulling out of a nuclear deal with tehran. >> you just don't get security by praying for it, you must invest, you must do what is necessary, and the europeans need to take necessary action. the united states has basically in my view shot itself in the foot by withdrawing from this agreement. also said iran could close the strait of hormuz, and the passageway for ships carrying oil from the persian gulf, but he said it doesn't want to. last month retail sales in the u.k. and effectively rising, after two months of decline. consumers have been a bright spot in the u.k. as businesses keep cutting investments. the bank of england says there has been a significant increase in the default rate of credit cards, the highest level now in two years. global news, 24 hours a day, on air and at tic-toc on twitter, powered by more than 2700

journalists and analysts in over 120 countries. hurtado.eana tom: thank you. as negative, oil a little bit weaker, american oil at $57 a barrel. showing, it is sort of a bull market. the 10 year yield and the two year yield in the u.s. have rolled over again, a little bit of lift. that should be green on the screen, higher by one basis point. and sterling at 1.2481. nehra: tom, we are seeing european equity yields lower. and it is a different story for some of the european banks. stoxx 600 off by .5%. we're generally seeing a risk off. spared.ingly, gold not higher onned cable,

comments from the chief bradley negotiator for the e.u. saying he is very to work on alternative arrangements for the irish border. does that mean we could see cable compromise? we will see? tom: let's look at another subtle chart. this is a study of the 10 year yield. where we come up and we hit one moving average, this is the claiming moving average. we came up again, and we have done it now it -- it third time. we are just not doing it, nejra. we hit a row since 2017, a wall and go right back over. nejra: i loved ray dalio's comment on linkedin about the inflation. of a he said, in that environment, you will want to be buying gold. and j.p. morgan saying the u.s. could get there. we will discuss that. the dow jones transport index

has been lagging industrials. i know we don't like to ask these, but it is an important story to show. joining us for the hour is general didn't sundstrom, pimco fort fully manager of asset allocation. bob michele from j.p. morgan asset management. thank you both for coming on the show. let's look at the 10 year yield, heading back towards 2%. how much lower can we go. tom: have much is a gravitational pull on that 10 year yield? bonefish all the way down to zero. we have had the recovery, it is coming to an end, and now the central banks, one after another are. cutting rates we saw that overnight with the bank of korea. we have seen it with the bank of indonesia. you will see it at the end of the month with the fed. you may see it for them use the ecb sooner than it will expect

-- you may see it with the ecb expect.than you that is a journey we are on until something different happens. nejra: is it time to favor duration? geraldine: i think that market price insurance cuts a little bit beyond. it is a question of timing to see whether we get a recession. there is a recession on the horizon and at that point the fed will bring rates to zero. but we are not quite there yet. data is resilient, the consumer is resilient, and the weakness is really in the industrial world due to uncertainties on tariffs. durationrecommend safe . it is a great portfolio diversifier even at those levels. tom: you just said that it is absolutely stunning, bob. he has the vector on the 10 year 20%. did i hear that correctly? -- at 0%?

not happen this year, but i think we are getting to a point where things are rolling over. we are in a trade war, you're seeing the impact on corporate central banksn forced to scramble to react to that, and by the way, they haven't been able to create higher inflation expectations for the last couple of years so the only thing they have left to do is cut rates as far as they can. tom: bob, i know you are talking on his personal portfolio on a daily basis. but the price movement you are describing is absolutely thunderous. i don't what you to talk about j.p. morgan's business, i know it is out of bounds -- what does commercial banking in the western world need from central banks if we are going to avoid an early 1930's yield structure? bob: what they need are for the central banks to react in full

force and try to drive growth and inflation expectations higher. everyone will benefit from that. if it means that the ecb has to cut rates further into negative -.ritory, whether it is 5 percent, then they will need a little help. tom: i get that, but don't we need to clear the asset structure, clear the debris out so that we avoid the social cost of negative rates on the public? bob: i think what you're talking perhaps monetary policy can only go so far. perhaps it can create a favorable and accommodative backdrop and perhaps at this point in the cycle, we need something more on the fiscal side. nejra: will you keep interest-rate exposure, would you also want to keep exposure to risk assets?

geraldine: yes, but cautiously fashion.moderate we recommend much more quality assets when it comes to both credit and equities and focusing on those subsectors. tom: geraldine, what does it mean on asset allocation? pimco has done a good job of structuring for a low rate environment. i am not saying you need to agree with bob michele, but if we sustain low rates and lower real rates forever, what does that do to our allocation? geraldine: at this juncture, we are not recommending to lower. zero interest rates is an amazing discount factor, and might attract a lot of people to equities. but you cannot lose the fact that earnings are coming into a recession. therefore, you have to weigh those two sides.

typically equities haven't done so well in the earning sessions. fixed income still looks all right. and a lot more caution when it comes to credit and equities, staying in securitized, higher-quality credit. and when it comes to equity, overweight certain factors such as prefer larger cap, rather than going into value. tom: jp morgan are saying we could actually go below zero on the 10 year yield. and it could be triggered by what they called if a recession. nejra: is that something you foresee as a possibility -- a vanilla recession, and on what timeframe? bob: what you have seen is the tip of the iceberg. here are two things to consider. when you look at money market funds or short duration funds, they are at record highs in terms of assets. so although bond yields have been falling and equity yields have been going up, that is as gold and cryptocurrency. in fact, money is piling up in funds.arket

what happens, when the fed begins to cut rates that money comes out into the bond markets. that is a massive pull. the central banks have not begun the easing cycle in earnest. what conference next year -- what happens next year? they are cutting rates and it are expending balance sheets. when they do that, rates plunge. if there is some risk taking that gets pulled back and you have risk aversion, i think geraldine that a good job of highlighting that as a possibility. that money is coming into the bond market. pulls ofe three big money that could come into the bond market but haven't. yes, you could go negative. nejra: alright, our two guests will be staying with us for the hour. up next, netflix shares plunge after slower growth overseas. we have more on that next. ! >> --this is bloomberg. ♪

♪ >> this is bloomberg surveillance. let's get the bloomberg business flash. investors were not expecting this from netflix. the streaming video giant shock to the market by reporting a drop in u.s. customers and much slower growth overseas. shares are much lower in the premarket, the biggest black eye for netflix since 2011, when the company split its dvd by mail business from its streaming operation. to germany, shares of acp fell the most in over -- shares of sap fell the most in over four years. they were up just 50% after a 26% gain the first three months of the year.

sap has spent more than 10 billion to buy two u.s. based cloud startups. the deal with red hat close last week. the company reported earnings yesterday. cfo jim cavanaugh wouldn't say how he expects red hat to help with cloud computing. ibm says sales fell for the third straight quarter. that is your bloomberg business flash. nejra: thank you. let's get back to netflix. we are joined by bloomberg intelligence technology and media analyst. matt, great to have you with us. netflix, the second quarter tends to not be as good as the others. is this just a blip or the start of a long-term trend? matt: certainly, most analysts are agreeing with the company that it is a blip. blip. is some

to come in at 2.7 million against the forecast of 5 million squibbers was a big miss. they expect them to have a better handle on what was going on in the business. the u.s. is a concern because of the u.s. actually shrank marginally. and you are seeing a combination of factors. it was a good q1. so it shows you that when you are working on a business model where customers can churn off on a monthly basis, you need to be on your game all the time in terms of pricing and content, to keep people on the platform. nejra: so how much of a risk is the competition? matt: we are about to enter this disruption 2.0 in streaming with a disney and apple in particular coming on into the market in the coming months. but not just them, there are others. the u.s. market on average, most people who stream have an average of three services. they have been stuck at that

level for a year or two now, so i think it will be a test of customer loyalty and whether they get taken away to the disney or apple platforms. it is not just a risk for netflix, it is a risk for the traditional pay-tv cable platform as well. tom: where is the profit? i have a free cash flow of -3 3 billion modeled out by bloomberg. they are doing the amazon model, but it is not amazon, is it? isn't.t i think the next two or three years will be a real test of the business model given the weight of the competition coming into the market. it will really stretch them in the next couple of years given that they are so heavily cash flow negative. they will have to invest more and more in content. the positive is that they have things like the disney content rolling off, it frees up cash flow that they are currently paying to disney to invest in their own content. but they need to keep building their customer base. 151 million today, but it needs

to be bigger to make the business model work into it with cash flow. tom: matt, thank you so much. we have a lot more coming up. andldine sundstrom of pimco bob michele of j.p. morgan asset management. ace ins are in the bond technology, but it is this whole dream of beating amazon as well. buts not 2000, geraldine, what is it? what is the character of all these companies chasing the amazon model? geraldine: i think the tech sector is different from the 2000 and should be split into two parts. there is a part of the tech that established, that has a lot of quality properties that are generating growth and very strong cash flow. on this one, we would definitely overweight, especially in the software sectors. then, there is the part that is till -- unicorn might be an

exaggeration a part of tech that losses, andling on it is really about having faith in the business model. ,hen you separate those two it makes the environment very different from the 2000 era. in that sense, the first category of companies that i described that still have a high growth, high cash flow balance sheet are cheap to the market and relatively attractive as investments. nejra: what other distinctions beyond tech are you making in the corporate credit space in your portfolio right now? geraldine: i suppose we are making a big difference between securitized investment grade and high-yield. when it comes to high-yield, very much like j.p. morgan, we are recommending people to be very careful. paying a lot of attention to maturity of your high-yield book. we have good visibility on cash flow. when it comes to credit, we think that the premium is very low.

we think it is an asset class that can have bumpy liquidity, when risks need to be shuffled from one balance sheet to another. we are relatively cautious and prefer the securitized area, like nonagency mortgages, or even agency mortgages for that matter, where we feel the risk meme is relatively fair. back --, let's come this is bloomberg. good morning. ♪

>> you just don't get security by praying for it. you must invest. you must do what is necessary. and the europeans need to take the necessary action. the united states has basically in my view shot at else in the foot by withdrawing from this agreement. we certainly have the ability to do it but we certainly don't want to do it because the strait of hormuz is a pipeline. it needs to be secured. we play a major role in securing it but it has to be secure for everybody. we are not going to build nuclear weapons, because if we wanted to, we could have built them long time ago. the supreme leader had made a commitment, a religious commitment, which is not breakable. his religious view is that nuclear weapons are from the bashar for been -- are

forbidden, haram in muslim terminology. nejra: that was iran's foreign minister speaking to john micklethwait. it might take some assurance from that interview particularly on the comments of the strait of hormuz, a big chokepoint for the global oil market. any time we have had concerns it could be shut off, have seen it like in the oil price. oil is fairly steady today. senator paul of kentucky will do us some form of john kerry redux in discussions with iran but it is a very different washington calculus the we saw -- that we saw months ago. nejra: a lot more politics in geopolitics of talk about. coming up, we will take a look at sterling, took about brexit. interesting most today. the pound has been oscillating about this week on the increased prospect of no deal, than we get comments from michel barnier of the e.u. say that there could be

some negotiation when it comes to ireland, and that has perhaps raised the prospect of a deal. tom: what i think is really important to get off the calendar i know it is a boring, tape even though bob michele has told us it is not, the tape is the move, the real issues on the political calendar going on july 23 and then, july 31. i have fascinated by the debate in london. i find it just amazing what lawrence had to do yesterday. lords had to do yesterday. nejra: and we have geraldine sundstrom and bob michele here. what a team. this is bloomberg. ♪

♪ "surveillance," yields in today. 1.81, maybe 1.79.

we get back to an important discussion on fixed income in a moment. areana: the u.s. and china struggling to find a path forward trade talks. there has been slow progress on initial demands. donald trump complained china is not buying the large amount of farm goods they promised. itsu.s. has not improved treatment of huawei, a key chinese demand. to president is deciding offered a-- amazon deal worth $10 billion. republican lawmakers have complained companies such as oracle have been frozen out of the competition. iran's foreign minister says the u.s. shot itself in the foot by pulling out of the nuclear thatment and telling us

that does not mean they will develop a nuclear arsenal. >> if we wanted to build nuclear weapons we could have done it a long time ago. the supreme leader made a religious agreement that is not a couple. his religious view is that nuclear weapons are forbidden. haram in islamic terminology. viviana: he accuse european nations of not living up to their commitments under the agreement. in puerto rico, thousands took to the streets demanding the governor resign. showgue of online chats him making misogynistic slurs and mocking his constituents. puerto rico has been mired in crisis, struggling to emerge from a crisis from a decade ago and federal funding to recover from hurricane maria. global news 24 hours a day, on air and @tictoc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. i am viviana hurtado.

this is bloomberg. nejra: thank you so much. with less than a week until the u.k. gets a new prime minister, boris johnson is a newest dutch a u.s. trade deal will not be reached soon after. discussions will be tough and robust. results of the leadership context will be -- contest will be next week. we are seeing the pound rise today and comments from michel barnier perhaps talking about negotiation on the irish border. we have had more concerning comments from jeremy hunt and boris johnson around the backstop. as the pound attractive at all? bob: i don't think the pound is attractive. the backstopof will escalate and boris johnson will use the threat of a hard brexit to try and negotiate a better position.

i think the pound has difficulty in that environment. what is more interesting is gilt and the sea change, i carney which tells us -- by carney which tells us there is a sea change and he is willing to respond with more monetary accommodation. nejra: can i get your take on those and ask whether it makes you long gilt? nejra: we have a much more -- geraldine: we have a much more neutral approach on this. brexitend of the day, will still be benign but possibilities of new elections on the cards. we focus where we see excess risk premium and we see that in credit, specifically in the financials in the u.k. they seem to be doing relatively well even in the case of a hard

brexit would like to earn the premium in the u.k. spread. tom: if we get the quick spend of your jp morgan call on low rates, what does that due to to commercial incentives in the united kingdom, commercial someng, trying to find form of ninety-day libor, et cetera? what does your call do in the united kingdom from the doing of business day today? bob: i don't want to take credit -- tom: i get that. bob: i attribute that to him. i'm sure i will get any mail from him. the central banks are getting back to the cutting cycle, that is true. net interest margins could be under pressure. i think the banks have gone through a decade of rebuilding their capital buffers and should be able to withstand that.

willtes get too low, you need help with central banks -- from central banks. say the germaney two-year will do given the extrapolation over to your low rate call in u.s. and u.k.? i need to get you in trouble. bob: it is just going lower. tom: thank you. bob: ecb rates are -4/10 of a percent. what math gets you to minus three quarters of a percent? people need a safe haven. it is in benchmarks. there are a lot of tracker funds that by it at any kind of level, so they are willing to pay some degree of safe keeping charge for two-year germany. tom: i want to make clear, bob michele has given me going there someday. would go tondstrom

three decimal points. nejra: we are talking about the 10 year bund yields and people are saying there is no floor. goldman is calling for -55. let me get your view on investing in the german curve because i get told even with negative rates, there is value. geraldine: we think there is a floor on the negative side, a moment where people could switch to other things and we are having people go to u.s. to ration. there is more capital appreciation. the u.s. curve is steep and if the rates can go lower, it should flatten and reserve -- resemble other curves. we are liking a little bit more the backend of the curve in europe. bob: one of the things that is driving the following rates in

europe is the cross currency swap faces. if you take -- basis. if you take germany, swap it to yen, you are picking up 3/10 of 1%. it is higher than 10 year jgb's. what could change that dynamic as the central banks enter their rate cutting cycle, and the fed starts to bring rates down, that could shift even more money into the u.s. bond market because the cross currency swap hedge will decline for a lot of foreign investors. just wanted to say, for all of you watching, this is an extraordinary discussion of fixed income we are seeing. geraldine sundstrom of pimco with us and bob michele. we will continue. this is extraordinary. today, the g7r

meetings in chantilly, maria tadeo is there. and -- bruno le maire melinda gates. this is bloomberg. ♪

♪ this is bloomberg "surveillance." its profitising forecast for the second time this year. earnings expected to rise by as much as 15%. the outlook was boosted by nude drugs for heart ailments -- new drugs for heart ailments and psoriasis. -- cutting global demand for the third time in three months, adding concerns trade disputes

plagued danske -- the bank says extra compliance costs and a tougher trading environment force to lower its outlook for this year. bankhave been in survival since the estonian money laundering scandal last year. >> we have been trying to aim for and are hoping for a joint settlement across all jurisdictions. can give theng we notion to the regulators to have a combined view on this case we had in estonia. danske bank faces criminal investigations in europe and the u.s.. are having an exceptionally spirited conversation with two guests in london with nejra cehic, bob michele and geraldine sundstrom.

what timco calls the mystique of 2%. -- pimco calls the mystique of 2%. there is a mystique about bond total return. it is the coupon and its capital gain. are we getting used to a new bond total return looking out 5, 10 years? geraldine: certainly, that is why pimco recommends to overweight u.s. to ration in portfolios because we are seeing capital gains out of europe. there will be a floor to this. you have to pay attention to your role down on the curve -- roll down of the curve and that is why we preferred the belly of the curve, may be a little more out on the e.u. curve which is steep. tom: this chart showing the -10

year japan and germany and the huge distance of the united states. you say we will narrow that gap in the quicksand of the global nejra. what does it do to the stock market? bob: i think initially, as the central banks respond with more monetary accommodation, as long as you are not in recession it should continue to inflate all asset prices as it has done periodically over the last 10 years. that should be good for equities. what happens if recession is on the horizon and earnings fall? we don't think the equity market could withstand that. an important point, there is an awful lot of faith that investors in risk asset classes are placing on central banks to provide monetary accommodation. cycle going to end of

cycle, central banks could ease and provide monetary accommodation and that forestalls a recession, we would never have recessions. it does not work that way. at some point in time, late cycle becomes an cycle, you have a recession, and monetary policy can cushion the downside. nejra: how significant is the real rate in the u.s. being negative since june? bob: we assume the central banks have squeezed us bond vigilantes out of the market and they control it. i can sit and fight it. do not fight the fed. i will not fight the central banks. if they want to create higher inflation expectations and that means a jade curve taking -- j curve taking rates negative, i am along for the ride. nejra: michael -- bob talking

about not fighting the fed and not fighting the market. geraldine: it is a supportive environment for emerging markets as long as we do not fall into a recession. they have the same duality has equities that bob highlighted. emerging market is hard as a blanket statement. high-yielding emerging-market currencies nowadays, especially compared to spreads or other expected returns, look rather juicy, especially from a euro standpoint. we encourage that is a carry trade. about, are all talking the central banks are responding. there is global monetary coordination and they are doing what they can, but it is late cycle. you need something on the fiscal side. maybe this is something they

should be talking about at the g7. nejra: we certainly have been talking about it. geraldine sundstrom and bob michele stay with us. , canada to bill morneau finance minister, live from the g7 in chantilly, france. that is next. this is bloomberg. ♪

♪ nejra: i am nejra cehic in london with tom keene in new york. let's turn to the g7 and a clash over digital taxation. france refused to budge on its levy that would hit tech giants. guest, us as a special bill morneau. played a key role in tax cuts for the middle class and small businesses in canada. we have been talking about the fed and bond market and the prospect of fed rate cuts. the interestrned rate differential between the u.s. and canada could lead to a stronger canadian dollar? we obviously recognize

that there is differences in our economies that are there, but i think what we are seeing is the canadian economy is strong in the u.s. economy is also strong. that is a positive. the rate differentials to the extent that they obviously exist today and will be continuing to do so or just a reflection of our economies. i don't spend time worrying about it. nejra: talking about your economy and the position it is in, he referred to a strong economy. what is more important, stimulating the economy or balancing the budget? bill: from our perspective, we have been pretty clear. canada is in a foz it -- positive fiscal position and enables us to invest in middle-class canadians. our strategy has been working. we have the lowest rates of

unemployment in a generation. we have wage growth that is positive. there is always going to be more work to be done, the results of our approach, investing in our future have been clearly positive for canadian and positive for our economy. tom: minister, it is good to see you wearing the toronto raptors paean -- pin. the focus of the trade agreement is between mexico and the united states. distill the appointments of an agreement -- distill the importance of an agreement between your canada and trump? bill: we obviously see the ratification of the usmca as being critically important. it enables investor confidence, so we are looking towards that process going on in the united states. andncludes mexico, canada,

the united states getting to agreement. i am optimistic we will get there. it is a continuation of the strong working relationship with the u.s. administration, defending canadian interests and being constructive on getting to . better outcome tom: we speak of the idea of a polarized nation. now me the balance you face and the struggle of a resource rich canada with all that is going on in ontario and quebec. how do you balance that day today? bill: you bring up an important issue. he really have to think about the environment and the economy at the same time, and that has been our approach. we have a big energy sector. ournow that getting

resources to international markets is important and that can be important for the global market, but we need to think about the environmental impact. we put a price on pollution across our country as being a critically important step, recognizing our need to reduce emissions over time. getting that right is critically important for the future. we think canada is very much in the position where we are the ones who can show how to do that, how to address both of those issues. tom: you need to say bilateral or multilateral. how do you and mr. trudeau and ms. friedland, how do you balance your trade policy given a mercantile american president? think you have seen our approach. hand, a on the task at nice canadian interests. you sue -- use saws work with

the u.s. -- saw us work with the u.s. on tariffs and why it is better for the united states and canada. we got to a much better outcome and we will continue to be just -- constructive day after day. we hope that will be reflective on how the g7 can work together recognizing trade challenges, recognizing the u.s. has an agenda and we need to deal with it constructively. that is how we have taken it and when i talk to my g7 counterparts, it allows us to make sure we expand our relationships together in a way that is healthy for our economies in the global economy. nejra: what discussions have you had at the g7 about governments doing more heavy lifting with monetary policy globally a lot of people say reaching its limits? bill: we have had discussions around the table about the

importance for countries that have fiscal capacity to be making investments. that is clearly what we have done in canada, so it is a good thing for me to be able to advocate. monetary policy in the current context is not something that will enable us to deal with any prospective significant challenge, so we need to recognize that. that is an ongoing discussion, not a new issue. it will be important for us to think about that in the face of challenges. nejra: how real a risk as a housing correction in canada? bill: from our standpoint intended, we see that household indebtedness is a continuing issue. we have been very measured in dealing with our housing, putting in place measures that ensure people take on debt prudently. that has been positive. we have reduced the rate of

increase in household indebtedness. ,e will continue to monitor it but i'm confident we have dealt with at risk in the appropriate way and it allows us to move forward on our broader initiative, thinking how we ensure that the middle-class class can deal with affordability. we need to think about the long term as well. , from the g7 and france, bill morneau. united health care -- away from the banks and j&j, united health out what they modest beat. -- with a modest beat. ♪

♪ tom: this morning, yields roll over. an inflation experiment fails.

tom porcelli on chairman powell's terminal value. until october, or 31. lords and tories will do what it takes to keep parliament running. prime minister johnson placed his levers. the president speaks to the converted and says the congresswoman should go back to mogadishu, north dakota state, or maybe the swath called the university of minnesota. this is bloomberg "surveillance," tom keene in new york, nejra cehic in london. this is a huge deal, the politics and polarity of your united kingdom and america, it is extraordinary. nejra: it is sending the pound on the move in the u.k. boris johnson saying that theresa may did's brexit -- dead brexit deal needs to be junked.

the pound moved higher. so many being -- conflicting messages. tom: buried in the news flow as well is the idea of a $1 trillion deficit. this is the g7 meetings in france. who do we have? is maria there? nejra: yes, and we just caught up with belmar now -- bill morneau. conversation, our maria tadeo with some good questions to bruno le maire yesterday. in japan wherert 23 people are believed to have died in a suspected arson at an animation studio. three dump-in -- does and others were injured. a man burst into the studio yelling "you die" and then set

it on fire. president trump is sending more troops to the border with mexico. there are already 4000 troops. they will be stationed at ports of entry and working at migrant camps. retail sales in the u.k. surprisingly rising after two months of declines. consumers have been a bright spot in the u.k. as businesses keep cutting investment. there has been a significant increase in the default rate on credit cards. global news 24 hours a day, on air and @tictoc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. i am viviana hurtado. this is bloomberg. tom: equities, bonds, currencies, commodities. futures negative three, curve and euro go nowhere, oil south.

that is american oil at $57 a barrel. -- 14.31 on to 12 the vix. over,o yields that roll 2.05. i put sterling in because nejra would have a tantrum. nejra: i have got it as well. lower for a second day. earnings in europe from the banks. a similar story in the u.s. for net interest margins. will we get to negative rates on the treasury 10 year yield? some say so. gold on the back foot. ray dalio talking about reflation. you want to buy gold in a paradigm shift. tom: we are going to do that, fold in the bombshell research report from jp morgan looking

for a long glide path to a lower interest rate regime worldwide. let's dovetail that into your world, tom porcelli. you are expert on wage growth. it is not there. sustainedcalling for or uniquely lower and make an industry and that means wage growth goes nowhere. tom: we tend to agree that rates are basically going nowhere. we have thought this for some time. that is just sort of using the dynamic in place today. if we think about in the coming years and demographic realities, turn rates of growth probably slowing down. some things could save the day in that regard, but if that base case plays out, it will be incredibly difficult for policymakers to do much with the policy rates down the road. tom: they are constrained and have lesser degrees of freedom,

and all of the emotion of that is labor dynamics. the is your call on unemployment rate out six months? tom: we do think we could see improvement. tom: a lower statistic? tom: absolutely. we think that is probably the low point and then you'll will start to drift higher over the coming years. it is interesting when we think about wage pressures in the united states. it is a high conviction call for us and we will see pressure build. nejra: every person that tells me that inflation is going nowhere in the u.s., i have someone saying it is going to grind higher and some point me to the trim means pce. what measure is guiding your outlook? tom p.: this is the key push and to ask.

one thing we have been clear about is how dusted off the word "transitory." it was the right thing to do. we look at the volatile versus nonvolatile components of pce and the volatile components have done nothing but drift lower over the prior several months. it has been fair to call inflation transitory. the nonvolatile components are running at about 2% in the aggregate. we are sympathetic to that bigger idea in the more immediate term. one thing i have been fond of saying is that if you look at core services inflation, it is running at a 3% pace and that has been true for many months. there is inflation if you know where to look, but in the aggregate it is probably how most people pay attention to it. people seem to be comfortable calling it soft and this is a conversation i'm sure we will come back to.

1.7 from ag to be core pce perspective. blunt toollicy is a and with some precision we can get to 2% inflation precisely. this is a much bigger point, 1.7 where we are at target. nejra: fine-tuning policy tricky, so many people tell me. what should the fed do to avoid a policy mistake? tom p.: if we are being rational and fair, a 25 basis point cut -- we do not believe in a 25 basis point cut, yet we recognize they will do it. we don't think a cut will unleash some imbalance in the immediate term. calling this a policy mistake today might a bit of a stretch, but as we sort of look down the road, just think about this. you have a consumer that is

q2 and at a 4% pace in we are cutting their discount rate. logic.rt of defies we can get into the risks of that down the road. tom: there is a log chart 10 year yield, slope matters and these are fancy moving averages. february, test one failed. may, test one failed. it is an elegant chart. here we are in july and we come up. the reflation experiment, the market is saying no. that is a fact. tom p.: it is easy to have 2% tends when the rest of the world is looking at negative yields. it is a pretty high conviction call for us. we do not think that 10 will go far. tom: put up that billboard that

showed the japan and germany rate with the u.s. rate. i think one of our interns from indiana university did this, absolutely extraordinary. u.s. yield, germany yield, japan yield. it is in there somewhere and shows the disparities. bring me to tears, this is extraordinary. we have never seen a differential like that, have we? nejra: i have got a line chart i can bring up later to highlight this as well. youporcelli, i want to ask because you put the huge rate thatrential so far to go you have got summit jp morgan saying in a vanilla recession that could set the 10 year off and we could go negative into quicksand in the u.s. cannot escape. your view on that? tom p.: i am not familiar with

the crux of that study. what i would say is it is easy for lower yields given everything we talked about in the last few minutes. i am sympathetic with the idea that yields will drift lower. how much lower is an outstanding question. in a vanilla recession, it is to get intor 10's negative territory, but if we do have a vanilla recession, yields will drift lower and we do not think into negative territory. this is the right conversation to have because we are talking about structural problems over the next few years, and is easily to seriously entertain that idea of materially lower. nejra: it is over a multiyear period. three to five years, something like that. tom p.: in the immediate term,

it is incredibly difficult but in the immediate to long-term, absolutely. nejra: great to have you with us, tom porcelli stays with us. speaking inre chantilly, france. we are continuing our coverage throughout the morning. coming up on "daybreak america," a conversation with bruno le , 1:30at 8:30 new york london. this is bloomberg. ♪

♪ this is a big idea that is borne out of facebook. if he is big enough to create an idea that is global in nature,

he should be big enough to come and talk to us about it. tom: the chairwoman speaking on any number of issues, talking on the tensions we have seen in regulation and technology. right now to the attention of the politics of the land worldwide, it has been an extraordinary set of days in america. everyone weighing in, including a gentleman of about dutch operations in the obama administration. this is an important washington post essay by a gentleman running one of our most challenged cities. how democrats will help their nominee win states such as wisconsin, michigan, and pennsylvania. it was the liberals who controlled the party's agenda for decades before president clinton's victory in 1992. that's one of the reasons we lost every presidential election between 1968 and 1988 except the

post-watergate win by carter. clinton pulled the democratic party out of obsolescence. derek wall bank joins us today. of there the moderates democratic party? rahm emanuel says they are out in force. derek: they are propping up joe biden's campaign. he is leading in most polls. the first one i have seen him trailing on where, let harris leads by just two and biden leads everywhere else on the simple question of electability. he polls best head-to-head against trump and there are a lot of democrats, i keep seeing paul left her poll, the number one thing you want to do, beat trump. that is all it comes down to for democrats.

everybody else on the left side of the party from harris to warren to mayor pete have to convince people they can beat trump head to head which means wisconsin, pennsylvania, ohio, iowa. the midwest road to the presidency is the easiest and most obvious way to get there. tom: with your experience more in reading, do you have a sense the president can expand the constituency? he havehe margin, does 10 basis points beyond the core? bill: that is a good question. -- derek: that is a good question. he is doing a full on base play. some republicans thought their base did not turn out like they needed it to into thousand 18, but this is a guy -- in 2018,

but this is a guy who thinks everyone was wrong before and he will keep doing what he is doing. he does not frankly believe a lot of what political experts say because people counted him out for. tom: you are so styling in that bowtie. i cannot wear that tie in new york. you can only get away with it on the pacific rim. styling from singapore today. there is much more going on. we will come back -- we have lots to talk about with tom porcelli from rbc capital -- capital markets and we have a lot going on from chantilly. that is where the g7 is. this is bloomberg. ♪

♪ this is bloomberg "surveillance." regulatorsust finding qualcomm $200 million. pricing accused of chips sold out to eliminate a small arrival. they were find last year. investors have not been expecting this for netflix, shocking the market by reporting a drop in the u.s. and slower

growth overseas. it is the biggest decline since 2011 for netflix when it split its dvd by mail business from its streaming operation. tom: stranger things have happened. greatly appreciate that. ovide, a smartra essay on netflix. writing with the appropriate snark on netflix, trying to bring that up. the theory goes netflix will stop bleeding cash and borrowing money because they will only be able to raise the prices when it comes essential to paul sweeney's household. it is far more like conventional entertainment companies then an amazonian supermarket. tom porcelli is expert on the media.

moment wenally the discover netflix does not amazon? paul: it might be. the issue has been the virtuous circle. add more subscribers which generates more revenue which allows for more programming which allows for subscriber growth. , had a veryrowth big miss in the u.s. and internationally. for the very few bears, this is a little bit of a -- tom: we counted up the number of conference calls we have been in over the years as we were doing tequila shots, and it is painful. did they read between the lines on the conference call? is there emotion about the plan forward? paul: the company did a good job

saying, we missed on subscriber shares. we raised our prices and did not have a lot of new programming, so they are putting it all out for the third quarter, saying they will add 6 million subscribers. in9 will be the biggest year terms of subscriber growth, so they are still very aggressive, back have story. the stock -- back half story. the stock will take a hit today because it is a miss on subscribers. nejra: you have wall street coming out saying this is just a buying opportunity as we look to the second half. netflix is saying this is a blip and the second quarter tends to have been worse than other quarters anyway. is this a blip? paul: it might be more, because this was a big miss on the u.s. and internationally. as they introduce new shows in the back half of the year, will

that be enough to reignite subscriber growth and get bulls back on track? this was a significant miss because the market early focuses on subscribers and they missed in the u.s. and internationally. nejra: a lot of those subscribers even with original programming are wanting to go back to the old favorite which netflix is losing. with competition, it is not so much that they might take customers from netflix but stymied its growth. landscapecompetitive will change in the second half of 2019 because disney plus will launch. one can argue no one has more and better content than disney, then you have comcast and nbc, a lot of new streaming services. need tos joyce byers get together with jim hopper on "stranger things"?

that is one of their properties that is working. $12p.: you will spend billion to $15 billion on content this year, more than anyone else in hollywood, and we have to see whether it shakes out. tom: take the advice of paul sweetie -- sweeney. you have got to get more winona ryder in the plot of "stranger things." us, rbcelli with capital markets. an important conversation with the foreign minister of iran, this is bloomberg. ♪

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check it out! now you can schedule a callback or reschedule an appointment, even on nights and weekends. today's xfinity service. simple. easy. awesome. i'd rather not. ♪ nejra: german finance minister saying the trade war has created uncertainty in the global economy, speaking at the g7 in

chantilly, france. we are tracking all the developments. tom: it is always good to see the former mayor of a major city an important-- thrilled tom are porcelli is with us. era is late in the draghi where they are beginning to look at the inflation goal. this is a huge debate within economics now. this was alluded to in the last hour from pimco with the mystique of a 2% level. much more on this important story. this is the arch issue. we framed up a structure amid normal inflation or reflation. target dead?

tom p.: it is incredibly difficult to get there. you have to consider what the likelihood is of getting to sustaining and going north of 2% and a note -- in an environment where we import disinflation or than any other time in history, and number two, this gets into the weeds but i will give you an overview, this idea of importing disinflation on top of, when you think about quality level adjustments that the inflation folks make to the data. in an environment where you are dealing with quality adjustments , it is not difficult to get to 2%. the biggest example was cars. my parents bought their first car in the 1960's for $6,000 and now the average car price is

$30,000. in cpi, car prices have been flat and slowing. in a had don ackley adjusted world, it is difficult to get to world,nically adjusted it is difficult to get to 2%. tom: a modest drop in euro off this bloomberg story and the idea that they go with a more gentle inflation goal which lowers their relative interest rates to the rest of the world and makes dollar less attractive , euro less attractive. within this pricing, the idea of effective technology, everybody is dealing with this. nothing has changed, has it? tom p.: not today. i am fond of saying if we want nicallyt in a hedo

adjusted world, why doesn't ford and gm adjust their profits? this notion that 2% is the right target for today is misguided. one of the interesting things when the fed has a big powwow talking about inflation, we found it disingenuous that the conversation started with the fed saying, bring your studies to our powwow but make sure you are anchored with 2% as your inflation target. it would be better if they considered the alternatives. nejra: with the fed having to react, best -- that leaves less ammunition in the next downturn. tom p.: the notion of ammunition, the right way of thinking about that is this. the fed will not be able to cut rates as much as they have in a forst, but this is better or worse idea and then the fed will roll into quantitative easing.

that is the tool kit. will bes they have used used again and that is quantitative easing. nejra: when you look at the impact of the trade war and we brace ourselves perhaps for more escalation or some sort of ongoing spat. warhe impact of the trade deflationary or inflationary on the u.s.? tom p.: you share opposing views because both are sort of right. in the immediate term if you have a trade war, you will see inflationary pressure. that is a foregone conclusion. assuming there is no new additional tariffs after the big round of tariffs kicks in, the price will just adjust so in t plus 13 months it shakes out and you wind up running at the same pace prior to when the tariffs

went in place. there is no better opportunity for the fed to use the word "transitory." tom: we talk investments and corporate performance and folded into way topline economist -- fold it into a topline economist like tom porcelli. report, here is the chairman and ceo of honeywell which i will consider a legit company. bring it up, a little hard to read. raising our organic sales guidance to a new range of 4% to 6% percent. nominal gdp story of american resilience, isn't it? tom p.: i could not agree more. i love that comment you were able to dig out. think of that in the context of the fed cutting rates now.

think of that in the context of what i highlighted earlier that you will have a handle on consumption. i will say it again as i have said many times, the fed is lacking justification for cutting rates and the hard data and comments like this are driving this home. tom: according to tom porcelli. tom p.: [laughter] nejra: i have been focusing on the dow transportation index, lagging on the industrials. they both have to rally to be bullish on the stock market so stock bulls might take fright. do you take fright at the transportation index has been lagging? tom p.: one thing we have to keep in mind as you have a fundamental backdrop in the united states that does not get much better than where we are. i am not making the argument that it is perfect, but it is

pretty darn good. you have this nice backdrop wrapped in the context of the fed about to cut rates. in the immediate term, this is more of a risk on backdrop. i think you pay the piper sometime down the road, but for the immediate term it is a green light for risk. nejra: great to have you with us, tom porcelli stays with us. viviana hurtado is standing by. viviana: the u.s. and china are struggling to find a path forward in trade talks. has been slow progress. trump complained china is not buying the large amount of farm goods they promised. the u.s. has improved its huawei, a key chinese demand. shares of s.a.p. fell the most in four years. 50% after a just

26% gain in the first three months of the year. we spoke with the cfo. >> the profitability in the cloud is deeply increasing. four percentage points in q2. we are well on track with 68% gross margin to meet our target of 75% gross margins in the cloud by 2023. thanna: sap has spent more $10 billion to buy u.s. cloud startups. president trump siding whether to intervene in the cloud computing contract that could be worth $10 billion. republican lawmakers have complained companies such as oracle have been frozen out. in puerto rico, thousands taking to the streets, demanding the governor resign. chatsue -- leak of online

show him making misogynistic comments. needs federal funding to recover from hurricane maria and 2017. global news 24 hours a day, on air and @tictoc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. hurtado.ana this is bloomberg. nejra: thank you so much. iran's foreign minister sat down with bloomberg editor-in-chief john micklethwait who asked about the unfolding tensions in the strait of hormuz. fin. min. zarif: we said that vote was not going to syria and we cannot tell you where it is going, because the united states what prevent us from selling that oil. the united states is preventing us from doing transparent oil sales. john: you say the united states is directing? fin. min. zarif: unfortunately,

because there are no e.u. sanctions applicable to non-e.u. member states. states,like the united does not impose sanctions on third parties. that is only what the united states does, and the e.u. has objected to that all along. the united kingdom was not in a position to seize the ship. it was not our ship but a ship carrying our oil, and it was not going to syria. it is immaterial where it was destined to. none of their business. there are no sanctions on iranian oil, and nobody has the right to confiscate that ship. it is piracy, peer and simple. -- pure and simple. john: you have denied being behind the attacks in the strait of hormuz. who did them? fin. min. zarif: the united

aates and allies have made party event because it is right next to our coastline. we have 1500 miles of coastline on the persian gulf. it is right there. it is a very crowded place. john: is it dangerous because it is so crowded? fin. min. zarif: it is very crowded, and last time it was as crowded as it is now, the united states navy shot down an iranian civilian plane with 290 passengers. it is dangerous. we feel the danger. that is why we want to avoid a dangerous escalation, but we cannot devote defending our country. john: your revolutionary guard said it would close the strait of hormuz, but what would be the situation when it would do that? fin. min. zarif: we have the ability to do it we do not want to do it, because they are our

lifeline. it has to be secured. we play a major role in securing it, but it has to be secure for everybody. john: can you control the revolutionary guard? some people say they are on a different tension. fin. min. zarif: i don't need to control anyone in iran, but iran has a sophisticated system of governance where everyone does what they are supposed to do, and we are not supposed to take measures that undermine our security. an: the minister of iran, important conversation with our editor in chief john micklethwait. coming up today, speaking of the conversation, the french finance minister will drive forward the , his for what will say offended france. futures, negative two. ♪

♪ this is bloomberg "surveillance." let's get the bloomberg business flash. unitedhealth is highlighting its strength as it expands into more areas of care, boosting their profit outlook after better than in the second quarter. last year, overall membership increased by more than 700,000. novartis raising its profit forecast for the second time this year. earnings are expected to rise by as much as a mid teens perspective, boosted by new drugs for heart ailments and psoriasis. scandal plagued don's can bank is in talk with the regulator about new capital requirements. they say a tougher trading

environment forced to lower its outlook for this year. dansk a bank has been in survival mode since the estonian money laundering scandal last year. >> we are hoping for a joint settlement across all jurisdictions. this is not something we can control, but something we can give the notion to the regulators to have a combined view on this case in estonia. dansk a bank faces criminal investigations in europe and the u.s. that is the bloomberg business flash. tom: time for the single best chart. if you are just waking up, the research bombshell of the last 24 hours has been jp morgan. we talked to bob michele about ever lower interest rates. and jon ferroe will kill it on "real yield" later.

we have come up better than that in the recent years. what is the ramification to our system if we get a jp morgan outlook of a zero interest rate? europeanized or japanized? tom p.: it is important to wonder whether we are becoming europe down the road, and the structural evidence drives home we are going in that direction. this notion of the aging of the population, that is very real. isess you can have -- here the thing that could save the day. you could have a productivity boom. if you could put in place the right policy to enable turnctivity to continue to at a reasonable -- churn, you

can brent that impact but that is much easier said than done. short of that, trend growth in the united states will slim out. tom: we have a $1 trillion deficit in the trump white house. policywe affect fiscal to provide remedy to jp morgan's call? tom p.: this is a much bigger conversation. tom: we have one minute. tom p.: what i would say is the tax cuts from last year were interesting in the immediate depreciation. that is a nice way of trying to help -- tom: there were elements that spurred genuinely. tom p.: i am not making a judgment on the whole of the tax cuts. if we are talking about something that could help this productivity, that is an idea.

you.thank wealth management of the year canada for the decade, mr. gorman of morgan stanley. the bank earnings are out. taylor riggs headlines, yeah. all focused on wealth management. this is bloomberg. ♪

♪ i am nejra cehic in london with tom keene in new york. the ecb is discussing revamping its inflation goal and the markets are tightening at the btp bund spread. the euro touches a session low and euro-yen breaking through some support. euro,tronger yen, weaker at key support. that could work. right now on banking, morgan stanley reporting in a bit. gerard cassidy joining. as morgan stanley a bank?

it is bank in name and they make some loans. they have huge margin loans, but because of the financial crisis, goldman sachs and morgan stanley who have been able to tap into the federal reserve's borrowing lines, it is not as much of a bank that we would think of. it is more of an investment bank. tom: everyone wants to be james gorman. i thought it was a pretty tepid report on what everybody wants to get into wealth management. trend tordone, the wealth management? gerard: we have to be careful because there are many companies chasing that revenue stream. as we have seen the smaller m&ts, today mmt corp. -- corp. sold their management business.

the economy and scale are critical, and goldman wants to grow that is this and has through acquisition and organic growth. nejra: one of the takeaways that bloomberg is that we have seen record earnings from these big banks and that shows the fed is key to whether the fund continues. which banks would you prefer out of the big ones? tom p.: when you look at the numbers that have been reported, bank of america numbers were it is ave -- gerard: consumer banking powerhouse. when you take a look at the economies of scale they have. they have been successful in driving earnings and revenues to record levels. i would put that at the top of the list followed by jp morgan who had strong numbers. these companies are becoming the dominant consumer bank in america, and consumers are in a

strong position in the states, as referenced by the low unemployment rate and faster wage growth. nejra: what do you put at the bottom of the list? gerard: a challenge continues to be with wells fargo. the big disappointment in their quarter was that they had to back away from their expectation in 2020 that the cost savings they expected to achieve one fall to the bottom line. now they are saying those cost savings will be used for incremental tech spending for compliance and regulatory reasons. wells fargo still is struggling with these issues from their 2016 scandal. tom: gerard cassidy, thank you so much, great appreciate -- greatly appreciated. and gerard cassidy with decades of experience

across american banking. to me, what is fascinating is what has not happened in american banking. i don't hear anyone talking about acquisition of well-run or troubled e.u. banking. there has been a dead silence about the idea of being opportunistic in europe, which is not helping. that's happening. -- happening. nejra: the opportunities for some of these u.s. banks as deutsche bank retreats from equities. tom: out in minutes, morgan stanley. this is bloomberg, futures on the terminal negative one. ♪

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to get stranger. the stock plunges after a subscriber miss. honeywell delivers yet again. the company posting solid sales growth. the good come of the bad, the ugly. morgan stanley is on deck. the ecb rethinks inflation goals. the central bank will study a ,evamp of its inflation targets bemoaning the limits of monetary policy. welcome to "bloomberg daybreak" on this thursday, july 18. lonely here in new york. david westin ditched me at nbc. [laughter] david: there's this fascinating report you flagged about the ecb reportedly rethinking its inflation target us morning. alix: you some money flooding into european debt. you saw a little