Leaked that were very frank about his assessment of the president , and it was not very flattering. It was business as usual, but five hours later that proves not to be the case. David but President Trump really had gone after him, even calling him stupid and things like that. At the same time, the British Government backed him. But it is hard to do your job if they are not going to talk to you. Alix for sure. But also the leaking. He was supposed to report back. That was the point. In the markets, we are seeing a bond selloff headed into the fed , particularly on the long end and in europe. German bund yields are at their highest level since three weeks ago. You have persistent weakness in the equity markets, down 2 10 of 1 . It is a mixed dollar story. Some industrial output from europe. Eurodollar goes nowhere. Yields up by about three basis points, 2. 1 . We havent seen that in about a month. Crude, lots of things boosting crew today. Russian production is down. More harsh words from president rouhani in iran as well. David and the inventory numbers. Alix i always take that as a grain of salt, though. David time for the morning brief. At 9 30, new york city is hosting a tickertape parade for the u. S. Womens National Soccer team to celebrate its second consecutive world cup championship. At 10 00 eastern time, fed chair jay powell is his semiannual Monetary Policy report to the senate. At one thought this afternoon, the u. S. Treasury will auction 10 year notes after a tepid response to the three year auction yesterday. Fed 00 this afternoon, the releases minutes from its june meeting. Now we are joined by Vincent Cignarella and gina martin adams. Is what chairman powell actually says. Lets take a look at what the markets are anticipating the fed will do. Ofe than one cut by january 2020, two by january 2021. Alix i think its a little vincent i think its a little ambitious. I think they are looking to hit a homerun and make a name for themselves. 25 basis points is likely. Not so much because the economy needs it per se, but i think it maybeake act of what was a policy error in january when a hike wasnt necessary. Theres also a lot of positive news coming out of the trade talks. My sources in asia tell me that is totally not correct, and i think the president has probably spoken in the ear of jay powell. The reality is the talks are struggling a bit, and a 25 basis point rate cut right now would be a pretty decent insurance move. Alix it raises the question, would it be an insurance cut or the start of an easing cycle . I feel like that is the nuance we are hoping to get today. Gina it is, and i think our hopes are little bit inflated. I dont know that we will get answers to those questions in a congressional testimony. How much can you get with respect to Monetary Policy plans . We expect more about chairperson powells anticipation of economic growth, his relationship will come into question during the q a period, but how much are we going to get with respect to july or december cuts . Vincent i think thats a really good point. This may be the first time we see a chair in the defensive on testimony because i think we see along party lines the democrats very supportive of him and suggesting fed independence, and that he should not be bowing to the president s wishes, and the republicans probably saying what is wrong with a cut, etc. David how does he remain data dependent and at the same time not disappoint the markets . Im not sure in the data you can say weve got to be cutting. Vincent you saw the jobs report friday was brilliant, and took every thing away from the previous report. I think the 25 basis point rate cut is harmless. It is totally harmless. It does nothing to impact the markets. It does nothing to add anything to the economy. It just modifies some of the people looking for a rate cut. Term, i thinkthis theres a reasonable possibility from jill it from the july 31 meeting that we see something along the lines of a hawkish cut. We will get the one and done which the markets will not like. Ironic that donald trump fired janet yellen, who definitely would not have hiked rates, and now hes upset about it . The European Commission downgrading growth Inflation Forecasts for next year. This, howble barrel much more earnings expectations in europe really have to come down . Gina its a big question mark for the european economy. We saw what looked to be stabilizing pmis in europe, but in reality the Manufacturing Sector is probably a lot weaker. The Chemicals Group is a good example, very interconnected with manufacturing. German manufacturing in particular is extremely weak. Look at the composite numbers, and it looks like generally European Growth expectations e stabilizing tumbler stabilizing, but you do have that weak link in manufacturing. I would watch that space as an area of weakness. It filters over into the u. S. This is what i think the fed has to contend with. Theres a president for the u. S. Theres a precedent for the u. S. Remaining extremely easy because Economic Conditions were so difficult. You could be set up for a case in the second half where the Global Environment is still so weak that it forces the hand of the fed to consider that in the broader scheme of things as a future to present of economic growth, and it is coming largely out of europe. David as you look at those numbers, how much easier is going to get in europe . Even on mario draghi out the door, we may need qe. Vincent i think one of the things unfortunately for mr. Lagarde if she is the next head of the central bank, youve already seen the pushback from the heir apparent to Angela Merkel saying the bank is being too easy. Until you get france and germany on board to essentially take on some deficit spending to lift their economy, theres very little the ecb can do. Andjust dilute holdings push yields lower and lower, to the point where you are hurting the banking and lending sector. It just doesnt make sense. David the real question is what can the u. K. Do about brexit . Boris johnson and jeremy hunt had a debate last night. This is how much they disagreed with one another. Get brexit done by october 31. I posed a straight question, and he said very clearly before that it is leave by october 31. , do or die i will not take anything off the table by october 31, do or die. I will not take anything off the table. I dont think that we are going to end up by any means with a no deal exit. David that clarified it for me exactly where they are headed. Vincent it is clear as mud to too. They are in this rock and a hard place situation where they want out of the eu because the electorate has said so, but they dont like the terms. The eu has said these are the terms, the choice. The u. K. Keeps saying, can we change it just a little bit . They keep saying no. In a way, Boris Johnson it correct. It really should be no or go on october 31. If you get another delay, it weighs more on the british economy. Less investment, less capex, lower pound. It doesnt solve anything. Alix but in the meantime, the data was really good today. It was better than we thought it was going to be. Gina this is one of the big complex with the u. K. Equity market. Just like u. S. Stocks, it made new year today highs last week. Stocks are doing generally ok. The pmis and the u. K. Have started to show some weakness, though. If you look at the leading indicators of economic growth, they havent been particularly strong and have weakened over the course of the year. There does appear to be some economic drag to come into the numbers. What is saving the u. K. Is the pound. The decline in the pound over the last several months is absolutely saving some degree of gross and optimism with respect to the equity market if you get a turnover in the pound of growth and optimism with respect to the equity market. If you get a turnover in the pound, that could be the straw that breaks the camels back. Alix weve been waiting for that to filter through, and it finally did with the export data. Gina martin adams and Vincent Cignarella, thanks. You can find all of the charts we use throughout the show at gtv on a terminal. Browse the features, save our charts. Go to gtv. Coming up, s p futures falling ahead of the fed chair. We will talk to Charles Schwabs chief Global Investment strategist. You have theresa may speaking in parliament now about the resignation about the u. K. Ambassador to the u. S. She says it is a matter of great , andt of great regret that Public Servants must be able to give full and frank advice. Viviana this is bloomberg daybreak. Bloomberg has learned activist investors at eqt are set to take over the board at the biggest natural gas producer in the u. S. Brothers toby and derek rice are 7 of the proxy 1 fight. Say the Brothers Company has underperformed. Boeing feeling the pain from the grounding of the 737 max 8. Second quarter deliveries plunging 54 . It is boeings bestselling aircraft. None have been delivered since the grounding in march following two fatal crashes. Tesla is telling employees it is ready to increase production. Tesla delivering a Record Number of electric cars in the second q. The Company Makes all of its cars at his only Assembly Plant in fremont, california. That is your Bloomberg Business flash. Alix so keep your jobs, work a little harder, ramp up production. David cant be too specific come but there is more coming specific, but there is more coming. Alix we saw this in a leaked email from tesla. We dont need specifics. Its fine. David hes a manager of expectations. To give them some credit. Alix but for the Second Quarter, they really delivered. David but they have to make some money. Alix please, profitability in evs . Fed chair jay powells two day testimony to congress will kick off today. If you check out the bloomberg, the white line is what the fed funds rate will be in january 2020. The redline is 2021. We are repricing how many rate cuts we might see. Morgan stanley sticking very dovish, saying the fed is cutting its key Interest Rate by half a percentage point. Position islicy essential. We expect the full cycle to move into full swing and a full policy response. Eintop. Us is jeff kl what using about Morgan Stanleys call . Guest i think it is too aggressive. The fed is divided. You got a camp that thinks that in this global slowdown are enough to warrant may be a 50 basis point rate cut, but the other half of the fed sees 2 core inflation in the u. S. And says, what are we worried about . Lets say that ammunition for later. I think that puts powell in the box today of saying nothing more than really was in the statement. David have they put themselves in a corner given where the markets are . Now one defending right data out of the markets rather than the economy. Data not so much what is going on in the economy as the markets telling that they have to cut . Jeff thats right. Have nothing to dissuade the market from the idea there will be a rate cut this month, and perhaps some additional rate cuts will follow. The challenge with that is that it really doesnt give. Hem a lot of flexibility we could see some potential resolution on trade that would change things. Think the market here has put far too much confidence that the fed can alleviate all of the pressures on growth. You seen what happens in the stock market. Misplaceddence may be rather than merely looking at what the fed might do. Alix when we look at today and see a selloff in the long end of the curve, whether here or in europe, do you agree with that . Is that the right trade into this testimony . Jeff i dont think so. I think powell isnt going to tell us anything new, so the idea that we are going to see further aggressive rate cuts, this may be the start of a cycle, but the cycle may be longtailed, but maybe not the aggressive rate cuts the market is pricing in. The market has gotten a little ahead of itself in pricing in these moves, and in europe as well. David weve got really great jobs numbers. The market says that might indicate some the about the fed. At one point does bad news at what point does bad news really become bad news . David that would be jeff that would be earnings season showing up. That could turn into outright declines later this year. Global manufacturing pmi are a pretty good leading indicator of profit and has fallen 14 months in a row, showing few signs of turning around. That may indicate we may see losses later this year. That in the past has been the turning point at which the outlook for fed rate cuts, often reflected is awesome is as optimism in the markets, turns to pessimism and a more prolonged downturn. Alix thats what sort of confuses me with market positioning. If the fed has to do an insurance cut and could be the start of a rate cutting cycle, but then you have 13 trillion in negative yielding debt, junk bonds in europe starting to get negative territory, 100 years since reebonz outperforming in the first half of the year 100 year century bonds outperforming in the first half of the year, what does that single . Jeff that the market is unconcerned about inflation ever coming back, and ignoring the fact that core inflation has. Een 1 or so in the euro zone what we have is maybe too much stimulus chasing a relatively mild economic downturn. On the other side, maybe the recovery doesnt lead us into a more robust inflation environment. So all of thisk, negative yielding debt right now , there zero more theres a more robust rate cycle that results in higher inflation. David Jeff Kleintop of Charles Schwab will be staying with us. Coming up, the European Commission cut growth and Inflation Forecasts for the region for next year. More on that next. This is bloomberg. David the European Commission issued its most recent projections for European Growth and inflation, and the news was not good. Still with us is Jeff Kleintop of Charles Schwab. Spain was the one place where they took it up, but overall the euro area down. Germany down, france down. How bad is it over in europe . Jeff things are pretty weak. What is interesting is it is germany this time also lumped in with the rest of those. Ink in the last downturn 2012, 2013, germany wasnt part of that. This is different, and it could lead to fiscal stimulus, not just qe from the ecb. Thats very important because Monetary Policy is nearly exhausted in terms of what it can do in the euro zone. Now with germany looking at one of the weakest growth rates for next year, that might mean tax cuts in germany. They had a budget surplus. They could do that. Maybe if they do, they could be more flux of will on italy, spain, greece, and other countries. Alix youre seeing a selloff in the bond market, particularly in germany, and eurodollar goes nowhere. What does that tell you . [laughter] jeff right. The difference is what qe might look like, and i think at this point, the market is pricing in a little more emphasis on rate cuts than a big qe program. I think the opposite is the case. More hesitant to cut rates and focus on another round of an Asset Purchase Program that can narrow spreads rather than further pushing down sovereign yield. David people are widely expecting the ecb to become even more loosening in their Monetary Policy. Is that going to address the problem when you talk about things like manufacturing growth and things like that . Are cheaper rates going to help that . Jeff no, i think they will do very little. The reality is the issues are different than that. Financial conditions arent really tight in europe. They are fairly loose. The issue is more of a classic late cycle environment. Back headedn to cut into the last recession in europe in 2012, and it really didnt make a difference. We saw a recession there as well. I think it may be the case again this time. Alix how much more expectation is there for europe to come down now . Jeff it is hard to say. They have been cut pretty late. 600re looking at the stoxx come up at the second half estimates are still too high, 6 . Ing for 5 or fall for theed to second half of this year, although next years numbers dont look to out of whack look too out of whack. Alix a lot of sighing from jeff when i ask about europe. [laughter] you will be sticking with us. Coming up, jay powell is in the hot seat with congress today. We have a preview of his testimony with senator pat senate a member of the banking and finance committee. What all of that winds up meaning for the dollar. Lots of reports on what President Trump is doing behind the scenes to get that weaker dollar to help growth in the u. S. Some weakness in the equity markets. This is bloomberg. Alix this is bloomberg daybreak. You are not seeing a lot of movement in the equity market. Dow jones futures off by about 2 10 of 1 . Same for the s p. The under performer in europe is germany, with the dax down for tenths of 1 . This is the longest down 4 10 of 1 . This is the longest losing streak for the dax since march. Industrial output in france doing better. Inthe bond market here and europe, you have the backend yields in the arrest backing up by three basis points, and germany by six, the u. K. Similar. Eurodollar goes nowhere. Cable goes nowhere. Debate,hnson in the lots of questions, and the currency market seems not to react. Pressure production weaker. Crude more idiosyncratic. David thanks so much. Fed chair jay powell begins two days of congressional testimony on capitol hill today and his semiannual report to congress on Monetary Policy, with everyone scrutinizing his every word on whether and to what extent the fed will loosen Monetary Policy. We welcome senator pat toomey, pennsylvania, member of the Senate Banking and finance committee. Lets get right to chairman powell. The markets think that we are going to have at least one rate cut this year and at least two by next year. Where do you think we are headed . Sen. Toomey im not sure, but i get the market consensus is pretty overwhelming for at least a modest rate cut in the near future. When the markets are this convinced, they are usually not disappointed. I think it is actually a bit of a closer call than what the market seems to suggest. I think the fundamentals still look good in the united states. There certainly are increasing risks, especially on the trade front. Thent be surprised if what market has priced in comes to pass, but looking further down the road, it is very hard to know. David what do you hope to learn from jay powells testimony, particularly about what he is looking to . Sen. Toomey that is the right question. I want to understand better how the fed thinks about this very strange world we are in. How does the fed think about bond yields and the fact that the entire yield curve is trading well below the fed funds rate . How does the fed think about the effect of european sovereign debt markets, most of which are absurdly trading below zero in yield . How does that affect the u. S. Bond market . How does that affect where the fed funds rate should be . What do they think about what the neutral rate is . Clearly it is lower than what we used to think, but what actually is its, and what guides your thinking for how to determine that . These are the things i would like to understand better from the chairman. David as you know, trading goes up and down. The market might do thing for various reasons. What is adetermine deeper underlying concern for the Global Economy and the u. S. Economy, how strong we really are . Sen. Toomey thats one of the challenges. I think it is very hard to parse out when the 10year is yielding at 2. 05 or wherever it is. Historically, the 10 year has sort of roughly tracked the expectations for nominal gdp growth. I dont think the market is saying we expect average nominal gdp growth to be 2 . That part of this is the fact that Central Banks around the world are buying massive amounts of sovereign debt and distorting this market. But you cant prove that. Its one of the dilemmas and one of the challenges that the fed faces. David lets assume that you are right and it is distorting the markets to some extent. Do we need to keep up with them . The president seems to indicate we should be. Hes come out more than once and said he really wants lower Interest Rates, and there are reports that hes even talking to people on how we can weaken the u. S. Dollar. Sen. Toomey president s generally prefer lower Interest Rates, but low Interest Rates are not always the right remedy for the economy. I think we cant ignore the bond market. Our bond market is not subject to the direct distortions that the europeans and others are because our fed is not out buying every treasury insight anymore. They were for a while. Inform ourt has to judgment. I think macroeconomic numbers have to inform our judgment. We had a strong First Quarter, surprisingly strong, but i dont think anyone thinks the Second Quarter is growing at 3 plus. On the other hand, we just printed a terrific jobs number. This is why these guys have a really tough job. David as we listen to chair powell, none of us can forget that President Trump has raised questions about his tenure, questions about the job hes done, and said more than once, i can fire him if i want to. What would year reaction be if President Trump what would your reaction be if President Trump tried to remove fed chair powell . Sen. Toomey i dont think that would be a good idea. I dont think that President Trump has the Legal Authority to do that. It would be a bad idea in any case. He has done us an enormous service by overseeing and managing the process of normalizing Interest Rates. You can argue maybe they went up a quarterpoint too high in december, fine. But theres no question that we are closer now to normal, neutral rates that we were for a decade after the financial crisis. I think that experiment with zero Interest Rates and massive bond buying was very dangerous. On balance, i think the chairman is doing a great job. Hes managed this process relatively smoothly, frankly more smoothly than i thought the exit from qe, whatever we were up to, and now hes looking at the data and contemplating which direction we go from here. I think hes doing a really solid job, and im hoping he will stay right where he is. David he says he wants to do whatever he can to extend the business cycle. If he cant do it from Monetary Policy, is there room for fiscal side in your neck of the woods . Sen. Toomey weve created expansion on the supply side by lowering rates, by allowing capital expenditures, by rolling back regulation. Weve expanded the supply side that expands the productive capability of our economy. Thats why we are getting strong Growth Without inflation. Thats exactly what we want. The traditional business cycle, academics would have it as an inventory buildup that would get too big and that have to be worn down. In time, the inventory driven cycle is much less of a phenomenon now than it was some decades ago. I think it is entirely possible that we could have very strong sustained growth for a very long time if we get the policy right. I dont think we need to throw a lot of cash at it from washington. The economy is fundamentally ok. I think we want to keep good tax policy, continue to rollback excessive regulation where we can, and sensible Monetary Policy, and we will probably be in good shape. David thank you so much for your time today. Thats republican senator pat toomey of pennsylvania. Alix investors banking on dovish fed to keep the rally going, but will earnings spoil all of that . That it could end the bad news is good news dynamic in the market. In the last 20 years, rate cut rallies have proved to be shortlived, but eventually started to compress again in the face of weaker lending indicators. 500fed put ended when s p Earnings Growth fell to 0 . Still with us, Jeff Kleintop of Charles Schwab. Do you agree . Are we looking at Earnings Growth of zero . Jeff we are very close to it. Additional fed rate cuts, while they are designed to boost revenue growth, may actually further compress Profit Margins and we can the earnings outlook. Financials make of a very large portion of s p 500 profits. ,s Interest Rates come down that may put pressure on interest margins, and that is certainly the source of a lot of the profits for the s p 500 already. We are seeing negative yearoveryear growth for financials, and that could dive into deeper territory with further cuts. So we could go the opposite direction and push numbers into the negative territory. David where do we see alix where do we see the actual Earnings Growth versus revisions to the downside . Areas ofre are some the market showing resilience to growth, areas like health care, more defensive areas of the market. This has also been the case as we begin to see the cycle turn down from an earnings perspective. Theres usually not enough to sustain the market. Back in 2001, the fed began to cut rates and markets got a little bit more positive, but didnt avert the 2001 recession. They did so in 2007. That did not avert the 2008 recession. Gravity holds earnings down in the revenue as well. Alix we seen at the end of the tightening cycle duration outperforming. You can see all of those different strategies. Low momentum stocks, low vol stocks, risk parity, and low duration. They are all moving higher. Do you still bet on that trade, or is it time to change it . Jeff i think it may be time to change. Buying the news of buying the rumor of rate cuts is what we have seen here. We may end up selling the news. Markets priced in a lot of optimism that the fed can turn things around. That is maybe beginning to fade as we see rate cuts may not be enough to avert High Consumer ,onfidence, low cfo confidence continuing recession in the Manufacturing Sector, and the weight that is going to pull down the earnings. Alix jeff, great to see a. Stay with bloomberg to see you. Stay with Bloomberg Television today. We will bring you fed chair jay jay powellsnc testimony before congress. Now heres Viviana Hurtado with first word news. The u. K. Ambassador to the u. S. Has resigned amid criticism from donald trump after leaked memos showed Harsh Criticism of the president. China will take further measures to stabilize trade. Tv,rding to government run beijing will lower import tariffs and improve export rebate policies as the u. S. And china resume negotiations on a trade deal. More questions about the health of german chancellor Angela Merkel. Merkel had her third spell of shaking in a month. She was seen trembling briefly as she stood along the finish Prime Minister in berlin. A spokesman the finnish Prime Minister in berlin. A spokesman saying merkel is fine. Global news 24 hours a day, on air and at tictoc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. Im Viviana Hurtado. This is bloomberg. David thanks so much. Coming up here, searching for the next big deal. The biggest names in media and tech are gathered at a conference in sun valley. More on that next. This is bloomberg. Viviana this is bloomberg daybreak. Coming up later on bloomberg anderson, bail r,fford portfolio manage live from sun valley. Debt trading an era that began in nazi germany ends today in mexico. The final Volkswagen Beetle rolling off the assembly line. In the 1930s, an engineer was hired to fulfill it off hitlers to fulfill adolf prospect for a peoples car. Its been made only in mexico since 1968. Hiphop mogul jayz getting into the marijuana business. He signed on to be chief brand strategist for california pot ampany, saying he will play crucial role driving Creative Direction, outreach, and strategy. That is your Bloomberg Business flash. So im not sure if i took it seriously, but jayz is a real businessman. Alix and hes the latest ticket to this company. You had joe montana part of the last fundraising round, you had the former ceo of yahoo put money into the company. That is just this one company. There are tons of other big names behind other pot companys as well. David theres got to be something there, without a doubt. And then you have kiss. Alix yeah, gene simmons apparently the chief evangelist officer of invictus. That makes me not take it seriously, if you have chief evangelist officer. Marketing, jayz, that i can definitely believe. David it sums like john the baptist or something. Alix maybe thats his deputy. To cover three things wall street is buzzing about this after thehares Rising Company is sent to cut ties to bond trader to a bond trader. Deutsche bank telling fixed income traders david all the executive search firms are doing really well right now. Joining us now is sonali basak. We talk about game a lot. Finally good news. Sonali good news for some of its big investors such as george soros. The ability for them to clean up this problem brings up the question again about whether gam will be for sale. That would be even better news. Alix who would want to buy Something Like that . Sonali the Asset Management industry is in a huge shuffle, so its still tens of billions of assets under management. After tim haywood not being there anymore, and theyve been making real steps to liquidate the fund, it might be a bit of a cleaner asset to buy. Insurance companies, other asset managers, banks looking to build up their Asset Management divisions are all potential buyers. David consolidation is the name of the game in Asset Management right now. Lets talk about sun valley. We will put up a list of some of the big deals that came out of it. The first when i remember well, because i remember bob iger called me and said our chairman just sold us to Michael Eisner at disney. , im not sure in the end he would say it was worth that much, but theres a bunch of huge deals out there. Sonali huge deals, and ipos potentially. Alico has had a stellar year on uber. Beyond that, theres plenty of talk about cbs, viacom, sprinttmobile. Alix have you been out there . David no. Alix whats it like . Are these like backdoor deals being made . Is it like davos, where it is highlevel industry players just talking . Both . Sonali i think davos or milken. It is not just tech and telecom these days. Once. Arro was there david this is basically to get people together for deals. My experience with tom murphy and Michael Eisner was there was thinking and talking going on beforehand, but this is a nice, convenient way for them to get together. There isnt that much face time in a relaxed atmosphere, so it is sort of just stating. Sonali and a lot of these are fierce competitors and enemies as well. It is a way for everyone to get together and talk about how the industry is changing. Alix cbsviacom. David thats the one everyone is rooting for. Alix lets go to our last story, which is all the financial jobs reshuffling. First, we learned this morning that Deutsche Bank, if you are a fixed income trader, you get to keep your job. Really . Bit of there was a uncertainty around this region of the bank given that they said they would resize the fixed income division. That said, with equities gone, fixed income really has to carry the weight in the investment bank. It is a massive fixed income division. This commercial real estate business in the u. S. Goes head to toe with j. P. Morgan and in structured finance, they are one of the top. David citi says it is hiring come of it j. P. Morgan very quietly had some traders leave. I am just wondering if you are a bank, you are thinking that now is the time to lay off some folks because no one will notice. Sonali in the j. P. Morgan story, it is equities as well. Those jobs in particular are having a hard time. J. P. Morgan is coming at this from a place of strength, not like Deutsche Bank, where it is a position of weakness. Business that is highly electronic nowadays, where fixed income requires still a lot of heads. Alix so who you wind up hiring is still the point, too. One of the stories that percolated in social media over the last 24 hours with Deutsche Bank as the amazing what about the tailors going in with bags of clothes. It happened to be a bitcoin bag, but it wasnt actually filled with bitcoin. Upy are going into suit executives and everyone else is getting fired. Sonali speaking of bitcoin, i dont know if you follow the contingency on twitter. They jumped on immediately. If you want to look at that part, they have a lot of commentary about that picture. David and in fairness, those wereemen walking in not told you bank employees, they were tailors. Alix why dont we do it when the article comes out about Deutsche Bank giving pay raises to people they want to keep . Sonali they have to pay people to them around if they want to keep them. Sonali basak joining us there. David coming up, political turbulence in mexico. We discussed the abrupt departure of the countrys finance minister and what that means for the president s administration. Alix tune into Bloomberg Radio across the u. S. On serious xm that on sirius xm channel 119 on sirius xm jenna 119. On sirius xm channel 119. This is bloomberg. David this is what im watching, its mexico. Time, thisbout noon sudden announcement that the finance minister had stepped down. He had long been a colleague for the president , mr. Amlo. He said im quitting because there are too many discover and seize and extremists that too many discrepancies and extremists that dont know what they are doing. The peso dropped against the dollar, now coming back of it some. It puts that entire administration under some pressure. Alix what i did not know is just how important the finance ministry is to the credibility of the mexican government. David it is called the treasury essentially down there, and they have a real sensitivity to the peso and making sure they dont undermine the peso. Amlo has a really tough situation because hes a populist come about at the same time once to be prudent. This gentleman who stepped down, the markets really counted on him. The question is the pemex. Alix connects just has too much debt. David they have so much did not alix pemex has just too much debt. David they have so much dollardenominated debt. Alix how do you fix that . That is really the issue. Hernandez victoria will be joining us on this fed day. This is bloomberg. Most of us dont know how much data we use, but we all know were paying too much for it. Enter xfinity mobile. Americas best lte with the most wifi hotspots, combined for the first time. When youre near an xfinity hotspot, youre connected to wifi, saving on data. When youre not, you pay for data by the gig. Use a little, pay a little. Use a lot, just switch to unlimited. Get 400 back when you buy the new lg g8. Call, visit or click today. The great fed debate. Chair jay powell kicking off his today testimony to congress. Morgan stanley sees a 50 basis cut in july. Europes weak growth is here to stay. The European Commission cuts its growth and Inflation Forecasts for next year. South korea and japan prepped for a long fight. South koreas president warns Business Leaders in an extended battle over export controls as he deals with a weak economy, high unemployment, and a battered stock market. David welcome to bloomberg daybreak on this wednesday, july 10. We are just getting this report out of germany from Angela Merkel. She had another public appearance where she was shaking very visibly with the finnish from mr. She has said the finnish Prime Minister. She has had a News Conference where she says shes had an issue, but is working through it. Alix this is probably the first time shes addressed it directly. She says she is looking into it, and says that health isnt an issue for her leadership, but that she wont say anything more. David in the meantime, we also have a shakeup in the representation of the United Kingdom in washington. The ambassador from the u. K. To washington has been under a lot of stress and strain because they delete some cables from him critical they leaked some cables from him critical of President Trump, he has resigned. Alix theresa may has said she didnt want him to resign, but i brought up the telegraph article released at 2 00 a. M. That says he is still doing his job, still focused. What happened in five hours that changed that thesis . David from his point of view, he had almost no choice. You want to do the job, and what he said i think was not inappropriate. He was being frank with his government about what he thought was going on, but you dont want those things leaked. Alix you really dont. In the markets, most Asset Classes are waitandsee for fed chair jay powells testimony, with the exception of the bond market. Yields up by about three basis points. In germany and other areas in europe, it is up by six basis points. The highest yield in germany in about three weeks. Equities go nowhere. Crude idiosyncratic, and inventory draw story as well as an Iran Political risk story. David it is all about the testimony today. At 9 30 this morning eastern time, new york city will host a tickertape parade for the u. S. Womens National Soccer team to celebrate its second consecutive world cup championship. This is a great event. At 10 00, fed chair jay powell gives his semiannual Monetary Policy report to the House Financial Services committee. We get wholesale Inventory Data for the month of may. At 1 00, the u. S. Treasury will auction 34 billion in 10 year notes. Finally at 2 00 this afternoon, the fed releases minutes from meetings and 19 june 18 and 19 meetings. Alix investors really hanging on every word to keep the rally going in the equity market. They could be in for a bad earnings season, according to ubs. Take a look at this bloomberg terminal. They show that u. S. Earnings growth could be below zero, and that is going to reverse the thesis that bad news is good news. ,hey say, in the last 20 years rallies have proven shortlived as market multiples expanded, but eventually started to compress again in the face of weaker leading indicators. The fed put ended when the s p 500 Earnings Growth fell to zero. Joining us is victoria fernandez. How do you look at the fed put as we enter earnings season in just a few days . Victoria we know that earnings expectations have continually come down. Epst now, expectations for growth year over year are negative in the Second Quarter, about flat for the third quarter, and then this big jump in the fourth quarter, but that has come down by over 200 basis points this year. We are seeing expectations come down by about 20 basis points in the last week alone. I think the earnings expectations are lower. Perhaps companies can beat the numbers they post, but it is going to be the guidance that really sets the tone. Definitely affecting market sentiment, and the fed will probably listen to some of that. David how much of the taking down of expectations is topline . What can the fed do about that . Victoria we are looking at some numbers from credit that came out, both their median and aggregate numbers. Seem to be numbers ok. It is really the margins bringing them down. We saw that with levis numbers yesterday. Revenues beat, but it was margins and ipo costs. Really margins, especially with the tariff issues, affecting that bottom line number. David how much of it also is a backing off of share purchases . What is the repurchase situation . Victoria weve seen Record Numbers, especially in the tech world. Five of the largest buybacks were all done by tech companies. I wouldnt be surprised if we continue to see some of that, but companies are also watching leverage ratios. We might see a little bit of a pullback, but i think you will see Companies Using some of that cash for buybacks. Its worked in the past. I think that will continue. Alix something that has been a puzzle to the market is that you have staples and utilities really the only sectors where it looks like we will have positive Earnings Growth. The rest get crushed, yet se are the sectors that that are expensive. What you make of that . Victoria we are not looking at sectors, but individual companies, doing more of a bottom up approach. Theres names within all sectors you can look at and have opportunity going forward. We bought intel recently just because theyve been hit and we are longterm investors. Weve bought palo alto, mcdonalds, schwab. So dont look at just the highlevel sector. Look really at specific companies and find opportunities there. David what creates the opportunity . If you are looking at individual companies, what do you say is an opportunity compared to others in the sector . Victoria we have a multifactor model we run these companies through. It is looking at their cash flow, their equity ratios. We run all of those numbers through. Intel is a company we think for the longterm had some upside potential, along with the other names i mentioned. Look down into those Balance Sheets, see where you think theres going to be some upside going forward. Those are the names you are going to add. Alix how do you avoid a value trap . When you have 13 trillion of negative yielding debt, century bonds and junk debt in europe, bonds that ared so cheap you cant buy them . Victoria the bond market has been overbought in our opinion. We think yields are too low. We expect them to go a little but higher. We seen that move by about 10 basis points in the last week in the u. S. You mentioned the german bund yields moving higher as well. On the equity side, you have to look for companies you think still have upside potential based on the uncertainties in the market. Focus on those names. David let me ask you a hypothetical. If you could remove trade uncertainty tomorrow, what would happen to earnings projections . Victoria i think they would definitely move higher. When we hear the calls that are going to be coming, especially starting next week, you know that guidance is going to talk about the tariffs out there. That is probably going to be the number one issue, along with the dollar. Take that uncertainty out of the market and you see the market move higher. In my opinion, it is that uncertainty keeping companies from investing from that capex. Remove that and you have a positive momentum. David the tory fernandez of cross mark Global Investments will be staying victoria fernandez of cross mark Global Investments will be staying with us. Viviana hurtado is here with first word news. Viviana the British Ambassador to the u. S. Will resign facing a storm of criticism from President Donald Trump since candid and unflattering memos were made public. Mr. Trump the administration would not work with him. Prime minister theresa may speaking in parliament. Pm may it is a matter of great regret he has felt it necessary to leave his position as ambassador. The whole cabinet rightly gave its full support for him on tuesday. He has given a lifetime of service to the United Kingdom, and well him an enormous debt and we owe him enormous debt of gratitude. Viviana he says the Current Situation makes it impossible for him to do his job. In the u. K. , lawmakers narrowly passing a measure that would keep the next Prime Minister from pursuing a no deal brexit without a fight. That is aimed at Boris Johnson, likely to be the uks next leader. Hes argued the u. K. Needs to act seriously about a no deal exit from the European Union to persuade the eu to shift its position. More questions right now about the health of german chancellor Angela Merkel. Merkel had her third spell of shaking in a month. She was seen trembling as she stood along the finnish Prime Minister in berlin. She says that she is still working through the spell, but it wasnt an issue when it comes to her leadership. Global news 24 hours a day, on air and at tictoc on twitter, powered by more than 2700 journalists and analysts in more than 120 countries. Im Viviana Hurtado. This is bloomberg. David thanks very much. Coming up, continued weakness in europe. The European Commission cut its gross and inflation forecast its growth and inflation forecast for the region next year. Thats coming up. This is bloomberg. Viviana this is bloomberg daybreak. The head of fixed income at Deutsche Bank assuring traders they will keep their job. Debtank move to resize operations wont lead to dismissal. Hiphop mogul jayz getting into the marijuana business. He signed on to be chief brand strategist for a california pot company. They are saying jc will play a crucial role driving Creative Direction jayz will play a crucial role driving Creative Direction and outreach. Tesla delivering a Record Number of electric cars in the second 1 the company the second q. The comedy make all of its cars at its only a simile board on this. You had some positive news come out of france, and look at the italian 50 year bond. It was oversubscribed, which is not what you would expect to happen. Maybe there are slivers of hope, but in general the trade and tariff issues are weighing on the economy. Alix when you look at the company level, which initially came to the foreground with basf, how much more to earnings need to be revised in europe versus the u. S. . Alix they really related it to china. They were saying a lot of their exports have to do with the automobile industry, really lagging in china right now. I think you will see some of the estimates come down there. David when you point to china, that may be more about trade restrictions. There may be underlain weakness in the chinese economy. How much of that is affecting germany and their manufacturing . Victoria i think that is true. The euro zone is an export economy. China is one of their largest customers, so any slowdown in china, whether domestically or having to do with trade, is going to affect. Weve seen things flowing in china for a while. We get their gdp number in about two weeks and see how that unfolds from there. Obviously theyve been putting more stimulus in place. Theres going to be some questions. The government has already issued about 2 3 of their quotas for bonds this year, and we are only halfway through the year. We will have to see how they continue to support that economy going forward. Alix how do you look at u. S. Companies that have exposure to europe . We talk about those that have exposure to china. How do you factor that into your models . Victoria i think that is going to be the same type of story is the relation to china. Youre going to have to look at the fact that there is slowing growth, there are potential tariffs that are going to happen with the eu. Companies are going to have to put that into their expectations. We will probably hear some of that in the guidance that comes out next week, so we will have to look and see if we start modeling that a little more than what we have in the past. Alix victoria fernandez of crossmark Global Investments be sitting with us. Coming up, japan and south korea prepare for a drawn out fight. We will talk about what it means for the Semiconductor Industry and tech in todays bottom line. This is bloomberg. David im not a look at three Companies Worth watching this morning. Today we have a special version of bottom line because we will focus on comedies specifically in asia on companies specifically in asia. Joining us is bloombergs editor for asian technologies. I knew that japan and south korea had an issue from world war ii, but now it is really blowing up. Reporter these are really longstanding tensions. While everyone has been focused on tensions between u. S. And china, this dispute between japan and korea has really escalated. The latest decision was sparked by longrunn from the time when korea was a colony of japan. There was a recent Court Decision where the south korean courts decided that japan needs to pay more compensation to people working in japanese run factories during that time. Japan took offense to that, and now they have slept some export restrictions on materials that are really essential to the south korean industries, particularly the Semiconductor Industry and display industries, part of this whole Global Supply chain for smartphones and pcs around the w how much of this is between them, and how much of this is how the world is going to deal with conflict now, taking a page out of President Trumps book . Reporter it is definitely an escalation. Whereas trump seems to have particular goals with china, it is not clear what japan is doing here. It seems mostly a reaction to this Court Decision. So longs a 1965 treaty, ago japan thought that they had resolve these issues, but now they are escalating again in a way that could affect some of their most important industries. David i appreciate how interrater japan and south korea are. Now we have president moon jaein saying this could go on a really long time. Have a trade surplus, but not with japan. Reporter they are getting a lot of those key materials from japan instead. Those two countries are closely integrated with each other, and they are part of the supply chain we all depend on for technologies that we all use. Alix our second story has to do with something about supply chains. There was a great article in bloomberg that talked about factories in a desperate state. The largest supplier of consumer goods are basically anecdotally saying everyone is moving out to vietnam, and china is freaking out. True . Very big,this is a important supplier in china. The ceo came on, and what was surprising was the tone he used. He talked about desperate straits for these companies, that they are very worried about trade tensions between the companies. It is important to understand they have done a lot of their business in china. They have materials made for Companies Like walmart and nike within chilso have operations within the rest of asia. Clearly this is a signal to customers or wouldbe customers that we can do business with you if you want to source from vietnam instead of china, or from somewhere else in southeast asia. Hes talking about of his business here for what their business capabilities are. David they have been really pushed to the wall. Does this indicate that with the push and supplies, they really maybe hurt badly . Peter as the ceo said in this interview, these Companies Operate on razor thin margins. The tariffs from the u. S. Are a big hit for them. If you are moving goods from china into the u. S. , this is a significant factor. He says they are not moving factories out of china, but diversifying their supply chain, so they have options if the tariffs stay in place for a longer time. David finally, if we needed wither trade dispute china, it may be over youtube stars. They want influencers for themselves. Peter clearly we went into the wrong business. Alix we are too old, by the way. Peter at tencent, there is a californiag place in where tencent will come and try to recruit some of the american stars to appear on their farms, on their forums, and the parent of tictoc wants to come and get some u. S. Social media stars, too. Alix are there restrictions on social media . Can you even watch youtube . Peter i dont think thats part of the trade dispute at this point. David but our social media cant go in if facebook and google arent in there. I wouldnt be surprised if President Trump said, wait a second, this is unfair. Peter its a good point. Youtube, the biggest video outlet here, cant operate within china. They are not able to take it vantage of the Advertising Opportunities there. Alix so great to get your perspective. Bloombergs Peter Elstrom joining us there. Coming up, fed chair jay powell in the hot seat today. We get the headlines breaking at 8 30. Morgan stanleys chief economist will be joining us. A selloff in the bond markets in the u. S. And germany. The long end of the curve, yields pushing higher. This is bloomberg. Xfinity mobile is a Wireless Network designed to save you money. Whether you use your phone to get fit or to find the perfect gift, youll use less data with a network that automatically connects to millions of wifi hotspots and the best lte everywhere else. So you save hundreds of dollars a year on your wireless bill. Xfinity mobile has the best network. Best devices. Best value. Simple. Easy. Awesome. Click, call or visit a store today. Alix this is bloomberg daybreak. I am alix steel. Powells released testimony to the House Financial Services committee. Other Asset Classes, to meet is the bond market worth watching. You have yields backing up over in germany seven basis points. The curve steeper in the u. S. By two basis points. Currency markets go nowhere. Michael mckee joins us from washington with the latest. No promises, but a strong hint of a rate cut in the testimony. Chairman powell will tell house members that many of his foreagues saw the case somewhat more accommodative Monetary Policy at their june , based and since then on incoming data and other developments, it appears uncertainties around trade tensions and concerns about the strength of the Global Economy continue to weigh on the u. S. Global economic outlook. Inflation pressures remain muted. It is a short statement. We areds, prepared to adjust any of the details for completing Balance Sheet normalization. Inflation is running below the best symmetric 2 target and the economy is stealing with trade tensions and slowing Global Growth with the debt ceiling and brexit on the horizon. Tradent progress on turned to greater uncertainty since may, powell says, and our context in business and agriculture report heightened concerns over trade developments. 3 growth in the First Quarter was largely driven by net exports and inventories, not generally reliable indicators of ongoing momentum. Growth in the Second Quarter appears to have moderated as trade concerns slowed Business Investment notably as well as manufacturing and housing investment. Overhanging everything, the longterm effects of high and rising government debt. The multiple references to trade suggests the white house is the main impediment to the economy and it is interesting to note that powell begins his testimony by emphasizing that congress has given the fed an important degree of independence so we can effectively pursue our statutory goals based on objective data and analysis. The bottom line appears to be the strong june jobs data has not changed the fed taking and their analysis leads them to a likely rate cut, which donald trump once anyway. David great summary. Please stand by. We will now bring in Michael Feroli, Jpmorgan Chase u. S. Economist. Victoria fernandes is still with us in houston. , from what we just heard from michael mckee, are the markets going to be disappointed with this approach . Michael i dont think so. What you heard in the opening remarks still strongly suggest they will be easing policy. They continue to highlight the uncertainties weighing on the outlook rather than highlighting the jobs report or the arguably benign g20 outcome. Reminds the markets and the public that many participants saw case for easing at the last meeting and high levels of uncertainty. I think it suggests they will be inclined to ease. I do not think they should be read as a disappointment, certainly for those looking for easier policy. David does this give any alix does this give any indication if we will see frontloaded cutting or if we will see a prolonged rate cutting cycle . Does this give any caller . Michael i think it is hard to infer from this statement whether they are thinking about 25 or 50. There was nothing that suggested an economic crisis. He did say the economy have performed reasonably well but there are uncertainties weighing on the outlook. To me that sounds more like an approach that lead to a few cautious insurance cuts and less the Economic Data really disappoints which they have not yet. To me it reads more like a cutting cycle, something more like you saw in 1998. A few insurance eases rather than dramatically slicing rates. Differentt might be from earlier cycles is theres an emphasis on trade. That is something outside the feds control and it can turn on a dime. How can the fed in chair powell set forth a stable course on Monetary Policy when it is all up to somebody else and it can change in a moment . Victoria youre exactly right. The reasons we do not feel the fed should cut rates. We think they should take a patient stance. , but we are not in a downfall at this point in time where we need to cut rates. Ande is a volatile issue cutting rates 25 basis points is not going to affect the trade issue. I do not think that is a solid reason to cut rates. The question of cutting rates comes down to whether the slowing we are seeing is is it because we are going to a lower level of growth or because we are seeing deceleration . For us it is not a significant deceleration, we see just a lower level of Sustainable Growth and we think they should be patient and wait for all of the data over the next three weeks. Alix one person who is not patient is President Trump. D. C. , any wordn in the statement about his relationship with the white house or anything about the dollar that may have trickled through . Michael nothing at all. Certainly nothing on the dollar. Nothing about the president s comments on the fed. As i noted, he started out his testimony by praising congress for giving the fed independence and allowing them to do their job based on objective facts rather than political concerns. It is almost as if he is starting by thing here is a message for you on pennsylvania avenue. We are basing our judgment on what were supposed to do and not trying to shape things one way or the other. The markets seem to be either leading or falling very aggressively. We are watching as the dollar goes down equity futures go up. What is the danger the market is getting ahead of itself . Michael that is always a risk that the fed will do the right thing and the market will expect more than the fed is prepared to deliver. I think the fed realizes what the market is it acting. What the market is expecting. They did not do anything to push back strongly going into the speech, the market was expecting 25 basis points in july. This did nothing to push back against that. The fed are mindful of what they are doing. Warranted,at is given the soft Inflation Numbers and the rest of the outlook. What about the neutral rate . As this rate cutting cycle occurs, how much lower does the neutral rate have to go . Michael no one knows where the neutral rate is. This is something we infer from how the economy performs given a set of Interest Rates. One of the important developments in the socalled pivot that has taken place is that the fomcs estimate of the neutral rate has come down even further, to the point where now the policy is probably close to neutral, neither stimulative nor restraining growth. The fact that with inflation pressures low and you are at neutral and you want to get back up dear 2 target, i think that means some easing is warranted. That marking down the estimate of this rate has been an important element in why the fed has turned more accommodative over the past year. David Michael Feroli and victoria fernandez and bloombergs michael mckee, thank you for being with us. Stay with us. Well bring you jay powells testimony before Congress Live at 10 00 eastern time. Alix one of the highlights is that investment seems to have slowed notably. Because of trade uncertainty since june continuing. David he says the trade uncertainty has gotten worse. I do find it interesting he leads off by saying Congress Makes it independent. Alix are they independent from the market . You have upon selloff underway. That totally changed. The dollar moves lower. It is a typical easing reaction from the market. David the president is one thing. The markets are different. Now lets get an update on headlines outside the business world. Viviana hurtado is here with first word news. Viviana trade was not the only issue as the u. S. And china resumed negotiations in hong kong. Huaweis and the state of will be coming up. Down. S. Agreed to come criticism of chinese rule in hong kong. The u. S. Is still limiting Huawei Access to u. S. Goods and services. It has been called a billionaire summer camp. Moguls from the tech, entertainment, and Media Industries flocking to sun valley, idaho. We spoke to ceo david babylon who talk to his programs. We are not in scripted and not in movies and that is where most of the industry is. Most of the industry is in nonscripted and nonmovies. We are doing a lot right and if we keep working hard we will viviana coming up we will see what Portfolio ManagerJames Anderson and others. Donald trump says he is looking a lenient plea deal with labor secretary alex acosta. Deal he he suck the stuck with Jeffrey Epstein in 2008. Epstein was arrested for sex crimes. He faced several charges when alex acosta was a federal prosecutor. He was allowed to plead guilty to lesser charges and escape a life sentence. 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. David it appears there is more than just the jail el chapo shares with mr. Epstein. The fed is going after assets. Alix this dell is the big deal jail. Isnt it where bernie made off was . There were pretty famous inmates. David it is just downtown and it is not a pleasant place. Ive been in, not because i was incarcerated. Typically they assign you to a federal penitentiary. It is not pleasant. Alix i love that one of the lawyers said i cannot imagine epstein there alone in a prison uniform. Yes, prison. David not like the one in florida where he is out six days a week to do his job. Alix this is an actual prison. David coming up, the Interest Rate outlook and how it weighs on banks. That is the next installment in this week series, banking on change in todays follow the lead. This is bloomberg. Viviana im Viviana Hurtado in the hewlettpackard enterprise greenroom. Coming up later today on ,loomberg markets the close we are live from sun valley. This is bloomberg daybreak. Heres your Bloomberg Business flash. Activists investors taking your the board as the biggest natural gas producers. Tobyn Board Members will become ceo. The brothers sold rice energy to eq to for seven billion dollars. Since then, they say the company has underperformed. Another 14spacex million in equity. It is the third offering the Rocket Company has helped. Another 100 million will be offered. Three days after the initial sales, the pension plan announced it had backed spacex. Had begun in nazi germany ends today and mexico. The final Volkswagen Beetle rolling off the assembly line. In the 1930s, austrian engineer was hired to fulfill adolf hitlers desire for a peoples car. The beetle was resurrected after , becoming a big hit in the u. S. In the 1960s. Recently it has been made only in mexico. Lead. Time for all the a deep dive into stories making headlines and moving market with insight from industry veterans and insiders. Bank earnings kickoff on monday. Today we look at Interest Rates and the headlines they may present to the Banking Industry overall. Here to take us through it is taylor riggs. Taylor as you know, banks are sensitive to where rates are going. Right here ive charted the five the yield and it blew banking performance relative to the s p 500. Banking performance turned lower before we got a big decline in the fiveyear. On the righthand side, it stabilized a little bit. Im curious if that continues to go lower now that weve heard from jay powell that he is open to a rate cut given the slowing economy. As you can see, this is jpmorgan and has been improving profitability under a rate hike cycle. Watched as see if these banks now cut their forecast now that we are looking at cuts instead of hikes. We wonder if that does after a lot of these banks have reaffirmed that fullyear forecast on the First Quarter earnings call. Speaking of firstquarter earnings, i want to take a look at cold enough rio, the ceo at and america. Given where we were in the First Quarter, looking at rate hikes in not cots, whether expectations were for deposit growth and profitability. Bank of america said some headwinds had occurred, but they were reaffirming their forecast giving a flat yield curve and no expectation of further rate hikes. We do not factor in rate cuts. They had been looking at 2019 aii of half of what was in 2018. David Bloomberg Alix bloombergs taylor riggs. Joining us now is finale bassett sonali basak. Is underweight the banking sector. Focusing on the yield curve, we talk to Lori Calvasina yesterday. Heres what she had to say. It seems likely yield curve matters to the banks when people are worried about tipping into a recession. When we have better Economic Data and the yield curve is viewed as more of a oneoff and not sending missing signal on the economy you do not hear about it. It is the preponderance of the evidence. I do not think you can use the yield curve as a single indicator. Alix eli, what do you think . The curve flattening and being inverted is not good for the banks. The curve flattening is also not good for the banks. On the banksthesis is not predicated like loris on the yield curve. What are some of the reasons you are underweight . Eli lets talk about a year ago when we went underweight on banks. Net interest margins and loan growth disappointed. Historically, banks have generated loan growth of twice real gdp and three times gdp on the small side. What happened a year ago was gdp was growing at around four and banks were generating loan growth. If youre not getting paid when times are good, what will look like when times are bad . A year ago, rates were headed up . Most banks are asset sensitive which benefits from higher rates. It did not happen again. Sonali on top of that, you have a lot of technology pressure. Jpmorgan, you had told me that you been on them because of Technology Spending that had nothing to do with net interest margins. The big banks have made it a point to reinvest in technology. A very big way, providing barriers to entry and a better consumer experience. That has benefited them from a market share standpoint and others. David are they losing money and losing revenues and profits . Eli that is one of the concerns we have. And 2007nking in 2006 grew to about 60 of banking. We are getting up there again. When we look at any sector including banks, we look for areas deprived of capital and try to avoid areas that have created too much capacity. There is too much capacity here. Competition is headed up and that is one of the reason a year ago you do not see the loan growth you should have. The pricing function should have been better and it was not. Worried at all about risk moving too much into sectors outside the Banking Industry and are you worried about the risk the banks are taking on to react to the pressure they are getting from the shadow Banking Industry . If your question is our terms and covenants and conditions starting to give way like 12 years ago, the answer is yes. We are hearing stories of much more aggressive lending and that leads to higher nonperforming assets. Alix how does that play out over the next five years . If part of the reason banks are struggling so much is because people are arguing regulations, once that plays out, doesnt move back to the banks . Eli the question is when do shadow banks go away and the banks get to recover . Not until you get economic decline. A true deceleration of the economy will start pulling some of the shadow banks away and then it will ship that. Between now and then, what kind of risky loans will you get to your question about aggressive lending to compete with the shadow banks . The fear would be that in the economic decline, some of thosewarts will be exposed. Sonali not always bad about low rates. Is there any hope that financing can outpace that the kleins . The declines . Sonali eli were experiencing burnout. Rates have already come down dramatically. The fact that rates are coming down again, many people who could refi have already refinanced. The wave will not be as it was in the past. Alix youll have to come back. So much more to dig into. Eli salzmann and bloombergs sonali basak. Thank you much. Signaling jay powell and openness to rate cuts and markets react sharply. More on what im watching next. If youre getting in your car, jump on radio. Bloomberg radio can be heard across the u. S. On sirius xm onl 119 on the u. S. The Bloomberg Radio app. This is bloomberg. Alix here is what i am watching. Jay powell signaling openness to a rate cut. On incoming data and other developments, it appears uncertainties around trade tensions and concerns about the strength of the Global Economy continue to weigh on u. S. Economic outlook. Inflation pressures remain muted. You can see a buying boom in the treasury market. You can see yields down in the treasury. Gold shooting higher, equities moving higher. A classic fed cutting move. Trade, andll about it is getting worse, not Getting Better seems to be what he is saying. Alix it is all about trade, if trade gets fixed, what kind of reversal do you see . David that is a danger. Alix and at what point are you like guys, i cannot fix this . David the guy in pennsylvania avenue, that is his job . Alix absolutely. It will be a fun couple of hours. Coming up, bank of America Merrill lynch u. S. Equity strategist. This is bloomberg. Hey im bill slowsky jr. , i live on my own now ive got xfinity, because i like to live life in the fast lane. Unlike my parents. You rambling about xfinity again . Youre so cute when you get excited. Anyways. Ive got their app right here, i can troubleshoot. I can schedule a time for them to call me back, its great you have our number programmed in . Ya i dont even know your phone anymore. Excuse me . what . I dont know your phone number. Aw well. He doesnt know our phone number you have our fax number, obviously. Todays xfinity service. Simple. Easy. Awesome. Ill pass. Jonathan from new york city for our audience worldwide. Im jonathan ferro. The countdown to the open starts right now. Jonathan coming up, chairman Jerome Powell heading to congress, firming up dry rate cut bids. Morgan stanley calling for a big one, a 50 basis cut move as the president is said to be concerned a stronger dollar is a threat to his the comic agenda. With 30 minutes until the opening bell, good morning. Heres your wednesday price action. Futures turn higher, up 13 positive the s p 500,. 4 . Yields lower two basis points on the 10 year. The move on the twoyear, a lot bigger. Lets begin with the big issue. Looking ahead to jay powells semiannual testimony. We think powell will confirm market pricing. This is what Central Banks do. I do not think he will correct at this stage. This is his l