Thank you for watching bloomberg surveillance. The stocks europe 600 down a touch. A lot of the focus is on the jay powell. You can see the u. S. 10 year yield at 2. 10. And we are looking at the pound. Boris johnson is the person who will probably become the Prime Minister and keep saying no deal brexit should still be on the table. We seeing Market Movement with the pound extending. You can see cable at 1. 2458. Coming up, we talk commodities with blackrock at 10 30 a. M. London time. But first, lets get straight to bloomberg first word news. China are. And holding the first highlevel talks since a truce was called in the trade war. Top trade officials are speaking on the phone. Larry kudlow says the initial talks were positive. There was headway last winter and spring, then it stopped. Hopefully, we can pick up where we left off. Ambassador lighthizer and secretary mnuchin are exploring all that. Discussions today went constructively. But its too soon for details. Factories and barely escaped deflation in june, unchanged from a year earlier. The deceleration raises fear of eroding profits and trouble repaying debt. The Worlds Largest supplier of consumer goods warns that the trade dispute threatens the very existence of some chinese factories. Spencer now, the trade corridor is being disrupted by whether there is a deal or not or tariffs or not. Lot of u. S. Based customers are trying to diversify outside of china. Not leaving china, but diversifying to spread at the risk. South korean president moon jaeins warning Business Leaders of an extended trade battle with japan over export controls needed to produce semiconductors and computer displays. There are concerns it could disrupt Global Supply chains. 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. Francine . Francine thank you so much. Lets kick off with the fed and investor expectations. Jay powell begins at of testimony to Congress Later today. He will face a barrage of questions, but only one matters to the markets. Is ready to push the fomc towards its first Interest Rate cut since 2008. Joining us is the Unicredit Group chief economist. Thank you for joining us. Does the fed have any choice but to cut . No. [laughter] francine so they will cut because the market says . Yes, but it is because they have indicated it. You could say that the market has a driven it, but they have been leaning in that direction and have not taken it back. Now, it is too late. Ncine if you litter listen to richard clarida, he was saying it was much more tempered and that the market cap priced in. Fed going to worry they are facing a lack of independence not just from President Trump but the markets . Erik it is always the problem. There, i think the fed has been to state its independence, in a sense. Thisntral banks dont do when a Central Banks dont do this, it is because the markets tell them. Let me look at my chart showing one of the preferred yield curves the fed looks at. If you look at our question of the day, will the Treasury Curve the flatter or steeper after jay powells doubleheader . Erik i think it will be flatter. But i am not sure if there is a whole lot left in it in the sense that it is priced. The market has understood what they intend to do. I dont think they will correct us at the stage. Francine if you look at the fact that the three month 10 year yield has inverted since may, is the fed worried about that . Is it an impending recession . The message out of the fed has always been that we should not be so worried about the inversion of the curve. There are different issues at play. I never really bought it. It is a pretty good predictor for recessions. In the fed cannot prevent it from happening. They can cushion the blow from it coming out early. And if they do go ahead in terms of cutting, they are earlier in the cycle than any of the other previous downturns. So that will help cushion the downturn. But you are right, you also refer to the labor data. All of the probabilities we have on the recession are all flashing red. So we have lots of reason for them to start to become more dovish. Francine is this with a trade war that is here to last . We heard from mr. Kudlow that the talks seem to be back on track. Specter of worsening trade tensions its taken off the table, what does that mean for trade policy . Erik i dont think it means anything because the fed cannot change policy based on trumps tweets. It is a tv reality show. On the off, love each other, dont love each other. The underlying problem is the guy is a protectionist. He is out to change the way the world is working in putting trade infringements on. That is bad for growth. The central bank knows it. The key reason we are seeing the change in tone from the fed and the ecb is because they are getting nervous about this. Francine if the fed cuts, is it one and done . Erik no chance. There is this insurance idea, but that is not the way it works. Can you ever member a weakening economy and you do one . When they start, and they will start, i guess they will do for cuts in all four cuts in all. But the risk is for more rather than less. Francine thanks, we will get back. We are getting some news saying that in south africa, they may cut some 2000 jobs as part of the restructuring program. s we will have a good look at some of the steel prices and its impact on these producers. Coming up, we talk about Deutsche Banks rating. Thats coming up next. This is bloomberg. Francine economics, finance, politics, this is bloomberg surveillance. Lets get straight to the Bloomberg Business flash. Tesla says it is exploring plans to boost production. That is according to an internal email. Teslave is coming after achieved record deliveries in the second quarter, beating expectations and easing fears over demand or electric cars. Another 200 14 million in equities sold by spacex, the third offering his company has undertaken. It was identified in Regulatory Filings and the ontario teachers pension plan has announced it has back to the company. Richard bransons Virgin Galactic will become the worlds first publicly traded is a company. Spacefunny traded exploration company. It will help fund the company until spacious can fund profits. We had a deal from saudi is and if weot possible were to actually take this public a long time so i think this approach seems to work very well for us. That is your Bloomberg Business flash. Francine Deutsche Bank will pay bonuses to deserving staff according to christian sewing speaking at a conference call. Despite the lender posting its fourth loss in years, they are trying to prevent its best remaining employees from jumping ship. Shares in Deutsche Bank are down over 7 over the past three days. Joining us is the associate in associate managing director at moodys. Welcome to the program. When you look at Deutsche Bank, what has the plan changed in your eyes . How has it changed . Francine what does it mean for the creditworthiness . The key thing from our point of view is that the recently announced construction plan is bond friendly when and if achieved. Francine will it be achieved . The Share Price Rose when restructuring was announced and that people said that this may be too ambitious. So do you have similar concerns . Aurie we think there are three main challenges of the group will face in achieving this plan. The first thing is that they have to achieve a massive reduction of this capital relief addition, they need to restrain the franchisor roshan in their remaining fixed youme business franchise roshan and their remaining fixed income business. Erosion in their remaining fixed income business and have to do it in a difficult environment. Francine is there a worry that by cutting too much into equities, they will lose customers elsewhere . Laurie that is what i was referring to. They want to retain a sizable fixed income franchise. Their Corporate Bank which is now at the core of the Business Model. , butey expect some erosion more than they desire will work against what they are trying to achieve. Francine what are you seeing in tokyos cocoas . Laurie the spreads have cvs ond a bit, as have their nonpreferred and senior unsecured. As compared to the equity market, which is down. About are not concerned their ability to meet the coupons on those instruments. Francine what are you doing in terms of the Credit Rating . Laurie on the back of the announcement, basically we affirmed our baseline Credit Assessment which is be a one and our longterm deposits. But we kept our negative outlook which we had in place. That is a reflection of the challenges they will face in delivering this plan and the persistent low profitability they have been producing. We expect it will remain at least through this year and probably flatten next year. Francine the concern is that this is a bank that will be very tied to the German Economy at a time when the German Economy is not doing great. Erik yeah, im worried. As he said correctly, the profitability is terrible. As you said correctly, the profitability is terrible. And also the issue of how much revenue you could realistically expect to generate at a time when the German Economy is not doing well and headed for a downturn. Then you have all the competition and the rest of it. So this is a tough one in the overall market. And german banks have been lacking. In the peripheral, we have cost to revenue ratios down. The last for Deutsche Bank was like 90 laurie 97, yeah. Erik is absurd. And the german banking market is still challenged by the fact that you have subsidized banks. So it is going to be tough, i think. Francine if the German Economy gets better, how much is that impact the rating for deutsche that impact the rating for Deutsche Bank . Laurie a strengthening operating environment and rates going up would definitely be a boost for the plan. Are done onmates the basis that that does not happen. And a deutsches would be able to achieve about a 7 return on tangible equity by 2022. So it is still below what they are trying to achieve at 8 . Francine fabulous, thanks so much. Associate managing director at moodys and erik from unicredit stays with us. As trade talks resume, south koreas president warns a Business Leaders to dig in for an extended trade battle with japan. We talk trade. This is bloomberg. Francine this is bloomberg surveillance. The u. S. And china have held their first talks since President Trump and xi jinping called a truce. Top trade officials spoke on the phone. Larry kudlow says the initial talks were positive. Lets get to another front in the trade war. President moon has warned the countrys top Business Leaders they may have to dig in for an extended trade battle after japan lifted export controls on key components. Joining us from soul is our reporter seoul is our reporter. Present moon jaein invited all of these Company Leaders and executives of the nations top 30 companies to the president ial office. Suggested was that these companies focus on domestic products and domestic production. It is a bigger wave of rejectionism within the region for not only an extension of the chinau. S. Trade spent, but also also making a stretch to korea and japan. He is saying that koreas economy being heavily reliant on importers, south korea should shift to focus on domestic reducers producers. Francine what is the purpose of this meeting and to actually would attend who actually would attend . The companies include samsung, and they motors, lg, these are the companies that would be directly impacted. What moon jaein is trying to do is send out a message, saying the government will that these companies up, pushing for an extra budget bill within the National Assembly to protect these companies should they be impacted by these export curbs. Francine thank you for the update. From korea. Ining us we focus so much on the u. S. And china that we forget the chip the koreajapan tensions. Are we expecting a currency war . Are trade tensions something we just have to get used to . Erik i think that is right. Even though we have the wto where people usually went to settle these things, it takes a long time. So there is nothing unusual about two countries gearing up a bit. But it is within the bigger framework and discussion of u. S. China and the future of multilateralism. Francine what does it mean for the World Economy . If you look at supply chains and things moving around, is it permanent . Or does it drag everyone lower . Erik i think it drag everyone lower. On the effectudy of some of these tariffs. In particular, the u. S. China. But the numbers are enormous. Looking at just tariffs trump has suggested, it can shave Something Like 2 off global trade over three years. This is massive. It means that Global Growth under 4 to aund little bit over 3 . Within you are in a shiver of a recession. Francine do countries not adapt . Erik exactly, that is the shortterm effect. And one of the interesting things in the dispute is that exports from vietnam to america have exploded. , butu redirect quickly longterm gains, all of the effect they have had in the world, all of the positive effects of globalization, particularly in emerging markets where we have never seen such success before, that is being challenged by this. Francine we have to come back and ask you about renminbi at seven and what that means for trade. Erik from unicredit stays with us. Coming up, the candidates for the next u. K. Prime ministers clash over brexit, we ask if they are ready for the october 31 deadline. We have more from the debate and the latest polls. If you look at what happened yesterday, parliament was flexing its muscles as Boris Johnson doubled down on a no deal brexit. This is the word. This is a 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. Powell faces congress today. Fed to cuth the rates for the First Time Since 2008 . Candidates for the u. K. Prime minister clash. Investors are ready for the october deadline. President moon jaein tells companies to prepare for a trade battle with japan. The u. S. And china prepare highlevel talks. This is bloomberg surveillance. This is gdp. Gdp in line with expectations. Becausebackward looking it is for the month of may. 0. 3 higher month on month. Three month on three month, that is in line with expectations. Belowrial production is at 1. 4 . Is lagging. G, that 1. 4 instead of 2. 2 . 1. 2471. D is at we are dealing on whether we should leave the eu without a deal. That is what the candidates debate. Does gdp in may make a difference to traders . Know. These numbers are being revised. They are backward looking. If you are sitting on the Trading Floor and you trade currencies or Interest Rates, these are not particularly important. In an environment where we are hitting a cliff in this country. U. K. Mps have voted in favor of preventing the next Prime Minister of forcing through a no deal brexit. Betweene led to a clash the two men vying for the party leadership. We will hear what they had to say about delivering brexit by october 31. I am not going to take anything off the table. It is a curious thing to do if it is about taking control back from parliament to shut it down. You to keen as boris and leave by october 31. No deally handled brexit could be costly. You are telling businesses they do not need to prepare for no deal. I dont think we will end up with a no deal exit. I do not think there will be a disruptive or disorderly brexit. We need leadership that is going to guide us through a crisis and make a great success. That means being honest with people. The way to do that is to get brexit done. Francine lets get the latest our executive editor and erik. We had this vote in parliament. What does that mean . Positions,ing of particularly if Boris Johnson becomes Prime Minister. Lawmakers are saying we do not want to be bypassed. Boris johnson says i am keeping option on the table. Point, he is a hardline brexiteer. Instead of saying i would negotiate with the other parties or have discussions, he is saying this is what i want from a deal and i am going to get it done in time. If he gets the leadership, it is an antagonistic relationship with parliament. A fight, if there was who would win . Rosalind john major saying he would sue to stop johnson Prime Minister from suspending parliament. It is unclear how that would work. Parliament should have the right to vote on the deal, whatever deal Boris Johnson would negotiate or try to renegotiation try to renegotiate. Francine i thought that is what the gina miller thing did. If he negotiates Something Else with brussels, does that need to get voted o