Im going to be interested in the contrast between Monetary Policy and the skinny budget. The first budget from the Trump Administration, it will be fascinating to see. Alix and dynamic scoring. Here is where we are stacked up. 2. 5 hours before the open in the u. S. Equities softer, s p futures off. 10year yield on the margin, the basis point down. 1 ascatching a bid, up 1. The pound recovers. Europound was down for a while and is now reversing. Im taking a look at where volatility is nowhere, up by just. 5 . Goldman sachs says buy copper and oil, market not listening. A 60 losing streak, the longest since november. Kicking off this big week for Central Banks, our guests. To me, the big question is 2018. It shows the possible rate hikes the markets are expecting. For 2018, we are just over to michael. What is it going to take for the fed to move that line . Its going to take more clarity on the fiscal front. An interesting disconnect is it being pulled up on fiscal but not expecting the fed to react. Alix bob, is the market prepped for that in terms of the dollar . I dont think the market is completely prepped for big fiscal stimulus. Hasview has been that what been driving equities is not necessarily trump, but Global Growth, which is rebounding quite smartly here, around the world. Everyplace is looking pretty robust. I think right now the fed is not discounting a major fiscal stimulus. They havent factored that into their expectations, but they are pretty far behind the curve. If you look at normal cycles and where they should be, given a level of inflation and growth and unemployment, i think they have a lot to do, and i dont think the market has really discounted a lot on the fiscal side, and that could add even more to the fed action, which would increase the dollar. Alix where is the market most complacent . 2017, we were at 2. 5 hikes. 2018 may have the most complacency. There is so much uncertainty you can go up to a meeting and not know what theyre going to do. Trying to divine what they will do in 2018, particularly given the uncertainty of fiscal policy, is difficult. The market is taking a middle ground. They will do a little more, not as much as this year, which is a bit of a catch up, taking a wait and see attitude t. This president and his administration had talks about doing a lot, and when it comes down to reality, there hasnt been a tremendous amount of followthrough in terms of some of the things declaring china a currency manipulator, things like that. I think the reality of governing is setting in, and i think the fed in the markets are just sort of sitting back and saying what really develops. More of aing to be News Conference that janet yellen has. We are at 100 likelihood for march. What are you going to be looking 2018 . Ther to one isuple to questions, what the fed is seeing outside this fiscal question. This has changed the balance of risk and there has been a lot of concern going into this year about the possibility that we are one that shock away. It would give a backdrop of support and the fed could be more aggressive. We are looking signs that the Risk Assessment has shifted. The other thing you want to keep an eye on is the Balance Sheet. Wouldnt expect a lot of news. I think we will probably see a meeting or two in which we have some big discussions, some presentations from staff on how to communicate it and executed, but cerner or later execute it. Get asked andll repeat what we said, we want to get rates closer to neutral. The difficulty will be when they get the funds rate above 1 . 1 has been viewed as the threshold. You have to at least get the funds rate to 1 before you talk about the Balance Sheet. That may be where they are in june. I think the Balance Sheet issue is going to become the predominant one as we go through the second half of the year. She could probably skirts that issue in the march conference. Alix michael, what happens to the curve . It comes back to expectations of fiscal policy. Obviously, i think the short end is going to continue to price in alix all the way . For now, it makes a lot of sense. Its a question of how much we are going to be seeing an extension of the budget, particularly on the debt side as we go forward, and that is an open question. Alix we had centralbank divergence for so long, and theres a potential we could now. Called virgin convergence have is that influence the market . I think it is at best a second half story, or later. Its true that Global Growth looks better. We have the boj this week, too. I think they are going to be very slow to back away, and the markets could sniff it out in the second half of the year. From the ecb standpoint there is still a lot of concern about the elections yet to happen. The divergent story certainly plays until the back half of the year. At that point you are potentially looking at some narrowing of, say, the treasurybunds sprint curve, some of the dollar strength. David we have talked about fiscal policy may be getting some assurance from the fed. What about Global Conditions were generally . The Global Growth picture . Is that actually freeing up the fed to take more risks with Interest Rates . That could be the biggest change for the fed versus six months ago, whats happened in the global environment. That seeing numbers indicate gdp growth in the eurozone could move above 2 on a yearoveryear basis. It doesnt sound like a lot, but their potential gdp growth is closer to one. We are definitely seeing better momentum in the rest of the world. Interestingly, with two exceptions, the u. K. Is slowing down after being surprisingly japan cant16, and get any momentum. What is interesting is those are the other two Central Banks meeting this week. So if you are talking about the ecb moving toward a little tighter policy Going Forward, other Central Banks around the world, the two exceptions are be the bank of england and the bank of japan. The others would be meeting this week. Alix you bring up a good question. Is the fed data dependent, or have they shifted their reaction function . Is it more how they view the economy, the Global Economy, and then they make the decision . It is part of a ship that was gently suggested when she started talking about international conditions. The fed seems to be more conscious of the Global Economy rather than just truly domestic issues. It comes and goes, but i think that is definitely a case. I think the question for the fed is one of risk management, given that we are at or very close to zero we have to because just. Now that we have the global backdrop in the fiscal story, that potentially means more balance or upside risk. Alix bob, what is your strongest conviction . For us, its dollar higher still as we go through the course of the year. Not necessarily against the euro. We have been thinking 1. 051. 10. But i think as the year progresses the fed will outdistance the rest of the world and we will see the dollar move up against emergingmarket currencies. Right now, emergingmarket currencies are benefiting from this surprising Global Growth momentum. If that begins to fade later in the year and the fed keeps hiking, then i think we could see some movement in the dollar. For us, it is dollar higher. Guests will be staying with us. Coming up, the senior professor at the akoni university and nobel prizewinning economist joins us from elan. This is bloomberg. From thmilan. This is bloomberg. Time now for other stories making headlines. Im emma chandra with your Bloomberg Business flash. The reports of intel buying the Israeli Company mobilize up to 15 billion. The deal is expected to be announced today. They make software for pedestrians. It would be the biggest ever in israels tech industry. Insurance executive mark tucker will be taking nonexecutive chairman of hsbc. He is ceo of aia, and will start on october 1. His primary task will be to find the new ceo to replace stuart gulliver, who has led hsbc for more than six years. Iceland is back. The government says, effective tomorrow, it will release all the remaining capital controls to allow icelandic citizens, corporations, and funds full access to Global Capital markets. The banking collapse led to its worst recession in more than six decades. And that is your Bloomberg Business flash. Im emma chandra. This is bloomberg. David in a week full of economic and political events, markets will be focused on the future of the eurozone, and what that tells us more broadly. Joining us now is michael is also senior professor at caponi university, and will speak later today at a conference on protectionism and nationalism. Professor, thank you for joining us. Pleasure to be with you. David a little bit of a delay. We will be patient. We have an event coming up tomorrow, professor, where we have Angela Merkel, the chancellor of germany, coming to washington to meet with donald trump. Is this a clash of two worldviews about globalization, trade, or is there room to meet in the middle . Oh, i think there is room to meet in the middle, but both sides are going to have to move somewhat. In the background, there is a difference of views. The European Union just reaffirmed its commitment not only to globalization but to the multilateral approach. I think it is multilateralism versus bilateral is him that will be the area of possible disagreement. David but President Trump has made it very clear, he does not believe in multilateralism. He wants to do it bilaterally. Do you think Angela Merkel could persuade him to move toward her . Well, im not sure. Thats part of the uncertainty we all face. But i hope so. Lism is fine for the Major Economies in the world, they can work out mutually beneficial relationships and solve the challenges in terms of distribution that we have, and that President Trump not only identified but that helped get him elected. Multilateralism, however, is a pretty important entry card for the smaller countries in the earlier stage of development. They dont do well in the bilateral world. So hopefully they will find some meeting ground, where they accept parts of each of the agenda is, but keep the Global Economy open for the weaker, less strong, less wealthy economies in the world. David what is at stake for Angela Merkel . Do we have some growth it is not as robust but there is growth. How vulnerable is germany and europe more broadly to the new trade policies the Trump Administration is talking about . Europe is somewhat vulnerable, although i think the principal owner abilities have to do with the differences between north and south, to be perfectly honest. Trumps policies are likely to cause the dollar to be strong. That is, on balance, beneficial to europe. The growth you were talking about is mainly in germany and north of here, the problem areas where nationalists are gaining ground, in france and italy, in the south. Ist is where the weakness from the point of view of european coherence and cohesiveness. I hope they come to some agreement on the question of these nationalists. There is a subset of the Trump Administration that is reported to be highly supportive of the nationalist parties in europe, and that, i think, is not helpful from the point of view of trying to maintain, in a difficult environment, European Cohesion and coherence in the eurozone. David michael, when you talk about that divergence, it is not strictly geographic. That may be manifest as early as this week, when we have the dutch elections, the french elections. What does that really tell us about the sustainability of the eurozone, as it is now configured . Well, thats the 64,000 question. I think in the dutch election, the issue is mainly sovereignty, as it was to some extent in britain and the brexit vote, and immigration. Quasire important economic or noneconomic overlays. But in france, the issue is nationalism, sovereignty, but there is a significant fraction of the population thats starting to feel the pinch of globalization and other major trends. The pundits say on this round that madame le pen will not win, but once one of these parties gains enough ground to take control of the government, theyre antieuro. I think we are talking about a longerterm risk, rather than shortterm. I dont think the netherlands would take the eurozone down, but a withdrawal by a france or italy would produce a major disruption. David is the eurozone in a position where they either must go forward or must go back, in the sense that they must become more integrated with fundamental reform, which was demanded by those who voted for brexit, or they will have to look at a different, and perhaps more diversified, approach . Yeah, that would certainly be my view, that the status quo is unstable. Its a status quote in economic and i think the populists and nationalists will continue to gain ground. People who support them are basically saying this isnt just a more difficult recovery, it is a permanently impaired condition. The sameeve the gdp is today as it was in 2000. High, unemployment youth unemployment high. I just him think you can keep this up forever. What you said is right. Either brexit and the trump election and the rise of the populist party serves as a wakeup call and there is a major change in policies, both at the National Level and at the eu level, that make it easier for these economies to adjust and start the growth engines, or we will sort of drift. Alix looks like we might have lost professor spence. Lets see if we can get him back. What is that windup meeting for the ecb, bob, when you have better growth at the end of the day in some areas, inflation in some areas, politics in some areas how does the ecb said policy for that . You know, i think right now the ecb is going to sit back and see what develops. There is certainly enough excess capacity across the euro zone economy that they are not facing significant inflation pressures. Core inflation is stuck at. 9 , near the low of the cycle. I dont think they will be in a hurry. They have time to sit back and watch, much like the fed had time to sit back and watch last year. For the fed, i think that time is up. They have to act. Grudgingly, theyre coming to the realization that, in fact, their economy is picking up pretty substantially. But again, like the fed, i think they will be very patient to adjust it as we go through the course of the year. Alix professor spence is back with us. What do you think about what the ecb will do when it has to cater to Different Countries . Bob says they will have to wait because the risk, but then you have inflation heating up in germany, and that provides its own pressure into the election were on jul Angela Merkel is fighting. There are two parts to the ecb, and they are both important. I agree with what was just said. If inflation continues to heat up, regardless of where it is, but especially in germany, and starts to get core inflation gets up near target, which is just below but not far below 2 , they have to react. The pressure is building for them to do that. That wont necessarily help the countries that are doing less well, but i dont think they have any choice. The ecbs they mandate is inflation. Theres another part of the ecb that is important, that has never been used. It is called the outright monetary transaction. Draghi did inrio 2012 to calm down the sovereign debt markets. That is still in place. Thats another piece of the puzzle that doesnt get talked but potentialh, instability in the sovereign debt markets would certainly cause a major disruption in europe. We have got major challenges. David finally, we have developments going on across the channel, in the u k and even today is the house of commons is debating this law that would allow theresa may to exercise article 50. If it, in fact goes forward, and there is a brexit, and they cant come to an agreement on european side how bad could it be for europe, if there really is a disorderly breakup . Well, it is certainly not good. But again, if you imagine a the adjustmentch mechanisms in europe are made more flexible, were fiscal transfers there is more inflation so the overleveraged parts can adjust faster, the uncompetitive parts can adjust, then i dont think a brexit is the main event, to be honest with you. Its more piling on in a relatively weak situation that makes it worrying. David ok. Thank you so much. Nobel laureate and senior professor, michael spence. Alix the other big news we are watching is in commodities. Oil prices weaker again today, a Goldman Sachs says it is time to buy. They came out yesterday saying by copper in oil. Joining us now is Bloomberg News executive editor for energy and commodities. It was interesting his call, bec ause they said it wasnt about china, that the weight on commodities was overdone, and they are still buyers. Yeah. Thats quite a sensible position. Last week was a wobble, we may get more wobbles, and the supply situation stops. Calls. R ete the two key and they are saying dont get too hung up and do they comments. Think about the longterm. What we know from commodity cycles is that you get a few years of really bad prices, and then you have a subprime problem. Alix this chart really shows that. The blue line you see is wti. The white line is the time spread, one versus twelvemonth oil prices. You can see the weakness has not caught up in terms the time spread. That says to me that supplies are still title than what the stock market thinks. Absolutely right, and if you look at the beginning of next year, you have that backqu idation, which super sizes returns. Thats a great environment to invest in oil. But shortterm, six months, it makes it tricky to make money in t