And president xi jinping having dinner. Herearkets reacted to take us through the market reaction, Michael Mckee. What is at the fed had to say that got the attention of the market . Mike they did talk about the market. They are watching valuations. The feds job is to keep Financial Markets stable. They are a little concerned at the way things are going. There isnt much they can do about it at this point. This may just be a verbal warning shot to wall street. Aboutd went into detail its Balance Sheet program and where they will start reinvesting. By the end of the year, they want to get a couple more rate increases in and then the open question is how they do it once they start going. David nobody quite knows the answer to that. Rate hikes on the one hand and rolling off the Balance Sheet on the other. Mike there was not a tied to that in the minutes, but there was the interview with bill dudley. Qe lowered Interest Rates. If you start removing it, you will start raising Interest Rates. What seems to be going around the markets is this idea that the fed starts normalizing the a move sheet, you get upward in rates, they dont have to move the fed funds rate for a couple of months. Play ifuld come into janet yellen and Stanley Fischer are removed from their jobs next year. Plus, three more governors. It could be a disruptive time and you have Monetary Policy on automatic pilot. Jon the continuity of management at the Federal Reserve. If you initiate a new plan and then get new leadership next year, who is to say this is going to carry on . Mike nobody is. It could be changed by a new fed. The president s will all still be in play. A responsible economist would want to do what the fed is talking about doing, putting this on a path, rolling off in the background, not used for finetuning policy. Alix this is where fed fund futures will be. January of 2018. January of 2019 the blue line. This year, we are still at two rate hikes. Next year, just one rate hike at the end of the day. Is that the right interpretation of what the fed said yesterday . Mike the Balance Sheet reduction will serve as a possible rate increase. Alix enough to take out to more rate hikes . Mike its hard to say. As weve said, donald trump is getting nothing done right now, but hes not stopping his effort. If he does get some sort of fiscal stimulus going, it will fall into 2018 and you would see the fed move faster and further than it otherwise would. That will get is a rate increase or two, but we could see a violent change in the fed fund futures. Jon a communication problem. Who would have thought . During is from princeton is bob doll joining us from princeton is bob doll and mark cabana. How do you calculate how many and normalizing the Balance Sheet . Bob getting the number right is going to be hard. The context is obvious. The fed is slowly going to raise rates. And then slowly address the Balance Sheet. For years, weve had the fed as a tailwind for the stock market. They are turning around and eventually becoming a headwind. , running thisna policy passively, how do you do that when the maturity profile is so lumpy . Mark the fed will inevitably live with the variability in do off theat to treasury portfolio and what the payments look like. Todont think they will want actively manage this too much because it will jumble already a complex comedic asian problem. They will look to eventually phase out there reinvesting. Complex communication problem. In order to help the market gradually adjust. David doesnt that suggest it is going to take a long time . Mark if they involve the treasury portfolio, they can pay down the portfolio pretty rapidly. They have 135 billion or so coming due next year. 350 billion for 2019. If you add that on top of what our mortgage strategists think, we will roughly see 150 billion or so in mortgage prepayments, you are looking at a pretty sizable reduction. David what effect would that have on the market . Bob the important variable beyond what were talking about is what the economy is doing. The fed will move based on conditions. If the economy is doing fine, earnings are doing fine and that prescription for the fed going the other direction make sense makes sense, markets will handle it ok. Stocks do best when the fed is lowering rates. The easy money in the bull market is in the rearview mirror. We are moving past the skepticism phase. Phase, the mature fed is beginning to normalize rates and earnings will tell the story. Alix what happens to the curve . It is pretty steep over the last few days. How much is a Balance Sheet reduction worth to the curve . Mark it is very difficult to estimate because it largely depends on how treasuries adjust their issuance of strategies. We will likely see the belly of the curve steepen a bit. Term premiums will likely increase and move a bit more normal levels. Thought by allowing the portfolio to roll down over the course of this years worth 15 basis points. You could be talking about a 50 basis point increase. It is a highly imperfect estimate. A lot of it will depend upon what the treasury does, but you could see rates moving higher as a result. As the fed continues to discuss incorporate i dont know about dump and run. The fed is wanting to give the market a fair amount of lead time to adjust accordingly. Jon a quick question. They talk about Balance Sheet normalization. Yields were lower on the 10 year. Ism, the was the Economic Indicators have been pretty good for the last month or so. Now, they are more mixed. , markthank you very much cabana. Bob doll is taking with us. We want to welcome our twitter viewers. Bloomberg daybreak is a streaming live. Is streaming live. Up next, we go live to palm beach, florida. President trump and president xi jinping will meet later today. Golf may not be on the agenda. This is bloomberg. Alix President Trump with two days of meetings with president xi. North korea testing a Ballistic Missile and trade. Joining us from palm beach, cummin kevin cirilli. Look like forn President Trump . Kevin he has to get something across on National Security. The administration feels they might be able to find some Common Ground on dealing with north korea. He will be flying from Andrews Air Force base to florida in West Palm Beach at around 2 30, he will land. Sean spicer will speak to reporters, trying to set the parameters of this twoday summit. They will head into private meetings with Top Administration officials, including wilbur ross , Steve Mnuchin as the begin to talk about things like trade and whether or not they will be able to find Common Ground. It may be more difficult on that issue. Later this evening, President Trump will be accompanied by First Lady Melania Trump and they will join president xi and his wife for a private dinner at maralago. Alix that is the agenda. , you have Party Members watching this meeting closely. Da chinese officials have described this meeting as a fresh starting point. They have been very restrained in terms of responding to trumps tweets and rhetoric on trade. They see this as an opportunity to build up a rapport for xi jinping. This meeting coming so early in the Trump Administration allows china to gauge trumps style and attitude. This will lead to a symbolic deal on trade going forward. I dont think there are expectations for a major deal at this meeting china has their own domestic Political Considerations back home. This meeting will be about setting the table for bigger talks down the road. David is President Trump ready for this summit . The chinese have been preparing for years, if not decades. Trump doesnt even have his staff together yet. Is this a disadvantage for him . With and the shakeup steve bannon being removed from the National Security council. The issue of why they are not at the white house come reportedly mother there was concern from chinese officials they were going to maralago as opposed to the white house. Should be noted. At the white house, reportedly, there was concern from chinese officials. North korea will remember that the last time President Trump was at maralago with japans Prime Minister abe, north korea did have a Ballistic Missile test. Earlier this week, they did the same type of action. President trump has publicly said that he feels he should be able to work with the Chinese Administration officials in order to address north korea. That is where they are looking to find Common Ground. Likes President Trump optics. The big announcement on buying a lot of boeing planes. Enda trump does need a symbolic win. Im sure the leader of china will be more than happy to deliver on those optics. Theres conversation that they could go the japanese route. Increasing investment in infrastructure in the u. S. Be concessions you might announce procurement contracts. Deal. Pectations are a big china will put something on the table to placate trump. China understands the meaning of giving face. Jon have they already seen components of globalization abroad . Policy are they already seeing what they want to see ahead of this meeting anyway . Da they are trying to be seen as a champion of globalization and trade. We know they are not intervening to weaken the currency. The are legitimate complaints with regards to dealing with china is making notress in some areas, but the champions of free trade just yet. David thank you for joining us today. Still with us is bob doll. Lets take a look from the markets point of view. How did the markets react . Where will we see it show up in the market . Bob i dont know if we will see anything big immediately. Theres no more important trade relationship in the world than that between the United States and china. If they can show cooperation some and we can see National Security statement around north korea they agree on and i would love to see them shaking hands and show cooperation. Symbolism is important. David that did not happen with angela merkel. What if the summit goes that way . Bob that would not be good. Underlying all this is the concern about global trade. It is not growing like it was because theres not as much cooperation. We need to trade globally in both directions. A bad a summit would not be great news. Alix bob doll is sticking with us. Coming up, Tim Wentworth will be joining us. This is bloomberg. Joining us now is michael moore. Glasssteagall written all over it. How realistic is it . Mike theres been idea for support for a new glasssteagall from both sides of the aisle since the financial crisis. The question is how big of a legislative priority that would be. Another is how strict it would be. Been the u k, theres a softer split then you had under glasssteagall, which gave us morgan stanley. Alix is it surprising that gary cohn when in favor of this . Mike it is a little surprising. The expectation was that the banking regulations would not be a top priority for the administration. Their banks have dealt with so much new regulation since the , there would be a willingness to step back and let banks adjust to regulation. Laying something on top of this would be a little surprising. Jon i will propose a story and then you can talk to me about how to manage the following story. Advantage ofve Goldman Sachs against j. P. How would they manage that kind of story if it does emerge . Mike that would certainly be a story going forward. Jpmorgan would certainly have a relative disadvantage from this compared to a firm like goldman. Depending on how it is structured, it could be a headache for all the banks. That is something that would point out. Certainly, there are winners and losers on a relative basis if this were to go forward. How would these separated investment banks be regulated . Would it go back to Something Like we saw before the crisis where they were much more light noth or would they be getting as big of an advantage . Jon thank you very much for joining us in london. Bob, another takeaway of how unclear it is what the policies of this administration will be around things like financial regulation. Caseis the bob doll best scenario . Bob this is a bit of a surprise that this dialogue is shaping up now. The banks have had so much on their plate and they need to digest. We need a healthy banking system. That is good for wall street and also really good for main street. , lettinghings digest banks get back on their own feet makes a lot of sense. We throw in this and it is another headache that will the banking system. Glasssteagall doesnt do that, does it . Thisi dont know where glasssteagall conversation is coming from. I agree with you, those things dont have a whole lot to do with one another. David gary cohn announced he had a deregulatory commission where is that . Bob i dont think it is a very far at all. Theres a lot of things the Trump Administration talks about. They are ideas. They dont have the time or personnel to put a lot of this together. A package like that on the surface sounds like great news, but what are the details . Alix how do you factor in banks . Weve seen a lot of flows coming into that sector. Knowing we have the regulatory issues and still overhanging the banks, knowing the yield curve cant stay steeper, what do you do with them . Bob im still of the view that like the back part of last year, we will get a little more growth, little higher Interest Rates and less regulation. Theres no sector that benefits more than the banks. The backeld curve at and keeps coming down, that will be good news for the banks. We need more reflation in this is the man that trade has some question marks around it. A big group of people who arent surprised by this news. David coming from gary cohn. Whether fairly or unfairly. Jon check out this lineup. Payrollsnt you down to what is in store tomorrow . From new york city, you are watching bloomberg. Ive spent my life planting a sizesix, nonslip shoe into that door. On this side, i want my customers to relax and enjoy themselves. But these days its phones before forks. They want wifi out here. But behind that door, i need a private connection for my business. Wifi pro from comcast business. Public wifi for your customers. Private wifi for your business. Strong and secure. Good for a door. And a network. Comcast business. Built for security. Built for business. Ways wins. Especially in my business. With slow internet from the phone company, you cant keep up. Youre stuck, watching spinning wheels and progress bars until someone else scoops your story. Switch to comcast business. With highspeed internet up to 10 gigabits per second. You wouldnt pick a slow race car. Then why settle for slow internet . Comcast business. Built for speed. Built for business. Jon from new york city, this is bloomberg daybreak. Two hours from the cash open. Futures a little firmer come up 26 on the dow. Switch up the board quickly, treasuries look like this this morning. Year. The u. S. 10 a bit earlier, president draghi making some headlines on Forward Guidance and drawing a line. I wonder if that is going to change anytime soon. From todays of standpoint, i deviate. Cause to jon the ecb agreed to discussion on normalization warranted in the future. They discussed the downward rate pledge. That Forward Guidance did come up. Rates will remain at present or lower levels for an extended period of time and will pass of the horizon of asset purchases. President draghi says that will remain. It is clear that the ecb is having a discussion about it. Joining us is james athey. That line that rates will remain low until well past of the Asset Purchase Program, are they going to have to rethink that . James you would think so at some stage. To be honest, ecb communication has become a bit of a challenge for them. There is some pretty wide disagreement among the council members. Mother theoday today if you believe that stock is what makers, you could easily the argument that stopping purchases is no way of tightening. It is stopping the further easing. The bar for that should be a lot lower. Jon rates remain at present or lower. Do they change the sequencing . The deposit rate could rise before the Asset Purchase Program ends. Or, do they change the time that rates could rise amelia after the Asset Purchasing Program ends . After the Asset Purchase Program ends . James they could indeed change the sequencing. Since then, theres been a lot of backtracking on that. The most straightforward thing to do is stop the purchase is first and foremost. That would follow the plan set out back in 2013. Alix rates could rise before qe ends. Ecb members saying they are open to having that discussion. How large is that camp . James difficult to say. The communication has been inconsistent. Some of the centrists flipflop a little bit. Certainly the northern europeans. We know what the germans think. Putting them firmly in the hawkish camp. Be that, it will depend on what the data looks like. Test beyond that. Beyond that, it