Had a slight beat on revenue. But they did better on earnings per share, 1. 24 as opposed to 1. 19. Thats the first of several to come. Now we want to go to our morning brief. Were going to continue with retail sales reports, as we have macys out at about 8 00 this morning eastern time. 30 minutes later, its weekly initial jobless claims in the United States, plus Producer Prices coming up for the last month. And at 10 00, as alix mentioned, bill dudley holds an economic briefing on Regional Wage inequality. Finally at 1 00 this afternoon, the u. S. Treasury is going to auction 15 billion of 30year bonds. Throughout the day, people on both sides of the pacific are following developments in the potential conflict between the United States and north korea. To take us through the perspective from asia, were joined from hong kong by our chief asia economics correspondent. Give us a sense of how it looks over there. What are the possible effects that people are expecting of a possible conflict . Theyre nervous generally here at the moment, i must say, and there would be quite a significant Global Economic impact if we were to reach a conflict. Analysts are starting to run the numbers. If you take south korea alone, it makes up 2 of the Global Economy. It is home to some of the worlds biggest electronics companies, some of the worlds biggest carmakers and ship builders. Theres a feeling that if there was conflict, it would be rip into the Global Supply chain and drive a shortage of products. And then we have impact on shipping lanes in northeast asia, and this part of the world is am home of the Global Trading scene. And without even getting into the cost of reconstruction, some of which probably will be borne by the likes of u. S. And others, which already have significant debt so. Theres a feeling that if we were to reach the point of conflict, it would be quite a setback for Global Economy, and thats why so many people feel its so important to avoid that scenario. David to what extent of the markets are reacting . Whats going on with the stock markets over there . Enda i dont think the reaction has been especially excessive. On the one hand, theres a sense of deja vu with sabre rattling, but the change of tone coming from the u. S. , especially the warning from president trump. I think theres now a feeling that people are sitting up and listening to whats going on, and theres a feeling this negative sentiment hanging over some of the worlds biggest economies here is not just south korea, its a potential risk to japan as well, potential impact on trading lanes with china, that people are now starting to get concerned about if these latest round of sanctions arent seen to be effective, then theres the concern where does it go next . If it gts the military route, people would be very concerned, and thats where you would see a significant reaction. Alix thank you so much, enda, joining us there. And the question becomes, how do you price an event . The latest call for caution comes from t. Rowe price. The head of Asset Allocations said everything is expensive, and we are late in the Business Cycle. Doesnt leave a lot of room for error. Its cutting its firms allocation to the lowest level since 2,000, plus reducing emerging market debt. Sebastian joins us from altimore, and guys, great to see you. Sebastian, lets start with you. What is your call for caution based on . Well, the context is were in a lowgrowth environment, but equity valuations in the u. S. , with the ratio at 17 right now, are high. This is the 95th percentile in history for the last 20 years, so theres little room, theres little valuation buffer should some of the risks out there materialize and impact growth Going Forward. Alix there is a story in the market that what weve seen in the last few weeks has just been repositioning, so getting out of the some of the crowded trades, not a fundamental shift in the grew of the growing economy. What do you think about that . Well, first of all, lets just put the geopolitical risk out of the equation for the moment. I think thats absolutely right. Theres been no significant change in fundamental developments in both the eurozone, as well as the u. S. And what youre seeing right now is this momentum that the euro upside had developed as well as the dollar, the downside in the dollar, is probably losing some steam, and i think given how quickly things move, it makes sense that the market is going to stop a bit, reassess, and see some consolidation at current levels from. A pure fundamental perspective, however, id like to highlight something. Weve been saying that the dollar should correct lower, because it diverged. Right now the dollar has moved a lot, and we are reaching a point at which the fundamental case for the dollar to go lower will still be there, but not to the same extent as before. I suspect that the market is going to be driven a lot by momentum, and that is why i expect some further downside to the dollar. Geopolitical risk is definitely something thats unforecastable, basically, and its something that we should start factoring into the equation. David so sebastian, to what extent is it not a matter of the fundamentals deteriorating, just not moving as forward and fast as we thought there would . The question of momentum is not as much as we expected on both sides of the atlantic. Sebastian and also whats priced in. There are good things happening out there year over year, Earnings Growth in the u. S. , 10 , 13 in europe. But we go back to the question, whats priced in . Volatility is so low, its ticking up with recent events. But its all about the expectations that are already reflected in evaluations. I think you have a difference if you look at u. S. Equities, for example. U. S. Equities, we are late in the cycle with high valuations, with the Central Bank Going towards the paper route. In europe, were earlier in the Business Cycle, and theres potentially room for further Earnings Growth there. I think you have to go back in to wheres the buff when her youre growing at 2 . David what is the potential feedback of f. X. , particularly the stronger euro, thaw predicted may keep going . What might that do to things in europe . Right, i think this is a fascinating subject, and i say this because we started spending a lot of time thinking about this and trying to model it. If i was to summarize, our results would be as follows. The relationship is not linear, and at the end of the day, what is in the world, right . In the following sense, it is intuitive to make an argument that a higher eurodollar is going to put a profit margin that are under pressure, is going to tighten financial conditions, and therefore, its going to have an effect in the equity market and potentially on the economy. But one thing that this analysis fails to capture is the fact that where is the euro relative to its fair valuation. So let me put it differently, if euro is undervalue and had rises, does it deliver the same amount of tighteninger or the same amount, as opposed to when its overvalue and had rising . The answer is no. Weve done some preliminary work on this, and i think its fair to say that eurodollar would have to rise between 1. 25 to 1. 30, and it starts delivering meaningful and Lasting Impact on equity prices. Alix at the same time, we got sort of some hiring, some of the data coming from germany, not so great. So whats the downside troisk areas like germany, even though you have to wait a while for the euro to rise, some of the fundamentals are rolling over . Right, well, first of all, we have to bear in mind, alix, nothing goes up in a Straight Line or nothing goes down in a Straight Line. Im pretty sure the data will always be contaminated by monthly volatility and there will be fluctuations here and there. But looking at the big picture, i think whats really important about the eurozone, its not just that the aggregate growth has surprised on the upside, dispersion of he growth rate is actually at the lowest its been for a number of years. And that tells me that this is a recovery, although not fantastic by any stretch of the imagination, it does have robustness and seems to be lasting for quite some time. So i wouldnt be that much worried about a drop of one, two, three three drops here and there in a number of surveys or monthly volatility. Alix now you sound like the fed. Seb sebastian, to wrap it up with you, ive heard a lot from different individuals about theres no catalyst for the markets to really move lower, but nonetheless, the upside is limited. Whats the risk, though, in your risk aversion call coming too early . Theres always a risk of being too early with risk aversion or derisking your portfolio. But you have to look at where youre starting from, and youre starting from a point where, again, valuations are fairly high, were late in the cycle, the political sphere has been very volatile, and on the other hand, markets have been quiet. Its been very quiet in the markets. Last two days aside. So you have all these conditions that introduce overall, that introduce fragility. I should say, we still believe role of stocks in the long run when saving for retirement. But right now, there are lots of catalysts that could introduce a pullback, so we have a modest underway to stocks underweight to stocks. David both will be staying with us. Coming up, more on our top story, with a former assistant secretary of state, as tensions with north korea rise. Live from new york, this is bloomberg. I think theyre surprised by inflation coming into the downside during the spring here. And not by tiny amounts, really by a large amount compared to the progress that we made through 2015 and 2016. David that was jim bullard saying the fed is perplexed as the rest of us. Still with us, our two analysts. Sebastian, i want to start with you, because this is all connected with the cautionary tale youve written in this sense. If the inflation is headed down, and were getting c. P. I. Numbers tomorrow, that might indicate the fed is less inclined to raise rates. What will that do to your prescription . Sebastian the question is, is inflation late to the party, or is it just not showing up . Think about Central Banks locally and liquidity pumped into the system. Were talking about 9 trillion in global stimulus. At the pace, even though the of 200 ling back, billion a month being inject globally, and primarily b. O. J. And e. C. B. , so you have all this q. E. And this liquidity injection and very little inflation. Meanwhile, employment is coming up, especially in the u. S. , now down to 4. 3 . So people talk about the phillips curve and what is the fed really focused on, and reducing macro volatility has been a side effect of all this stimulus. So is the fed ok with lower inflation and employment continuing to tick down . Theyre going to be very careful about how they implement the unwind of the q. E. But i will say, last thing, this remains an open question. How all this q. E. Globally, what will the unwind of all that policy action do to the markets . And i think all Central Banks, fed included, will be very careful about how they unwind all of this. David so i think all of us can agree theres uncertainty about the unwind. Does that mean were better off putting it off for a while . That means if inflation royals are lower, that allows for a pause, and that means we dont know whats going to happen, but maybe we want to put it off a bit. Yeah, and just well, i think it largely depends on how the west of the data pans out. Look, the reason here, is i suspect somewhere along the line theres been a structural change in the phillips curve, and thats a conjecture. I cant prove that, and i think no one can really prove that right now. But there has to be a structural change in the relationship between wage growth, price growth, and employment, unemployment rate. To the extent there has been one and growth keeps on going along nicely, although with the rise of 1, 1 1 2 years, i think its probably the right time to start a very gradual unwinding of the Balance Sheet stimulus that weve seen all these past years. However, if the lower inflation that we started seeing in the u. S. , start suggesting that there is a general deterioration in economics, theres something going wrong with aggregate demand, and that is going to put Central Banks into a very difficult spot, and its going to be very, very difficult this time, because they dont have the ammunition to fight back, really. Alix which is really what we heard from bullard yesterday. Were also going to hear from bill dudley later on today n. June, his comments were seen as hawkish, and nothing has really changed. Inflation is still low. The economy and labor market is Still Holding up really well. Do we finally get some real support for the dollar here on that . I think support from the dollar is largely going to come from positioning, squaring of positioning and potentially some technical correction rather than purely on the fundamental front. Of course it will get a massive upside surprise in c. P. I. Numbers and given where the market is currently sitting, having priced in just barely 125 basis point hike over the next 12 months or so, we are likely to get support for the dollar, even on the fundamental front. But i think right now, numbers close to consensus are likely to provide a fundamental support for the dollar. Alix so sebyastian, from your end, if the dollar isnt vulnerable necessaryly to any kind of real upside or shakeout, what is the biggest asset class that is most vulnerable if we start to see inflation wind up pick up, and if the market has to start rerating the fed . So lets look across Asset Classes. Everything looks expensive right now. Weve talked about equity, valuationless in the u. S. Being in the 95th percentile. Global bonds are in the 95th percentile as well. If you look back 20 years. If you look at credit spreads, high yield or Investment Grade, theyre in the 75th, 80th percentile. So you have these elevated valuations that have come from this sustained stimulus of the Central Banks mainly, which makes the relative allocation between those Asset Classes somewhat difficult, but also more important. And reemphasizes the need for the portfolio across the board. So if you ask me which asset class is the most vulnerable, i would say were always, despite a low v. I. X. , which is usually good for risk assets, were always facing some fragility which were late in the Business Cycle and evaluations are so hay. So you have triggers that can push this. We could have a slowdown in china, and you start with that evaluation buffer. Remember, Energy Prices are a huge factor. Theyve been a factor in depressing Earnings Growth globally, especially in the u. S. , and in other areas of emerging markets, significantly a year and a half ago, and now were seeing recovery in earnings, and a lot is coming from Energy Prices. So no clear answer there. Alix bumming us out. Both of are you sticking with us. Coming up, calls for caution are mounting, as we just heard. You got futures pointing to a third day of losses. Were going to debate whether up to the buy the dips. Joining us, we hear about that. He likes the energy stock that i cant wait to talk to him about. This is bloomberg. This is your Bloomberg Business flash. A billionaire is considering a bid for cable operator, Charter Communications. Thats according to people familiar with the matter. He may have some andation, though. Soft bank wants to merge chart we are its struggling u. S. Wireless company, sprint. And thats your Bloomberg Business flash. David thanks so much. As the brexit drama continues, the u. K. Was out with disappointing numbers on its economy today. Perhaps most surprising of all was the fact that exports were actually down, surprise the lower pound. In fact, the trade deficit widened out. So let me turn to you. Given the fact that weve got a widening trade deficit now, does that mean the pound is going to decline even further to make up the difference . Yeah, i think thats about right. First let me say a couple of things about this discrepancy that we may be seeing, i. E. , were not really seeing a lot of improvement in the trade balance. While we have had a considerable decline in the tradeweighted sterling. I think one explanation could be that it takes some time for these declines, these depression in sterling to filter through and start seeing some improvement in the current account balance. But at the same time, i think there are number of forces that we may see further downside in sterling, especially against the euro. Im not that much inclined to call for a higher or lower cable, largely because i think this will be, to a certain extent, influenced by whats happening with the weak dollar factor. But as far as euro sterling is concerned, i think the answer to that sque yes, i expect the euro sterling is going to increase, is going to appreciate from here. Alix by how much, and is that based more on the weak innocents u. K. Or still the story of a stronger euro, better economy, and the e. C. B. . I think its both, and that is why eurosterling aat a sweet spot right now, even though it has appreciated so far, largely because were seeing a divergence. Were seeing a divergence in Economy Dynamics between the eurozone and u. K. , and were also seeing a diverge next political dynamics between the eurozone and the u. K. And lets not forget this, theres still quite meaningful amount of flows in the u. K. That need to be reversed. Well, not need, but they can potentially reverse. These flows were accumulated during the periods of the eurozone debt crisis. There were portfolio flows. Flows are a bit more sticky, of course, but as the mixture of favorable economic and political die natural nicks the eurozone improves f