tv Bloomberg Markets European Open Bloomberg August 23, 2017 2:30am-4:00am EDT
♪ open, wee european bring you the first trade of the day. i am manus cranny alongside matt miller. here is what we are watching for you today. shutting it down. president trump says brace for a government shutdown if his border wall does not get funding. stocks stall and the peso falls as trump says he might terminate nafta. brexit back down. u.k. prime minister concedes that you law will influence britain long after brexit.
will this, my's speed divorce talks? waiting for draghi. president speaks ahead of the jackson hole summit. will he give any substantial clues about the central banks next steps? matt: we are less than half and a lower -- half an hour away from the open. futures are trading, a bit of a mixed bag in my you see dax futures a little bit, ftse and cap futures down a little bit but not a lot of direction so -- gains the games we we saw yesterday. some slight, some bigger, the dax closed up 1.3% and the cac and ftse were both up almost 14%, .8 or .9 of 1%. bunds, not a lot of movement, yielding 0.4 even. see a lot of direction
from investors. a lot of investors are waiting to see what mario draghi has to say later on. digesting markets are what donald trump said and the distance you have to travel between rhetoric and delivery and action. that distance is substantial. gmm is the personification of that. aussie stock dipped lower into the close. a rally of 1% predicated on the possibility of tax cuts. the market is dealing with the possibility of nafta, wanting to pull out of nafta as the possibility -- and the possibility of a government shutdown if he does not get $1.6 million to -- billion dollars to build his wall with mexico. not much of what trump has said and that is not
a market consensus point. you are seeing the aussie dollar is the mexican a so biggest personification of the markets' risk. the peso has dropped and city said it could trade by [inaudible] to the dollar. that is the gmm, the peso and other commodities and down again reacting. juliette saly has a broader complexion of what is going on in the world with the first word news. juliette: u.s. president donald trump has threatened to bring the government to the brink of a shutdown if needed. he said he might terminate the north american free trade agreement. speaking at a rally in arizona he called them a credit lawmakers who objected to his plans to construct all while obstructionist density was time to crack down on illegal immigration. >> we have to close down our government, we are building that wall.
let me be very clear, to democrats in congress who oppose a border wall and stand in the way of border security. you are putting all of america's safety at risk. angela merkel has rejected the caricature of her party is being obsessed with the debt at a rally. she said her budget record is an active generational justice. in an exclusive interview, her chief of staff said germany has a vital interest in preserving dieselndal that hit the automotive industry. >> i am optimistic that we will overcome this and the german car manufacturing industry will come out of this situation stronger and safer as it has been before. the uk's prime minister has conceded that eu
law will influence written after brexit. seven months on, from theresa may declaring the country would take back control of their laws and bring back jurisdiction to the european art of justice the government said it is looking to escape the body's jurisdiction. trading on the hong kong stock exchange was suspended today as authorities announced the highest level storm warning for the first time in five years, as a severe typhoon lashes the financial hub with heavy wind and rain create hundreds of flights were canceled and trains were canceled and all schools closed for the day. global news 24 hours a day, powered by more than 2600 journalists and analysts in more than 120 countries. this is the. matt: mario draghi is due to speak and there is a error of mystery about the content of the speech.
he is expected to begin tapering the banks quantitative easing program but these are being made complicated highest to euro and a fairly common in speech he had later on in the week. let's bring in paul gordon. and mark cudmore, bloomberg's mliv strategist who is live in start -- singapore. say anything market moving or will he save that for jackson hole? paul: he may save it for even later than that. september 7 -- for that policy meeting. academic.o be quite the topic is the interaction of research and monetary policy decision-making. he has scope to say something that moves markets. that should be fairly dry. if i was to bet my money on any signal not necessarily a policy so -- signal or some kind of logic, that would be a jackson
hole. manus: let's get you from a market context. insatiableis appetite along the euro, draghi's challenges to use his coated words whether it is important or very important or the threat from the rise of the euro. will he hold off until we get to jackson hole for using the codewords? mark: he may old off on jackson hole. i think the risks are from today or jackson hole that anything surprises devilishly rather than hawkish lee. i do not think you will make any policy commitment. the more likely thing for him to do at jackson hole is to reference the currency in some way that is perceived more of a aggressive top-down. the risks going into jackson hole are for a negative surprise and the euro-dollar but the base
case is nothing major to happen either way. mariowhat options does draghi have, does the ecb have in order to turn around this low inflation picture and is one of wem i turn around, could hear there will not be any tapering and they are going to stick to qe or rented it out? -- ratchet it up? below goaln remains and it has been for years and it is predicted to get back to its goal for another two years. the likelihood that as the ecb pushes on, the question is whether it pushes on with its bond purchases in conjunction with low interest rates or find other ways to maintain stimulus while peering back to a because they cannot keep buying bonds forever. it will run out at some point. manus: i am looking at the last aport i had the week ending
couple of weeks ago. the market is very long, it has been the longest it has been in nearly three years. betting man or woman would say you take some of this risk off and in terms of that kind of extended credit trade. if the dollar is the most crowded trade surely the euro position must be a heck of a long one in the market. mark: there is a little bit of expectations the euro-dollar might come back ahead of jackson hole but what you have seen is in the news in the u.s. has hit the dollar separately. people are a bit preemptive and probably regret that decision. you will see the euro-dollar, under pressure ahead of jackson hole symposium starting on friday and there is a slim chance for an actual shock to
the downside. even more importantly, if there is a shock, that shows where there is the real impact. even if there is a hawkish surprise which are -- we are not expecting the dollar can go further because the markets are positioned for that. much, marks for a cudmore out of singapore and paul gordon, our ecb editor out of frankfurt. you can follow the mliv blog. .ype mliv we will bring you mario draghi's speech live from germany where meetingsses the sixth on economic sciences in just about half an hour's time. get ready for a shutdown. president trump threatens to bring the u.s. government to a halt if needed to pressure the republican congress into funding
economic conditions has fallen to the lowest this year. after the greatest proportion of responders said they are looking to hire but confidence has diminished. on pouring cold water prospects. the chinese suv maker said there are no talks between the two companies and it may not pursue a takeover of the italian american carmakers jeep division. commenting a day after expressing interest, great wall said they are begun certainty. -- big on certainty. and according to the wall street journal, citing people familiar, the company has not yet made a final decision on its successor but michael worth is seeing -- is seen as a likely candidate. has lost its top andn resources executive
firefighter its recruiting team. according to two people familiar, he was -- his resignation was announced internally august 10, the day they started to halt the hiring of celery -- salaried employees. it is supposed to help the troubled nearly public company expand. that is your bloomberg business flash. checking in on markets, we would normally be seeing how hong kong was trading but hong kong trade suspended today due to the thai fund bearing down on the city. the nikkei closed higher by around .3 of what percent, review sing -- reversing its earlier for chance. australia's market closing .2 of 1%. the kiwi under pressure after the new zealand government cut its gdp forecast. toshiba was a front runner in the tokyo session, daewoo saying it should watch security.
they may be close to clinching a deal on their fortune. health scope falling the most on record after its full-year profit fell by 39% and it warned it could see a similar outcome this financial year coming and the stock here, singapore's largest taxi operator is in talks with uber to form a possible partnership. apple is gearing up to release the new iphone 8 and there has been some speculation that we had some leaks coming through but have a look, we have seen analysts increase their price targets for apple but this chart showing samsung still very much ahead in terms of analyst ratings even as it market value exit a key point. the iphone will get the sales it wants. matt: we will be following that story closely. juliette saly for us in hong kong. at a rally in phoenix, arizona,
resident donald trump threatened a u.s. government shutdown campaign promise of building the wall. >> believe me, we have to close down our government, we are noting that wall. to me be very clear democrats in congress who oppose a border wall and stand in the way of border security. all of america's safety at risk. matt: he asked for $1.6 billion to begin construction. congress is under pressure to pass a spending bill to keep the after september 30. he addressed nafta at the rally saying he will terminate the trade agreement at some point if he wants. joining us now is kathleen hunter, bloomberg politics editor. let's talk about a government shutdown. republicans control both houses of congress. the wall andnd
continue to fund the government without problems? kathleen: if only it were that simple. there is a couple of issues with that. the idea that this could go smoothly. one of the issues is that when it comes to spending legislation, even though as you say republicans control both chambers of congress and the white house, in the senate they will need democratic support, it will take 60 votes to get spending legislation through the senate. they will need eight democrats to come along and vote with them. republicans have a slim majority in the senate. democrats have been pretty clear that they do not want in they will not accept any border wall funding. that is going to be a hard sell and it is hard for me to think through a way in which they are going to thread that needle without forcing a shutdown or without trump backing down. manus: it looks as it will go to the wire. an interesting difference here in that speech, he talks about border security and building the
wall. he is giving himself and out. is my interpretation of it. there is border security. the consensus position in the marketplace is building the wall is not something that seems to be a consensus position. there is an interesting point. party, therand old men and women who do politics on a daily basis in the u.s. who are up for reelection next year. and they have their jobs at risk, not president trump. that is right. that is an important dynamic to remember. midterm elections are coming up more swiftly than we realize. historically it is true that the president's party loses seats in the first election after he is elected. manus: i do not think he would care but they might. kathleen: trump should care because the last republicans --
less republicans there are in congress the harder to get things accomplished and it is already quite hard. he should care but whether he does or not is an open question. the comments he has made an setting up the potential for turning up the ante and increasing chances of a government shutdown, that would be congressional -- could be potentially devastating. his supporters like to think of him as a strong negotiator. we have not seen any results of that reputation yet. i assume it is just negotiating tactic when he says i think "we will be terminating nafta at some point." expect the president to cancel nafta? kathleen: i think president trump focuses on the bully part of the early pulpit, we have an
expression, the believe pulpit which is his ability to use his of rhetorical position, to affect change and get people to get things done and for trump he sees that as carrying a big stick and saying that, putting all these threats out there saying i will not sign a bill it does not have my border wall funding. if i do notaying is get what i like i will pull it out altogether. he likes to throw these extremist scenarios. we saw that with north korea. he likes to issue these broad warnings when it comes to policy and that is his negotiating tactics we have seen. tillerson, please to see that the regime and pound yang has -- in pyongyang has dialed things down.
manus: minutes to go before the start of your trading day. wpp will be in the focus. the stock is called anywhere between 5% and 7% i am seeing in some calls. the revenue growth, their forecast was cut and that is slightly negative. the results confirm weaker transit seen across the advertising industry. they have cut their revenue growth forecast, clients are curbing their spending, and it is the clients who are injured fast-moving consumer goods and package goods sectors. i wonder who runs the budget and those -- in those companies? great story. you have all singers activism. futures although we are not seeing a lot of direction from
manus: just under a minute until the cash markets open. futures finally caught up. in paris, downop by 0.1%. the s&p futures put on 0.1%. this morning, the market is assimilating its thoughts on the probability of the u.s. pulling out of nafta. the market is beginning to understand whether building a wall between the united states and mexico israel. will there be a shutdown? matt, you've got a chart.
i will give you the quick line on sberbank. we've seen headlines come in across the bloomberg terminal. matt? matt: 8.3 billion rubles. i have a chart that you want to check out. the reason i'm showing you this is, we are not seeing a lot of direction in the equity markets. we are waiting for mario draghi. this is the ecb's balance sheet. g #btv 2029. it breaks down all of the assets the ecb is holding. this is a chart you want to make note of. this picture could change. we're hoping to get some detail from mario draghi on the possible change. for is what we're waiting to see some direction on the markets. manus: we are indeed. european equity markets opening lower. services pmi from france. for services pmi, 55.5.
the survey was 55.8. you are seeing a lower suite on the services. manufacturing 55.8, that is a beat on the survey 55.5. you are seeing this suite of data come through ahead of jackson hole. we are waiting for mr. draghi to speak. let me jump into the u.k. market. nejra is standing by. we are waiting for wbt to actually open. let's get into the detail of the markets. nejra: i'm starting with the gilt market open. i wasn't expecting the yield to go anywhere too fast given what is happening with the 10-year treasury yield and bund yield. the gilt yield pretty much unchanged at the open. pretty much where we closed yesterday. looking at the equity market as
well, the risk on we were seeing yesterday, a little softer today. we are off by just 0.1% on the overall benchmark stoxx 600. slight negative bias. you are seeing more industry groups a little bit lower. consumer staples and energy underperforming. you've got a weaker crude price in the session after that data showing gasoline stockpiles rising. we are waiting for the eia data. we are seeing metals a bit softer. we were seeing material stocks gaining. utilities outperforming on the upside. not a huge amount of movement on the stoxx 600 at the open. i showed yesterday a chart comparing the euro with the euro stoxx 50 and that inverse correlation. this is showing european small caps outperforming their u.s. counterparts. you've got the ratio between the stoxx 600 small 200 index versus
the stoxx 600, and the russell 2000 index versus the s&p 500 in blue. some say this could be down to currency effects because the small caps in the u.s. have seen a headwind from a weaker dollar. the stronger euro hasn't been too much of a headwind for the small caps in europe because they are domestically focused. matt: i'm just taking a look at the moves here. you can find this on your bloomberg by typing in any index and then mov. i've got the stoxx 600. there's not a lot of movement in the index. we're looking at the individual .overs. you can see that b.a.t is taking the most off as far as points are concerned. also, you see some biotech and drugmakers that are weighing on the index. k down as well as
diageo. take a look at the gainers, what is holding the stoxx 600 at the water level right now. you see some drugmakers there as well. glaxo is there as well as astrazeneca. not a lot of direction. the market trying to still interpret what donald trump said and what that means for the future of the u.s. and global economies, and waiting for mario draghi's speech before a vote of moves are made. europeugust 23, most of still on vacation, and there's not a lot of liquidity in this market. manus: most of them are in the south of france and greece. let's talk about the global issues and rhetoric overnight coming from phoenix. donald trump threatening a u.s. government shut over his campaign promise of building the wall. >> believe me, we have to close
down our government. we are building that wall. let me be very clear to democrats in congress who oppose a border wall and stand in the way of border security. you are putting all of america's safety at risk. for $1.6ump has asked billion to begin construction. congress is under pressure to pass a spending bill to keep the government open after september 30. trump also addressed nafta, saying he might terminate the trade agreement at some point. s&p futures slipped lower. with us now to make sense of it all, if one can, is will hobbs. good morning. another couple markers set down for the world markets to absorb. one intimating that he wants to pull out of nafta, and he wants
$1.6 billion to build his wall. he holds sway politically. the gop are in charge of both parts of the united states administration. what is to stop them getting what he wants? before you begin, my apologies, sorry to interrupt you, wpp has opened. 40.46, what i would call a fast market. wpp, let's just get that out of the way for you. that is down 9.54%. more on that story very shortly. that is the biggest one-they move since november 11, 2008. apologies for interrupting you. talk to me about trump. william: domestically, ever since well before he was elected, his powers are constrained. congress has most of the domestic powers.
the ability to persuade congress or work with congress, that is what matters. this is where nafta renegotiation comes in. you've got to ask how easy it is for him to pull out of the agreement. there's some debate about this. it stipulates that a party may withdraw or give notice to withdraw. is it congress or president? a reading of this would suggest that it is not the president, it is congress, because the president is singled out in other parts of the document. he obviously can go nuclear. there are parts of the 1974 trade act. the second point to focus on is, what does nafta renegotiation look like. wilbur ross has talked about rules of origin being unfair, too much china content coming through, and so on. and also that some of the labor
laws are not up-to-date with the modern trade agreement. all of that is basically inflationary. any renegotiation or a back out, that is inflationary for the consumer, bad for bonds. that is really what we're looking at. what i'm hearing is that it doesn't look like trump really has the power to do this swiftly and soon, and they've got to renegotiate. on the other hand, the dangers of a bad renegotiation could hurt the economy. what is the president's effect on the markets in the short and medium term? initially, there was market euphoria that drove stocks up. stocks are still at record highs even when the president hasn't achieved anything on his agenda,
so it is clearly not him driving these rallies. william: it is a good question. the easiest way to view the presidency until now, this administration has been able to say, congress is a check on his powers domestically. historically, in the postwar period, you've been able to say that the presidents who have managed to affect lasting economic change have been the consensus gatherers, the unifying figures. those are the ones who persuade congress to work with them. trump never really looked like that. a unifying figure is not what we've got in the white house. for the international side of things, and on the domestic side that cuts out your good and bad stuff,ou focus on other on the underlying economic fundamentals already in motion. internationally, there is
significant scope for the president to damage the economy. that has been acknowledged by many sources. until now you've been relying on economic self-interest keeping him on the straight and narrow. that could change. as he gets more frustrated domestically, does he use his unfettered power internationally to make some big noise? i guess that risk is rising. manus: this is what the chief economist from hermes was suggesting, that he could go nuclear with regards to trade sanctions with china if he doesn't get his way with north korea. he may not have presidential power over nafta. markets perspective and from a markets risk, we've seen these many bellicose moments. it has been proven worthy to buy dips. this is the dividend yield.
there is the government bond yield. hardly flinching on the risk of nuclear war. william: most of the time you are relying on calmer heads prevailing. you found that north korea is sort of behaving a little bit better. i think the real problem for is that the economy is looking increasingly robust. in terms of synchronized global economic growth, you've only seen the last two decades, two periods, where the world has been as synchronized as it is now. you are getting a nice global economic cake. how much can he spoil it? how much does he want to upset investors? that is going to be an evolving question. for the moment we are happy to side with the economy. we're seeing the pmi, the hard data coming through, further evidence that things are good
for investors. that is the thing to focus on at the moment. it is important to keep an eye on what this administration wants to do. matt: we still have a lot to talk about. will hobbs is head of investment strategy for barclays europe. up next, court concessions. theresa may changes tact, admitting that e.u. law will influence the u.k. long after brexit, but how will the eurosceptics take this shift? this is bloomberg. ♪
matt: welcome back to "bloomberg markets: european open." i'm matt miller in berlin alongside manus cranny in london. not a lot of direction in markets. the stoxx 600 is very little changed. the ftse also down 0.1% while the dax is up about 0.2%. the cac not moving in paris. there are individual movers stories, including wpp, which we are watching closely. down 7.5%. i want to get to some of the smaller companies. let's go to nejra cehic. nejra: starting with the german
up 3.7% after a report that elliott management may turn its attention after pressuring bhp billiton on to delay a multibillion-dollar investment in a canadian project. k+s seems to be moving on that today. one of the best gainers on the ggitt,600, followed by me moving higher today. seems to be on a re-rating, with uyfferies upgrading it to b from hold. lowerekta, this is called by some at the open. we had numbers this morning. net sales for the first quarter were a beat, but the first quarter adjusted actually missed. perhaps a surprise to some that we are seeing gains, up 0.5%.
matt, manus. manus: thank you very much. prime minister theresa may in this country has conceded that they european union law will influence the u.k. long after brexit. directseeking to end jurisdiction of the european court. that is a climb down from a declaration to bring an end to the court's jurisdiction altogether. the compromise is aimed at speeding up divorce talks, but is likely to open her to attack from the eurosceptics. will hobbs is the head of euro investment strategy at barclays. the u.k. leader wants to end direct jurisdiction of the european court of justice. this would be perhaps tacit acceptance that there has to be some relationship with the european court of justice if she's ever going to get divorced talks moved ahead.
is this a breaking of redline for you? the potential compromise moment? william: it is some part of compromise. the government's positions have long been inconsistent. we are still in a have your cake and eat it phase of the talks. the government is looking for unrestricted access to the e.u., but it has red lines. co. argued that a transition agreement would mean the ecj would have jurisdiction over the u.k. it shows that at least there's going to be some party. does this mean the talks are going to be called off next week? that may still be the case. we're still not at the brexit bill state. manus: matt, jump in here. matt: when does this really have
an effect on your investment strategy? traders can move every day on some new brexit story, but as an investor, when do you start to lock in trades because you can get a sense of direction from these negotiations? william: i think there's a couple things to think about. it is easier to take a step back and standby the principal that the e.u., given its massive negotiating clout relative to the u.k., is going to have to be pretty inept to allow the u.k. to leave the e.u. with better or even the same terms of trade as it enjoys on the inside. it has to be worse than where we are right now. -- that should mean a lower trend growth rate for the
u.k. sterling should be a little bit lower. some assets should find the going to little bit tougher. manus: there is no upside in anything you are saying to me. william: for u.k. assets -- manus: they are a global stock portfolio. william: for sterling, it does matter a bit more. manus: we will talk more about the world very shortly. will hobbs is head of investment strategy at barclays. we are going to bring you mario draghi's speech. it is live from germany, where he addresses the sixth meeting on the economic sciences. he is due to start speaking in just a few minutes. ♪
manus: wpp have sent a warning shot to the marketplace. the stock is down 9.41%. bloomberg is speaking to the ceo on the phone. saying it is a very tough business environment. the second quarter was tougher than the first. that stating perhaps a very obvious statement. he does go on to say there was a seminal event in q1 which was forfailed kraft bid
unilever. reverberated throughout the industry. that hit advertising spending. if we go back to the context of what wpp have said to the market, they warned that spending coming through on consumer goods companies is where the real pressure has been. it cut its full-year forecast amid lower spending by customers in consumer goods and manufacturing. let's get your business flash. sebastian salek is standing by. sebastian: let's get more on that story. shares have fallen by as much as 12%. that is after the world's largest advertising company cut its full-year revenue forecast ashed spending.e the company says revenue and like for like sales growth is to be between 0% and 1%. ured cold water on prospects
of a deal with fiat chrysler. the chinese automaker said there are no talks between the companies and it may not pursue a takeover. commenting just a day after expressing interest, great wall said there are big uncertainties. that is your bloomberg business flash. manus. matt: i'm going to pick it up. hobbs,ith us is will head of investment strategy at barclays. we are waiting for draghi to speak. the market is waiting as well. what do you expect to hear from mario draghi today? do you think he's going to hold his tongue until jackson hole? do you think we're going to hear anything about the taper? william: expectations have been moderating a little bit. the euro strength, the fact is that the ecb, they pointed out in their last accounts that they
are still waiting for a convincing uptrend in core inflation. some sort of to evidence of labor shortages, even early pipeline price pressures, even if it is not showing up in the ppi just yet. they are still advocating a patient game. the change in language seems a little premature. for the jackson hole speech, that is going to be talking about global growth and global dimon is him -- global dynamism that markets will reach to what is being said through german exports, whatever, and that may have an implication for monetary policy. generally, we are not expecting too much. manus: short-term trades are always interesting, not that you do those. you are more skewed to investment. would you be long euro going to the next 10 days? william: we've softened our euro
position. we did feel that the prospects for the eurozone were being materially underinvested. that gave us quite a strong euro position. we pulled that back. in the ecb, they do suggest there's the potential for some continuing momentum. that is certainly possible. what is going on in the eurozone at the moment, they are still that europeenerally is set to continue and to enjoy a period of above trend growth, whereas earlier in the year, the consensus seemed to be that euro was going to break up. manus: matt, will's point is that french manufacturing is at the fastest pace since011. matt, jump in. matt: we see in the pmi you are
referencing their, we do see economic growth for sure. thewondering if draghi goes , we're going to taper regardless of a lack of inflation route, or if he uses that bazooka to bring it about. what do you expect? william: there's no great rush at the moment. inflation is not putting much pressure on central bankers. that doesn't mean they don't .ant to get a move on the world looks more normal. it is time for emergency monetary policy to be removed. the fact that inflation is still so benign suggests they are going to be allowed to do so. the market is expecting next year to see more qe tapering and maybe second half of the year you start getting those rate hikes. you need a big change in the
underlying inflation outlook for that to really be moved forward significantly, in our opinion. manus: the one thing that the market wants to know from all of these central bankers is whether the models are broken. and what they might say. if you apply the taylor rule to europe, germany would have something like a 9% interest rate. far away arehow we? when we look at the normalization process, we are debating where the new normal rate would be. quantitative easing has probably, as you take qe off the table, you are probably saving about five interest rate hikes. but in europe, we are so far away from normalization. you mentioned the end of 2018. i'm surprised you might be that
strong in your opinion. william: deeper rate hikes. we see the first 10 basis point hike second half of 2018. you are right. rule, you the taylor are way behind the curve in the u.s. and europe. the other thing to look at is simply looking at nominal gdp. manus: i knew i would get there in the end. i'm a bit like the number nine. these are the taylor rules if life was normal. william: it depends what real interest rate you put in there. you can lower it down a little bit. in the end, you are behind the curve no matter which way you look at it. if you look at nominal gdp, this tends to be a rough gauge of where nominal interest rates should be. in the u.s., 4%, 5% maybe. europe, germany, maybe 3%. that suggests interest rates
have a long way to travel. the danger, and this is the worry we would have at the moment, is that the world economy looks normal. access to credit is coming back nicely. business confidence, consumer confidence, normal levels, even high levels. the worry is that you don't let monetary policy move as quickly and you make the same mistakes you made in the last cycle. i know my ms ani'istakesure i could repeat them exactly. we do want to getary policy and the cost of credit back to more normal levels. matt: first i want to show, will, you talked about which numbers you plug into the taylor rule to make it work. on the bloomberg, you can view . that with tayl you get all these yellow boxes and drop-down menus.
you can customize your own taylor rule for any central bank around the world. you can see the united states in the top drop-down box. change that if you like to euro area for example. then you can change your own taylor rule. we are getting some data out of germany. i just switched over to the screen here so we can see the data we are getting is pmi right now. pmi, mentioned the french basically in line with surveys. services pmi at 53.4. 59.4.cturing pmi at that is far better than the survey. atn you've got the composite 55.7. the economy is looking strong, but the inflation isn't coming with it. let's listen in to mario draghi to see what he has to say about the situation. professor, president,
secretary, members of the board, nobel laureates, and economists -- by the way, before i start the formal presentation on my remarks, let me say that i'm words,oved by your martin, and honored by this invitation, which gave the opportunity not only to be in an audience of this status, but also to see again friends of a youtime, and martin, reported some of what you think are my features of my character. if your remarks are true, let me
say that i owe much of this to the education i received from some of the people in this room today. thankful toially processor -- for inviting me to address this conference. all of you nobel laureates share the extraordinary ability to explain parts of our everyday reality that have not been understood before. all were previously seen from a different and less informative perspective. .ou are the builders of science that is also a guide to policy making. your discoveries have contributed to the way we think, the way we do policy, the way we affect the welfare of millions of individuals. this year marks the 200th
anniversary of david ricardo's theory of comparative advantage. in the words of paul, one of the few counterintuitive fundamental ideas in economics, which moved the world away from mercantilism. inn we look at other giants history of economic thought, , who drove us into policy activism, until the founders of econometric model building in postwar time, we cannot conclude that there is little in economics that does have policy implications, and that the interaction between research and its policy application is continuously evolving in an ever-expanding universe. let me review the most recent developments of those
interactions and focus on monetary policy and financial regulation. ability ofwn in the postwar macroeconomic models to accurately forecast the economic developments of the 1970's and early 1980's open up space for further advances in research. largees that by and provided the foundation of the precrisis consensus that inspired central banks in their , as professory just gave an example of, and inspire central banks and governments in their stance on regulation and supervision. in a very stylized fashion, the range of views that formed this consensus shared three general features.
dominant was the emphasis placed on the interactions between policies and economic agents' behavior under rational expectations. rigidityrice and wage were often the only types of rigidity considered in the economy. finally, financial markets and intermediaries, their regulation, their imperfection, and their supervision played only a minor role, or were even entirely neglected in macroeconomic models. let me tell you immediately that it would be a mistake to look back at this considerable body of theory and evidence only with today's disenchanted postcrisis eyes, and to underestimate the profound changes that it produced in policymaking and institutions.
let me give you just to prominent examples. in the 1970's, governments attempted to maximize social welfare in the form of low unemployment and inflation by trying to exploit the short run trade-off between the two. the engineered surprise booms just once before promising to revert to a policy of low inflation future, especially where motivated by the electoral cycle. the insights of a number of nobel laureates, some of which are here today, showed how these policies were bound to fail, and why they were inconsistent. the same incentive remains in the future, and promises to do otherwise like credibility. rational wage and price sectors will not believe in a policy that policymakers will renege
on, making it difficult to achieve price stability without a recession. overestimaterd to the critiqueimpact and the consistency have had over the last 40 years. some of us still remember that in the 1970's most central banks, not the bundesbank, most central banks were under political control and obliged to follow short-term oriented policies. 2000's,he 1990's and the importance of credibility was increasingly appreciated, and evidence mounted that independent central banks with a clear mandate delivered much better economic outcomes than those under direct economic control. the result was a revolution in central banking.
today, most countries' central banks are independent, but subject to a mandate drawn by the legislators who in turn hold the central bank to account. , communication of monetary policy has become much more transparent. second dominant feature of the paradigm prevailing before the crisis was its focus on nominal wage and price rigidity. models including these rigidit ies had greater explanatory power than previous models and were more in line with policy practices at the time. price stability emerged in both central-bank mandates as the overriding objective. the central bank should pursue in order to maximize social welfare.
in the words of an influential a sciencene could see of monetary policy developing next to the traditional art of monetary policy. absence of aotable role for banking and finance in these models. wage and price rigidity together appeared to be sufficient to provide a realistic characterization of the transition mechanism of monetary policy. financial sector developments didn't seem to affect this mechanism because financial intimidation was assumed to be fully efficient. generally, the interest rates faced by households and businesses typically moved in line with movements in central bank policy rates. there were some models that incorporated financial friction
into macroeconomics. central banks were aware of the role of monetary and financial markets in the transmission mechanism. and the first euro system research network of the ecb started the so-called bank lending channel, which maintains that banks play a crucial role in the transmission of monetary policy. but the impact of financial frictions were generally estimated to be small in developed countries. these frictions were absent from the canonical models used for monetary policymaking. financial economists started banks and financial markets closely, but they used predominantly partial models and showed little interest in the way the system interacted with a wider economy. paradigm ins macroeconomics predicted neither the onset nor the severity of
the crisis in any meaningful fashion for the conduct of policy. unconditional trust in the self preparing capacities of financial markets or simple neglect had led to deregulation and lack of supervision in the years preceding the crisis. low-quality capital with little absorbing capacity, underestimation of asset risk, excessive and unperceived leverage, ignorance of interconnections, disregard for liquidity buffers, low resilience of the funding -- were and purrs a fes just a few of the factors that produced the most severe
financial crisis since the great depression. unfolded, the interbank funding market dried up and credit availability contracted sharply. annual credit growth fell from two -2.1% in 2009. and from 8.5% to 0.7% in euro area over the same period. the effect on economic activity was sudden and significant. gdpeen 2008 and 2009, declined by 3.6% in the united states and almost 5% in the euro area. though the initial effect of credit contraction was similar in the united states and
european union, its propagation was considerably different, owing to the european union's bank-based system of financing. hit inst banks to be 2007 were the ones that invested the most in financial products that had by then lost much of their value. these banks were mostly located in germany, france, and the netherlands, countries with comparably strong compositions. 2008, it wasg in the turn of several spanish and irish banks which were exposed to the collapse in domestic real estate markets. governments stepped in. the european commission estimates that in european union, public-sector aid
provided in 2008 was around 5% 9%gdp, and in 2009, around of the e.u. gdp. the direct net fiscal cost to the financial support in the united states the same time are slightly lower, estimated to be around 5% of gdp. up until that point, sovereign debt had been considered as effectively risk free. regardless of the rating of the sovereign, the greek crisis destroyed that illusion and induced a general repricing of risk in the european union. this repricing of sovereign and other risks combined with the drying up of funding markets affected other countries' banks, which, having little exposure to
either toxic financial products or to real estate, had been immune up to that point. were in italy and portugal overly exposed to their sovereigns. their fragile sovereigns. the banking crisis morphed into a sovereign debt crisis. credit contracted even further, aggravating the ongoing recession and further weakening the banking system in a vicious circle. fears of potential sovereign default with likely catastrophic impact on domestic banking sectors caused interbank lending between countries to dry up, and funding markets in the euro area became frank mentioned -- fragmented along national lines. this was a major problem for monetary policy because it tightened the transmission of monetary policy across the euro
area. the interest rates faced by businesses and households and sovereigns became increasingly divorced from the movements in short-term central-bank rates. the crisis that started as a global crisis was now becoming the crisis of the euro. the financial sector played a significant role, not only propagating, but also originating shocks to the economy. financial frictions largely absent from the precrisis experience of developed economies, and the canonical models, had become the measured drivers of the recession. the resulting crisis prompted academics to reassess existing paradigms and policymakers to adjust their frameworks. the rediscovery of the notion
that policy may have a role in coordinating private expectations at times of severe uncertainty clade a major part in this transition to today's pros -- postcrisis world. a number of significant academic contributions during the 1980's had focused on the way behavior would change depending on what individuals expect private agents to do. the presence of this interdependence between agents, strategic complementarity, leads to multiple outcomes. ach of these outcomes is rational equilibrium. bank runs, and panic-based sovereign debt crisis are examples of policy intervention being needed to
avert outcomes during a financial crisis. to an extent, this is not a new idea for policymakers. offral banks have staved panic-based runs for centuries. the financial crisis has shown that severe financial frictions can access or bait strategic complementarity. the financial sector nowadays is much more sizable relative to the economy and runs are correspondingly more costly. advances in the literature have made strides incorporating those ideas into macroeconomics models, thus providing a clearer theoretical framework for these types of interventions. economic research has also evolved in its thinking of how central banks should respond to emerging crisis, particularly
when the standard monetary policy instrument typically is short on interest rate. at the lower bound, monetary accommodation cannot be provided through further reductions in the short-term interest rate, and policy must become nonstandard. one option is to rely on forward guidance, to promise to keep interest rates low for longer in the future. such commitments, if credible, lower longer-term interest rates and provide economic stimulus even when the current interest rate remains unchanged. while forward guidance is a useful instrument, recent research has highlighted that its effect can be significantly proved if combined with other nonstandard monetary policies. research in both academia and central banks has therefore
re-examined alternative monetary policy tools, including so-called quantitative easing or qe policies. the newly developed models have been useful. earlier studies based on the assumption of frictionless markets have concluded that qe is completely defective. the renewed focus on financial frictions clarified that this conclusion is unwarranted. once it is recognized that financial intermediaries are subject to leverage constraints. large-scale asset purchases can ease these constraints and increase investors' capacity, leading to a portfolio rebalance to work risky assets and to strengthen lending activity for banks. in all, research has confirmed that central banks are not powerless when interest
rates have reached their lower bound, provided they are willing to explore nonstandard policy avenues, they can continue pursuing their price stability mandates even in the most adverse circumstances. the policy has evolved by and large along the main lines suggested by research. as short-term interest rates approached the effect of lower bound, central banks on both sides of the atlantic undertook unconventional measures aimed at influencing the whole constellation of rates that are important for financial decisions. forward guidance helped guide market expectations on rates. qe involved direct intervention by central bank and markets through large-scale asset purchases to influence the yield curve beyond the very short term.
a large body of empirical research has substantiated the success of these policies. both in the euro area and united states. central-bank policy moves extended beyond measures to counteract impairment of the transmission mechanism caused by the financial friction. the ecb also acted in various delivering socially undesirable outcomes by coordinating expectations. this is the second line of thinking that research had developed. one such policy initiative was our lender last resort intervention during the financial crisis. revisiting the principles set out a century and a half ago in the light of the ongoing crisis,
the ecb lent freely to solvent financial institutions. we did so in multiple ways. liquidity operations moved to a fixed rate with the unprecedented maturity of four years. eligibility in our operations. the second occasion came later, in 2012, when we had to prevent a self-fulfilling bad outcome that threatened to occur as a result of the sovereign debt crisis. there was a euro crisis i mentioned before. investors had begun pricing what we called redenomination risk into sovereign debt and bank markets as they worried about the possible breakout of the euro area.
however, as i said earlier, the pricing of such risk lead to a breakdown of money markets, a fragmentation of banking system, and threatened the unity of monetary policy transmission across the euro area. expectations field the vicious circle. tightening monetary conditions in countries affected by the perception of redenomination risk put downward pressure on economic activity, exacerbating the perceived risk. such moves were a classic example of expectations leading to an outcome that is -- matt: that is mario draghi speaking in germany. he is saying that research shows qe and forward guidance are a success and central bankers can use more monetary tools to control rice stability. he has had difficulty bringing any inflation into the picture,
francine: the ecb president says the policies have been a success, but gives no clues on the tapered timeline. the accident the law. donald trump threatens to shut them a government unless he gets his way on the mexican border wall. and marketing mystery. shares in the world's largest advertising company plunge. good morning. this is "bloomberg surveillance" and i'm francine lacqua in london. we have eurozone pmi