guy: thursday the 14th of july, italy underperforms prayed to count onto the close starts right now. >> the countdown is on in europe. this is bloomberg markets, european close prayed with guy johnson and alix steel. guy: italian politics front and center once again in europe. i think about parity on the

euro, yes there's a fix on the gas prices, but politics are back and exerting influence. look at what's happening in the italian two-year. we are up by 26 basis points today, is that justified widening. the ecb has to make a calculation here that it is worried about fragmentation, but why that fragmentation occurs is going to be really important and we will talk about italian politics in detail in a moment. italian markets generally underperforming today. euro-dollar at one. doing fine off of recent lows. we did see a very strong cpi data coming out of the united states again. that was on the downside plus the banking story building stateside as well. consistently below one paired we come back up again so we are trading at one right now. stoxx 600, european equities are softer today. energy is where we see the weakness. piercing crude generally on both

sides of the atlantic lower running down sharply but italian markets once again proudly underperforming. stoxx 600 down by 1.6 percent. italian market down by over 3% today. >> we just had chris waller speaking in a speech, mike will interview him at about half an hour. he said that still a safe case -- 75 points is still a safe case for july. he could see the door to 100 but saying the 75 is where he sits. let's look at market reactions. s&p also low off the session. you've got the big bank earnings story. morgan stanley, j.p. morgan, taking risk off the table, putting aside more losses for charge ups and for loans. two year yield is where you will see the reaction to the comments and still standing firm. that spread between the two in the 10, and now you're looking

at something like 26 basis points today. a huge spread and the dollar story is a euro weakness story. it is also a stronger dollar story and you can see that reflected in the cable rate and in dollar-yen. its highest level since 1998. the ripple effects that will have all over emerging markets as well is in europe. >> it is like the rate hike is on steroids prayed let's get back to italian politics. the prime minister mario draghi, the government is currently on the brakes. this is as we potentially work our way towards a confidence vote. potentially withdrawing support from that government. the euro chief there, we understand that draghi has went premonition of the president prayed what is he going to do? >> we do not know.

as far as we understand he has this cabinet meeting for sometime later this afternoon and will probably say what he discusses. for now there's been no news. there's been no whisper. it is still not clear where and how this will continue. alix: how do we avoid a draghi resignation? >> it is difficult. draghi has signaled he does not want to lead a different government from the one he does now. he wants to lead a national unity government. everybody must be behind him. and clearly after what they say, they walked out on the vote. it will be difficult to patch things up. people are trying to do just this. guy: if we were to see an election in italy, what would be the likely outcome from that election, a lot of the current

polls pointing to. >> first of all let me tell you it would not be immediate because of the way the italian constitution is written it wouldn't be possible to have an election for early autumn, say early mid september paired right now riding high in the polls is at the far right party. and the whole center-right group would probably come out on top of the polls. but that is for now. guy: thank you very much indeed paired we look forward to continuing coverage of what's happening in rome. the e.u. is cutting its gdp forecast to the euro area with an inflation rate that will average 7.6% this year. joining us to talk about this is the eu commissioner for the economy. commissioner, thank you very much for your time. how do you make a forecast for

the european economy, of the euro zone economy when you do not know whether or not to the gas is going to be on or off? >> good afternoon. in this case we have our forecast, baseline scenario and we have a more adverse scenario. what we present is our baseline scenario. which is built on the situation we are in now. of course we already have several russian gas cuts. we have countries with complete cuts, poland, denmark and we have townships with partial cuts like germany, italy and others. the baseline scenario is in any case a baseline of lower growth

and higher inflation. growth at 2.7, inflation at 7.6. if we had a complete gas cut, this scenario could even go in a more negative way. this meaning a negative territory for growth. at the moment we are not there. the forecast is taking into account the situation we are in now. >> what happens if euro-dollar stays at one or below parity? what would that due to your inflation and growth forecast? >> well of course we are all looking to the strengthening of the dollar. we know this is not particularly against the euro but against more currencies. against the british, against the

japanese yen. and the euro is not weakening against the yen or the pound. the point is in the past you could have thought of advantages of having a weaker currency or export, but in the situation we are in right now, this is not an advantage and it is particularly dangerous, the strong dollar for emerging and low income countries. and i think this should be a matter of concern also for us in the more advanced countries. >> to come back to the issue of the currency rate and how it's affecting the european economy, i'm assuming you did the calculation on inflation with a higher exchange rate, i.e. when the dollar was weaker and the euro was stronger. we no longer have that so can i assume there is upside risk if

we stay with the currency at its current level to your inflation forecast? >> our inflation forecast i have to say strongly depends on commodity prices and mostly on energy. if you look to only the energy component of inflation, it is now at 42% and the energy component of inflation at the beginning of last year was negative. so in our eu economy, the main driver of inflation is not overheating of the economy, it is commodity prices and particularly energy prices, our estimate is we are now peeking the inflation. we will have in this quarter

inflation at 8.3% and we are estimating that in the last quarter of the year it will start a very low decrease. this is of course also connected with the evolution of the relation with russia. this is the main driver of inflation. alix: the german economy minister warned the country face noticeably clouded outlooks the second half. what would you put the odds of a recession for europe this year? >> well in these troubled waters we are navigating, i think we should not lose sight of the fact that we still are experiencing also the positive trends of the reopening of our economies. so we have two different forces confronting that.

one is the positive trends on the reopening with the accumulation of savings, with the labor market lowered and employment rate in our history. and at the same time we have the war, we have energy prices and high inflation. out of the moment, these forces are balancing themselves and we are not in negative territory, so i would not suggest to use the narrative of the 70's, that the war in yom kippur, the energy crisis, the recession, stagflation. we could arrive to this situation but we are not yet there. we are still with limited level of growth. guy: commissioner, i look to your press conference earlier on. you said within that when asked

about what's happening in italy, you were concerned and surprised. what could be the impact economically for europe and europe's ability to act together if we were to see the draghi government falling? >> well of course the european union will have strong relation with italy independently of the internal political situation, but we would normally not interfere with. having said this i think it's quite obvious that we have been very happy this month to have such a large majority in italy with such a strong leadership from mario draghi. and i really sincerely hope that this could last. alix: if it does not, what

happens paired will we be in some kind of another italian debt crisis? >> i do not see debt crisis nearby because you know the financial situation is quite different from the one we had 11 years ago. the banking system is stronger maturity of the debt is much longer. when we talk of increasing interest rates in the european union and in the euro area, we are passing from a negative territory near to zero. so financial conditions will not be particularly severe in the next one or two years. our concern is that such a

strong majority of a strong leadership is the best solution to implement all of our plans and especially our recovery and resilience plan. >> let's talk about that for a moment. the concern has always been that italy has a very poor track record of spending eu funds effectively. were we to see mario draghi no longer the prime minister and italy, would you be concerned that that risk would reemerge, that italy would not be able to spend those funds effectively and that would have a knock on effect to europe's ability to repeat the exercise again, to act jointly again in the future. >> will indeed even mario draghi was not a magician solving all of a sudden the problem of absorption of european funds from italy.

italy is with spain and others one of the lowest absorption capacities among european member states. for sure this government has been strongly committed to implement these plans and i sincerely hope that with this they can go on in the coming months. as you heard from your rome correspondent, the situation is quite uncertain at the moment. >> thank you very much. it seems at the market sees mario draghi as him as issue -- magician. we thank you for your time today. coming up we will continue that conversation of political turmoil in italy. yields going higher today paired what it means for the ecb and its efforts to avoid fragmentation along with the macro ceo. this is bloomberg. ♪

guy: we've just been talking about it in italy. spreads widening out. that is the issue. the ecb concerned about fragmentation. there are different kinds. which one is the ecb going to tolerate? joining us to discuss is the macro hodge ceo and head of research. the ecb has a problem next week. we now have fragmentation in the form of prices in italy. is this the kind of thing the ecb is there to tackle and how do they navigate this? >> i think it is difficult for

them in some ways officially this is not want to tackle. in reality this is what they're here to tackle. europe will never have a policy. in the end it's always the ecb that has to bail out italy in some way. they will have to come up with a fragmentation plan that will be strong to calm the markets down in this situation. they for big part next week. if they don't announce something big. alix: some are talking about heather needs to be conditions attached to any kind of money or bond buying and transmission protection mechanism. i've heard that before. if you like we've heard we will help you but there will be conditions but can italy survive something like that with those conditions? will that do the job? saadia: i think the market -- bilal: i think the market would not like it if there were conditions attached.

they haven't really used that since sin -- covid introduce the program. on top of that, they suspended a lot of the rules that were governing fiscal balance across europe anyway. through the fiscal rules are suspended anyway than what's the meaning of those conditions. i think there will be chances from germany in particular, but in particular -- practice i think there won't be any conditions. guy: anything positive about the european economy? bilal: good point. the positive would be a lot of bad news is priced in in italy paid so they're set to go for some upside surprises. in general i think everything is pretty bad right now. there's a gas issue from russia. there is a heat wave, wherever you look there is a problem in europe. alix: why is euro-dollar still

at parity? why aren't we materially below that? bilal: we have fallen to parity so i think that is one thing. it's interesting is if you look over the past week or so, there has been some speculation the ecb could be more hawkish based on the behavior of bond yields in europe, they have started to pick up in the market became dovish on the ecb. over the past week they said they may have to raise rates. interesting from an event perspective, it is hard between the euro right now when it's moving on the russian pipeline. so if they do restock the gas, then europe will spike higher off the back of that. it quite tricky situation. >> what happens on that front? >> if they restart a pipeline then europe pops higher. guy: do you think they will

restart? bilal: my base case is they will but i am not an expert in reading minds. mainly because if you look, he tends to strangely respect contracts. i think he wants to take the high ground here and use this as a later barter trip. alix: is that what it would take , a russian gasketing turned back on to that 40% word was before for the dollar to find its top? bilal: i think temporarily that could be something. but a bigger picture in order for that to find it top, you need the ecb really started to ramp up. if it -- if it is raise rates by 25 basis points going into 50 and stop it's not really enough when the fed is raising rates by 100 basis points at the next meeting. to the needs to be a bigger focus by the ecb on inflation which strangely it hasn't really focused on that much because of the energy crisis.

alix: talking about the fact -- guy: talking about the fact he's focused on 75 rather than 100. is the market opens the doors to 100 though, would be foolish for the fed not to take it? >> is a good would be foolish for them not to take it. they raised 75 rather than 50. the bank of canada raised this week by 100. i think given the data we have seen the inflation is not peeking right now that they have to go something like 100 paid that the best time for it. payrolls are strong grade inflation is higher than expected. if you look in surveys across the u.s. still inflation is a big fiscal issue. alix: do you think -- if you take a look at 100, is that fully priced in different markets and asset classes or is there some kind of risk if they go in? >> i think markets are not fully

pricing that. i think markets can go down more. the challenge we have at the moment is what the market is trying to say with rates is they may go 100, but then we will have a recession and the fed will be cutting rates. because of that, there is this funding dynamic where an aggressive fed may not necessarily end up leading to long-term yields going up that much. i think that's not correct because i think the fed will go more aggressively. and the recession will likely be deeper. guy: we have kind of put stages of denial around this. we are now seeing a mild recession. questions around a mild recession, is that enough? bilal: i don't think it is right now. even the data we are seeing, given how far behind the fed is,

normally when you have very high inflation, the rate is usually the same level as inflation. right now in theory the rate should be someone like seven or 8%. if you are really far behind then you have to jack up rates even more which ends up becoming a much larger deeper recession which is the problem had in the late 70's and early 80's. alix: what is the thing that breaks it up? following the weakest level versus the dollar since 2006. the repercussions of that stronger dollar is already having big ramifications paid what breaks the hardest? bilal: i think clearly seeing affects under pressure so the dollars going up a lot. the south african rand moving to new highs. dollar china is probably the one to watch. that is a major currency can be

a market mover. more generally i would say equities could see another 20% downside. many of seen a 20% correction there. thinking this is the end of that correction but if you were to see more that i think equities could be seriously vulnerable. guy: but that doesn't happen for a while. he is lowering his forecast for the u.s. 10 year. bilal: i heard that whole segment. news that there will be a recession. but behind that view is they won't raise rates that much. the markets think fed will raise rates, i think it's more likely to see higher than that. and the fed is much more willing to slow the economy down than people think. and i think that's the kind of misunderstanding right now. guy: thank you very much indeed. quick fire questions, we covered a lot of ground there. the european close, we are

entering into a negative end of the day here in europe. this is bloomberg. ♪ when people come, they say they've tried

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guy: wrapping up the session in europe. the thursday session quite ugly as you can see italian markets under pressure. down by 3.31%. watching this story develop. i will show you the two-year. dax down by 1.3%. the u.k. down by 1.4 percent. energy stocks under pressure today. oil is lower. let's look at the session and how it developed. this is the course of the day. largely in one direction. but we appear to have forced

them a little bit. interesting to see whether the u.s. continues with that to chiron equities. i'm fascinated to see how they close the day paid let's show you what's happening with some of the other asset classes. italian two-year, 23 basis points up. the palooka story develops. the downside feels like we have had a look below, if you look at the clearing out positions i'm hearing. a lot of that may open the door a little bit for euro weakness. ecb next week critical. rent crew trading below 100. down by another two point five today -- 2.5 today. energy unsurprisingly down at the bottom. you can see iron ore coming out of pressure.

banks are down as well. top end of the market, travel and leisure. let me show you some of that travel and leisure story up by 4.33% today. oil prices, european carries a hedge on the u.s. counterpart. nevertheless loyal oil prices. -- lower prices. then there is angler with the story down by 4.5%. alix: you have chris waller speaking in idaho making some headlines earlier in a speech he talked about headlines was a larger hike in -- if that is warranted. yields on the two-year came off the high. yields up by one basis point. let's listen in. they are talking about retail sales. a nice inflation indicator. >> we all have a big party and blow it all in one year or will

we stretch it out? >> do you want a party? shall we do the party? i'd like to welcome everybody watching on bloomberg television around the world and bloomberg radio. we are speaking to christopher waller. a member of the board of governors federal reserve pride you said you favor 75 basis points and you would consider 100 given how the data comes in. this 100 ideal blue up this week. what would it take to get you from 75 to 100? mr. waller: 75 is my base case. we knew this inflation report would be ugly and it was. it was just uglier than we thought. 75, which there was some concern was not to happen is now in my view should definitely happen. with the report did yesterday was anchor. i don't speak for the rest of

the committee. but for myself, 75. we do not want to make policy on one data point. but this is another reading in a long sequence very high inflation. and with the data on the real side economy showing this paradox that the real side looks to be softening, you are kind of in this thing, you don't want to overdo the rate hikes. a 75 basis point hike is huge, don't say because you're not going 100 you are not doing the job. so like i said, if i see the incoming data in the next two weeks coming in showing me the demand is still really strong and robust, then i'm going to lean into a higher rate hike. mike: the counterargument is you said you want to get to neutral and your to find new that is around 2.5%. if you do 100 that gets you closer to neutral much faster. so why not?

mr. waller: for me it's two to 225. for me a 75 basis rate hike gets us my estimate of neutral and i'm thinking everyone after that is extra on the economy. we all have this kind of different view of exactly what neutral is and that's the problem with this concept. it is not some scientific thing. we all have kind of a view of what it is and it's all kind of similar. for me, 75 basis points. mike: a lot of people of been saying to 22 and half is neutral for years pre-now we have inflation on the cpi measure and we have the economy slowing. but a very strong labor market. has neutral moved up? mr. waller: this is going to be a geeky answer.

but the way i've often thought about neutral, the way the language came about as we asked ourselves if you were achieving both goals of your mandate, employment was where you wanted it, inflation was where you wanted it. what should the policy rate be paid when you hit the perfect nirvana, what's the rate? to me that's what i think of. at that point you would neither want to stimulate or contract. so that is kind of the concept of neutral that i have in my head. it is not data dependent, we achieved our objectives tomorrow , we hit neutral. that's where you are at. that is the concept. so i don't think it moves up and down a lot based on the current cpi. that number hits my goals. >> a lot of people who suggest that recession is all but inevitable at this point because the fed has to put the economy

into recession in order to break the back of inflation. one of the analysts in a report said the fed would tolerate a mild recession. how do you feel about that? mr. waller: in order to pull down inflation we have to pull down total demand. to try and take price pressures off, wage pressures off. that's what we have to do. that's the job i was given by congress. so the issue is how much can you bring it down to push down inflation without causing too much damage on the real side of the economy. so what i think is very plausible ease we could have was thought of as a growth recession which is the growth rate falls below year average but it doesn't go negative. typically a recession is negative. so you could have slowing growth for four quarters and that might be enough with demand now

without going into full-blown recession. i still think that is possible. mike: i forgot to mention earlier we have index cards out there that jill has and if you have questions, write down your questions and she will collect them and bring them up we get to the audience feedback. mr. waller: just no tomatoes. mike: in the beige book which is a sort of anecdotal account of the economy in various fed district around the country came out wednesday afternoon. a number of districts, recession fears are growing particularly among ceos. do you think a recession is inevitable. how do you think about the possibility that we will contract. i know you said you can probably get there without it, but are we tilted the odds towards recession? mr. waller: that was kind of the

punchline at the beginning part of the speech as we have this conflicting data between the labor market and the real side of the economy. and i just have a very hard time for many economic model i know which would add 2.7 million workers. it does make me think people have negative productivity making the existing workers worse? it has to be something about the measure of how we do this. that's why we do revisions over time. we get a flash estimate and then collect more info over time and say maybe that wasn't the right one. that's the problem we have in policy we make policy on real-time data. we don't get to wait six months to 12 months. just based on the labor market, it is inconceivable to have a recession when were at 3.6% for unemployment. mike: this has come up in conversations i've had with a

number of people of the last couple of days, that americans according to the surveys are extremely pessimistic about the economy and by some measures the lowest feeling ever. and the newspapers keep reporting we are contracting and the economy, can we talk ourselves into recession? mr. waller: a lot of it is analysts are trying to get ahead of the next move to get their positions in line and they talk in their books. and that chatter starts making its way in corporate america. it is kind of funny when you look at these household surveys. jobs are plentiful, if you want to job you can get one. you would think that this plus a lot of pushing on your bank account tells you we are in pretty good shape. but inflation is just destroying people's attitude. there watching real wages go down.

there watching the bank count empty into the car. i have the same problem as everybody else. so that really is it. i think the negative this is just the inflation which we haven't seen in 40 years is making people very pessimistic. i am sympathetic to that. mike: you brought up a good point about wall street. originally analysts were convinced that if you're way behind the curve you've to raise rates a lot and now the fed is going to raise rates a lot which means were going into recession so we should sell everything. and then they were convinced that you would have to start cutting rates and then we are back to this week we have to go hard up 100 basis points. how much attention you pay to what's going on with talk and the market activities it happened on wall street? mr. waller: the talk matters in the sense that that gets priced into interest rates and other things that i care about in the financial markets.

we start seeing that, those interest rates started factoring into the economy. so in that sense i care about what said. but in terms of protecting a recession, this is a very hard game or you're trying to predict a turning point in the economy. anybody who does this for a living knows you always below that point. everybody predicts a recession after the fact. very few get it right. it's the same with expansions. people are thinking. i don't see why that has to be the case. recession so necessarily automatically follow these. with this great labor market we have to deteriorate incredibly fast to go into a recession. mike: if you ended up going 100 basis points, do you think markets are prepared or will we see a big selloff and everybody shocked because the fed decided the economy is so bad?

mr. waller: i think markets may have gotten ahead of themselves a bit and just assume it will go to 100. market pricing has a probability 100 basis points. that hike around 7% this morning. i think that is kind of getting ahead of itself. like i said we knew this was not to be good enough. this was not a surprise. 75 was the base case. ended kind of just confirmed it. i look at cpi the took what i had and made it -- to go above that i have to see more data. we just got this yesterday. we don't want to make snap policy decisions based on some knee-jerk reactions to what happened. we want to be able to sit and talk to each other, talk this through and then in two weeks

make the decision. mike: a question from the audience. guy: you been listening to a conversation between mike mckee and the fed governor chris waller. if you'd like to follow that panel, you can do so under bloomberg terminal fairly straightforward, downplaying 100, downplaying recession but watching the data. this is bloomberg. ♪

ritika: you are looking at a live shot of the principal room. coming up the china base book ceo joining us. this is bloomberg. ♪ guy: rishi sunak, penny mordaunt ahead of their rivals in the race to become the next british prime minister. with us now, bloomberg u.k. government reporter. so we are seeing candidates

departing the field now. down to five candidates. how does this work out where the votes were for those candidates being excluded likely will ultimately settle. >> we had two candidates knocked out yesterday and their focus is right -- split pretty evenly. we had one who was knocked out today. we expect those to go to the higher. then you look at tom who is in last place at the moment, he is 32 votes prayed if he was knocked out, i think rishi sunak would get those paid you can see how he likely gets to the final runoff of those numbers and it's really between these two to get the rest of these to contest him. alix: what actually happens next? when's the next runoff. this debates coming up. what are the key events coming up? joe: there is a debate tomorrow

night, of the first time really the candidates who go against each other and that's a pretty big moment. they are hoping they might back in -- might get back into contention. the next ballot on monday evening where you can lose at least one candidate and be -- and then further out from tuesday and wednesday to get us down to the final two. alix: thank you a lot. also want to update you on those debts that interview with michael mckee. he is sticking by the 75 basis rate hike. saying there's no need for this reaction to one cpi number. talk to each other, also very much downplaying the idea of a recession. how you can get that with 3.6% unemployment rate. your suing that -- you are seeing that in the two-year. coming into the front end. this is bloomberg. ♪

alix: the other story we are following, jp morgan, morgan stanley, those stocks down after reporting second-quarter results prayed both stocks hitting a low. managing director of oppenheimer joins us. outperform for jp morgan as well as morgan stanley. talk about the outperform and will is the take away from results today. >> i think both of these are incredibly sound companies. the way they make money in the stock market i think buying things on their out-of-favor and people are panicking. i guess what i would say, the big takeaway for me from all of this is what incredibly good shape the banks are. you go back most of my career in the market for the s&p is down 16%, somebody would've gotten taken out on a stretcher.

it was rothchild in the market crash, shearson lehman in the early 90's, you have bear and then lehman you know. whereas in this case, jp morgan and the 70% return on equity. what i think the real difference is is that james gorman said it well. the environment is complicated but it's not 2008 complicated. what he means by that is the income statements, banking revenues are down. on the other hand the banks are really de-risk on their balance sheets. guy: so chris they are a bit safer. i extension you could argue therefore they are a bit more --. i'm looking at what i'm seeing here and i'm struggling to get excited. the stocks are down pretty hard.

but what i'm struggling to see is something that would encourage people to get back in. what do you see to get back into the stocks? chris: they are highly profitable. in the market like this you can grind out a 16% and 14% return on equity respectively. that is something to be excited about. people take it for granted but you are seeing in a lot of the fintech companies, take a look at clar now, their last valuation was at $50 billion and this one at seven. people are going to come back and appreciate the good nice consistent predictable return. >> do you think these banks have de-risk to enough and brought down their value enough considering the uncertainty in the environment?

chris: i think they have done more than enough. i cover the private equity-based alternative asset managers and you can really see it if you cover both sectors. you can see basically all the risk has migrated, not all of the risk but the huge portion of the risk has migrated off that balance sheet. and in two credit vehicles and private equity vehicles that are managed by the alternatives. in 2009, the companies i cover, back in 2006, the companies had about $4 billion of credit assets. today that number is close to $1 trillion. those were all risk assets that used to live on bank balance sheet. they don't have room on that anymore. >> how do they fare in a recession, not the mild recession we are talking about right now the fed goes hard,

does that durability hold up? chris: there will of course be an increase in losses. where you will see it most in particular his credit cards, but again these are mainly prime now. subprime is territory you cannot go to given the stress test these days. so the overwhelming majority of big bank credit card loans are prime loans. if you think about that, it means if unemployment goes from 3% to 7%, that would be a pretty significant recession. it is still not going to eat that deeply in to white collar, middle-class people who are the bulk of the credit market. guy: we have to leave it there. great stuff.

more bank earnings of course coming tomorrow. a busy day. highlights at the start of our show as well. from alex and from me, this is bloomberg. ♪

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>> from the world of politics -- >> if you're driving to the polls because to $122 to fill guesting, that might create problems for us. >> to the world of business. >> certainly the inflation report suggests there is no reason to say a smaller rate increase and we did last time. nothing moves in that direction. >> this is balance of power with david westin. ♪ david: from bloomberg world