>> from the financial centers of the world, this is bloomberg markets with alix steel and guy johnson. ♪ >> it's 30 minutes and for u.s. trading day friday, may 26 in your the top market stories -- deal or no deal? debt ceiling negotiators are closer to compromise on spending but there is no agreement yet with the x-date looming. still chugging along, high

inflation against -- consumer spending did it shows resilience and sends yields higher. what is it mean for the fed's june move and marvell is the latest to cash in on the chip boom. from washington, i am kailey leinz with guy in london. welcome to bloomberg markets. kayley: happy friday, a friday before a long weekend with the debt ceiling hanging over our heads. guy: kailey leinz is here and that means you generally want to buckle up and we will get some breaking news and it generally means things will go a little sideways but maybe in directions we didn't expect. she is at the epicenter of the action this weekend. that's where we find you. kayley: that hasn't been a fun couple of weeks to be honest as

we have tracked the progress or lack thereof on the debt ceiling. it seems we are getting closer but we are waiting for news today potentially. guy: with got some news right now and that comes out of the university of michigan. it's in the form of a slightly better inflation read. the one year inflation number, these are the final dates we get for may, the original number was 4.5 and it takes back down to 4.2 and is very gasoline dependent. longer-term inflation expectation had ticked up 3.2 and this number is stable at 3.1. as we've been learning, the data are certainly pointing us in the direction of more fit hikes and that's what we got from the pce data today and we will talk about that later. the market is getting to the point where it's getting comfortable with the idea of a june hike. let's get back to where we started. what could possibly go wrong

over this long weekend in the u.k. and the united states? kailey leinz is in the house and we have a difficult we can coming towards us. let's kick around how the market should view what should be happening. listen to corbyn and michael -- liz mccormick and michael mckee join us. what is your perspective on what could go wrong over this weekend? do we get a deal or no deal? >> it seems more and more likely we are going to get a deal. we understand the two sides are coming closer together on a compromise of spending caps and lifting the debt ceiling for two years, maybe the defense spending increase at the biden administration was looking for but there isn't room for error. we could see another walk at of negotiations like we saw last weekend and that indicates that once a deal comes to a

handshake, the actual members of congress, their caucuses may not like it and they are the ones that still have devote for it to make it become law and the clock is ticking, as we all know. guy: let's figure out what is happening here. from a market perspective, you find yourself in a situation where it looks like we will get a deal but we've all got long memories and we -- we remember tarp and a deal is not a deal until it's a deal. house of the >> ourselves talking about this? the market has long memories and i don't think anyone will fully believe it until it's all signed on the dotted line. there is a couple of potential pitfalls already but the market is trying to focus on the data that came out this morning. they are looking into that june meeting. if everything crumbles, i think

people want to have a long weekend and they will check their bloomberg and be worried that something blows up. kayley: i'm right there with you. i would really like to not work at all this we can but i know i will be a test to my own especially if we don't get anything announced by the end of today. how do you view this from an economic risk standpoint? we had a warning from fisk earlier this week. it seems the risk is maybe higher than a sanguine equity market would indicate. mike: i think the risk is on the fed size whether they raise rates and by how much. you look at what could happen and if it deal doesn't happen, then we have a big problem, something that's hard to quantify when they use adjectives like tremendous issues or armageddon or something like that. if a deal does happen, from the contours we have been seeing, it

doesn't look like we -- it will have any effect on the economy at all. they are mostly shuffling money around rather than actually cutting spending that would reduce growth. the fed will be the game there in trying to reduce growth because of these inflation numbers that have come out. guy: let's go to the inflation numbers. we talked to joan shu a few weeks ago and she suggested that maybe the consumer confidence numbers were being held back by concerns about what was happening in d.c. the latest headline numbers, inflation is fairly stable. if that's with no deal, what does consumer confidence look like with the deal and how is the fed going to pull this together? mike: i don't want to rain on the university of michigan but it doesn't have a lot of correlation with what is actually going to happen in the consumer economy going forward.

the famous quote from alan greenspan was we watch with they do come in not what they say. probably a lot has to do with the drop in gasoline problem -- prices. we are one dollar than the we were at this point last year. paper of dish people are feeling a little better about that but that is that telus what they will spend? the consumer confidence numbers had fallen but we saw a big increase in consumer spending during the month of april. at this point, it looks like people are still out and willing to spend. the business numbers that came in show business investment, this economy is stronger than the fed and others anticipated. we've just got to see what it will take to slow inflation down. it's just kind of sticking around.

kayley:kayley: you are seeing that stickiness in the bond market. we are now at 456 on the two year treasury yield. if we are thinking of things that may go wrong this weekend, are things going wrong into the bond market or does that bring more selling pressure? we know what happened in 2011. >> that's what makes it more complicated. in the short end, there is more focus if things go wrong, we still have that data but it doesn't mean the fed will ease. they may have to jump in and do support programs that people have been buying the long and if there is a flight to safety, the whole deal falls apart. even with the downgrade from s&p in 2011, people bought equities. if there is a deal, at first it looked like a deal may be a headwind to the economy and now it's looking like it's not so bad. if we get a deal and it's not such a hit to the economy, with the data we are seeing, you will

see the fed bets get ginned up again. a few weeks ago, there were no hikes priced in. that's the sticking point but if there is note deal and everything falls apart, we hope that doesn't happen but your going to see some flight to safety in the long end. one investor set of a deal goes through, we might go back to 5%. that's one call but there is a lot of risk in the market. guy: everybody sees what's happening out there in the real economy looks good in everyone is enjoying themselves. everybody is traveling and it feels like an economy that is still doing very well. the market realization around this has been relatively quick and brutal. who seen a complete backup and yields in the u.k. and you see that in the united states.

as people come back from their holiday tuesday, what is the potential here for the market, for the pendulum to swing completely the other way? we are starting to price in hikes so how many more could we pricing? >> before svb went down in early march, people were pricing terminal fed funds rate going above 6%. i think the risk is you come back and people spend money or whatever and things look good in a deal is done. the data still looks strong. do wegin up the terminal rate at 6% again? every session was imminent and then it got pushed further back. if the slow down doesn't pan out and inflation remains sticky like you guys just said, i cannot see why yields start going down for any good reason. i think that is the risk, that

we come in next week and the deal is done and friday is the jobs report. another strong jobs number, i don't think things could go lower. kayley: liz mccormick and michael mckee, thank you both for joining us. we will get more insight into our question of the day -- what could go wrong over the long weekends? namura will be next, this is bloomberg. ♪

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>> mccarthy and biden, anything can happen when they meet in they will meet more often and there are adults in the room. there are young staffers in the white house who think they will run this negotiation, i hope there were adults that understand the implications of doing is something as stupid as defaulting. kayley: that was kyle bass speaking with us yesterday on the ongoing debt ceiling negotiations. that brings us to our question of the day -- what could go wrong over the long weekend?

with this is charlie from nomura . what could go wrong and how do you position for it? >> i appreciate being on. there has been in the months building up to this with regards to the debt ceiling discussion, you have this perception of imminent recession in the background and you have a regional bank profitability crisis within accelerates the credit and lending slow down that these into the recession risk. there have been neon swans. none of the stuff is coming out of left field and it has created an over hedging event into a risk event that is likely failing to materialize. over the past week and markets, you seen these trades that benefited these hedges that benefited whether it was buying duration or goal, trades that

were short the dollar and all that stuff is come off substantially because along the way, quite remarkably, the people closest look go she have been very constructive. in my mind, it is not about these hedges that have been put on and are now leaking is the market rallies higher and bonds have sold off precipitously, it's actually about the forward months ahead because the deal is getting done. there is a liquidity drain concern in the market we could speak about. guy: we will off to have to can -- also have to contend with coming back next week and we got university of michigan data that probably points to another rate hike. the consumer is still in great shape and inflation is relatively stable. we got payrolls coming up next week. is the real risk, do we enjoy

barbecue and come back tuesday morning and we realize that we will be dealing with significantly higher rates from here and will have less liquidity to go through the process and that could potentially be an ugly market set up? >> that's exactly were my head is. we are in that squeeze all the news -- good news as blood from the stone at this moment. perversely, this creates two major headwinds for the market. the first is we are real-time repricing the fed path. people have come to these last few months and perceive the end of the fed tightening cycle and over anticipated this slow day of that has has yet to materialize. they have kept pricing potential in for a deep cut if one of these left tail events like the

debt ceiling fail. that now has been repriced much smaller and instead of that perception of the fed is pausing or cutting after, now the market has to price in the complete opposite. there might not even be a pause. they might have to add in hikes. you are seeing that in the last couple of days. this data is too strong and core inflation came in higher and now is off fear. acceleration -- inflation accelerations bring the fed back to the table. there's also the fact that after this deal gives done, the treasury has to replenish funds and that will mean baton, trillion plus a short-term bill issuance to crowd out risk assets. kayley: there is the liquidity

challenge and we have to consider what this deal brings as far as cuts to spending. there is a pullback that could have growth implications. let me ask you about the u.s. dollar because even if we get a deal, it was still incredibly difficult for the u.s. to maintain the ability to pay all of his bills. i wonder if we question the full faith and credit of the united states and there is no indication won't be like this again in the future, can the dollar still bring dominance in this kind of politically difficult environment in the u.s.? >> the dollar demise is perpetually overplayed. is the reserve kurth dish currency for a reason. some something i've spoken about as the dollar smile. the dollar tends to rise in a better growth environment which ironically is where the u.s. is

shifting into as we speak. with that come interest rates move higher so that goes hand in hand. people are repricing the fed hike because the data is strong. it also goes higher at the other end when there is a risk off of them which was part of his rally that lua short dollar trade that's been out there. everyone wanted to short the dollar on the basis we were nearing the end of the fed tightening cycle and europe was taking of and china was taking off. what you see over the past couple of weeks is those trays -- trades getting stomped out. u people have ton-lend those decisions because u.s. exceptionalism is proving true as well as the fed not finishing their job in regards to the still above trend inflation. it's a problem for them. guy: do you have plans for the weekend? what will you be doing? >> we are going back to the

motherland of ohio. we will have beers and hotdogs with the family and i will not worry about the debt ceiling at all. we will come in over the next couple of weeks and we can start worrying again once the deal goes on. people forced into the market and after that, we can talk about the liquidity drain and have more nervous conversations but now was a time to relax. guy: that sounds fantastic, enjoy it. we appreciate your time and thank you very much indeed. still ahead, marvell shares soaring and they say ai revenue would be at least double, more on that next. this is bloomberg. ♪ t decision. like when i decided to host family movie nights. miracle-ear made it easy. i just booked an appointment and a certified hearing care professional evaluated my hearing loss and helped me find the right device

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when covid hit, we had some challenges. i heard about the payroll tax refund that allowed us to keep the people that have been here taking care of us. learn more at getrefunds.com. kayley: it's about 23 minutes past seven on the west coast a

let's get to the top tech stories from the bay and beyond. joining us now is caroline hyde. we have to talk about the ai magic themes hitting another company. it was nvidia yesterday and now marvell up 26% on the day. is it just using the magic word or is this real? caroline: no such thing as an overnight success but it feels like it. merval is giving real tangible numbers. they will likely double the revenue from ai related products over the fiscal year which goes from 200 million to 400 million but that will double again with explosive growth overall. you have the ceo talking about how they have leaned into ai and that's with building. they talk about network conductivity products and emerging cloud optimize silicon

platform. these are ceos that have managed to see this coming. there was a great piece that says since 2012, some of the data analysts at the likes of morgan stanley and other key banks, have written about deutsche bank. you seen the ai experience building and the patents growing in explosive rate. you cvt's a bit that is still pretty quiet. you are starting to see that shift. nvidia is now bigger than t -- then to keep u.s. rivals. guy: cathie wood so that one coming. caroline: she did a little while ago and out she sold out just as this happened. we will putting those pressure -- those questions to her later. trying to understand why she took back some of those bets in an extraordinarily outperforming

stock. this is one key area you have to keep an eye on. the ceo has nvidia tattooed on his arm and he built the business. it was back in 1993 but managers to leverage new types of technology in making sure there just those joyous pictures you get turned into code and interaction. this is clearly a company that people cannot get enough of that the moment. guy: i look forward to hearing what kathy woods'responses when she gets that question from you later. nothing to talk about on the technology show but caroline hyde will be coming up in about 19 minutes time. the next set of earnings calls, you are thinking about how you

will deal with your next set of earnings. how many times will you mention ai? it could be the seven words that will generate a decent stock this time. kayley: like i said, magic beans. coming up, we will talk about inflation. ♪

kailey: we are one hour into the u.s. trading session on this friday before memorial day weekend. abigail doolittle is tracking the moves, it does not look like people are nervous to take on risk. abigail: it does seem that way, that is causing the s&p 500 to climb higher on the week. this is a one-week board, moments ago the s&p 500 had been down on the week earlier this morning, down about 7/10 of 1%. russell 2000 still down, you can see this huge gain for the

nasdaq 100 and chips on nvidia, ai. we are seeing a bit of a divergence, not showing as clearly with the s&p 500 up slightly now, but let us look at one potential pressure on stocks going forward. we have seen these levels before, not so long ago, right before the bank turmoil. two year yield close to 460 again, over the last 11 days, rising 11 days in a row, backing up 66 basis points over that time period as investors start to bet that the fed will hike in july and maybe also june, so tightening is back on the table. this is interesting. we do have most sectors lower, the last time i looked, only to sectors higher. one of them fractionally, but tech, chips up 4.1%. all other sectors were most sectors, i think seven or eight, down more than 1%.

a piece of this for staples and materials -- staples and utilities having to deal with yields backing up so much, those dividends look less attractive. if we put this together in the bloomberg terminal, what we are going to see is we are now looking at a fifth week of where the s&p 500 underperforms the nasdaq 100 dramatically. the last time we saw that was all the way back in 2021 and 2020, you will note that both of those years were pretty bullish overall on the safety trade of big tech, maybe we are entering a new phase or we are going back down in a sideways trend. guy: what i think is incredible here is there was once a fear of the technology sector continuing to be rate sensitive, we are disproving the on a daily basis at the moment. it seems as if ai has superseded that concern around that sensitivity. thank you very much indeed,

abigail will be back later. it is scary on the conversation around what is happening with u.s. inflation, a pick back up in april. but get the numbers, look at what we got in terms of spending data today. they are out there spending, you will see that this weekend. flights are full, people are buying drinks. it is going to be fun, by the sounds of things. the downside is it potentially puts another fed rate hike in play this summer, we are now priced for another one this july. let us talk about how far we could go. dominique dwor-frecaut joins us now, at one point you had an 8% target for fed funds rate. the market moved sharply away for even 6% for a while, we are now moving back in that direction. how far do you think the fed is going to have to go, given the data we are getting today? dominique: if it links fed

policy and historically, the rule has been a great predictor of the fed funds rate, since the 1970's, every fed tightening cycle has went to fed funds rate, gotten close to the rule. a few months ago, it was likely the rule was still relevant. currently about 8%, you want to take the models seriously, but not too literally. . i would agree that my view has been vindicated by the data.

look at what is happening to core services inflation, excluding housing. it is not going down. look at what is happening to housing costs. they are up again. i think we are not going to get to 8% in the next six months, but i stick to my long-term view and in terms of the next move, i have had to disclose that the fed will hike 25 in june, assuming the crisis is resolved. i have had that since the last fed meeting. i stick to my guns. kailey: on the subject of the debt limit issue, we are just hearing from house speaker kevin mccarthy, speaking to reporters about debt limit negotiations. he says he thinks negotiators made progress last night. but if we bring around the

fiscal issue into monetary policy, i could see that either way this shakes out either we do not get a deal done and potentially see the first people on debt the u.s. would have ever done, or we get a deal that brings spending cuts and potentially less impulse to growth along with it. wouldn't either of those scenarios mean the fed has to do less? dominique: there is no question that if we are in the middle of the debt ceiling crisis by the time of the june fed meeting, they will hike. on your point that fiscal policy has to get tighter, i could not agree more. if you look at the budget deficit right now, it is 7% of gdp, which is enormous in its own right. but if you take into account the fact unemployment is the lowest in 50 years, fiscal policy is out of control and needs to be reined in a little bit.

i am not sure we will end up in such an extreme situation such as the debt ceiling at you. contrary to popular perception, i do not believe meeting the x date means a default. on the contrary, what will happen? we know it from past fed transcript, the treasury is going to prioritize debt service payment. the u.s. has plenty of cash to cover interest payments, that is not an issue. the bigger issue is whether the u.s. would be able to haul over its debt. kailey: if i could just mentioned, on the issue of prioritization, the treasury secretary has called that a default by another name and even fitch ratings when issuing the washer earlier this week said prioritization would not be consistent with a aaa rating and put results in a downgrade.

i wonder if a downgrade would be just as bad. dominique: no, look at the last time the u.s. got downgraded. this was 2011, there was a big negative market reaction. since then, the market where we can see the downgrade of the u.s., the bottom line is -- the dollar will remain the global currency. to come back to the issue of default, i would argue that default is nonpayment of interest of principal on the debt. i cannot see this happening, even if we hit the x date. the treasury has more than enough cash to cover interest and the fed is going to make sure the treasury is able to haul over its debt.

this has proven good advice. i disagree the default -- guy: let me ask you one final question. the british chancellor, jeremy hunt, said something i do not think i've ever heard of say before. he was asked about the bank of england, the bank of england raising rates and was asked, would you prefer a recession john going higher inflation? he basically said yes, he would rather than the bank of england hit inflation hard and potentially deliver a recession. is it going to take a recession to bring inflation back down to target? how about will the recessions need to be into wordy you think they come, particularly in the u.s.? the u.s. consumer seems to be in good shape right now. dominique: unfortunately,

because there is a feedback loop between wages and high prices, because prices are high and vice versa, the only way to bring inflation back to target is going to be a recession. a feedback loop between wages and highthat is gh tougher -- i do not think the fed is ready for that yet. we are going to see inflation probably creeping up in the second half and the fed eventually -- my expectation is we will move toward the valley of the fed funds rate, 8%, sometime in the latter part of this year, may be the first quarter of next year. 2024 may be the year of the recession. kailey: thanks for joining us today, that is dominique dwor-frecaut. we appreciate your time.

coming up, we will turn to the strength we are seeing in japanese stocks, the recent rally pushed it ahead of the world's major benchmarks. strategists say it has further to run, we will discuss, next. this is bloomberg. ♪

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last week, at its highest level since 1990. this is the 10 year yield here in the u.s., it is backing up 16 basis points. the yields are up modestly, little less of a selloff. i would say pullback. as for overnight inflation read in tokyo, showing a little bit of moderation coming off of the recent peak, closer to 4%. that could be a fundamental positive that we are coming down off of that inflation high. finally, this is interesting. we had the yen, which had been rallying earlier from the peak of last year, this is the dollar-yen, falling because it shows japanese yen strength. now it is the opposite, the dollar is starting to dominate the yen and begs the question of whether we are going to see some carry trade for the risk rally we have had recently, especially the ai and chip one that you were talking about a few minutes ago. guy: everyone is getting excited

about the dollar again, it is amazing to watch. on the rates narrative, maybe it makes sense. i want to talk more about japan, we have the perfect person on set do that. very nice to see you. shoki: thank you for having me. guy: a lot of people are trying to understand the japanese market, investors are getting excited. but the thing everyone is really struggling with, which i hope will be able to give us insight into, is what is going on at the bank of japan? we saw the governor speaking earlier on today, talking about when rates will potentially change, where-year-old curve control is going to end. he said the key point for policy decisions is whether inflation will rise in a stable and sustainable manner.

how much longer is yield curve control going to last, it is a critical question for the whole of the world. in a stable and shoki: the best case for the boj is they will take off by october of this year. for that, he needs to see sustainable inflation, meaning looking at the core indices that not many people watch. that is u.s. core cpi in median cpi. the cpi prints that we are seeing are mainly -- i think that is the divergence we see from the boj and investor community. we have to see a little more stronger core cpi. guy: do you think we are going to get that? that the core number will take up enough? what do you think we need to look for for that switch from the boj to become a reality.

? shoki: i think we need to see non-energy stuff, inflation picking up. the governor has been repeating on tv and -- that we have not seen the battle of inflation yet. he is very cautious, because back in 98, back when he was the board member, he really -- when the boj hiked rate, he was against it. i think he has the mindset that japan might fall into deflation when the trend is not strong and long enough. kailey: what does this mean then for japanese assets?

what are the implication toward the curve but also japanese equities? have they gotten too far ahead of themselves in the near-term? shoki: for rates, yes. i think there is real demand in the belly. these japanese investors -- from the u.s. market into japanese jgb's are going to be supported. as for equities, i think -- i am a little bit dovish on the equities side, because we have seen flows shifting from u.s. or european equities into japanese equities. that is the risk that i see. guy: do you see that trade accelerating as we go through this year shoki: -- this year?

shoki: yes, they need to buy the long end jgb's. guy: where does the money come from? shoki: they have an hedging 10 year treasuries for a long time. it is basically underwater and negative carries, so they have to be shifting down into jgb's. kailey: on the subject of treasury -- i am here in washington, where we are all waiting to see if we get a deal on the debt ceiling. we've been hearing from the house speaker talking about progress made and working as hard as you can to get the deal done. it raises the question of whether or not the u.s. could ultimately default or get close to it and i wonder what the implications are for japan as a massive holder of u.s. treasuries. shoki: i think japanese

investors are looking at the optimistic side of treasuries. i do not think many are looking at a ust file at the moment. though they have to sell some treasuries they still have, they are not looking into default, hopefully. guy: abigail brought up the dollar, the kind of flows you are talking about, the dollar has come back onto the front foot. how substantial are the flows going to be? what are the implications? how substantial could implications be? shoki: i think it is on the dollar side, to be honest. we had strong pc, as well as manufacturing data today from the u.s., as you saw, to year yield stick debt.

went up to 140. so i think it is on the dollar side. but i do see some risk that they may go up to 150, we saw initial finance intervening last year. guy: great to see you, thank you for your patience. you came to join us the other day and kevin mccarthy was speaking, so thanks for coming back and joining us. it is great to see you and to get some insight. shoki omori joining us from mizuho securities. this whole story is going to be fascinating, the japanese -- in some ways, and many ways, it is the hold up. it is interesting to hear them talking about the boj is convinced inflation is embedded in the japanese economy, still the supply side causing the problems. kailey: it is interesting to contrast that with the picture

here in the u.s. as we see data this morning showing persistent inflation. we are talking about how the fed may be hiking this summer, not cutting this year. the diversions and the monetary policy path is very stark. guy: talking about the idea we could be getting up toward seven, 8%. you could really end up with an interesting scenario, the boj pulls away a little later on this year, the fed's hiking much more aggressively. i could be setting us up for significant turbulence toward the back end of 2023. we will carry on with the conversation, this is bloomberg. ♪

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make a sound decision. call 1-800 miracle now, and book your free hearing evaluation. guy: forget the question of the day, we are risk on. going into the memorial day holiday, the u.k. has the day

off on monday, as well. u.s. markets are flying, equities on the front foot. tech is leading, stoxx 600 up by 1.3%. caution is being thrown to the wind, look sick we are may be getting a deal. everybody wants to go and enjoy the weekend. next week, we will see whether there is a hangover. dollar is on the front foot, just north of 107 at the moment, as you can see. are we going to get a break below that? that is something you want to pay attention to, we will talk about potential for a european recession, may be rather have a recession then the high inflation we are dealing with in the u.k.. there's plenty to talk about. metals are on the upside today, 3.61%. we are seeing physical metals coming back a little bit today, but there is an upgrade that is having a positive effect,

basically saying the recent underperformance is an opportunity. we will talk all about this, why are stocks not going down? that is a key question for sebastian raedler, we are talking to him next. the closest coming up, this is bloomberg. ♪

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guy: friday the 26th of may, risk on is the sentiment and you can see it here in europe with the stock story, up by 1.4. the standout story is turkey, turkey has had a decent rally into this weekend, we have the runoff for the turkish elections this weekend and will get the results early next week. we will talk about that later on in the hour. risk on into the weekend, countdown to the close starts now. >> the countdown is on in europe , this is bloomberg markets: european close with guy johnson and alix steel.