sonali: i'm sonali basak and

bloomberg real yield starts now. coming up consumer sentiment rises. household spending picks up and pce growth mildly. the numbers set the stage for fed rate cuts starting next month with one big data point next week. the u.s. jobs report. today's big issue is the fed's favorite inflation gauge. >> feels like a soft landing for most of the data we have gotten in august. for me a good mix of data. >> consumers are the biggest concern. gdp went up, revised. but gdi, the income component was not that strong at all. >> the consumer is definitely under some pressure. we hear that from all the company reports. what is boosting companies now is the fact they have been able to cut costs. >> we are looking for noise in the data as we transition from a

very strong economy to whatever word you want to put on it, not quite so strong. >> there are risks out there. we have to remind ourselves we are in a late cycle environment. >> there's murkiness in the data but for fed expectations are built in for a rate cut. >> 25 basis points as it is what we see from the fomc meeting in september. i think we only get one more this year probably in december and the market may have to reprice. >> rates might nudge north of 4% on the 10 year. >> the unemployment rate is much higher in the last report. we have to watch these things closely, particularly, the labor market. >> you saw long-term numbers on u.s. pce. coming closer to the ever elusive 2%. looking at the short-term headline number on a three month annualized basis, a metric that economists say paints a more accurate picture of the trajectory of inflation you see

a bigger slowdown. you can see how much progress has been made since 2021 and 2020. let's flip the board to see how the bond market has reacted to the data over the last two weeks. we have lost more than 10 basis points in the two year yield. short-term rates fueling a change in sentiment. you have to wonder if it comes from inflation data or growth figures we have gotten in between. a lot of people in the markets are concerned about what the job market will look like next week when jobs data comes out friday. inflation is just half the story for the fed. wells fargo has their eye. michael: in payrolls, unemployment, and the latest consumer confidence report with more consumers reporting jobs

are scarce and fewer consumers reporting jobs are plentiful. looking at the totality of the data i think that's reliable even if week to week or month to month on payrolls you get noise from a bunch of factors. sonali: joining us is ira jersey. after you had the most recent data, there were calls earlier this month for the idea of the 50 basis point cut in september. there was a moment when you heard people call for an inter-meeting cut as well. but now you are seeing the market adjust quickly to the idea of 25 basis points in september. why? let's there are two things. the recent data we received this week, the gdp data coming this morning's personal consumption and spending data, although this suggests the economy is ok. therefore if the fed is going to cut it's probably not going to be a supersized 50 basis point cut at the start. the market is starting to price

that out. still a little chance of the 50 basis point cut. we are priced for more than 75 by the december meeting. i think that's probably too pessimistic and the fed will go slower than that. nonetheless, the market still sees significant cuts to 3% by the end of next year. the w rp function, pointing to dramatic rate cuts over the next few months. >> there are at least 100 basis points of rate cuts priced in through the end of the year. is that realistic? >> no i don't think it is. it's too much. sonali: how do you put money to work in this bond market now? >> it is better to look for long duration bond whether investment-grade or even high

yield. certainly, the fed is still easing. there is no chance of the fed will raise rates. this says the trend in treasuries is down and there is supply scarcity of investment-grade and high-yield bonds with issue would slow compared to previous years. there is still tremendous appetite for your paper. sonali: fascinating that you say that about the supply. our brother, as you know i have been obsessed with this story, about the way treasury issuance has been brought about. concern about activist treasury issuance. do you think there could be issues down the road when it comes to treasury issuance? where could they come from? ira: i am not one that says the treasury is active issuance and all that. because the treasury department's job is to minimize

debt payments for the taxpayer in which congress passes massive budget deficits all the time. i think the risk is as interest rates come down, there will be more term issuance. the treasury department, as interest rates fall more, they will increased the amount of 30 year, 10 year, 20 year debt being issued. they will issue less t-bills. keep in mind, there is massive amounts of money at the front end of the curve right now. there's no reason for the treasury department to move away from issuing bills. lastly, we saw more record in flows into money market mutual funds. all they can buy today because of regulations is t-bills. there is tons of demand for t-bills right now. eventually, that will change. as interest rates go down people will shift out of money funds and go to other asset classes. probably that is when the treasury department will have to

start shifting from people's to long-term debt. sonali: if you think the treasury were to go further out on the curve, given what you are saying about duration, returns you are getting their relative to elsewhere. do you think it should succeed? magaret: i think they should issue more long-duration paper for a number of reasons. the average maturity of treasury debt is too short if we had a huge move in rates. i think there is an appetite, again, every basis point counts for a fixed income investor. i think if they issued long you would see that absorbed by long-duration buyers. sonali: separately getting back to the macro, of course there are trading dynamics under the market that are very complicated at this juncture. next week is massive. investors have said not only are they watching very closely the jobs report, some have told us

they are even more worried about jolts. what are you looking for? margaret: it's a good point. the fed has two mandates, full employment and inflation. we have seen multiple signs employment is weakening and job growth is weakening and inflation has been stubbornly above target. on one hand they would like to make minimal cuts in rates. once again too little too late on rate cuts. you have seen the employment picture giving way and they are really betwixt and between. historically they favor being too cautious, waiting for the data. we will probably see more slowdown in the economy and jobs number. inflation will continue to be sticky probably and not come down the way they want to see. sonali: ira, this market has been extraordinarily jittery towards jobs. you looked at the last jobs report. the two words that were most

pervasive work growth scare. looking at next week's jobs report how much risk is there that the 50 basis point rate cut call comes back on the table? ira: a high risk. there is debate in the market now about is it the non-foreign payroll number, the wage number, or the household survey number that matters? markets will move massively on algorithms trading the headline on foreign payroll number. but the details matter. if you get a number well below consensus, 125, 100,000 on payrolls. then, the 50 basis point, i think we'll be back on the table and you will see that priced into the market for sure. sonali: looking at next week's numbers you see, perhaps, and elevated move ira was talking about, something driven by computers as well. do you participate in that market where we have seen volatility, yes, subside a bit, but still very present?

margaret: basically looking where rates are now you have to say that a ration for longer-term rates is down. the fed is lagging. the market has been telegraphing the economy needs lower rates. a 50 basis point cut would be appropriate. but, the fed likes to be more cautious and slow. i expect they will lean more towards 25 basis points even though it may suggest more weakness for employment numbers. sonali: what kind of risk does the election ad? this is the only fomc meeting before the november election and we have one soon after. if we have a new president, and there are worries again that inflationary policies could come into the economy, how do you invest long term? margaret: i think the trend for inflation is above or the fed would like it. 2.5%, three percent, something like that. i don't see it coming down.

the fed has themselves in a box. we are close to the election. historically the fed doesn't like to make moves right before the election in case it looks like they are influencing the outcome. the clock is ticking for the fed to act in the face of weaker numbers without coming right up to the election. it more or less implies that even after the election we may see lower growth in gdp say for the first quarter of next year. sonali: that is margaret patel of all spring and ira jersey of bloomberg intelligence. next, the option clock. u.s. credit issuance slows down to close august but september has more in store. this is really old on bloomberg. -- this is real yield on bloomberg. bloomberg. dea, and now becomes the future

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sonali: i'm sonali basak and this is bloomberg real yield's. time for the auction block where we saw a slowdown in u.s. credit issuance this week but not in europe. its primary markets saw total issuance in august past 100 billion euros, more than any previous august since at least 2014. one of the busiest weeks of 2024. in the u.s., treasuries we saw options for the 2, 5, and seven year, all saw that it was stocks and yields in more than year with the two-year having the lowest since 2022. a slow week for investment great sales but the days after labor day are usually one of the busiest of any year. a bloomberg survey seized companies selling about $125 billion in september. when it comes to high-grade credit: martin from schwab is employed. that is not worried. >> looking at investment-grade

corporate bonds from a credit risk standpoint we aren't that concern. we are concerned growth can slow but we aren't concerned a recession is on the horizon. we are seeing signs here and there but not in the next quarter or two. sonali: joining us is credit suisse when he sees her and invesco's matt burrell. i want to start with the riskier parts of the credit market. how much concern will you start seeing when we see the economy weakening one markets all your help shrug it off any worries? winnie: it's interesting because the market had a little blip of volatility. for that lower rate parts of the high-yield market, companies that have not been able to push out big near term maturities have been struggling with widening in triple c spreads and the distress market lagging,

counterintuitive given momentum that was so strong in those sectors last year and how economic data has been resilient and the rest of the market has been strong this year from a fixed income perspective. there will be follow-through from the unrated cohort if we see macro follow-through. sonali: matt, there was a rush of new issuance coming into the market earlier in the year and that's starting to taper. it seems like you have a window before the november election or any other potential risk events through the end of the year. how will supply and demand shakeout when it comes to new issuance and the period right after labor day? matt: all year long we have been expecting to slow a little bit and it just hasn't done that. i think it has been seven out of the last eight months have exceeded expectations for supply that month.

we are told, next month it won't be as bad and that hasn't been the case. probably $50 billion next week alone. j.p. morgan said they might have as many as 17 deals on tuesday. there's a lot in the pipeline. but what is amazing is demand has more than met it. post the japanese unwind trade, the volatility there, meta-came with a large deal and everybody else came after. we were seeing 20 plus two euros per day that week and yet dealers were still able to tighten spreads significantly versus the original talk. i think this proves demand is there. investors just want things to be a little cheaper and they will buy even more. sonali: winnie, at the end of the day where is the best risk/reward along the credit spectrum. winnie: right now we really like the high-yield double be market. the story for a lot of

high-yield double bees is very intact. we don't expect balance sheet erosion or the potential for a massive fall angel downgrade that weighs on double bees. it is a longer duration segment in the high-yield market that should be good in a fed cutting cycle. sonali: matt, do you agree that you can move further down the risk curve and to be happier with the return? matt: we feel happy about fundamentals. we don't like credit spread valuations. we like yield valuations. we think there still an upgraded way of coming out of doubleb and investment grade. a lot of buyers were interested in buying investment grade at 6%, missed their window and now they are saying the fed will have a fed but if things go wrong so they are stepping up with a double b high-yield. we are seeing demand from investors awaiting the all clear signal from the fed. with fundamental signals with

that we are still positive. we wish credit spreads were 400 on high-yield and 125 on investment grade but that is and how it will work. anytime you see volatility or backup we will look to buy it. sonali: it was interesting about an upgraded wave. would you agree especially given concerns about slowdown in growth? >> it's interesting. we think they're still momentum on the upgrade side, but it is smaller capital structures and then once we have already seen upgraded. there was an initial wave of post-covid upgrades where you saw ford migrate from high-yield to investment grade and there are a good list of issuers with smaller capital structures moving back into aig index over the next 12-24 months. it might be slower giving choppiness on the macro front. but we do feel pretty good about that potential.

sonali: matt, i will make you answer is a bond investor something equity markets have wondered a lot about. when a company -- comes to companies that are large caps, small, mid-cap companies, you have seen people flirt with the russell throughout august and then pull back. a lot of the worries come down to leverage. do you believe the worries are real? matt: a couple things around the smaller companies. they are typically in the bank loan market, the high-yield market, some in private credit. private credit access is there. set the darling that everybody loves now. i don't see that pulling away. i think it will help the space. bank loans it should benefit from the fed cutting. the company's borrowing, a lot of small-cap companies through the bank loan market, their borrowing costs will get cheaper. we want them to continue paying down debt. if the fed has to cut that's not as good as the fed getting to

cut because they are getting the soft landing. there is a balance there. with traditional high-yield it's a little bigger cap. around 50% of the high-yield market. that generally won't be your smallest cap companies but overall, i think the biggest winner there will be from the bank loan market when the fed starts to cut. if you take 200 basis points are fields and a smaller cap borrowing through the bank loan market i think that can be good for overall wellness. sonali: at the end of the day how many rate cuts does the market need to ease the pressure of small and medium firms? winnie: great question. one or two 25 basis point cuts won't do it. instead, we probably need to get back to the 3%, 3.5% area that i think a lot of people are thinking more about as the neutral range implying a good 200 rate cuts that need to come

through the market before you see that momentum in small cap. the market will price that in well ahead of where the fed actually is. once the fed generally starts cutting, it is very rare they reverse course and start to hike again. sonali: a busy week ahead and we will talk about that next ahead. the final spread. the week ahead has a highly anticipated u.s. jobs report and more jobs data through droughts. -- jolts. we talk about that next. this is real yield on bloomberg. this is real yield on bloomberg.

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visit sandals.com or call 1-800-sandals l.a. pop i'm sonali basak. this is bloomberg real yield. time for the final spread. monday is labor day with u.s. markets closed. get rest. i week of huge economic data.

durable goods, pmi's, and various jobs data including the big payrolls report friday. my final thought. a look that payrolls estimates. there is a big expectation this jobs market is perhaps weakening. the prior report the unemployment rate was 4.3 percent. the estimate is 4.2%. participation recently increased to sending the unemployment rate higher. non-foreign payrolls estimated at 160 5000, the prior being one hundred 14,000. hourly earnings expected .3% higher year-over-year. three point 7%. wages has been a big part of the inflationary story. it from new york that does it for us. same time, same place next week. next week is in jobs data. a big show ahead. this was bloomberg real yield. this is bloomberg.

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leaffilter is a permanent gutter solution, so you never have to worry about costly damage from clogged gutters again. call us today and schedule your free inspection. to schedule your free inspection, call 833.leaf.filter today or visit leaffilter.com. sonali: welcome to bloomberg markets. i'm sonali basak. the s&p 500 is slightly higher after the latest economic data shows the u.s. economy holding up while leaving room for the fed to cut rates. the s&p is higher but down on the week. interestingly, now we are losing a little bit of the bed. we are having most sectors in the s&p lower on the day. not too surpri