♪ jonathan: i'm jonathan ferro, this is bloomberg "real yield." coming up, unemployment has a 17 year low, the wage growth stalls, disappointing inflation bowls. jay powell named the next fed chairman. and the republican tax bill could add $1.3 trillion to the tax deficit. unemployment grinding lower wage growth stalling out. >> being a bit softer, though i think there's a lot of noise in

the number. the economy is in very good safe. >> we have a robust economy with growth of 3% plus at least for the last two quarters, despite these rather disappointing unemployment numbers. i think we are past the crisis. >> getting a lot of distortions out there, but the underlying economy is strong. what's worrisome is the decline in unemployment happened for the wrong reasons. we saw pretty big drop in participation rates. this could be noise related to the hurricane. >> the job number is noisy. down to 4.1% unemployment. when you look at the u six number, down 1.5% for the year, we are bringing a lot of people back into the workforce. >> wages are accelerating. we don't think wages are going to move beyond levels that economy tremendously high because of automation technology. but it is real wage acceleration.

so it just allows them -- we think they're going to go in december, two to three times next year, probably three times. jonathan: joining me is matt hornbach and priya misra and nick gartside. is there any signal in this jobs report at all? ms. misra: this whole pickup and wage inflation we saw last time, there was a handshake. even though the labor market is tightening, we are not seeing wage inflation. there's pressure on the fed to keep hiking. that is the signal it's giving the market that one or two more hikes. and then the fed have to see whether they have to keep going. jonathan: several elements have to fold into the payroll story. chair powell, how is he likely look at these numbers?

are they one or two hikes away from saying willing to step back here? mr. gartside: when you look at jay powell, he is a realist. he's from the same mold as janet yellen. these labels of doves and hawks are not that helpful, what they are is realists. they look at the data. when you look at the data, in terms of economic growth, it is pretty robust. when you look at wages come a little bit disappointing. but there is real wage growth, so that was the fed absolutely in play for december. probably three hikes next year. mr. hornbach: i tend to agree with him. next year will be an interesting one with the fed balance sheet. starting to normalize more quickly. with respect to the 2.4% or 2.3% wage growth we are seeing, that's not out of the realm of what you would expect. productivity growth trending around 1% and 1.5% inflation.

that's going to get the wage growth somewhere right where we are. jonathan: growth rich and inflation poor seems to have been the story out of the last couple of years. any reason that's going to change soon? ms. misra: i don't think so. that 2% target of the fed has, that's very elusive. you have technology that keeps that low. i would slightly disagree, the issue with powell is think he's talked about short-term and long-term. i think the fed is going to see whether we can merge. if that doesn't happen, it may be unfortunate unless we get tax cuts. jonathan: if you look at where the federal reserve sees the long-term rate, and you plot that against the 30 year treasury yields, it's kind of putting a list on where 30 year treasury yields go.

we can bring up the chart. there it is, matt. is that something that just ask, stubbornly low, 30 year yields in the long-term rate over the federal reserve the keeps coming lower? mr. gartside: absolutely. as long as the fed raises interest rates when we are 50 to 70 basis points below the inflation target, the yield curve will keep flattening. no need for an investor to be worried about the inflation risk when you have the central bank that is pushing tighter policy in the face of low inflation. jonathan: do you see the same thing, flat from the front end, given what's happening with the

inflation story? mr. gartside: when you look at the curve, it will continue to flatten for exactly the reasons that matt outlines. when you look at inflation, it's tricky to see that much significantly higher inflation long-term. what i would say is watch the dollar. you will see the impact of depreciation of the dollar. although the u.s. is a fairly closed economy, that's been a fairly decent move this year. all things being equal, that should add a little bit of inflation as we get into year-end. jonathan: i wonder how much it moves the dial. and another question i would ask is, for how long the federal reserve can go it alone? you take the ecb guidance so far, qe autopilots are most of next year, maybe through the whole of 2018, you going to 19 with a deposit rate of -40 basis points and the federal reserve approaching 2.5%. how long can the fed go it alone? ms. misra: a little bit more, but when you are at zero real rate, -- i agree with everyone. it makes sense from the inflation standpoint and the global rate standpoint. if you have negative rates, japan is not easing or not producing their level of accommodation, if they are not hiking until mid to late 2019.

jonathan: we were talking about tax plan that added to the deficit and reduce the inflation story would boost treasury yields. i don't see it. why don't i see it? they are saying $1.5 trillion added to the deficit and i don't see it in treasuries. why not? mr. hornbach: markets, especially investors who are thinking about the fed next year are not able to extrapolate the deficit increase we are expecting. which according to the gct, the scoring on this planet was released by the house would add about $170 billion to the deficit in calendar year 2018. that's not going to be that much of a pickup and treasury issuance. you look in 2019, you have a $220 billion increase in the deficit, 2020, another $200 billion plus. but again, what's happening in 2019 and 2020, that's way too far out of the calendar for the market to trade off of right now. jonathan: nick, is that

something you believe as well? the idea that yes treasuries are lower, but there may be more coming to the market? yes we will add to the deficit? yes, the federal reserve will be pulling back as well, but it's too soon to price that in? mr. gartside: it's fairly too soon, but there's also a global phenomenon, which is austerity is dead and other countries are likely to turn the fiscal taps on. all things being equal, when you look at markets, it could will be they are still underestimating the potential for central-bank activity. not just in the u.s., the back to earlier comments, in places like europe. there's a huge consensus that the ecb will never move rates again. the reality is when you look at europe, you have superstrong growth in europe. the risk is the ecb actually pulls forward the possibility of rate hikes. jonathan: nick, what is the bank of england doing hiking this week? mr. gartside: they did the right

thing in terms of hiking rates. when you look back, the current post the referendum was clearly a policy mistake and the when you look back, the current suggestion then was the u.k. would fall into recession. it absolutely has not fallen into recession. they've done exactly the right thing in raising interest rates. when you look forward, the risk again is that the banks are a lot more hawkish than anybody expects. jonathan: across the bloomberg, what's the probability of them hiking in q1 next year? mr. gartside: over 50%. the data to watch is in the u.k., we have a budget. the autumn statement is in the next few weeks and the lesson from the election in the u.k. was that we are not tolerating austerity anymore. there will be a political reaction to that, which is to increase the deficit. you do a fiscal loosening, that's what gives the bank of england the excuse to hike rates in the third quarter.

jonathan: matthew hornbach, priya misra, and nick gartside. argentina capitalizing on investor optimism towards its reform minded governments. seems anyone can come to market at the moment. from new york, this is bloomberg "real yield." ♪

♪ jonathan: from new york, i'm jonathan ferro. this is bloomberg "real yield." i want to head the auction block now where we look at a comeback in argentina, the country sold $3.2 billion in international bonds just after argentina this summer sold $2.75 billion of 100 year debt. october was a record month for high-yield bonds.

corporate seven issued the 0 -- didi equivalent of 8.9 billion euros, breaking the previous record. a billion euro auction was met with the lowest ratio since january 2016 on the ratio for 30 years with the lowest since shall 2015. still with me is matthew hornbach, nick gartside, and priya misra. we talked about the ecb pulling back and we talked about the prospect of politics in europe reassembling a much more negative way and yet i see italy trading tighter to germany as the weeks progressed. i scratch my head wondering why. why is italy trading tighter to germany, despite the kind of things everyone is talking about? political risk around the corner and the ecb around the back.

mr. gartside: the one thing investors don't talk about economic risk and a really critical thing for italy was the upgrade. it was the first time in 22 years of the s&p had upgraded italy. and therein lies the tail. when you look at european aggregate, is probably the international economic success story now. and even a country like italy when you look at european that's been afflicted by low growth has a much stronger growth trajectory now. that's what investors are focusing on, that means the spread to germany can contract another 25 not 30 basis points. jonathan: what are your thoughts on what's happening with italian spreads? ms. misra: the ecb went so slow, they recalibrated, i think they are still not tapering, which implies they are not hiking at all 19. i worry about the italian election, some point the market is going to say political risk is hard to price in and maybe i want to step away from that. jonathan: matt, i see you nodding your head, you agree with that?

mr. hornbach: on the front and basis markets, and you look at the demand that coming from investors in japan, it actually paid to go into euros these days. from their perspective, rather than pay 200 basis points of spreads to go into a treasury, you get paid to go by europe. so, of course, absolutely agree. this is a carry trade, there's a lot of money out there. jonathan: i never thought hear you say people have gone long over a credit rating upgraded. that was having we did 10 years ago, not with developed market countries like italy. what's going on? mr. gartside: when you look at a country like italy, you have to treat it like a credit, don't you? it doesn't have its own central banks. the other lesson is rating agencies typically lag. it's a delayed reaction to much stronger growth when you look at italy. jonathan: look at the situation

in europe, nick. it's so difficult to push for your positive view of europe. if you push it through the fx market, with the ecb still hanging in with -40 basis point rate, if you push it through equities, it just refuses to expand. how do you push that through? that positive view on europe through the fixed income markets to really make money? mr. gartside: when you look at periphery, portugal, italy, spain, likely to contract relative to germany. and then european high-yield. some say that is the most misnamed fixed income sector, giving the yield a massive 2%, but the reality is when you look at fundamentals in europe, there are corporations were very robust and that spread and that yield is likely to contract lower and lower. what we saw in italy in terms of the upgrade you also see on the

corporate side. many more upgrades and downgrades. jonathan: nick, something we have seen in ones. the performance is mentally phenomenal. is there any more upside in that trade, as far as you're concerned? mr. gartside: a lot more upside. the eu coming of a much better economic picture. europe, probably for the second year running will outgrow the u.s. this year when you look at banks, they are still deleveraging, they are still adding capital. when you look a lot a lot of 81 bonds, the pain treated as those yields the lower from here, not higher. jonathan: as i listen to this, the mood music around europe has changed dramatically. do you see the kind of reforms, the changes nick is outlining to justify the price action this year? ms. misra: i see extremely accommodative central banks globally, which is creating the demand for yields. one other point to mix point, if

that does happen, is a lot of money is invested in european fixed income that will potentially get repatriated back to the u.s. i wonder if you go dollar funding squeeze outside the u.s. that could affect european credit. i would just lag that. jonathan: let's talk about that, quickly. there's a lot of cash overseas and in some of those countries that invested in other credit or just fixed income or generally across europe. do you see those companies get into a to those positions as they bring that money home? do you see it happening in impact on fixed income outside of the united states? mr. gartside: i mean, it shouldn't. in aggregate, we saw a massive buying from central banks. although the ecb taper starts next year, there will still be buying 30 billion euros worth. you have a similar not for the bank of japan and in the european context, the tapering is likely to happen in government.

so you still have a huge fire of -- huge buyer of corporate bonds in europe represented by the ecb. jonathan: is the pain trade still short bonds? mr. hornbach: yields are going to continue to create lower overtime. i don't a lot of weight into the idea that the 30 year full market and treasuries is over. and we for that quite a bit. we have heard it on shows such as yours. jonathan: thank you. mr. hornbach: we just don't see that happening. jonathan: matt hornbach sticking back away from that sticking with me. nick gartside and priya misra, great have you with us. bonds, choose contents, 30's, for basis points moves higher on a two-year and attend basis point move lower on a 30 year. that's a flatter yield curve, a much flatter yield curve over the week so far. big moves still ahead, the final

spread, the week ahead featuring president donald trump's to asia and much more as well. from new york, this is bloomberg's "real yield." ♪

♪ jonathan: from new york city, i'm jonathan ferro. this is bloomberg "real yield." time for the final spread. the president of united states, donald trump, makes his first official trip to asia, meeting with various government leaders, including xi jinping. and we hear from mario draghi. global ceos as well as bloomberg's you ahead summit s -- year ahead summit. matt hornbach for morgan stanley bloomberg's you ahead summit s still with us and priya misra in new york as well. and nick gartside joins us out of london. i was surprised by how much the yield curve has flattened this

week. priya, we talked about it before we went to commercial. becoming a tremendous amount on 230 and a lot of people are saying it's a crowded trade. your thought on where they are going over the next couple of months. ms. misra: i think the fed is telling you they still plan to continue to raise rates while the rest of the world for global bond rates sustained low. that's keeping the long and relatively anchored. i think you can flatten. the one additional piece of information we got from treasury this week was they are still thinking about the long ends, but they are not that excited. as a taxpayer, it's not the right thing to issue in the back end. i think if all the issuance is going to come in the front end, i don't think it's a big statement the front end faces issuance. mr. hornbach: what the treasury told us this week really change the dynamic around tax reform. over the past month or so, the yield curve steepened on increased optimism about tax reform. but that was because people

thought they were going to have to finance it with tens and 30's and a 50 year. treasury told us this week that it's unlikely to be the case. ultimately now, optimism over tax reform as that built into the marketplace is more of a flattener, not a steepener. jonathan: beautiful by treasury we didn't think there was much demand for longer-term maturities. i could pick out a whole list of options we've had this year that signal terrific demand for duration. where do think we are getting at with that? mr. gartside: when you look in the european context, we have european countries that a hundred years ago didn't exist now issuing 100 year bonds. in europe and the u.k., there's this appetite for longer dated bonds. and in this sense, the longer the better. jonathan: priya, was it about demand that people did want to buy it, or was it something

else? ms. misra: i think it is demand. you don't have pension regulations like they do in europe or canada. there's no need for a pension fund here to be extending out duration. if they were to start issuing, and for treasury, it's not going to be a one-off, it's every quarter we would have to deal with a new 50 year. with vol, that complexity is not valued. maybe volatility picks up, but i think it's a demand issue right now. jonathan: we wrap up the program and the week with a rapidfire question round. short answers, if possible. powell plus a tax plan equals a flatter or steeper yield curve through 2018? mr. hornbach: flatter. ms. misra: flatter. mr. gartside: flatter. jonathan: treasuries range bound or 3%? mr. hornbach: range bound. ms. misra: range bound. mr. gartside: range bound. jonathan: is carney still

unreliable boyfriend. mr. hornbach: no comments. ms. misra: i think not. mr. gartside: he is an unreliable boyfriend, he hikes more than is expected. jonathan: great to have you with me. matt hornback, priya misra, and nick gartside. thank you for your time. from new york, we will see you next friday at 12:30 in new york, 5:30 in london. this has been bloomberg "real yield." ♪

♪ announcer: the thrill of living well is in the pursuit. the pursuit of the rarest experiences. the pursuit of the finest products. the pursuit of quality in everything you do. and in all of these pursuits, you need the best intelligence to make the best decisions. >> we know that she sells for a lot, but what makes her important? >> it isn't easy. it's difficult work. announcer: welcome to "bloomberg pursuits," where you find information to help you follow tot helps you