jonathan: from new york city for our audience worldwide, i am jonathan ferro. bloomberg "real yield" start right now. ♪ coming up, u.s. growth delivering an upside surprise ahead of a much anticipated fed decision. present draghi making the investors wait until september. the ecb teeing up extra stimulus, fueling inflows into every major bond sector. from high yield to emerging-market. we begin with the big issue. something in the data for both the hawks and the doves. >> the u.s. economy is doing very well. >> the u.s. consumer really

dominates in terms of the overall gdp number. >> headline gdp growth is in line with what everyone expect it. >> wage growth, income growth has been relatively strong. >> government spending data, quite strong. >> there is some upside risk to the economy. >> the consumer side of things and the labor market side of things, but the manufacturing is under pressure. >> pretty significant dislocation between the industrial economy and the consumer economy. >> it is the composition of the data here that is worrying the fed. >> potential pockets of weakness. >> we do see a further deceleration in the u.s. economy going forward. >> ultimately, we are moving back towards a lousy trend. jonathan: joining me around the table here to discuss in new york marilyn watson, bob michele , of jpmorgan, and george bory. of wells fargo. maryland, let's again with you. you know how this works. you pick your bias, look at your data, and confirm the price. there is something in this for everyone. marilyn: that's right. the data was as expected, shows an economy that is still very, very healthy and is decelerating

to trend. it is above the fed's own expectations of long-term growth. i think you saw obviously very healthy consumption, so i think it is pretty good data, and looking at the fed next week, it will be hard to see how the fed will cut by 50 next week. jonathan: we have got to work out if it means anything to the fed at all. bob, your take. bob: if i want to nitpick, i could say the revisions brought gdp sub 3%, 2.5% at the end of the fourth quarter. you average the quarters, it is 2.9%. there is some slowdown there from what was expected. but marilyn is right, a solid number. the fed could not care less. that is not their issue. they are concerned about inflation expectations. jonathan: george. george: if you look forward, the inflation expectations, they look like they have bottomed and picked up. relatively healthy numbers, the consumer looking pretty good. many of the fed's targets seem to be trending in the right direction. as my colleagues have said, it

is difficult to justify an aggressive move, but we will see what, you know how they comment , around it. that is the important thing. jonathan: gdp today comes in at 2.1% on the money in terms of the forecast from the federal reserve itself for 2019. for gdp growth. you said inflation looks like it might start to pick up. how so? george: well if you look core , cpi looked like it kind of bottomed out. it is starting to trend higher. the consumer is in pretty good shape, earnings are picking up a little bit. there has been some backward provisioning to the inflationary data. -- revisiting to the inflationary data. the broad-based trend looks like it is showing some form of a bottom. it is the downward trajectory that looks like it has stopped. whether it is a sharp rebound, that is hard to say. jonathan: do you agree with that, marilyn? marilyn: yeah, i do. i think inflation may start to trend up from here. at 1.4%.at core pce is i think we will see a trend up from here. we have seen it trough. that is pretty much as the fed

has been saying. jonathan: can we get to bob michele's they call? i mean, we had to get to it sooner or later. we are heading toward 0% on the u.s. 10-year yield over the next two years. bob, just walk us through it, then we can have a conversation on it. bob: we are speeding there without anything happening. if you think about the high-end yield, it was the first week in november, 3.25%. a few weeks ago we hit 3.93. 40% of the yield on the 10 year disappeared without anything happening. if you look at the fed may begin to raise rates, may end the balance sheet runoff, they have not done those things yet. you look at money market funds, they are at record highs. you look at other asset classes, they have appreciated. where is the money coming from? well, it is coming in from overseas, because guess what most of those markets are in , negative yield. they are hunting around for yield. they see a global economy which is slowing down.

i disagree with the expectations on inflation. the fed is right, they should be wary. remember their old reaction function when doing qe was anytime the five-year, five-year breakeven inflation rate dropped below 2%, you got a round qe or you got operation interest. we are below 1.80. they have failed to create inflation expectations. their concern, they are becoming unanchored. i see them cutting rates and i see money pouring into the market. jonathan: your call essentially though is they are going to do all of these things and it will not work. if you believe that it will work, shouldn't we also simultaneously believe that the yields on 10, 30 yields should be going higher, not lower? bob: in the prologue, somebody said, well, growth will slow down to below trend. we are above trend. how can we be operating above trend from a gdp perspective and have low unemployment the equity , markets are high, and we cannot get inflation to 2%?

that is telling you that perhaps trend is a lot higher than people are telling us it is. and i think we are actually going down from there. you are right. i think the fed and the other central banks will do what they can, and they should. they should try to bring rates down as rapidly and as low as they can and create inflation expectations that steepen the curve and then shake people like us out of the long end. will it work? i don't know. i am skeptical. because if central-bank policy in and of itself were enough, we would never have recessions, but it buys some time for something to break on the fiscal side or on the political side with trade. jonathan: what do you think, george? george: i think in the u.s., the fiscal side has broken. if you look the u.s. is spending , roughly -- the deficit is roughly 5% of gdp. the government is spending pretty aggressively. it is a stark contrast to what's happening in europe. i think what bob is talking about, and i think one of the biggest challenges is the difference between the fundamentals and the technicals.

the fundamentals from our opinion would tell you that we are kind of close to trend, inflation is starting to bottom, the corporate sector is healthy. the consumer is actually doing ok. all those things are good, strong fundamental positives. it is sort of the negative yields externally and the excess savings that continue to flood into the u.s. that will put downward pressure on u.s. yields overall, but the drive to go dramatically lower would have to come from a big compression in spread and growth differentials between the u.s. and the rest of the world. and that is where we see some limitation. and that is where i think, why i think the u.s. 10-year has had a hard time breaking through 2%. there is roughly a -- let's call it a 170-basis point difference between the u.s. and germany, and it has kind of held there. it's been very consistent with the growth pattern between the two regions. jonathan: bob. bob: we will see what happens when the fed begins to cut rates. and suddenly, that near record

amount of money, absent the financial crisis, starts to come out of money market funds because investors want to lock up some yield. and then when central banks began to expand balance sheets again, we know what that does to bond prices. it pushes them up. if there is any de-risking because the trade wars actually lead to a much higher probability of recession, and that becomes a present danger, we will see where that de-risking goes. it will go into the bond market. i think there is nothing but the downside to yields. jonathan: let's explore one of those concepts you just mentioned the amount of money in , money market funds right now, and when the fed begins to cut interest rates, the money needs a home, and the money is going out along the curve, going into the 10-year and maybe even longer in treasuries. marilyn, your thoughts? marilyn: we see a structural shift in the u.s. economy. not only this shift we saw in gdp today, manufacturing for services, tech earnings, that has all, i think, been playing up for some time. but also quite right, we are

seeing foreign investors buying u.s. assets because they want the yield. we are also seeing in terms of demographics you also saw a , decent savings number in the gdp numbers today. you do see this aging population, and they do need to essentially save more if they want to have the same income that they would have had 20 10, years ago. rates are so much lower now. they need to be saving more to get income they want for their retirement. jonathan: does this put a ceiling on how steep these curves, how wide that spread can be from the front end to the long end? the kind of dynamics you are thinking about, bob? bob: if the central banks are as patient in cutting rates as the fed was in raising them, without question. then we and probably a lot of investors are just going to sit on the long end of the curve, and it will be as flat as a pancake. they need to do something that is shock and awe. i think we heard that from john williams last week. they are prepared to do that. they need to get in there and create enough stimulus that

inflation expectations do go up a lot. jonathan: in the end i am not sure what we heard from john williams last week after the walk back. everyone sticking with us. coming up on the program, the auction block. the richest high-grade bond deal of 2019 and investors could not enough. this is bloomberg "real yield." ♪

jonathan: i'm jonathan ferro, this is bloomberg "real yield." i would like to go to the auction block now, beginning right here in the united states in the treasury market where investors shied away from the seven-year treasury auction. $32 billion offering resulted in the$32 billion offering resulted in the lowest bid to cover ratio

february 2016. pepsico delivered the richest high-grade bond yield in 2019. investors could not get enough with interest growing to the $32 billion deal size. in europe, expectations for new ecb stimulus fueling investor appetite for high-yield, interim maybe upsizing its seven-year deal to 8 million euros, priced to yield, 3.5%. let's stick in the eurozone where ecb president mayor draghi painted a gloomy outlook for the european economy. draghi: generally speaking, you have resilience in the service sector. at the same time, this outlook is getting worse and worse. and it's getting worse and worse in manufacturing especially, and it is getting worse and worse in those countries where manufacturing is very important. but because of value chains, this propagates all over the eurozone. jonathan: still with us are marilyn watson, bob michele, george bory.

i want to pick up on those lines from ecb president mario draghi and bring you a quote from the president over in germany earlier this week, saying the following. "what is worrying is the weakness in manufacturing continues but it is now spreading, so we see numbers worsening in the services sector. it is certainly not getting better, and it is starting to affect the labor market. this is the big fear here in the united states. believing that manufacturing bleeding into services and we have some people in germany now, some officials, essentially communicating it has already started in europe. how much of a concern is that? marilyn: the data that we saw this week from germany was weak in terms of business sentiment, in terms of the outlook for the rest of the year, particularly manufacturing. it was very weak, and it is a big concern. but we are seeing a very different dynamic in the eurozone to what we're seeing in the u.s. so you are not seeing the capex, investment, you certainly don't have the fiscal stimulus in

europe that you have here. one of the things we've been saying very recently is you need to have some form of stimulus. because essentially, lenders are not paid to lend right now. right? you are getting zero or even negative rates, so there is no incentive for you to lend. if you want to get income, you have to go sort of into equities or private equity. there needs to be some mechanism to really get this money flowing again, get capex, investment in technology, start to regenerate and then build in terms of innovation in the eurozone. jonathan: not sure a low rate will necessarily help that. for the credit investor, it is difficult to sit here and say park the fundamentals and focus on the supply story, and the fact that they'll be eating up a lot of the supply, limited supply already in the european fixed income market, and just keep buying. how hard is that to swallow? george: i mean, we are going to see the same playbook that we

saw a few years ago and just a few months ago, the ecb will once again crowd out fixed income investors. you just look at sort of year to date, when we have seen in eurozone, where yields started -- yields are almost at 100 basis points lower. if you started with an asset class yielding 1.75%, do you think you would have the 7% return by the end of the year? the answer is no, but that is precisely where we sit today looking at european fixed credit income. i think this incremental reach for yield, this yield enhancement, a japanese phenomena, it is a european phenomena, it is certainly a u.s. phenomenon, will persist. while it may not be a great time to be a lender, it's a great time to be a borrower. we continue to see that ongoing borrowing trend. it is much more tepid in the eurozone than it is here in the u.s., but big, healthy -- large corporations and entities, governments, you know, are very

incentivized to basically kind of continue to borrow, continue to lever up. and that trend does not look like it is about to change given the existing backdrop. jonathan: bob, you have been constructive. you have talked to me multiple times about being a seller. less constructive in the united states. what about europe? with these technicals, with the idea the ecb is setting up another round of bond buying, what are your thoughts? bob: well i think you have to , run the technicals for a while. when i listen to draghi, and the market started to rally, i thought, darn, we missed it. maybe he will mingle at the press conference, and he did. he kind of bobbled it, we had a backup, and that was our opportunity to get in. we used that little backup to get into the market. absolutely. so i think yields are going a lot lower. i think he has set the stage to bring yields lower. i think everyone in europe is

scrambling to find positive yield wherever they can get it. i think he was brilliant, by the way, because he laid out exactly what everyone is observing, things are slowing down. there is absolutely no inflation impulse. and you know what, fed, you started all this. you finish it. you are the guys that raised rates and started the balance sheet run-up. we have not. we have not raised rates at all, we have been run down our balance sheet. and by the way, trade problems did not actually start in the eurozone, so you guys move first, then we are after you. jonathan: so anyone that may have missed the minolet reference, a goalkeeper made a very big fumble in the match area that reference cleared up for you in case you are not following the football. europeanurope and on fixed income, potentially moving toward a much lower interest rate at the ecb than we would

have thought of a year ago. if you look at the s&p, it came down to -75 basis points. they have tiering. if you look at the swiss curve, the swiss curve, it is trading more negative at the front end than the deposit rate over at the smb. do you see a dynamic developing where the whole yield curve in germany just chases the depot rate lower? what i mean by that, touching on a conversation we had earlier in the program lower rates at the , ecb, more stimulus does not regenerate inflation expectations. it just pulls yield curve down all across the eurozone. is that what you see happening? bob: we see some of that happening. i think it is all about messaging as well. it is the ecb telling market participants they are serious. they are going to do whatever it takes, and this time they will be more thoughtful. it will not be as punitive to banks. if banks want to leave money on deposit with them, they will cap them out at zero.

they will not take them negative area that does leave them the capacity to bring the front and down. will it work? i don't know what i agree with george, you probably need something on the fiscal side. it seems like the theory of having fiscal austerity, which was so popular eight, nine years ago, does not work. you cannot shrink your way to growth. and so now they need to find the sovereign that has both the ability and the courage to deficit spend. and that is going to be difficult to come by. the ecb is the only game in town in europe. jonathan: bob michele, sticking with us alongside marilyn watson, and george bory. a look at the treasury market. remarkably stable by the end of the week. yields up by a couple of basis points on the 10 year, 2.07%. at the front end, five basis points to 1.86. still ahead on the program, the final spread. the week ahead featuring a rate decision from the federal reserve. the main event with chairman powell in the spotlight. this is bloomberg "real yield." ♪

jonathan: i'm jonathan ferro. this is bloomberg "real yield." it is time for the final spread. coming up over the next week, what a week we have got coming up for you. u.s. officials heading to shanghai for trade talks with their chinese counterparts. plus a central bank bonanza. the boj on tuesday, the fed delivering an interest rate decision of its own on wednesday. thursday, mark carney at the bank of england. plus we get u.s. isn manufacturing data. then payroll fridays in the united states. marilyn watson is still with me, bob michele, and george bory. the boj not even a part of the conversation going into next week. marilyn should it be? ,marilyn: it has been on the sidelines for quite some time. expectations were high, maybe a little bit too high in terms of what the ecb may do. a complete change we will see from the fed when they do cut

rates. the bank of japan still has this enormous problem. change theirybe forward guidance. they could do more in terms of qe or something. i think it is very hard for them to do anything. we are perhaps hoping for more from the ecb, they didn't come through. so i think the bank of japan has been soing and has loose for so long, it fades into the background because it is accepted. we expect not too much next week. certainly, at some stage, they probably will have to do more. jonathan: your thoughts going into next week, bob? bob: i think the fed will do 25 basis points. i don't think that powell, clara do and williams -- richard clarida and williams have the vote to do 50. i think they are uber dovish, that they send the message they are serious and that they intend to create -- jonathan: if it were up to those three, they would go 50? bob: absolutely. i think they are, they are

mostly market practitioners. they have been in our seat. they understand that once disinflationary expectations indebted, they are very hard to root out of the market. i think actually the markets are in a very perilous position with that. jonathan: final word here, george. george: i think the fed has a difficult time to meet or beat market expectations. if draghi could not do it this week with a relatively generous offering of dovishness, the fed will be challenged to do so. i think it is going to reinforce the reach for yield strategy. and i think the next sort of point that people will start to focus on once we get through next week's data is actually september. it is sort of safe carry, save -- safe reach for yield, set your portfolio by the end of the week. the next point of time is in mid-september. jonathan: let's get to the rapidfire round. you know how this works. quick questions, quick answers. first question, the ecb rate cut in september that most expect to come, 10 basis points, 15, or more? 10, 15 or more?

bob? bob: start with 10. marilyn: 10. george: 10. jonathan: the low for the treasuries this year. i like to play this game. have we seen the low for the year? marilyn: no. bob: no. george: yes. move,an: the fed's next 50, 25 or nothing? >> 25. >> 25. >> 25. jonathan: great to catch up with you. from new york city, that does it for us. 1:00 p.m. new york time, 6:00 in london. this was bloomberg "real yield." this is bloomberg tv. ♪

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