jonathan: from new york city for our audience worldwide, i am jonathan ferro. bloomberg "real yield" starts 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 of 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 dominates in terms of the overall gdp

number. >> headline gdp growth is in line with what everyone expected. >> government spending data, quite strong. >> there is some upside risks to the economy. >> the consumer and the labor market side of things is looking good but manufacturing is under pressure. >> there is clearly a pretty significant dislocation between the industrial economy and consumer economy. >> it is the composition of the data that is worrying the fed. >> there are pockets of weakness. >> we do see a further deceleration in the u.s. economy going forward. >> ultimately, we are moving back toward a lousy trend. jonathan: joining me around the table to discuss is marilyn watson, bob michele of jpmorgan, and george bory. marilyn, 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 healthy, decelerating to trend. it is above the fed's own expectations of long-term growth. you saw very healthy personal 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 to work at it means anything to the fed. bob: if i want to nitpick, i could say the revisions brought gdp in 2018 sub 3%, 2.5 at the end of the fourth quarter. 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. george: if you look for the inflation expectations, they look like they have bottomed and picking up. we take away from it that it was relatively healthy numbers, the consumer looking pretty good. many of the fed's targets are trending in the right direction. as my colleagues have said, it

is difficult to justify an aggressive move, but we will see how they comment around it. jonathan: gdp today comes in at 2.1%, on the money in terms of the forecast from the federal reserve itself for 2019. you said inflation looks like it might start to pick up. how so? george: core cpi looks like it will bottom up, starting to trend higher. the consumer is in pretty good shape, earnings are picking up a little bit. there has been some backward revisioning to the 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: i think inflation may start to trend up from here. core pce at 1.4%. i think we will see a trend up from here. that is pretty much as the fed has been saying. jonathan: can we get to bob michele's big call? we have to go to it sooner or later.

we are heading toward 0% on the u.s. 10-year yield over the next two years. 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 set 1.93. 40% of the yield on the 10 year disappeared without anything happening. if you look at the fed may begin to raise rates, may and the balance sheet runoff, they have not done those things yet. money market funds are in record highs. you look at other asset classes, they have appreciated. where is the money coming from? it is coming in from overseas because 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. their old reaction function when doing qe was anytime the five-year, five year breakeven inflation rate dropped below 2%, you got a rounded qe or operation interest. we are below 180, so they have failed to create inflation expectations. they are concerned, they are becoming unanchored. i see them cutting rates and money pouring into the market. jonathan: your call is they will do all of these things and it will not work. if you believe that it will work, shouldn't we also believe that the yields on 10, 30 yields should be going higher, not lower? bob: in the prologue, somebody said growth would slow down to trend or above trend. how could we operating above gdp and have low unemployment, the equity markets are high, and we cannot get inflation to 2%? that is telling you perhaps trend is a lot higher than people are telling us it is.

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 low as they can and create inflation expectations that steepen the curve and shake people like us out of the long end. will it work? i am skeptical. if central-bank policy were enough, we would never have recessions, but it buys some time for something to break on the fiscal side or political side with trade. george: i think in the u.s., the fiscal side has broken. the u.s. is spending roughly -- deficits, 5% of gdp. the government is spending pretty aggressively. it is a stark contrast to what's happening in europe. what bob is talking about, 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 close to trend, inflation is starting to bottom, the corporate sector is healthy. that the consumer is doing ok. all those things are good, strong fundamental positives. it is the negative yields externally and the excess savings that continue to flood into the u.s. that will put downward pressure on the u.s. 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. that is where we see some limitation. that is where i think, that is why i think the u.s. 10-year has had a hard time breaking through 2%. roughly 170 basis points 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. bob: we will see what happens when the fed begins to cut rates. 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 yield. when central banks began to expand balance sheets again, we know what that does to bond prices, 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, 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. we saw in gdp today, manufacturing for services, tech

earnings, that has been playing out for some time. also, quite right, we are seeing foreign investors buying u.s. assets because they want the yield. we are also seeing that in terms of demographics. you also saw a decent savings number and 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 years ago. rates are so much lower now. they need to save more to get income they want for their retirement. jonathan: does this put a ceiling on how steep these curves can get? 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. 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. we heard that from john williams last week. they need to get in there and create enough stimulus that inflation expectations go up a lot. jonathan: i'm not sure what we heard from john williams last

week after the walk back. we can talk about that later maybe. coming up on the program, the auction block. pepsico delivering the richest high bond yield in 2019 and investors could not get enough. that conversation is coming up. this is bloomberg "real yield." ♪

jonathan: i'm jonathan ferro, this is bloomberg "real yield." i would like to head to the auction block in the treasury market where investors shied away from the seven-year treasury auction. $32 billion offering resulted in the lowest bid to cover ratio since february 2016.

pepsico deliver the richest high-grade bond yield in 2019. investors could not get enough with interest growing to the $32 billion size. in europe, expectations for new ecb stimulus fueling investor appetite. priced to yield, 3.5%. let's take in the eurozone, where ecb president mario draghi painted a gloomy outlook for the european economy. >> generally speaking, you have resilience in the service sector. at the same time, this outlook is getting worse and worse. and is getting worse and worse in manufacturing especially, and 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 germany. it says 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. the weakness in manufacturing bleeds into services and we have some people in germany now, some officials, essentially communicating it has already started in europe. how big of a concern is that? marilyn: the data that we saw this week from germany was weak in terms of business sentiment, the outlook for the rest of the year, particularly manufacturing. it was very weak. there was a contraction in germany. it is a big concern.

we are seeing a very different dynamic in the eurozone to what we're seeing in the u.s. you are not seeing capex, investment, you certainly don't have the fiscal stimulus in europe as you have here. one of the things we've been saying recently is you need to have some form of stimulus. essentially, lenders are not paid to lend right now. you are getting zero or negative rates, so there is no incentive for you to lend. if you want to get income, you have to go into equities, private equity. there needs to be some mechanism to get this money flowing again, get capex, investment in technology, start to regenerate and build in terms of innovation in the eurozone. jonathan: not sure a low rate will 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 limited supply already in the european fixed income market, and just keep buying. how hard is that to swallow? george: we will see the same playbook that we saw a few years ago and a few months ago, the ecb will once again crowd out

fixed income investors. you just look at year to date, what we have seen in the eurozone, where yields are almost at 100 basis points lower. if you started with an asset class yielding 1.75%, do you think you would have 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. this incrementally reach for yield, yield enhancement, a japanese phenomenon, a european phenomenon, 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 here in the u.s., but big, healthy -- large corporations and entities, governments are very incentivized to basically continue to borrow, continue to lever up.

that trend does not look like it is about to change given the existing backdrop. jonathan: in u.s. high-yield, over the last few months, you have been less constructive. you have come on this program and talked 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: i think you have to run the technicals for a while. when i listen to draghi, and the market started to rally, i thought, we missed it. he kind of bobbled it, we had a backup, and that was our opportunity to get in. we use that backup to get into the market. i think yields are going a lot lower. i think he has set the stage to bring yield 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. he laid out exactly what everyone is observing, things

are slowing down. there is absolutely no inflation impulse. you know what, fed, you started this, you finish it. you are the guys that raised rates and started the balance sheet run-up. we have not raised rates at all, we have not run down our balance sheet. by the way, trade problems did not start in the eurozone, so you move first, and 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 be a just in case you are not following the football. on europe and fixed income potentially moving toward tiering, which opens the door to a much lower interest rate at the ecb than we would have thought of a year ago. -75 basis points. they have tiering. if you look at the swiss curve, it is trading more negative at

the front end than the deposit rate over at the s&p. do you see a dynamic developing where the yield curve in germany just chases the depot rate lower? what i mean by that, 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. it is about messaging as well. it is the ecb telling market participants they are serious. they will do what it takes and this time they will be more thoughtful, not as punitive to banks. if banks want to leave money on deposit with them, they will cap them at zero, and that leaves them the capacity to bring the front end down. will it work?

i don't know what i agree with george, you probably need something on the fiscal side. the theory of having fiscal austerity, which was so popular nine years ago, does not work. you cannot shrink your way to growth. now they need to find the sovereign that has both the ability and the courage to deficit spend. that will be difficult to come by. the ecb is the only game in town in europe. jonathan: bob michele, marilyn watson, and george bory are sticking around. i would like to get a market check on where the treasury market has been. remarkably stable by the end of the week. yields up by a couple of basis points on the 10 year, 2.07%. the front end up five basis points. still ahead on the program, the final spread. 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 to head to the final spread. coming up over the next week, u.s. officials heading to shanghai for trade talks with their chinese counterparts. 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, u.s. ism manufacturing data. then payroll fridays in the united states. marilyn watson is still with me, bob michele, george bory. boj not even a part of the conversation going into next week. should it be? marilyn: they have been on the sidelines. expectations were high, maybe a

little bit too high in terms of what the ecb may do. the bank of japan still has this enormous problem. they could maybe change their forward guidance, could do more in terms of qe. i think it is very hard for them to do anything. perhaps hoping for more from the ecb, they didn't come through. the bank of japan has been easing, has been so 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 will have to do more. jonathan: your thoughts going into next week, bob? bob: i think the fed will do 25 basis points. i do not think powell, williams, and clarida have the vote to do 50. i think they are uber dovish, that they send the message they are serious. jonathan: if it were up to those three, they would go 50? bob: absolutely.

they are mostly market practitioners, they have been in our seats, they understand that once disinflationary expectations become embedded, they are hard to root out of the market. i think the markets are in a very perilous position with that. jonathan: final word, 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 the generous offerings of dovishness, the fed will be challenged to do so. i think it will reinforce the reach for yield strategy. the next point that people start to focus on once we get through next week's data is actually september. it is sort of safe carry, safe reach for yield, set your portfolio by the end of the week. the next point of time is in september. jonathan: let's get to the rapidfire round. quick questions, quick answers. first question, the ecb rate cut in september that most expect to

come, 10 basis points, 15, or more? bob: start with 10. marilyn: 10. george: 10. jonathan: the low for the 10 year. on treasuries. the price is right now, 1.93. have we seen the low for the year? marilyn: no. bob: no. george: yes. jonathan: the fed's next move? bob: 10. marilyn: 10. george: 10. there is some consensus. 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. ♪

♪ emily: i'm emily chang, and this is the "best of bloomberg technology," where we bring you all of our top interviews from the week. earnings from big tech -- amazon, alphabet and facebook all release second-quarter report cards, we break down the results. and facebook results were overshadowed by a new antitrust investigation opened into the companies social-media, add and mobile business. this after facebook paid a record $5 billion