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tv   Bloomberg Real Yield  Bloomberg  July 28, 2019 11:00am-11:30am EDT

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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 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 really very well. >> the u.s. consumer really dominates in terms of the
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overall gdp number. >> headline gdp growth is in line with what everyone expected. >> wage growth, income growth has been relatively strong. >> government spending data, quite strong. >> there is some upside risk to the economy. >> the consumer and the labor market side of things is looking quite 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 here that is worrying the fed. >> there are pockets of weakness. >> potential u.s. gdp is less than 2%. >> we do see a further deceleration in the u.s. economy here going forward. >> ultimately, we are moving back toward a lousy trend. jonathan: joining me around the table to discuss here in new york, marilyn watson of blackrock, bob michele of jpmorgan, and george bory of wells fargo. 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 , very healthy, decelerating to
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trend. it is above the fed's own expectations of long-term growth. i think you saw, obviously, very healthy personal consumption. so i think it is pretty good data and i think, looking at the fed next week, it will be hard to see how the fed will cut by 50 next week. jonathan: we will have to work it 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 2018 sup 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. jonathan: george? george: if you look for the inflation expectations, they look like they have bottomed and are sort of picking up. we take away from it that it was a relatively healthy number, the consumer looking pretty good. and many of the fed's targets are trending in the right direction. as my colleagues said, it is difficult to justify an
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aggressive move, but we will see how they comment around it. jonathan: well, gdp today comes in at 2.1%, on the money in terms of the forecast from the federal reserve itself for 2019. you said that inflation looks like it might start to pick up. how so? well, if you look, core cpi looks like it kind of bottomed up. it is starting to trend a little bit 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. -- backward re visioning 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 agree. i also think inflation may start to trend up from here. core pce at 1.4%. i think we will see a trend up from here. we have been seeing it trough. that is pretty much as the fed
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has been saying. jonathan: can we get to bob michele's big call? we are moving towards 0%. we have to get to it sooner or later, let's do it. we are heading toward 0% on the u.s. 10 year yield at some point over the next two years, bob. 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 1.93%. the 10-yearield on disappeared without anything happening. if you look at the fed, they may endn to raise rates, may 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.
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the fed is right, they should be wary. remember, their old reaction function when doing qe was any time the five-year, five year breakeven inflation rate dropped below 2.5%, you got a rounded qe or operation interest. we are below 1.80%, so they have failed to create inflation expectations. i think 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. because if you believed that it will work, shouldn't we also simultaneously believe that the yields on 10, 30 yields should -- 30 year yields should be going higher, not lower? bob: in the prologue, somebody said growth would slow down to trend or 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
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the 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 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. 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 the political side with trade. jonathan: what do you think, george? george: i think in the u.s., the fiscal side has broken. 5% 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. and when i -- and i think what bob is talking about, one of the biggest challenges is the difference between the fundamentals and the technicals. the fundamentals from our
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opinion would tell you that we are kind of close to trend, inflation is starting to bottom, the corporate sector is healthy. that the consumer is actually 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 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, that is why i think the u.s. 10-year has had a hard time breaking through to 2%. there is roughly -- let's call it a 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 patterns between the two regions. jonathan: bob? bob: we will see what happens when the fed begins to cut rates. suddenly, that near record amount of money, absent the
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financial crisis, starts to come out of money market funds because investors want to lock up some yield. then, when central banks began to expand balance sheets again, we know what that does to bond prices, it pushes them up a lot. 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 right into the bond market. i think there is nothing but 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 the idea that when the fed begins to cut interest rates, the money is goingome, and it out along the curve, 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, which we also saw in gdp today, manufacturing, services, tech earnings, etc., that has all been playing out for some time. but you are quite right, we are
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seeing foreign investors buying u.s. assets because they want that yield. we are also seeing that in terms of demographics. you also saw a decent savings number as well in the gdp numbers today. but 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. because rates are so much lower now, they basically need to be saving more to get the income they want for their retirement. jonathan: does this put a ceiling on how steep these curves can get? how big is that spread, 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. 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
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a lot. jonathan: in the end, i'm not sure what we heard from john williams last week after the walk back. we can talk about that later maybe. marilyn watson, bob michael, and george for a -- george bory. 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 next. this is bloomberg "real yield." ♪
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jonathan: i'm jonathan ferro, this is bloomberg "real yield." i would like to head to the auction block now, beginning right here in the united states over in the treasury market, where investors shied away from the seven-year treasury auction. the $32 billion offering resulted in the lowest bid to cover ratio since february 2016. incorporates, pepsico delivered
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-- in corporate's, pepsico delivered the richest high-grade bond yield in 2019. investors could not get enough with interest growing to the $32 billion size. finally, in europe, expectations for new ecb stimulus fueling investor appetite. -- appetite for high-yield. its seven-year deal to 3 million euros, 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 it 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, and george bory.
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i want to pick up on those lines from ecb president mario draghi and bring you a quote from the so 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. -- 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: certainly, the data we saw from ifos 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. it signaled a contraction in germany and 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 the capex, you're not seeing the
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investment, you certainly don't have the fiscal stimulus in europe as you have here. one of the things we've been saying very recently is actually, you need to have some form of stimulus. essentially, lenders are not paid to lend right now. 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 sort of go into equities, private equity. -- theree some form of needs to be some form of 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: and i'm not sure low rates at this point will help that. for the credit investor, george, 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, the 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 we saw a
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you 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, what we have seen in the eurozone, where yields are almost 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. -- credit fixed income. this incremental reach for yield, yield enhancement, a 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 it is here in the u.s., but big, healthy -- large corporations and entities, governments are very
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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 to me multiple times about being a seller in and around a spread of 375 basis points. 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 ride the technicals for a while. if i listen to draw the -- when i listen to draghi, and the market started to rally, i thought darn, we missed it. he kind of mingled he kind of , bobbled it, we had a backup, and that was our opportunity to get in. so we used that backup to get into the market. i think yields are going a lot lower. i think he has set the stage to bring yields a lot lower. i think everyone in europe is
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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. 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 actually start in the eurozone, so you move first, and then we are after you. jonathan: so anyone that may have missed the minolet reference, there was a game here the other night in new york city with the beloved liverpool city, and the backup goalkeeper made a very big fumble in the match be -- match. so that is that reference for you, just in case you are not following the football. but on europe and fixed income potentially moving toward tiering, which opens the door to potentially a much lower interest rate at the ecb than we maybe could have thought of a
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year ago. if you look at the s&p, it came down 75, -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 hold yield -- hold curvecurve -- hold yield -- whole 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 curve, all across the eurozone. is that what you see happening? bob: we see some of that happening. 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, not as punitive to banks. if banks want to leave money on deposit with them, they will cap them out at zero, they won't
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take the negative, and that does leave them the capacity to bring the front-end down a lot. 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 that wasn't so popular 8, 9 years ago -- that was so popular 8, 9 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. i think the ecb is the only game in town for europe. jonathan: bob michael sticking with us, alongside marilyn watson and george bory. i would like to get a market check on where the treasury market has been. twos, tens, and 30's 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 to 1.86%. still ahead on the program, the final spread, featuring a rate decision from the federal reserve. the main event with chairman powell in the spotlight. this is bloomberg "real yield." ♪
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jonathan: i'm jonathan ferro. this is bloomberg "real yield." it is time now to head to the final spread. coming up over the next week, what a week we've 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 -- mark carney's turn over at the bank of england. plus, we get u.s. ism manufacturing data. friday, wrapping up the end of the week with payrolls friday in the united states. marilyn watson is still with me, bob micheleand -- and 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
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what the ecb might do. a change we will see from the fed if they do cut rates. the bank of japan still has this enormous problem. they could maybe change their forward guidance, they could do more in terms of qe or something, but i think it is very hard at this stage for them to do anything. perhaps they were hoping for more guidance from the ecb that didn't come through. the bank of japan has been had such a loose stance for so long, it fades into the background because it is accepted. we expect not too much next week. but 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 that powell, clarida,and -- powell, and williams 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. i think they are mostly market practitioners, they have been in
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our seats, they understand that once disinflationary expectations become embedded, they are very hard to root out of the markets. and 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 will reinforce the reach for yield strategy. and i think the next point that people start to focus on once we get through next week's data is actually september. so 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 mid-september. jonathan: let's get to the final round, shall we? the rapidfire round. you know how this goes, quick questions, quick answers. first question, the ecb rate cut
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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 this year -- i like to play this game to gauge where the price is right now. the price right now, 1.93%. have we seen the low for the year? marilyn: no. bob: no. george: yes. jonathan: the fed's next move? 50, 25, or nothing. 50.lyn: -- bob: 50. marilyn: 25. george: 25. jonathan: 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. ♪
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