jonathan: from new york city, i'm jonathan ferro. bloomberg "real yield " start right now. coming up, no drama in this month payroll report. the attention firmly elsewhere as the white house with saws wall street, announcing more on chinese imports, providing more fuel or global bond markets, driving the german yield curve below zero. let's begin with the big issue. is the fed prepared to underwrite the trade war? >> it is highly likely the trade

issue will dominate a thinking at the fed. >> you have to extrapolate this and you can about the fed delivering a series of cuts. strong payrolls report that we can't today is likely going to secure that cut. >> we are going to get a 50 basis points one way or another. >> mr. trump now knows the funds he has to press to get the outcomes that he wants. >> that is why you are sitting president from so aggressive right now. >> to the extent trump continues to push on the trade war and that creates a downside risks, presumably means central banks will push more in terms of easier monetary policy. >> jay powell has made clear that he is willing to backstop the president in this trade war. >> this is an adverse feedback loop that could get very dangerous. joining us to discuss is oksana aronov, priya misra, and robert tipp. oksana, that interplay between the federal reserve and trade policy from the white house, talk about it. fat one from the

frying pan into the fire with that announcement. powell never had a particularly good reason for they cut. he kind of cited increasing uncertainty overseas, slowing conditions overseas, perhaps the lower inflation we see, which is not induce the fed to cut in 2017. they decided to use it as the reason this time. and trade tensions of course. he tried to walk a fine line by staying middle ground, saying this is a midcycle adjustment. the president then delivered precisely what powell cited as the reason. then turns it into an easing cycle probably, if the threat materializes, this threat of additional tariffs from a midcycle cut. back againsts his the wall and the fed has essentially chosen to fashion it self after the worst student in

the class, the ecb and the bank of japan. jonathan: i have been so many people tell me through the week, if you tell me what happened september 1, i will tell you my outlook. i wonder about is the same for you, if this had come out on tuesday and the chair had to hold this conference on wednesday, how different might have things been? priya: i think he would have said trade tensions would have boiled over instead of simmering. that is the only difference. i think the fed is actually grappling with a lot of uncertainty. they don't know how the global growth slowdown is feeding into the u.s.. it is ang to say manufacturing recession globally, feeding into the u.s. how does that affect the service sector? they have no idea how to get inflation higher. they are really selling this hard as an insurance cut. the market reaction tells you there is no believe that these insurance cuts will work. we have been calling for an

extended easing cycle, to markup this year, three more potentially next year. i am very skeptical that this will work. it is not really changing our call, but powell has this waffling attitude on wednesday. i think that would have changed, had the tweet come out tuesday. jonathan: most people would agree, a terrible performance. wasou believe monetary ease going to work, inflation expectations would be higher, longer rates would be higher, that is not happening. robert: it is not happening. there are different styles we have seen at the fed. what we are used to from mario draghi, janet yellen, alan greenspan, they really get the committee on a message, or at least come in with we are easing conditions, that is the thrust of the committee's move today. bestat way, you have the chance of easing financial conditions. if you come in and talk about

maybe we will raise rates before confuses things.you go back and the reason i say that, his approach is, i'll just a completely transparent. in a way he reflected with the committee told us in june which is half of them do not want to cut at all. and they are getting dragged, kicking and screaming. what we saw in the fourth quarter of last year is the fed will be hiking right, but he said absolutely not. this is an unsustainable gap between yields and u.s. yields. it will be destabilizing. you are going to have to get on board with the global program. oksana: the issue here is that the market refuses to be weaned off of the central bank banking. the past couple days, the fed says we don't need anything other than an insurance cut, and the market hates it. the following day we have a bad ism number and the stock market rallies. bad news is good news because you'll have more central bank intervention, and you mentioned

potentially manufacturing recession. what is wrong with a manufacturing recession if it comes about organically, as opposed to a financially driven recession, which is what central banks are engineering here. talked onyou something that is critical, how the market is responding to different pieces of information. the ism was softer, stock markets rallied. but how the markets responded to the tweet was different. , at leasttold me was from a lot of people's perspectives, we are this close to the tipping point in the global economy. any further pressure and enrolls over. you are seeing that in the bond market this week. really struck me as this could be the moment where people start to price in the policy mistakes all over again because they are not going quick enough. understandink people monetary policy in general is pushing on a string. forget getting help from the fiscal side. if we get hurt in a sense from

tariffs, i think the market is sort of treating this like a nonlinear response. the next three hundred billion is retail products, consumer products. this will hit the u.s. economy much more. we have the gdp shock from the implemented so far. as much as half a percentage point of gdp. we don't have that cushion. we are going to go to 1%, 1.5%. what can the fed do to get that higher? jonathan: we have to think about how rate cuts respond in the future. you think they go a couple more? feda: i do, but until the continues implemented so far. to say that this is insurance cuts, the market will continue to price 75 basis points. jonathan: most assume the fed would come into play, the front what we are seeing play out in the united states is that we are seeing play out in

switzerland, germany. you just get the whole curve come in, all the way out to 30 on the bund curve. negative yield at one point on friday. robert, is that what you feel like is happening in the u.s.? not the levels, but the federal struggle to engineer the yield curve and what will happen is the whole drop-down. 2003, weoing back to marked down our forecast in the long run, that the 10-year would average 3%. that as we came down averaging 3%, looking at the feedback from the economy, market down to 2.5, two. then we said the central tendency is probably 1.5, but it will take a year or two to get there. even though that may sound crazy, when you look at other places where the central bank is

actually running the mandate as stated. australia, new zealand, they want the good growth, they see the room on inflation, they cut rates. their rates are much lower than ours. the market is bringing the fed to that. the slower they go on the front end, the quicker the back and goes down. jonathan: that is the story. do you feel uncomfortable holding duration? i have heardhad nothing this week that makes me uncomfortable holding duration. do you want to lock in your profits on treasuries? no. i did find somebody who want to give up that position on duration. with thet is simple, curve shaped the way it is, what is the incentive for taking on more duration risk? still 60,ay libor is 70 basis points above the five-year. i have not checked in the last

hour. what is the incentive for taking on 30-your risk? it will continue to rally on some sort of additional accommodation from the fed going from ultralow rates in an environment that does not really called for extra ordinary measures? by the way, i made a comment earlier about the fed fashioning themselves after the worst students in the class. when we talk about the fed being able to support the longer end of the curve, create a steeper curve, revive the economy, or give it more escape velocity, we have not seen that in europe. not only have we not seen it, we see consumer confidence being hit. we see that from a rising savings rate in spite of the negative yield that investors are facing. savings rates are coming back to precrisis levels. yet another reason for why these policies do not work. in the u.s., the fed has the luxury to be data dependent and they choose not to.

priya: i will take the counter to that. the reason to extend our duration is that three-month t-bill, if you invest now, it may be much lower. the 10-year could be significantly lower. we are seeing this in europe. it is all moving saving rates higher. that is creating this reach for yield. if we look at the bloomberg ag index, look at how high risk assets are. what is my only hedge against risk assets? duration risk. i would say go maximum duration risk. jonathan: they are all itching to carry on the conversation. we will continue the conversation. the auction over in europe. that is coming up next. this is bloomberg. ♪

jonathan: i'm jonathan ferro. this is bloomberg "real yield." in europe, where investors offered to buy almost twice the amount of 10 year bonds the german treasury sold at auction. below the ecb key deposit rate or the first time. boeingunited states, selling $5.5 billion worth of in its largest ever dollar-denominated offering. in its largest ever dollar-denominated offering. a third and final issue, daimler getting more than 6.5 billion in its second multi-tranche offering of the

year. pricing tightening at least 10 basis points on all the tranches. staying in europe, the in its sd multi-tranche offering of the year. battle between the weaker fundamentals and qb continues. skye bridge has a warning for investors. >> putting the fed or central bank has been a losing battle post crisis. every short position you have had including lower quality deteriorating fundamental credits has worked against you. 2011, 2015, q4, fundamentals matter. since the start of this year they have not. the tablewith me at is oksana aronov, priya misra, robert tipp. fundamentalsetween and qe, how difficult is it to get your hands around that in europe? oksana: they have divorced each other, there is no relationship between fundamentals and prices in credit in europe, which is why we have stayed out of it. that is what happens when the european central bank provides an inordinate amount of demand for the credit market. you have high-yield names, junk rated names trading and negative

yield. it is really unclear what puts a stop to this. in the meantime, how do you analyze something that is a junk rated name and is showing a negative yield? jonathan: have to talk about the investment-grade names. let's have one example in the auto sector. you saw the daimler issue. big demand for that daimler issue. a company that has had profit warning after profit warning. not to pick on daimler, but euro denominated auto issuers right now, up to this week, those spreads were tightening. fundamentals suggest they should be wider. can you make sense of that? robert: in aggregate, when you look at credit quality dynamics, even in high-yield in europe, investment-grade, you are not seeing a wave of downgrades. the economic outlook is threading the needle. it is bearish enough that the ecb is providing this liquidity,

probably too much, and with a negative yield, probably dampening the outlook. blockro bloc is a savings and they are forcing everyone to pay to store their money. i don't think that will be a stimulus. that is bond positive. the economy is not so bad at the credit fundamentals are deteriorating. spreads on high yield, investment-grade are comparable to dollar-denominated. as a result, you'll see this search for yield ongoing in the government's, continued to feed out into the corporate bonds, lead to probably solid returns. situatione default with credit in europe has always been different from the u.s. the path through restructuring is much better define what he was credit than it is in europe. in europe, a default is basically a death sentence. it is a much more difficult process. of adly, with the idea rising defaults in europe, it is preposterous.

you have the ecb supporting businesses essentially. they don't have any catalyst for going through a default cycle. what we see in the u.s. in high-yield this month has been a nearly 1% pickup in defaults. june -- july,of we are looking at 2.5% of defaults. not that far from 3.5% annualized average that we have seen over the last couple decades. in spite of that, you see $15 billion of inflows into high-yield in the u.s. continue to see inflows in europe as well. certainly a tremendous amount of complacency. annualized average that we have seen over the last couple decades. with respect to risk, bb's are at 2.40. what are you going to make on these positions in the absence of central bank support? standpoint,a macro

as a government analyst, i'm supposed to worry about everything, but are we going to go from a reach for yield to being repriced in the u.s.? in the u.s., we had significant fiscal impulse. global fades away and growth starts to impact the u.s., does default risk start getting repriced in? i don't see that in the u.s. do you start to see the differentiation between high-yield and high-grade between the better companies? do we all have to do far more credit work? we have talked about liquidity risks in the past, but i think that default risk has been underappreciated in the u.s. because of strong economic growth. robert: i think you'll see volatility remain high. it's the beginning of 2018, we have had a slowly deteriorating economic backdrop that tremendous volatility. the stock market is up and down. i think you'll continue to see that because of your proximity to the zero lower bound. if things get bad, there is nothing you can do about it, and

leverages pretty high. having said that, what usually brings about the secular end of the spread cycle is a solid downturn usually brought by the central banks hiking aggressively against an asset bubble. we don't really have that. i think you'll see this highly liquid environment fueled by the bank of japan, ecb, the fed begrudgingly cutting, volatile but solid performance. do think oksana, what of the idea that credit can remain insulated from pretty much everything until monetary policy gets too tight? oksana: credit is already so tight it will be hard to stay insulated from everything. it is already priced for perfection. when we talk about credit, we cannot isolate ourselves in the fundamental argument, even if we think they are constructed. the volatility has been created by a completely changed liquidity landscape in these markets. that is my biggest issue with

the enjoy the ride argument. that argument is based on the idea that i will be able to get out before. the reality is, you won't. liquidity is not there. the five largest corporate bond etf's in total carry more assets than the street inventory and all other corporate positions. that should be a concern to all credit investors. jonathan: oksana aronov alongside priya misra, robert tipp. let me give you a market tip onward treasuries have been through the week. 20 basis points lower on the week on the 10 year. the bulk of that coming in the last couple days. still ahead, the final spread, the week ahead featuring a lot of asian central banks with decisions coming up. this is bloomberg "real yield." ♪

jonathan: i'm jonathan ferro.

this is bloomberg "real yield." week, ap over the next lot of right decisions coming out of asia and australia. you'll hear from st. louis fed president jim bullard wednesday. another rate decision this time from the rbi. pmi from china. thursday, trade balance data from china. theay, pvi numbers from u.s., and gdp from the u.k. and japan. are oksana aronov, priya misra, and robert tipp. going into next week, what are you looking for? robert: we have had a rally and the markets will take a lot of supply in the refunding. it will be interesting, always a proof statement of how solid the putting on the market is on. we'll be watching to see that. the way we are going out today, the bund market, looks like at yield lows. the market is supported. i think we will have in august

of indigestion. the market will be dealing with it will be trade and underscoring the case for lower yields in the u.s., compression of u.s. yields, which will be high relative to the rest of the world, toward global norms slowly. but volatile. priya: i'll be watching the nonmanufacturing ism, looking sign that the manufacturing slowdown is showing up in the services sector. fed speak, can they clarify the reaction function? if we stay here, will they ease again? i think we will hear them talk about is midcycle adjustment being one more cut. jonathan: i think a lot of people will be doing a post powell conference cleanup. let's get to the rapidfire round. a bit of spread widening in the high the back end of the week.

do you buy high-yield on that widening, or do you continue to sell it? oksana: continue to be patient. there will be better entry points. volatility is still with us. priya: the risk. robert: buy. jonathan: lock in the profit or cling onto that coupon? priya: klingon, by more. robert: hang on. oksana: lock in your profits. september expectations, 50, 25, nothing? robert: 25. oksana: 25. priya: 25. jonathan: from new york city, that does it for us. see you on friday, 1:00 p.m. this is bloomberg tv. ♪

mark: i'm mark crumpton with bloomberg first word news. president trump has signed a bipartisan bill to suspend the

debt to report two years and allows the u.s. government to spend more on defense and domestic programs. the measure received final approval when it was passed by the senate on thursday. the measure suspend the debt limit through july 31, 2021, eliminating the risk of a default until then. it also sets budget caps for two years that will permit $324 billion in additional domestic and defense spending above the current cap levels. in new york, a judge is recommended in new york city police department fire officer daniel pencil layout. he is accused of using a chokehold in the 2014 death of eric garner. weekswyer will have two to submit responses before police commissioner james o'neill makes a final decision on punishment. puerto rico's governor ricardo resignation takes effect at 5:00 local time today but his successor has still not been chosen. lawmakers have delayed a vote until monday after rosello's