jonathan: from new york city for our audience worldwide, i'm jonathan ferro. bloomberg "real yield" starts right now. ♪ jonathan: coming up, the u.s. economy delivering stronger-than-expected jobs growth, validating the fed's pause. clarida says the economy is in a good place. just as the u.s. and china look to close out phase one. we begin with the big issue, an unexpectedly solid jobs report. -- solid payrolls report. >> pretty solid report. >> solid report. >> really strong. >> the jobs number did not disappoint. >> pretty impressive.

>> we not only had a strong report but we had a revision higher for the prior number. >> don't write off the economy just yet. it has a lot of fundamental strength. >> the u.s. economy is resilient. >> they are a lot stronger than people think. >> the fed is in a good spot with where the data is. >> i don't think the fed does anything differently other than a pat on the back. >> a pat on the back for chair powell. >> this is a picture-perfect soft landing is what they are track for. jonathan: here in new york is bob michele, priya misra, and gershon distenfeld. priya, a solid payrolls report. i thought we would start by making up excuses for a weak jobs number but we got a strong one. priya: we went in looking for a weak number with the gm strike. i don't think the number told us a whole lot. we have known the labor market is very strong. pace.slowing

is the manufacturing slowdown? is it having an impact on the labor market? i'm not sure. it solidifies this whole fed hold. when businesses have cut back on capex, they will have to cut back on hiring. it is just not yet so far. jonathan: the jury is still out on this economy? priya: it is. global growth continues to be pretty weak. china pmi numbers are not showing a big rebound. we haven't really had any stimulus. i go back to what chair powell said in july. no business executive has gone to him because of interest rates, we are cutting capex. i don't know if they are putting the right stimulus in. if the fundamentals are still weak, hiring will slow down over the next six months. this is just a slow uncertainty shock. we are not seeing that sudden drop in payrolls that we are used to. bob: i think it was an ok report from the rather morose expectations. let's remember it is heavily

distorted with the gm strike, it will be revised. it is backward looking. we should step back and say, if it is so wonderful, which the market seems to be pricing in today, why does gdp continue to drift lower? why are we at 1.19% gdp growth and not 2%? -- not 2.9%? i would not put too much into a single report today. jonathan: does all of that resonate with you, gershon? gershon: it is still very weak, a standard deviation over what is normal. at some point those will have to reconcile. either we will get a recovery, or more likely, we will see it spill over into business confidence. it impacts hiring, unemployment. what is important is looking at the broad fixed income and equity markets, which are telling you different stories. the equity markets are siding with the consumer. which makes sense. but fixed income are signaling

caution. jonathan: you touched on something important. sub-50 ism. to characterize the u.s. economy, a tug-of-war between consumption, resilience, and business spending. a quiet week. do we need to resolve that? at some either the consumer point cracks or business spending picks up. gershon: i do think that is the case. in the next six to nine months, we will see. the question really is, you will not see this in the data, but is this a blip or a trend? of, i guess there is no certainty, but the trade tensions have been on the back burner a little bit. is that giving business more confidence? you are not seeing that in the earnings calls. they are saying they are very uncertain. at some point, we think it has to spill over to the consumer. jonathan: the economy to many watching the program, they may think it is good. the fed has made the right decision, they are validated making a pause. you think they are making a mistake, priya? priya: knowing what they know

now, they have exhausted this preemptiveness. chair powell had a pretty divided committee. half did not want to cut at all. they pushed this insurance cut, midcycle adjustment, as much as they could. now they need validation on the data. we have been calling for a pause. this market pricing in only one rate cut next year is much too optimistic. we still don't know the global growth picture has moved much higher. if the hiring picture slows down, we think the fed will be back in, and as chair powell said, they need a material reassessment. it will not be one rate cut, it could be three or more. jonathan: you think we could get three rate cuts in 2020? priya: that is our forecast. we think over the next six months, they will be back to material reassessments -- maybe they will have to do more, but if there is no recession, we are not forecasting recession, but at least two more. jonathan: i got the bob michele note about one hour ago. listen to this, the fed is behind the curve.

the overestimate compromise on the trade front and underestimate spill over into services and employ it -- and employment. you sound quite bearish, bob . bob: what is missing in all of this is going down to the grassroots level. what we hear from companies is they are struggling with margin pressure. they are feeling the impact in trade, they feel the impact of higher cost from their suppliers. it is having an effect. how do companies traditionally respond? they cut cost. that means fewer employees and less capex. i think all of that is in the horizon, approaching rapidly. i think the fed is somewhat naive to assume everything is fixed for now. i do expect things to continue to slow down. jonathan: i know gershon is keen to get to the market call. let's just get there. what is the market: treasuries right now? in treasuries right now? are you saying we are buying

around 1.70? gershon: without question. we have had a backup, there was good reason for it, we have had crossover buying from tourists looking for some insurance from other asset classes. now the big money is coming in. the ecb has turned on the spigot again to qe and you are seeing at a higher yield and with the slowdown people are seeing globally, they are looking to the u.s. as the high-yield market again. i would not say duration is a buy. is it possible to get three or more cuts next year? absolutely. certainly a greater probability that the fed will start hiking again. -- probability than the fed will start hiking again. i don't see any scenario of that happening in the next couple of years. jonathan: when you talk about a divergence in the market between equity and fixed income, what pockets of fixed income are you focused on? gershon: the overall level of yields. if you believe what the equity market is telling you, 20% return on the s&p, your due date

to where multiples have gotten to, you would not have yields as low as they are. they should be higher if people think that yields would be fine. we are 11 years into an expansion. in theory, it would be nice if the world worked that central banks had this magic power to keep us steady. the reality is, there are shocks in the system. it would not necessarily be the worst thing in the world, i know investors don't want to hear this -- but it would not be the worst thing in the world to have a mild slow down. we are not using the r -word, but we could have below trend growth for some time. bob: the markets are telling me exactly the same thing. there is a tremendous pile of cash that has been printed over the last decade sloshing around on these 17 trillion -- central bank balance sheets. it is looking for a home. it is taking bond yield down because there is no inflation. although things are slowing down, until you see a recession or projection of much lower corporate earnings, money will continue to go into equities and credit.

it is sort of this goldilocks environment that the central banks have created for now. but it certainly does not look like the future to us. priya: there is another dichotomy that i will highlight. every time the fed has eased, the curve has steepened, risk assets have gone up. this time we got the risk assets to move. the curve flattened. all three of these rate cuts, the curve has flattened. the rate market agrees with bob. the fed is making a mistake. the equity market is saying everything is fine for now, so therefore reach for yield. that may be the way that you reconcile these two markets. gershon: the question is, if we get weakness, will further easing matter? the fed can pat themselves on the back all they want, the problem in the economy was not the price of credit was too high. maybe it did impact sentiment, maybe more confidence, but it is not like 75 basis points makes a whole lot of a difference.

if we get weaker, will it make a difference if we cut closer to zero? jonathan: quickly, bob. bob: it does, because we have already seen mortgage refis are at a high level. so high, the treasury has reached its cap on what it can reinvest in the mortgage market. these drops lower in yield create discretionary income across the board. consumer level right now, corporate america down the road. gershon: i agree, but how much more is there to go? what happens if we see more weakness? is further rate cuts going to -- you will not get the same response. bob: why not go to zero? just get to zero. you don't have to worry about inflation. see what happens. you can always take it back. jonathan: you sound like a white house official, bob michele. gershon: we could become europe. jonathan: you don't need me today. priya and i will do another program. coming up on the program, the

auction block. a quiet week in high-yield. that conversation is coming up next. this is bloomberg "real yield." ♪

♪ jonathan: from new york, i'm jonathan ferro. this is bloomberg "real yield." i'd like to head to the auction block and begin in europe, where primary market sales jumped 47% last month, the second-biggest increase this year. multi-trench offerings. in the u.s., investment-grade borrowers sold over $26 billion of debt in two sessions. danaher among the standouts. they issued $4 billion to back part of ge'sof business be -- business.

finally in high-yield, u.s. junk-bond issuers largely remained on the sidelines. a grand total of two deals roughly for $2.3 billion. staying with high-yield, blackrock saying credit quality is taking center stage. >> every time i think the high-yield market has run out of gas and it is not interesting, i tried to buy high quality high-yield and loans. it is hard to buy it, but you can buy as much as you want of the weaker stuff. demand continues. jonathan: back with me is bob michele, gershon distenfeld, priya misra. gershon, your take on credit? here. -- gershon: there is nothing new here. it remains a bifurcated market. classes, use writing -- use ratings classes, let's call that double b solid paper. there is a huge bid for it. anything with any hair on it whatsoever you cannot give away. if you would have told us at the beginning of the year that high-yield would be up 12%, i wouldhave said triple c's

be up and it is kind of the reverse. you would think that is an opportunity to go the other way. we don't think so. we think the idiosyncratic risk and the credit risk is in the triple c area. jonathan: you agree with that, bob? bob: certainly a lot of demand for high-yield. i agree. if we look at the loan market versus the high-yield market, the loan market now has a yield that is 50 to 70 basis points higher than the high-yield market. usually that's inverted. that is telling you investors in the loan market are demanding more yield to hold those securities because that is where all the concern about the lack of covenants resides. priya: i think we have gone from reach for yield to reach for quality. if you look at last year, it was the high-grade stuff that underperformed. i read that more as a liquidity event. what i am reading now, the tea

leaves now suggest investors are getting nervous about late cycle behavior, going up in quality. this is normally a good sign for treasuries because you want something to hedge. the only thing to hedge for a risk asset now is long duration treasuries. i would still rather be lower in rates, higher in quality, even within credit. jonathan: i would love the insight from all of you on this. whether what we are seeing is a broader credit risk story or just pockets of idiosyncratic stress? you bring up high-yield, that is spread between double b's and triple c's. what is the signal there? leveraged loans, is that an inversion to floating rate? what is it, gershon? gershon: i think there is credit risk at the bottom end of the market. that's why you have to be cautious and it is hard to make generalizations. there are parts of the market -- heresy for me to say it -- there are parts that are cheaper than the high-yield market. there is one risk that is not credit related that investors are not talking about. maybe low probability because we

did not think yields would go up much. if they did people are buying a in five paper maturing to seven years that have call dates in, say, two years. if what happened in 2013 happens -- again, not a base case. that paper will lengthen in duration and underperformed by a large amount. big impact if it happens. bob: people are not afraid of credit right now. every time they go up in quality or raise cash, they don't see the default rates going up, they don't see the dire earnings warnings, and then they are forced back into the markets. until we get further into the cycle and see things slow down more -- you see it in corporate earnings -- money will continue to go into the market. jonathan: do you think they should be afraid? bob: i think they should be afraid. i do think that the cracks there are real. i think what you are seeing in the loan market, there has been a tremendous amount of credit

extended that has wound up in clo's that does not have the covenant you need. you cannot dismiss, high-yield market, its energy. you are getting legitimate earnings warnings. somebody like caterpillar saying, guess what, tariffs and the trade war are having an impact. our guidance going forward will be lower. it is easy to get out now and wait it out rather than think that you are going to be the person that picked up the last nickel in front of the steamroller. gershon: here is where i disagree. i share your concern about the high-yield market in the short term. the question is where are you going to go with the money? how we view it is, you have to expect lower returns. in essence, the very strong returns we have seen this year have borrowed from the future. investors have to expect lower than coupon returns for the next year or two. inathan: we have seen that 2019, if we look at high-yield spread in the u.s., the last 10 months, we have established this really tight trading range.

around 3.50 to 4.50. we get to the year to date, we ounce off of them, we approach 4.25, 4.50, and the buying starts again. what does that chart tell you, what does it tell you about the market? three times this year. priya: pressure to make returns. and the fact that the u.s. consumer, the service sector is fairly resilient. you cannot point to data and say this shows the consumer is falling apart, that default rate will pick up. which is why i think we are staying in that range. i think that is the range in which treasuries will also stay. the 10 year stays 1.50 to 2%. i am watching for pmi data. i think that is more leading the -- leading than the labor market. if you see the pmi numbers continue to decelerate in the years ahead, i wonder if the macro environment will come up more for the credit investors who say it's about time we cut

back on a lower quality. until the data is ok, we stable in that narrow range. gershon: averages are misleading. inside todouble b's 40. until you see that trend break, those will offset each other, and you will hover in this level. jonathan: coming up on the program, the final spread, the week ahead, including a rate decision from the bank of england, and a slew of earnings -- a slew of global pmi reports. that is coming up next. this is bloomberg "real yield." ♪

♪ jonathan: this is "bloomberg real yield." time for the final spread. coming up over the next week, monday, we get china and eurozone pmi's. then a slew of fed speak, including kashkari, evans, williams, and harker. thursday, a rate decision from the bank of england.

friday, inflation numbers out of china. with me for final thoughts, bob michele, gershon distenfeld, priya misra. let's get to the news of the week on a trade story. china says it has achieved consensus in principle with the u.s. in a phone call today between top trade negotiators. how do you characterize the story between the u.s. and china? what amazes me, particularly on this program, is how assessments of the global economy seem to change from week to week based on where we are in the trade talks and from one data point to the next. priya: i think there is an assumption in the market that weakness in global growth and manufacturing is all because of trade. i would argue the weakness started before the trade war. the trade war has not helped, but if you think it all hinges on this u.s.-china trade deal, do we have a deal or not, that is why a lot of people are getting whipsawed. when i look at the headline, it is saying in principle -- i

thought we had this two weeks ago. it will be agricultural products, no rollbacks of tariffs. if i'm a corporate and i'm thinking about my supply chain, the worst case scenario has been taken off the table. i don't think my base case still has not changed. still a lot of uncertainty. gershon: we live in an environment that we can get a tweet from president trump at any time that says something something different and that is the key. uncertainty. if the tariff situation was bad but more certain, the business community would have more confidence than complete uncertainty. remember, this is a president who started up with mexico not long ago. it is not just china. it is unpredictable. i am not putting it all on this president. the political situation is uncertain. it is easy to say the election is a referendum on trump. we cannot ignore the fact that the democratic party has very different ideas on how to manage the economy. markets are not pricing that in today. bob: we want to be hopeful there is a compromise on trade but we are skeptical.

what does this actually mean? did they agree to continue the conversation? is it we sell agricultural products which we need to sell to somebody who needs to buy them? what about the real issues? what about ip rights, tech, security? when will all of those things be discussed? that is why we have skepticism. jonathan: i think we all hope we will make progress. now the final round, three quick questions, three quick answers. the fed has been on pause before, started earlier this year, lasted nine months, and then started to cut interest rates. eight or nine months. will at last more or less this time around? more or less? gershon: less. bob: less. priya: less. jonathan: there is some consensus. the year end on the 10-year yield, higher or lower than where the two-year yield is right now? the two-year yield is at 1.57. will the 10-year end the year higher or lower than where the two-year is right now? bob: lower. priya: lower.

gershon: i don't know. jonathan: leverage loans or high-yield. you have to hold one asset class. pick your poison. leverage loans or high-yield. gershon, i'm looking for a surprise at the end of the program. bob michele? loans or high-yield? bob: high-yield. priya: neither, but if you force me, high-yield. gershon: three months, loans. 12 months, high-yield. jonathan: i knew that it would be ones. appreciate your time. that does it for this week. we will see you next time, same time and same place. this was bloomberg "real yield." this is bloomberg tv. ♪

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