jonathan: from new york city for our audience worldwide, i'm jonathan ferro. bloomberg "real yield" starts right now. 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. -- close-out trade one of a trade deal. we begin with the big issue, an unexpectedly solid jobs report. >> pretty solid report. >> really strong. >> good numbers. >> strung across the board.

>> the jobs number did not disappoint. >> pretty impressive. >> we not only had a stronger 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 very resilient. >> they are a lot stronger than people think. >> the fed is in a good spot with what they have done and where the data is. >> i don't think the fed does anything differently other than pat themselves 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: joining me around the table 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. 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.

it is slowing. i think the big question, is the global growth slowdown, is the manufacturing slow down having an impact on the labor market? not yet. it solidifies this whole fed hold. when businesses have cut back on capex, they will have to cut back on hiring. is just not yet, so far. jonathan: do you think the jury is still out on this economy? priya: it is. global growth is weak. china pmi numbers are not showing a big rebound. we haven't had stimulus him. -- stimulus. i go back to what chair powell has said. no business executive has gone to him. we are cutting interest rates. 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. jonathan: bob michael. bob: i think we see an ok report from the rather morose expectations.

that is distorted with the gm strike. it will be revised. it's bad work -- 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%? -- 2.9%? i would not put too much into a single report today. jonathan: does all of that resonate with you, gershon? gershon: the number was strong, but we didn't learn anything from that. it is still very weak, a standard deviation over what is normal. either we will get a recovery, or more likely, we will see it spill over into business confidence and it will impact hiring, unemployment. what is important is looking at the broad fixed income and equity markets are telling you two different stories. the equity markets are siding

with the consumer. the fixed income markets are signaling caution. jonathan: you touched on something important. sub-50 ism. to characterize the u.s. economy, it is a tug-of-war between consumption, resilience, and business spending. it's really quite weak. do we need to resolve that? at some point, either the consumer 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, and you will not see this in the data, is this a blip or a start of a trend? no certainty, but the trade tensions have been on the back burner a little bit. is that giving business confidence? you are not seeing that in the earnings calls. businesses say they are uncertain. at some point, we think it has to spill over to the consumer. jonathan: the economy though, to many people watching the program, they might see it and say 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 the committees did not want to cut at all. they pushed this cut, midcycle adjustment, as much as they could. now they need validation on the data. this market pricing in only one rate cut next year is much too optimistic. we still don't know the global growth picture. -- 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, it will force them to come in at at least maybe they 75. 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. the fed is behind the curve.

they overestimate the probability of compromise on the trade front and underestimate the spillover impact from in a factory to services and unemployment. you sound quite bearish, bob michele. bob: i do. what's missing from 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 get there. what is the market calling treasuries right now? are you saying we are buying around 1.70? gershon: without question. we have had the backup. there was good reason for it.

i think we have had crossover buying from tourists looking for some form of insurance from other asset classes they own. 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. jonathan: gershon? gershon: 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. i don't see any scenario of that happening in the next couple of years. jonathan: when you say there is a dove energy and's -- a divergence in the market between equity and fixed income, what parts 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 year to 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 have talked about this in the past, we are 11 years into an expansion. it would be nice, in theory, if central banks had this magic power to keep us steady. the reality is, there are shocks in the system. it would not 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 think 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 sized central-bank 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 environment -- goldilocks environment that the central banks have created for now. but, it certainly does not look like the future to us. priya?n: 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 flattening. the rate market agrees with bob. the fed is saying everything is -- the fed is making a mistake. the 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 reality is, the problem in the economy was not the price of credit being too high. maybe it did impact sentiment,

maybe the fed is more confident, but it is not like 75 basis points makes a whole lot of a difference in the economy. if we get weaker, will it make a difference if we cut closer to zero? jonathan: just wrap up this conversation, bob. quickly weigh in. 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 do 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? will further rate cuts -- you will not get the same response. bob: we have inflation, why not go 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. you two don't need me, i'm sure.

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 would 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. in the u.s., investment-grade borrowers sold over $26 billion of debt in two sessions. danaher among the standouts. issuing $4 billion to back its purchase of ge. 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. blackrock saying credit quality is taking center stage. >> you got get income. every time i think the high-yield market has run out of gas and it is not interesting, i try 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 for yield continues. jonathan: back with me is bob michele, gershon distenfeld, priya misra. gershon, your take on credit? gershon: i wish i could disagree with rick. i would like to disagree with him, but there is nothing new here. it remains a bifurcated market. 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 would have said -- it is kind of the reverse. we think -- 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: there is certainly a lot of demand for high-yield. 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 fourth quarter of last year, it was the high-grade stuff that underperformed. i read that more as a liquidity event. what i'm reading now, the tea

leaves suggesting investors are getting nervous about late cycle behavior, they are going up in quality. this is normally a good sign for treasuries because you want something to hedge. the only 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: one thing i have spent a week during to get my head around is if what we are seeing is a broader credit risk story or just pockets of idiosyncratic stress? you bring up high-yield, that stress between double b's and triple c's. what is the triple their -- 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. there's parts of the market, and this is a little 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 it's low probability, given we don't think yields would go up that much, but if they did, people are buying a lot of paper maturity. if what happened in 2013 happens -- again, not a base case, that paper will lengthen in duration. maybe not high probability, but big impact if it happens. jonathan: michael? -- michele? 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: you think they should be afraid? bob: i absolutely do think they should be afraid. jonathan:? why -- jonathan: why? 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 piled up in clo's that does not have the covenant you need. you cannot dismiss, high-yield market, it's high-energy. you are getting legitimate earnings. caterpillar is saying, guess what, tariffs and the trade war are having an impact. our guidances 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. jonathan: gershon, do you want to weigh in? gershon: here is where i disagree. i share your concern about the high-yield market. 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 then coupon returns for the next year or two. jonathan: we have seen that through if we look at high-yield 2019. in the u.s. for the last

year or so, much of the last 10 months, we have established this really tight trading range. around 3.50 to 4.50. 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? priya: pressure to make returns. and the fact that the u.s. consumer, the service sector, is fairly resilient. you cannot point to any data and say this shows the consumer is falling apart, that default rate will pick up. i think we are staying in that range. that is the range in which treasuries will also stay. the 10 year stays 1.5% to 2%. i am watching for pmi data. i think that is more leading the labor market. if you see the service pmi numbers continue to decelerate in the years ahead, i wonder if

the macro environment will come up more for the credit investors where they 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. spread on double b's -- 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, featuring the rate decision from the bank of england and a slew of earnings reports. that is coming up next. this is bloomberg "real yield." ♪

jonathan: it's time for the final spread. over the next week, starting we monday, get china and eurozone pmi's. then a slew of fed speak, president,he fed

kashkari, evans, williams. thursday, a rate decision from the bank of england. friday, inflation numbers out of china. with me for final thoughts are bob michele, gershon distenfeld, priya misra. let's get to the news to end the week on the 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 the weakness in global growth and manufacturing is 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 trade deal, 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.

we have no details. our view is that 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 has changed. there is still a lot of uncertainty. gershon: we live in an environment that we can get a tweet from president trump at any time. and something that says something different, and that is the key, the uncertainty. if the tariff situation was bad but more certain, the business community would have more confidence. this is a president who started up with mexico not long ago. it is not just china. it is unpredictable, and i am not putting it all on this president. the political situation is uncertain. we don't know -- it is easy to say the election is a referendum on trump. we cannot ignore the fact that the democratic party has different ideas on how to manage the economy. markets aren't pricing that in today. bob: we want to be hopeful there will be a compromise on trade,

skeptical on what this means. 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: we will do the final round, rapid fire questions. -- rapid fire around. 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. 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. as a reference point, the 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: do you have a coin? jonathan: i don't have a coin. gershon: then 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? 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 nuance. thank you for your time. what a week. that does it for this week. this was bloomberg "real yield." this is bloomberg tv. ♪

taylor: i'm taylor riggs and this is "the best of bloomberg technology," where we bring you all of our top interviews from this week in tech. coming up, the beat is on. apple's fourth-quarter results beat across the board despite sputtering iphone sales. profit and sales top estimates. we have complete coverage. plus, twitter political ad ban. ceo jack dorsey does what

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