>> from new york city i am jonathan ferro. real yields starts right now. coming up, the u.s. economy delivering stronger-than-expected jobs growth. the economy is in a good place. the united states and china look to close out a phase one trade deal. we begin with the big issue, an unexpectedly solid jobs report. -- payrolls report. >> >> pretty solid report. >> really strong. >> the jobs number did not disappoint. >> we not only had a stronger

but we had a revision higher for report strength. the u.s. economy is resilient. >> 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. 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 that the labor market is strong.

is, is the big question global growth slowing down? is the manufacturing slowdown? is that impacting the labor market, i think not yet. it solidifies this whole fed hold. when businesses have cut back on capex, they will have to cut back on hiring. it is not yet so far. jonathan: the jury is still out on this economy? priya: it is. china pmi numbers are not showing a big rebound. we have not had 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. bob: i think we see an ok report from the rather morose expectations.

it is heavily distorted with the gm strike, it will be revised. 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%? 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 below what is normal. 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 -- different stories. the equity markets are siding with the consumer. fixed income are signaling caution.

jonathan: let's get to the markets you touched on something first. important. sub-50 ism. the u.s. economy is a tug-of-war between consumption, resilience, and business spending. do we need to resolve that? 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. you will not see this in the data, but is this a blip or 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: to many watching the program, they may think the economy 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

this preemptive=ness. chair powell had a pretty divided committee. they pushed this insurance cut, midcycle adjustment, as much as they could. now they need validation on the data. market pricing in only one rate cut next year is much too optimistic. we still don't know the global growth picture. 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 there will be a material assessment. 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. the fed is behind the curve.

they overestimate the probability of compromise on the trade front and underestimate the impact on employment. you sound quite bearish, bob michele. bob: i do. 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. all of that is in the horizon, approaching rapidly. 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. 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. 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 -- certainly a greater probability van the fed will start hiking again. jonathan: when you talk about 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 you would not have yields as low as they are.

yields should be higher if you believe the economy will be fine. we are 11 years into an expansion. in theory, it would be nice 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 -- 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 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 environment that the central banks have created for now. 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. we did not get the curve move, the curve flattened. all three of these rate cuts, the curve flattened and inflation expectations have declined. the rate market agrees with bob. that 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 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? 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? you will not get the same response. bob: 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. gershon: we could become europe. jonathan: you don't need me today. priya and i will go do another

show shortly. 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'm want to 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. 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. -- $3.3 billion. 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? -- on the demand for credit. gershon: there is nothing new here. it remains a bifurcated market. i hate to use rating 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 would have said -- it is kind of

-- triple c's of the up it is 20. kind of the reverse. double be up close to 14 and triple c's up by you would think five. 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. 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. 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 will be 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 spread between double b's and triple c's. what is the signal their? 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. 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 , lot of paper maturing in five to 10 year -- if what happened in 2013 happens -- again, not a base case. that paper will lengthen in duration. -- in duration tremendously and underperform by a high amount. 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. i do 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 piled 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. caterpillar is 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. the question is where are you going to go with the money? how we view it is, you have to expect lower returns. 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. jonathan: 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 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 data and say this shows the consumer is falling apart, that default rate will pick up. 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 -- than the labor market. if you see the numbers 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. 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 reports. that is coming up next. this is bloomberg "real yield." ♪

jonathan: coming up over the next week, monday, we get china and eurozone pmi's. then a slew of fed speak, including fed presidents kashkari, evans, williams. thursday, a rate decision from the bank of england. friday, inflation numbers out of

china. still with me are bob michele, gershon distenfeld, priya misra. 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 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 global growth weakness 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 u.s. china 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.

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. 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. the key is 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. 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 different ideas on how to manage the economy. markets are not pricing that in. bob: we want to be hopeful there is a compromise on trade but we are skeptical.

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: 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. will it last more or less this time around? more or less? gershon: less. bob: less. priya: less. jonathan: 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.

>> do you have a coin? jonathan: leverage loans or high-yield. you have to hold one asset class. 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 no answer. -- it would be new lands to. -- that does it for this week. this was bloomberg "real yield." this is bloomberg tv. ♪

scarlet: i'm scarlet fu. this is "bloomberg etf iq," where we focus on the access, risks, and rewards offered by exchange traded funds. ♪ buying opportunity or value trap? are inflows in european stocks here to stay? don't call it a comeback, former 3rd avenue ceo david barse returns to wall street -- and this time he's pitching custom indexes. and trick-or-treat, we unmask one of the scariest exchange traded products ever. love them or hate them, etf's are here to stay. and the flows can often signal