jonathan: from new york city, bloomberg real yield starts right now. bonds after an epic rally. more inflation data in america. testimony from fed chair jay powell. we begin with the big issue, what is behind these big bond market moves. >> there is technical, fundamentals, and policy. >> we have seen technical short covering. >> people being forced to cover

duration underway. we have confirmation that what was going on was mainly technical in nature. >> i think it is absolutely both. >> we have a combination of the two. >> this kind of re-collapse of longer-term interest rates. >> there are fundamentals at work here as well as technical factors. >> inflation is likely to decelerate. >> we have passed peak global growth expectations, priced in stimulus. >> we are at the half and it is 1-1. jonathan: we have an interesting situation going on here, we have a great panel. sue batra by, and jim bianco. sue batra, i want to begin with you. what is going on? subadra: i think i have to agree with the guest earlier on, it was mostly driven by technicals,

positioning in the markets was very short for a while. you have seen these positions getting unwound. also on the fundamental side there is concern on the employment front. this week we got the jobs report, 9 million job openings, 7 million unemployed, so there is a this match on that front. also if you look at the ism nonmanufacturing, the employment component of that index came down quite sharply. this follows low participation rates from the employment numbers that came out last friday. there is a real concern the fed may not be on a policy front able to achieve this goal of substantial further progress on the employment front by the end of the year, which is a precondition for them to taper asset purchases. jonathan: a lot to unpack there, we will come back to that. eric nelson, your take? erik: one thing that is underrated is we have seen this curve sliding on a global basis.

it started with the fed at the june fomc with the dots. expectations of rate hikes being pulled forward. we have heard from other central banks outside of the u.s. that are talking about raising short-term rates. the move down and long in yields has been a global phenomenon, driven by this transmission which runs counterintuitive to what you would think. hire short and yields does not mean higher along and yields, sometimes the opposite. jonathan: jim bianco, that is what we have seen. some may say this is just a monster short squeeze. i know that you don't buy that. jim: as a caveat, there is no good data on how short the market is, but the data we have suggests the opposite, that there was not a short in the market. it is a rush of people looking to get long. it looks like the mirror opposite of march.

march was everyone getting short when we hit 1.80 on the 10 year note. when we hit 1.25, it looks like a rush to get long. a lot of those momentum players are now underwater with the big backup we have seen at least since yesterday. if it is more of the longs buying the market, this could not be the end of the move, but the beginning of a move. usually a short squeeze would be in the middle. we could be closer to the end. jonathan: whether it is technicals are fundamentals, what has taken place over the last month, subadra, this is reinforcing the existing narrative that we have gone through peak everything and we can save the inflation fears that we saw in may. two jim's -- to jim's point, do you think that is the dominant

narrative? not necessarily the correct one but the consensus view that we are past a lot of this? subadra: it might be starting to get to a consensus view but we don't have enough information. we got the june data for employment last week. next week, we get a ton of data that will suggest what the growth pattern will look like for the remainder of the year. i think it is too early to capitulate on the growth front. perhaps growth expectations were somewhat more optimistic and we are starting to pair back some of that optimism, but i still think the economy is in a strong trajectory in the second half. jonathan: let's talk about next week. july 13 bigot cpi data. if i could tell you precisely what that inflation print would be, could you tell me how this bond market would respond to that information directionally with any accuracy whatsoever? erik: predicting the data is hard enough never mind the market reaction. it strikes me that we are --

maybe two or three months ago, people were not expecting inflation and they got it. now it seems the market is on the other cited, where inflation is supposedly already priced in, and we think there is no more room for upside surprises. so if you get those upside surprises, which we think is possible, the market looks to be poised for a sharper move to the upside in terms of longer and yields. that is where the risks are in our view. jonathan: i know some people take the opposite view of this. we had a guest earlier this morning on bloomberg, and he made the point that the reaction function might be counterintuitive. the upside to prices on inflation may lead to people thinking more about a more aggressive fed. you get this condition where there is surprise to the upside of inflation, but that leads to lower yields, bullish bonds. where would you come down on that debate, jim?

jim: it is a difficult debate to come down on. i would agree, this is an unusual environment trying to gauge the reaction function is going to be difficult. stepping back, bigger picture, the 10 year yield is 50 basis points a year ago, 1.80 in march. 1.35 right now. it has only retraced about one third of the previous rise in yields. that is still an uptrend. i think we are fundamentally in an uptrend in yields. if we get big inflation numbers, my suspicion is that will be muted negatively in the bond market and we will see how yields, more of a traditional response. understanding, though, that this post-pandemic period is unlike anything we have ever seen, that policy is unlike anything we have seen. i will go with the more traditional type of reaction. jonathan: which side do you come

down on, subadra? subadra: i think i favor kim's response -- jim's response. this is a very different paradigm. after the financial crisis, curves were a lot flatter than in 2008. in some respects, i feel like the curve will be flat relative to past cycles, but there is still a decent amount of room for the curve to steepen. especially as we enter into a tapering of asset purchases. there is a lot of long and supply. as the fed steps away from the market, you should see that get priced into higher yields in the bond market. jonathan: when people start to agree on the show, i have to take the other side to make things interesting. this is the argument that others would put forward as a counterpoint. the change we have seen is a federal reserve shifting

emphasis, that is all we have to see. that was enough to deliver a bullish reaction in bonds. we have this situation where they talk more about tapering but bonds have not sold off. we have to pay attention to that. point two. citi is doing some research and my colleagues have looked at this. citi says you can have a yield curve that on average piques 12 months before the first hike. you can make the argument that this is what is going on here. if you believe the fed will be more responsive to upside surprises, this could well lead to lower yields at the long end. you could also make the argument that if you believe, 12 months away is a rate hike, then perhaps the curve in the yield is already in. jim bianco, your argument? jim: the argument makes perfect sense, it has been what has been the case for the past 12 years,

because we have been in a low inflation or maybe even deflationary environment. but if the market is now reacting to something we have not seen in a generation, inflation, and you can argue right now the headline and core numbers are the highest we have seen in 30 years, then you can expect a bit of a different response out of the market, in that we would see higher yields moving forward. but if inflation is indeed transitory -- count me as one of those who is not convinced it is -- then, yes, the reaction we have seen over the last 12 years is exactly what you would expect. jonathan: what i'm describing right now on the bullish side of the argument is actually a more mid to late bond market cycle reaction. nobody has any idea where we are in this cycle. we had to restart, the reopening, but where are we at the moment? can we really draw a parallel

with this short, long recovery from the previous decade? erik, your thoughts? erik: to me, this all hinges on whether the fed is really committed to flexible average targeting. the big problem from the june fomc, the dots signaled some of the regional governors sort of blinked on this transitory inflation that we are seeing. but if you can see the core of the fed regain control of the narrative, get the governors more on board with this framework, that i think there is potential for this cycle to run quite a bit longer. perhaps we are in the early two mid part of the cycle -- to mid part of the cycle. but if you see hiking ahead of the inflation, where they don't commit to the average targeting framework, 5

[indiscernible] jonathan: we are going to have to reestablish that connection. he is with us alongside jim bianco and subadra rajappa. a lot next week winter here from jay powell. banks preparing for earnings season. that conversation is coming up next. this is bloomberg. ♪

jonathan: this is bloomberg real yield. a busy week coming to a close in europe. sales topping 30 billion euros for a fifth consecutive week.

yankee banks accounting for 90% of the sales this week. junk bond issuers slowly emerging this week. with us still are subadra rajappa, eric nelson, jim bianco. so many people are talking about this at the moment, talking about the rate of change, deceleration. we have seen peak growth. is that an important dynamic for you at the moment? subadra: it is pagan again, it is very early to state that we have reached peak growth. we need to see data in the upcoming weeks. but it is a concern we could see a potential slow down. the fed has 7% gdp penciled in for this year. inflation is expected to top

2.5%. we just have to see if the data delivers. jonathan: let's get into the data. 6.6% is the 2021 gdp figure. erik, 4.1% is the consensus view for 2022. 3.2 percent is the consensus view for 2023. those three things are important. you could look at them and say rate of change matters, or you can say kuebler to change is the most important thing for this bond market. listen to what bob michele has to to say on that very question. >> for sure it is the keebler to gains. it actually looks like the output gap will close by the end of the year. modern monetary theory has worked and that is an important consideration. with the output gap closing and

the u.s. economy operating above its long-term potential, that does create a lot of inflationary pressure. that does put the pressure on the fed and its new flexible average inflation targeting regime. jonathan: i would love your reaction to the same question. erik: to me, the accumulative changes what matters. another way to look at that is looking at the level of gdp. our economists expect a level of gdp above the pre-covid trend by the end of next year. that in and of itself is very important. when we look at the level of real yields in the market right now, a 10-year real yield that is way out of line with this above trend growth that we are seeing. as we expect nominal yield to come back over the next few months, real yields are lucky to be a big driver of that as the market realize they corrected

too far in the other direction on real yield and growth expectations. jonathan: what do you think, jim? jim: the one thing that we seem to be missing from this argument is whether or not there will be more stimulus. so far, we have had a lot of stimulus in 20 and 21. if that does not produce any kind of dislocation, i would expect we would see more stimulus as we go into 22, 2023. if all it does is produce a new high in the stock market, helps the unemployed, gives the poor something, and no consequence comes from it, we should expect more stimulus. you talk about the keebler to change, i agree that the cumulative change of the economy is important, but we are not understanding what it could be until we get some inflations for to change the thinking. we could see more tim this coming down this year and next year, and even higher growth rates. jonathan: subadra, your

reaction? subadra: i think the rate of change is important. the longer-term trajectory is much more important. 7% this year, another 4% next year. it will take a few years before we get down to 2.5% growth. that is a very strong trajectory. on top of that, we will get perhaps more infrastructure spending. that will also feedthrough over the next several years. all of that tells me that potential gdp is going to be a lot higher over the next several years. jonathan: the next layer of this is how the fed response to it. we had the fed minutes out earlier this week. erik, you make the right point, what is the reaction of the federal reserve? they spent the past year and have telling us what it is, but the doubts have crept in. this quote here is important. although they saw the risk to the activity as balanced, a substantial majority of participants believe that the

risks were tilted to the upside. this is not a shift in the reaction function, not even a shift in the forecast, it is a shift in the balance around their forecasts i'm about apparently that is very important for them right now. erik: absolutely. we were certainly surprised to not see the pce forecast move up in the june projections, given the shift in the dots. as we think about what the fed will do next, we are talking about another few months where the fed will have a really hard time putting his finger on the pulse of the american economy. probably not until september or october when they can really get a clean read on the labor market in particular. to us, the tapering discussion probably will not happen until the fall, which means a december announcement and a q1 initiation of the tapering process. jonathan: i feel like jackson hole is the place every year for

a pivot. they come on these programs and they talk about september being key, when the additional unemployment insurance expires, kids go back to school. with that in mind, if we don't get a clean read on the labor market until q4 of this year, why would the fed make a move before then or make any kind of declaration that they are about to make a move? subadra: that is except the concern the bond market is expressing in the last week. the fed has backed itself into this substantial further progress mantra. they have to wait to see the data before they act. personally, given the amount of qed we have had over the last couple years, what i would expect the fed to have done by now is to start tapering asset purchases. equities are at historical highs.

yields are very low. if anything, this is the perfect time for them to start stepping back from asset purchases, but they have told us they are not doing that. that is the concern driving the bond market, they will not be able to taper asset purchases because they cannot make further progress on the employment front. jonathan: subadra rajappa alongside eric nelson and jim bianco. coming up, the week ahead. chairman powell delivering another testimony on capitol hill. this is bloomberg. ♪ loomberg. ♪

jonathan: from new york city, this is bloomberg real yield. coming up, the economic data in america, inflation data, fed speak. could the paired shaman --

friday it is u.s. retail sales. with us for some final thoughts are subadra rajappa, eric nelson, jim bianco. you will notice we have not mentioned the ecb. the strategic review did not generate any reaction whatsoever from any of my guests. many of them think nothing has changed at the european central bank. let's get to the rapidfire around. i want to compare and contrast the european bond market and the treasury market. german 10-year is -30 basis points. u.s. 10 year is 1.35, 1.36. the german 10-year at zero or the u.s. 10-year yield at 1%, what comes first? subadra: the u.s. 10-year at 1%.

erik: german bond at zero. jim: germany at zero. jonathan: does the ecb hike at all the cycle, yes or no? subadra: no. erik: no. jim: no. jonathan: the most important question of the week, italy or england on sunday? jim: italy all the way. if you leave in the bond market, you cannot have england when. the last time they did, 15 years of inflation. erik: italy. subadra: italy. jonathan: you know the score. from new york, this was bloomberg real yield. this is bloomberg. ♪

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mark: i'm mark crumpton with bloomberg first word news. president biden spoke with russian president vladimir putin by phone today about ransomware

attack's that the united states has blamed on criminals in russia. the white house says president biden told president putin he must take action against cyber criminals acting in his country. when the two met in geneva last month, mr. biden warned mr. pruden about continuing cyberattacks on u.s. businesses and infrastructure originating in russia. in a letter to senators, majority leader chuck schumer says they should be prepared to work long nights and weekends and to cut short their planned august recess. leader schumer is looking to pass both a bipartisan infrastructure package and a budget blueprint that will pave the way for a larger democrat only tax and spending bill. he says committee staff have been working during the current two-week fourth of july break. the centers for disease control is looking to give schools more flexibility when it comes to reopening during the pandemic. in new guidance, the cdc says schools should use