>> live from new york city for our audiences worldwide, "bloomberg real yield" starts now.

jonathan: coming up, chair powell hikes the market, his cuts as the economy delivers negative growth and price pressure. -- pressure remains elevated. we begin with pricing out the fed. >> we are beginning to here some signs of the fed have it. >> the signs of the fed pivot. >> there are two reasons to price the fed pivot. >> whether or not there is a recession -- >> we are still at great risk of a recession. >> the second argument is chair powell in his unscripted remark said we are neutral. >> the pivot everyone is talking about. >> we still see core inflation accelerating. >> the fed is pivoting here. >> powell endorsed this message of data dependence. >> they are feeling enough optimism of the markets. >> the market is looking for a pivot. >> where the markets are pricing

now is not right. >> financial markets seem to be pivoting prematurely. >> even the fed itself don't know what to do in september. jonathan: and we don't know either. our guests join us, and also mino to run out the week. more important to fed rates this federal reserve, growth or inflation? >> it has been an ethics battle this week between downside risk to growth and upside risk to inflation. i will admit the downside risk to growth probably won this battle but the upside risk to inflation are still winning this war. inflation is still what we need to be focused on, the fed has told us they need to see compelling evidence it is coming down and honestly you just -- we don't see that compelling evidence yet. we don't see it with the eci number this morning, we don't see it looking at the pce number this morning rcep, so we do

believe the fed is going to need to continue to hike rates at least 100 basis points more and the pivot everyone is talking about is too soon. jonathan: matt, is it too soon? matt: yeah, and anybody that looked at the previous pivots from chair powell tell you this is not the way in which he pivots. it is much more quick, much more abrupt, and much more forceful. this was not a pivot from the fed. i do think the downside in growth data we have seen probably gives the fed a little bit more confidence that, at some point in the future, inflation will come back down to target. they are clearly looking at breakeven inflation rates to give them an additional sense of confidence, but we think that tips are good value here, particularly in shorter tenors. we think if the market really believes this was a pivot, that is going to lift financial

conditions -- let financial conditions ease, probably too much, and leads to more inflation in the near term. jonathan: if we are pricing out hikes and pricing in cuts and inflation is 9%, george, protection might make a bit of sense here. george: absolutely. i think the market is tried to force the fed's hand like you did with putting in nearly 4% or target on the funds rate. the market is trying to get ahead of the fed. i agree with what matt is saying, conditions or easing for the fed at a time where there trying to tighten. jonathan: larry summers has come out swinging today. he spoke to david westin and this is what he said, jay powell said things but to be blunt, we are analytically indefensible. he went on to say there is no conceivable way to .5 interest rate in an economy inflating like this is anywhere new neutral. can you speak to that? kelsey: we don't know where neutral is and i'm not sure why

powell has stated we are near it when it is not clear we are. what we did is we looked back at tightening cycle, the last four, when did the fed stop? on average, they stopped when inflation was 2.5%, the unemployment rate was 2.5% and then they kept the rate at the terminal rate for 10 to 12 months. the market right now, it is pricing in fed rate cuts and a terminal rate, they will stop at the end of the year while inflation is above five, where the un-implement rate is below four, and air also pricing in rate cuts after just three months. i just really do not think this is consistent with an economy that -- a policy rate at neutral and really what they need to be doing is moving the policy rate higher and higher. it is not clear we are at neutral. jonathan: where are real rates now and where were they the last time this fed had to pivot? kelsey: so it is really

incredible to me. the fed moved rates 150 basis points in the last two months, and incredibly fast-paced. they want financial conditions to tighten and what they got in response to the last policy meeting and 75 basis point rate hike was two-year real yields following. real yields are negative again and you think about where the real policy rate is today, it is still negative around 700, minus seven hundred basis points. that is not a policy stance that i would consider neutral. jonathan: matt, the road to september is long and the cvi prince, there are two more labor market reports and a ton of data next week. what is more important to you at this point, the data or fed speak -- which i imagine you anticipate pushes back again some of this? matt: we think the inflation data is going to be pretty spicy over the next couple months, so honestly inflation is not really where i think markets are going

to be focusing. they will be focusing on the growth data. it will be important what we see in the labor market. it will be important what we see in the pmi numbers. between now and september. ultimately, in order to get the market to start moving higher in yields again, you are going to need to see growth data rebound. you will need to see the market start thinking that maybe the next dot plot will have a higher terminal rate than the one in june. this was, in my view, the big mistake powell made, invoking a dot plot from six weeks ago. a lot has happened in the past six weeks. we have gotten strong inflation data, a very decent labor market report. i do not understand why he felt the need to bring up june's dot plot. that was a mistake. jonathan: but he did and we will get new projections. another dot plot. when they make those changes, what will they look like? george: at minimum they have to

hold their ground and there's possibility to increase in the long run but when we discussed neutral in this world we live in, what is short-term neutral versus long-term neutral and they will try to thread the needle and try to get us to saucer inflation and invoking this long run. as we are back to neutral makes no sense. i feel like there is scope to push back, but i agree with matt that growth numbers have to hang in here long enough into at least november before they give us criteria for pivoting. otherwise the market will try to force their hand. jonathan: the first two lines of the statement they came out read as follows, "overall economic activities appears to have picked up after edging down the first corner. job gains have been robust in recent months." that was june 15. this is the update in july and the first two lines look like this, "recent indicators of

spending production of software, nonetheless job numbers have been robust and the unemployment rate has remained low." is it all about the labor market report in your mind, based on where they were injured and where they are in july? george: i think we need to maintain healthy job gains into early q4 in order for them to stay on track to getting us about 3%. jonathan: matt, when you think about that, do we start to price in what we priced out if we get a strong report next friday? matt: it will take more than just one strong labor market report, but i do think with the amount of negative term premium and the very front end of the yield curve, bear in mind, even with powell invoking the june dot plot, the market is still pricing well below that terminal.. so if there's a decent amount of negative term premium in the front-end, every good piece of growth-type data out of this

economy is going to make that policy, that market pricing of the policy rate, move higher. -- higher, closer to the dot plot. it will take more than one report. jonathan: tell me how you play this yield curve story now. two's intends were close to 30 before the june meeting. what would you look to happen here through the curve on twos and intends? kelsey: we have been positioned for curve flatten her's. we think this battle between downside growth risk and upside inflation risk does lend itself to higher front-end yields but more stable come along and yields. a continuation of this curve flatten her is kind of what you are seeing today. just to go back to the idea that matt spoke about in terms of inflation breakevens and the front end of the curve being attractive, there is a lot of out the div security in inflation. we agree they do have value, but

the other way you could play that, being bullish on near-term inflation, is to be short the front-end. and we do think yields should be higher than 3% in this environment and that is where they are going. jonathan: george, do you share that view? george: i largely do but the thing is, most of the rally depression has come from breakevens tightening, widening again in the last couple days. the big compression in lower rate environment we have been in , mostly the bond market is viewing the fed as credible inviting inflation. that is contradictory if you think about how low rates could go overall if they're trying to raise them, but at some point there should be a parallel shift of high rates as well. i was bullish on the intermediate sector of the treasury curve. i think that needs to run its course and the home market should be thrown off from here. jonathan: matt, final word? matt: the one thing we cannot

ignore in this discussion about the u.s. economy is what is happening outside of the united states. ultimately part of the flattening we are seeing today is ultimately related to just this idea other central banks, aside from the fed, are going to keep tightening as well to get strong inflation numbers out of europe. ultimately the ecb will have to keep tightening, global growth does not look great here. those downside risks should put downward pressure on longer-term interest rates in the u.s.. jonathan: we've got to talk about europe and the ecb. up next, elsie and matt, george you are sticking with us. loosing monthly sales above estimates. the conversation up next. ♪

jonathan: i'm jonathan ferro and this is "bloomberg real yield." it is time to kick things off in the united states with -- remaining on the side. bond sales topping monthly estimates. in europe, the primary market recording is 28th day of the year without a single deal, helping close out the slow's mother 2022. sticking with europe, goldman-s chief economist expecting a -- goldman's chief economist expecting a recession. >> we are forecasting a recession in the euro area. it would be concentrated in germany and italy, the two countries most dependent on russian gas. it is a difficult situation for them. the economy, despite today's better second-quarter numbers, is looking pretty weak but inflation is much too high. jonathan: rock and a hard place

and ecb somewhere in between. what is the ecb's next move? kelsey: it's going to be a difficult road ahead for europe. we agree the road will slow -- growth will slow and materially. though the gdp numbers this morning to surprise the upside, the weakness did come from germany. on the other hand, we saw this morning that europe is still dealing with inflation like the rest of the world. we think the ecb will need to continue to hike, even another 50 basis rate point hike as possible. there drop to get to a neutral policy as quickly as possible, seeing what is going on around them, growth slowing, and an attempt to get to neutral is what they are looking to do as quickly as possible. jonathan: debater on the fed is divided. around the ecb it is one-sided. when i speak to people, they say the windows to the ecb is like they have one more meeting left and then it is game over,

recession. do you think they can go much further than another 50 basis points september 8? jonathan: our chief european economist is looking for another 50 basis point rate hike from the ecb. that's in september. he thinks they probably keep going into the end of the year. the ecb has an inflation mandate . it is a singular mandate, something it needs to take very seriously so even though growth is slowing, we are expecting a continued series of rate hikes the ecb. jonathan: the italian 10 year last month in june in the middle the month was 4% floss -- plus, and germany was close to 180 and it is someone percent now. what do you make of the rollover in european yields not just in the core part of europe but in others too? george: the bond market is calling the bluff on this. you get a super inverted hero

curve i guess at some point if the ecb keeps hiking. at some point i think the window is definitely closing for the ecb and in addition, i feel like this is -- we are all trying to figure out this give-and-take between inflations and growth and europe is in a harder situation than the u.s. for sure. jonathan: same question, how much weakness in the a comment -- in the economy for both central banks willing to tolerate? the market said is it -- it is about growth again. jp morgan calling for that. this year, at some point, back cap of the year. i'm wondering, when you think about the fed and think about the ecb, how much weakness in the economy are they willing to tolerate to get inflation back down? kelsey: looking at the fed to start, it really hinges the labor market and the on the limit rate still being airy low. this is a linchpin right now.

that is allowing us to feel like, though this position is hard, it is not really that hard. unemployment is still low, job growth is still high, you're looking at 300,000 average growth per month. so yes, the job is hard, manufacturing is rolling over, real gdp is slowing, but to lead on that unemployment and file policy rates could go higher when europe is a little more difficult, we have not necessarily seen the unemployment backdrop change materially but we do think that is going to return and that is why the window is smaller for the ecb. i will add that we have the boe coming up as well and we think that although it may be a split decision, a 50 basis rate point hike from there as possible. jonathan: maybe another 50 basis points from the ecb. matt, you mentioned something five minutes ago, the relationship between what's

happening in europe and how that bleeds to the rest of the bond market worldwide, including here in the treasury market. and you build on that's a little more? kelsey: i'm going to build on that -- matt: i'm going to build on that by giving a shout out to the bank of japan. the central bank has been the but of jokes for many years now and they have called this absolutely correctly. now that we are seeing downside risk to growth in the united states, you saw a dramatic strengthening of the yen this week. mind-boggling strength -- strain in the yen, dollar-yen down several figures. that is not going to help inflation go up in japan. if you're thinking about the bond market here from a global perspective, yields in japan are going to continue probably default from here. that is going to weigh on yields in the united states. i think international investors, particularly those in japan, are going to take a fresh pair of

eyes to the u.s. treasury market and probably put money to work. jonathan: dollar-yen a 2% move, euro-yen a 2% move and i will put my head up. matt, i coded operation ostrich about a month or so ago. i'm not sure whether this works out but it looks like a better wait for the bank of japan. matt hornbach, kelsey berro, george, sticking with us. still ahead, the final spread, the week ahead featuring a host of global pmi and the payrolls report is around the corner. i have to take a second take earlier because i cannot believe they came back around that soon. that's next. this is bloomberg. ♪

jonathan: live from new york city, i am jonathan ferro and this is "bloomberg real yield." the week ahead, over the next week, a whole host of global pmi's coming throughout the week including prints from the u.s./china, and eurozone.

i imagine you will hear a lot of fed speak next week. we will get a bank of england rate decision thursday, cassie barrow, the move a 50 basis points, and we round out with the u.s. trade rose report this friday in the current estimate is 250 k and the highest 300 k, and the low is about 50 k. back with us, our guests. bank of america had a note out this morning talking about -- talking about the weakness of the labor market and the labor market should "so quickly and soon." do you expect it to reach the labor market soon? kelsey: our seeing some signs of weakness in the labor market and i want to acknowledge that, particularly in claims data. this trend has not been very friendly. it has been trending higher now for a material period of time but the level is still low. overall, when i look at where the unemployed it is going, payroll growth would need to

decelerate quite a bit to get a material rise in the unemployed rate without an increase of labor force participation. my vibe is to say unemployment for this year probably stays below 4% but we should be expecting a deceleration in payroll growth because 300,000 to 400,000 is still consistent with an economy operating above trend growth and what the gdp data is telling us that we are probably moving into low trend growth environment. jonathan: another way of putting what you said is this federal reserve will have to hike more and people expect to take eat out of this labor market. is that correct? kelsey: that is correct eerie they stop more work to do. jonathan: bottom line for a lot of people the fed has a lot more work to do. we have time for the rapid fire around and let's do that. three quick questions and answers. payrolls next week, i went through the numbers, 250,000 is the estimates, that is the high and 50,000 is the low. do we get a negative print not just next week but this quarter?

at some point this quarter do we get a negative print, yes or no? kelsey: now. -- no. matt: no. george: no. jonathan: the fed's next move, 25, 50, 75, or more? september. matt? matt: our house calls for 50. jonathan: george? george: same thing, 50. jonathan: kelsey? kelsey: i go with a big 75. jonathan: that would be a shocker for a lot of people given what we have priced at the moment this week. final question, i know what your answer is this so i go to you first, how much work does this fed have to do? is it 50, less than 50 basis points, 50 to 100, or 100 plus? george? george: 50 to 100. matt: more than 100. jonathan: kelsey, coming last

you to give you the final word. kriti: 100 plus. -- kelsey: 100 plus. jonathan: thank you very much. to you at home thank you very much and we will see you next week same time same place, this is bloomberg real yield and this is bloomberg tv. ♪

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mark: welcome. i am mark crumpton with first word news. president biden and president xi jinping of china are laying the groundwork to meet face-to-face. during a phone call yesterday, they told their aides to set up a meeting. the plans, as house speaker nancy pelosi embarks on her asia trip today. she has confirmed plans to visit taiwan and china has warned against it. in the u.k., rishi sunak is conceding he is the underdog to be the next prime minister. while campaigning, t