jon: live from new york city to our audience worldwide, bloomberg real yield starts now.

coming up, more workers returning to the labor force, taking two year treasury yields lower. we began with a big issue setting the stage for the fed's next move. >> it's a good number. the labor force participation rate number is the key. >> the labor force is the most interesting piece. >> inflation, inflation, inflation. >> what does the report signal about any kind of inflation? >> the labor market in general just springs for a higher terminal rate. >> the economy is in good shape. >> the fed is focused on inflation. >> the economy can do it wants. >> at the end of this, you are likely to get something that's more of a hard landing. >> for the fed to bring this plane in would be extraordinary. >> i still think the fed is going 75 basis points this meeting. >> they are going to keep it

going and they couldn't possibly be more clear. jon: joining us now to discuss is george goncalves and sebastian. how would you characterize the report of this morning? >> it is a stellar report by any measure. i think the increase in the participation rate is the icing on the cake because that sends -- gets more people into the workforce, keeps wages subdued and it is what the fed wants to see. it wants to chase a soft landing. going into the next two weeks into the september fomc meeting, we will be looking at the cpi number -- cpi data could i think you could get -- the cpi data. i think you could get an increase in core cpi

year-over-year. jon: that goldilocks feel to it. 75 again in september for citi. they said it does not substantially change the narrative for the fed. inflation is still high, the labor market is too tight. we should still expect a 75 basis point rate hike at the september fomc meeting. >> i think that's entirely plausible, and giving the commons out of the fed in recent weeks, it would not be at all surprising to see a move of 75 basis points. if i was just looking at the data, though, their chief indicator on inflation, core pce, has moderated a bit, and the part of the economy most likely to be increased, real estate, has had an increase in

new-home sales and prices, a drop-off in activity, a steep decrease. that kind of dramatic shift, you know, it is only a couple months' worth of data, but that dramatic of a shift what i think warrant a more measured approach of 50 basis points, or, if they go 75, they try to keep the market from pricing into much tightening in those out months. jon: what it unwind the hard work of the federal reserve chairman at jackson -- would that not unwind the hard work of the federal reserve chairman at jackson hole a couple weeks ago? what a not unwind that effort? robert: the market had priced in that they would get to a peak fed funds rate in the early spring, the winter of next year, and then rates would come down. they have cured that problem.

you have something in rates now spreading out, so basically a year of high rates from now, in the high threes. so they move, stay there. they have quite a bit priced in and they are beginning to see it's really a bid. they want to keep the rates high, but by the same token, if they move to aggressively here and it turns out some of their other comments have been correct, that we are going to see the impact on a live basis and a sudden deceleration in real estate was the impact of the prior 75 basis points and they've just thrown another 75 added, they may -- 75 at it, they may throw mor

volatility in than they would like. george: it looks like it has come off little bit. we had a rough finish to august but i don't think the work is done with financial conditions. they need to do more. it is not just a plateau at a higher rate that will do it. it will be the constant pressure of saying we will stay on hold or keep rates high and maintain qt. the qt is now, when the rubber hits the road in september, and that, with the rate hikes, and being committed to it unwaveringly in that fashion will do it. jon: we have another fed put now. i think the equity market gets the joke because, earlier this morning, we had what many would call a kind of goldilocks thing. you could dream for a moment, maybe a couple hours, that they can engineer a soft landing, maybe not push rates too far and

bring price pressure down, but ultimately, if we are in this world of qt and a fed call not a fed put, that will mean risk for the next couple months at least. george: absolutely, and it is a global phenomenon. both the inflation problem is global and the reaction from central banks is global. the fact we've seen this global rise in rates -- for years, term payments have been compressed in the u.s. and we've benefited tremendously from low european and japanese rates. that's no wonder true. again, we are still early days in that process. jon: i want to talk about qt and maybe get some more details. i tried to press fed officials last week in jackson hole on what qt meant to them and i didn't get a clear picture of what any of it means whatsoever. i have to say also from

conversations i've had on shows like this one, it seems like we don't really know what kind of impact qt of this scale and pace will actually have on financial conditions. what is your best guess right now, subadra? subadra: i think it will be trying to remove excess liquidity in the system. we have over $2 trillion in one program, so some of that liquidity needs to come out. for now, it is coming out of bank balanced sheets -- bank balance sheets, and that will be perhaps mean -- transmission of qt will come over time as, you know, new supply hits the market and the fed isn't there to be the backstop buyer of all this new supply and someone else has to come in and take down that supply. and that is really when you start seeing it. to be clear, qt is not the opposite of qe, so you will not

see a meaningful buildup off the get go, but that is something that would happen over time. what i'm really concerned about with qt is the fact that a lot of the reason why the fed purchased a lot of assets in the first place is to provide liquidity in the treasury market, and my -- [no audio] start tightening liquidity in the system, then you might see some disruption in the treasury market and the sort of secondary market trading and the liquidity in the treasury market deteriorating further, and that's really what i'm watching closely right now, because liquidity conditions have worsened almost to the point we were at back in march of 2020, so that is something the fed has to watch closely as they unwind their balance sheet. jon: robert, your take? robert: it is having a big impact. you may not see it in term premiums. you see it in a couple ways in the market.

one of them is the spread between the cheapest securities in the market that are less liquid and the most liquid, richer securities in the market. that spread has widened. offers on treasuries have widened. and i think the fragility in the non-treasury market has really increased. and so i think that, you know, what we saw over the summer when rates were going up, corporate markets effectively closing down in terms of new issuance, i think is a function of the fed draining liquidity. so i think, you know, on balance, that's part of the tightening financial conditions. i think the fed wants that soft landing. they can hike towards these. they don't want the market to rally, to take the tightening out of the system, but i think this overall balance of low liquidity creates an environment where people are already reticent to take risk because it is hard to move that risk once you get it on.

so i think it is having an impact. jon: to go a step further, it is also not just about the fed. george, we are trying to engineer a soft landing. and it is good in that regard, the report this morning, but we are trying to engineer a soft landing on a very, very narrow landing strip, and you have these crosscurrents around it. qt is part of that, financial conditions, all of the above. you have europe too. the headline that crossed about an hour ago that gazprom will keep nord stream shut his another blow to europe. we know the ecb next week will hike anywhere between 50 and 75 basis points, and we've been told not just by fed chair jay powell but also by ecb officials that they are willing to tolerate a recession and carry on hiking. you might expect this from the german central bank -- night -- you might not expect this from the german central bank but you heard the same thing from them last week.

there are other forces at play here. how are you interpreting them? george: 100%. that is the point. this elevated uncertainty and the global rates phenomenon. there are things outside of the control of the ecb as well in terms of gas production and supply. this might not be the same market as the fed, but they still have to show conviction as to getting inflation under control and actually getting it to turn around and head lower, and we don't have evidence of that. it might not be until next year, and that's a long time waiting. september could be a volatile month for a lot of reasons. i have set it 1000 times, this war is a rate risk, credit risk. jon: with that in mind, and, subadra, final word here, do you

think we are underestimating the length of time the fed is willing to wait to make sure, and i mean really make sure, that this inflation genie is back in the bottle? subadra: the question is really whether the markets are willing to take the pain the fed is willing to inflict. you heard from the fed meeting that they are singularly focused on inflation. they want to get the fed funds rate as high as they possibly can, and that's going to have an impact both on individuals and businesses. they are willing to -- they communicated it clearly -- they say there will be job losses, further tightening of financial conditions, and even when they get to a terminal fed funds rate, they will keep policy restrictive for perhaps a while after they get to the terminal fed funds rate, so the question is what happens to financial

conditions under the circumstances? so far, the u.s. has been very, very resilient. the economy has been resilient. i don't think that -- i do not know whether that will be the case toward the end of this year and early next year when these conditions start taking a bite out of the economy. jon: you will be sticking with us. to get you up to speed, about an hour ago, gazprom said nord stream 1 cannot reopen as planned as -- as planned tomorrow due to a technical issue. whether this is a reason or an excuse, the equity market rolled over quickly, down 3.1% on the s&p, the euro-dollar about positive on the session, rolling over in a big way, 99.64 on the euro-dollar. the two year treasury down about 10 basis points. next, the auction block.

u.s. borrowers remaining on hold for the labor day holiday. that conversation up next. ♪

jon: live from new york city, i'm jonathan ferro. this is real yield. we kick things off in the u.s. high-grade bond sales closing out a biggest -- a busy august. the junk-bond market recording a second straight week without a single guest sale, borrowers on hold. in europe, market wide debt sales topping 79 billion euros, wednesday the busiest single day since late may. morgan stanley bracing for a

hard landing, speaking of europe. >> europe is in a difficult position. we are below consensus on growth in europe. we do think europe will see a recession in the back half of this year. that puts the ecb in a difficult position. we don't think the ecb will move 75 but continue to hike and will continue to be hiking into this weaker growth backdrop. jon: subadra, robert, george back with us. subadra, you put out a read on the german and italian 10 year strength. do you think that movement could happen again? subadra: it is possible. i agree with andrew in the sense that the ecb is in a tough spot from a policy perspective, but unlike the u.s., where the fed actually got a little bit ahead of the game, delivered a bunch of rate hikes, the ecb is actually only getting started. for the most part, they are going to have to raise rates aggressively, a 75 basis point

rate hike at the september meeting, possibly 50 at the meeting following that, 25 in the meeting after. very aggressive hikes penciled in. the ecb is not really embarking on qt like the fed is, so in some respects, their only policy tool now is to raise rates. and as you mentioned, the treasury bond spreads, you know, you are seeing a significant amount of narrowing their given the fact that ecb bond yields have gone up quite dramatically. one instrument is approaching 4%. so i think the ecb is playing catch-up and they will have to raise aggressively to address some of the issues on the inflation front. jon: one of the issues that's got my attention this week, and i think it's becoming a much bigger conversation, as we've

seen a big move in yields for europe, and the u.k.'s may be a decent case study. yields up, expectations for higher rates being built into the curve, and at the same time, the currency has depreciated. robert tipp, there is a conversation about some kind of risk premium being built into these bond markets, pain in the energy markets, but the bond market will not be open in the same way with qt replacing qe and inflation being high-end not low anymore -- high and not low anymore. how wide open do you think the bond market will be in the u.k. and elsewhere in europe too? robert: the u.k. gilt market has been subject to so many different risk factors and the credits market there become perennially less liquid than even their european counterparts. it is a function of their

separation from the european market and then the instability, some of which has always been there. the currency has been perennially weak because of their external accounts, but the political situation has exacerbated that. so, you know, it is not a market that will completely unhinge, but it is definitely the most difficult one to handicap and most subject to volatility and illiquidity. jon: what is your take on these developments, george, in the last month? george: it is really an unwind of the move we saw in july, a big rally, and then we sold off even more. you saw that in european and guilt rates. i think that goes back to the data you saw in u.s. treasuries. it is not zero. it is positive in a decent way

and most of these markets will become more domestic focused. domestic investors will have to underwrite their debt and be less focused -- their debt to attract overseas buyers. jon: does this mean depreciation in the currency or just keeping yields up? is that the story now for the europeans? george? we might have lost george con -- george goncalves. subadra? subadra: i'm happy to answer that. i agree. two george's point, you look at the attractiveness of treasuries or bonds or any of the other european sovereign bonds for japanese investors or any foreign investors, what you see is the return is not very attractive, so in some respects, if you are sort of relying on

foreign demand for global bonds, then you are going to need to see much higher yield levels than where you are now, and a lot of it has to do with the sentiment. the currency, the dollar especially, has been extraordinarily strong, so you will need to see more concessions before you see foreign investors come back and the market -- back into the market. bond markets globally have been extraordinarily volatile. particularly when there's this level of volatility, you don't see before investors step in to buy in and participate in the bond market. jon: subadra, george sticking with us. still ahead, an ecb rate decision and more remarks from chair powell. that's coming up. ♪

jon: live from new york, i'm jonathan ferro. this is bloomberg real yield. time for the final spread. the week ahead. coming up, the markets closed on monday in the u.s. european gdp data wednesday. we hear from chair powell. and an ecb decision from president lagarde. 50 or 75 in september for the fed? subadra, 50 or 75? subadra: 75. robert: 50. george: 75. jon: for the ecb? robert: 50. george: 75. subadra: 75. jon: who cuts rates first, the ecb or the fed? george: the fed. subadra: the ecb. robert: the ecb. jon: enjoy the long weekend.

that's it for me. i will see you next week. this was bloomberg real yield. for our audience worldwide, enjoy the long weekend stateside. this is bloomberg. ♪

>> i am mark crumpton. first word news. . president biden says there are signs that inflation started to wane in that the latest jobs report shows more good news. >> inflation, maybe, i'm not over present -- promising maybe begin to ease. gas prices have fallen 80 straight days, the fastest. klein. in a decade -- decline in a decade. >> mr. biden was speaking abou