tv Bloomberg Real Yield Bloomberg January 5, 2018 12:30pm-1:00pm EST
jonathan: him from new york city to our bureaus worldwide, i'm jonathan ferro. with 30 minutes dedicated to fixed income this , this is "bloomberg real yield." ♪ coming up, u.s. payrolls disappoint, which growth stalls, and unemployment sticks at 4.1%. one week of an expected jobs report is unlikely to derail the federal reserve. the economic data in europe looks hot, but inflation calls. we begin with a big issue -- the payrolls report. >> it isn't bad. i wouldn't overreact to this report. >> growth in the jobs market is solid. >> disappointing in many ways. >> a .3% increase in wage
growth. you have to look at the round the last 12 months and we could still be a path of up to 3% so that would be a sign of improvement in the job market. >> the job creation is fine. the wages was .3 with the revision down to .1 so a .2% per month. if we can get wages pulling, you can get inflation going, which is what the fed wants to get going. >> i do think you are seeing marketetty solid labor that's not necessarily extremely overheating, but it's a good thing for markets and equities. >> this is not a labor market humming along. it is certainly not consistent with needing to raise rates. and i think it pushes the fed possibility of raising back. this is a labor market that potentially looks like it's beginning to slow. >> the labor market is actually really hot, but the run rate for job growth is below 100,000 probably, so anything above that to me is taking away the slack
in the labor market. >> the labor market is not hot. it's not humming. it's slowing and relatively weak. >> as the economy continues to grow in the labor force continues to tighten, remember the unemployment rate is still 4.1%, a 17 year low. we are going to see real wage pressure here. jonathan: joining around the table is michael clark, kathy jones, and christian my ahmani. kathy, hot or cold? do you want to jump up to the debate and help us out? kathy: it's solid and you only need 100,000 or less jobs to keep diminishing the slack in the labor market. and thes some good news prime age of workers is moving higher and it's well above where it's been the last five or six
years so that means people are coming back to the labor market and things are moving along. krishna: even from markets perspective if it's classified as not so hot, it doesn't matter. the tax cuts are coming so on the back of it, the markets will see through. that's what they are doing. at the end of the day, the global racesa are doing well. jonathan: michael, your thoughts? michael: i'm in line with krishna. a year ago everyone would've been looking for the worst-case scenario out of every report. jonathan: or at least for the fed not to do something. michael: where now we move for five minutes and the markets go right back to where it was. people are looking beyond any clips of weakness. jonathan: travel below 50 basis points for a little while. what were your thoughts when that happened? krishna: i think that trend will
continue. looking for deepening in this environment is a fool's game in my personal opinion. the reason that is the case is that is the 3rd street inflation, markets would anticipate that the fed is going to slam on the brakes really hard and climb toward a recession in the not-too-distant th future. for a tiny bit, we may seats steepening. jonathan: is it a full trend? kathy: a steepening would not be too surprising. the only reason that they are flat and is the long and has been stuck. i think we get longer-term yields to grind a bit higher and more supply that has to be absorbed by the market in 2018 and beyond. i would not be surprised to see a moderate amount of steepening . jonathan: do you see any of
that? krishna: we might see steepening, but i don't think it lasts. with inflation reappearing, the markets would anticipate a faster normalization and therefore a recession to get back to where we were. jonathan: some stellar data with the pmi in europe, but then the inflation data is not tracking what i'm seeing into the output numbers whether it saw sentiment surveys or the hard gdp figures for labor market numbers. you would expect to see that and on the other side higher inflation numbers. you don't. why not? michael: that's one of the great mysteries. we think we will see higher inflation but nothing dramatic, just a small uptick going forward. we do think those inflation fears and more importantly the supply issues that you mentioned . in the past two years, supply has not matter that all. we are gone from 4.5 chilean dollars of debt outstanding admit 2008 -- $4.5 trillion of
debt outstanding in mid-2008. just because we're not seen that pressure yet means you can go further and further out forever. we will be adding about $1 billion of additional debt every year for the perceivable future. at some stage people will have to start to pay attention to that and have curve steepening in here. the next refunding announcement in early february, we will see 30 year auctions increase and that is when people get scared about the long and. jonathan: i spoke to gary earlier and he spoke about banking. do you think there was a reason for the u.s. long and to sell off sharply if the banking deregulation bill kicks in and around q1? kathy: i do not think it will happen very quickly. i think it will take some time
for deregulation to work its way through the system to produce the kinds of results that would cause the long end to sell off. in terms of all the regulatory changes, i'm more focused on the high-yield market at this stage of the game that the financials. jonathan: we are going to talk about credit in just a moment, but i want to get your thoughts on the inflation dynamics. are we thinking about inflation this year as a tale rift? do you need to hedge out or a base case that is going to materialize through this year? i think as michael was saying, that's the great mystery. i don't think inflation will lot.up a if it takes up a lot, we will see a much more forceful response from the fed to get us in a recession. ounting on breakevens picking up in a big way, i don't think it's in good contents. jonathan: of reall a really
interesting note from jpmorgan and the basis that's not coming. what is the catalyst to get the premium up and is it coming? krishna: i don't think it's coming. i think it's coming after recession and not before a recession. jonathan: kathy? kathy: there would have to be enough global growth to hold back a global recession. there's been enough throughout this last decade. for the first year, we have seen all the major countries growth the same time. there is a lag effect with inflation. it could take a little while longer, but what worries me is the term premium is still negative. the market is not price for it at all. krishna: per point is a really good one, which is that it has to come from overseas. the challenges that an emerging markets where you would expect this to materialize at this point, actually inflation expectations are relatively flat and that's one of the reasons
why emerging-market rates are so well and good at the moment. jonathan: michael? michael: we had two pieces behind the flattening and one has been the low inflation and the fed creeping higher. but then since september, we int had this dramatic move five 30's from 100 basis points to just above 50 basis points. that has been this extreme tension bid. some of that may be related to tax changes and we think that will fade as the years go on. the spec continued support for the long and early in the year, but we think that tension bid fate is the supply gears pick up. herty,an: michael clo kathy jones, and krishna my money sticking with me. in a race with emerging market economy, the race for foreign capital. that's next. this is "bloomberg real yield." ♪
♪ jonathan: from new york city to her audience worldwide, i'm jonathan ferro. this is "bloomberg real yield." i want to head to the auction block now where we start with a little look into the crystal ball for 2018. 680 billion dollars of high-grade u.s. dollar denominated corporate bonds are due to mature before year end. this is likely to be a signal of who will lead issuance of 2018. outside the event states, there's a race among em countries to secure capital. mexico completed a debt sale totaling $2.2 billion with demand reaching $15 billion. argentina sold $90 billion of debt with more than half of investors coming from north mecca. both countries taking advantage
of the lowest borrowing costs in a decade. michael, kathy, and krishna. i want to take the opportunity to talk about credit and i want to begin with you. something struck me about last year. you risk assets to perform more broadly and junk lagged. 500 andd the s&p my question more generally is why? wise high-yield not keeping up with the rally you see in risk assets? krishna: simple -- high-yield shares are just too tight. there's nothing magical about it. high-yield has had a substantial run over the last seven to eight years. we are at a spread level on the indices that lifted up some 300 because it's a difficult to get yourself to buy high level at that yield and feel good about it. kathy: i would agree with krishna.
spreads are really high and the credit quality is deteriorating. then you add the tax bill onto it, which is not favorable for high-yield issuers. you still have a great case there to be made for being all in on high gilts. yields could jonathan:. jonathan: i asked bill gross about high-yield and if you had -- if you have any. this is what he had to say earlier on bloomberg radio and bloomberg tv. >> spreads are very narrow and they follow the stock market. it's always must they want to for correlation. if the stock market goes up 1%, the spreads in the price of the cbx goes up by a quarter of that. jonathan: a huge difference between sitting here in saint 2018 is the year for coupon clipping. you're not going to get the capital returns he got over the last couple of years between that and saying i'm going to go short. krishna: i have an issue with what he was saying.
i don't think high-yield spreads are very attractive, but expecting the to widen meaningfully, which is what you have to have to have a short position, i don't think is realistic either. high-yield is ok and you can clip the coupons, but they don't widen meaningfully. if they do, it's in the back half of the year rather than the first half. we have enough global economic momentum going into it that equities do well in high yields therefore the well. -- therefore do well. jonathan: i asked bill to clarify what are you looking to happen and is reasoning is the front end of treasuries. they will get this real pickup that at some time will test high yields. what levels are you looking for on a two-year treasury this year? we are pretty much at the 2% mark already. michael: we are looking at four rate hikes this year so we think there's further to go on that. we will get more rate hikes next year. we think we are going to continue to see pressure on
those. the other issue on the front of the curve is that this tax bill may have impacts on investment grade also. you have over $2.5 trillion of trap offshore cash that right now is largely invested in high quality u.s. fixed income assets. when that money comes home, it is likely to be diverted to other purposes. you have this massive buyer base and you just don't have a 2.5 chilean dollar shift in investment mix without leaving a mark. jonathan: are also the big buys and the big issuers. what are you left with on the back of the repatriation story? kathy: i'm not really concerned about the repatriation because i think it may not be as massive as everybody expects. our past experience is that it's been pretty modest. secondly i think the balance will work itself out in the investment grade area. high-yield is another issue
related to not only the spreads but the tax bill and the ratio of interest expense with ebay. beinitda being high. jonathan: that's got to mean something for credit, doesn't it? krishna: i hope michael is wrong and i think the markets hope michael is wrong. if that is the case, we're looking at a recession in the not so distant future. if we get four rate hikes this year and we expect to are three more next year, i think we're looking at a recession. jonathan: the base case right now is three. an extra 25 basis points is the tipping point? krishna: the expectation is the u.s. economy starts slowing down. if it's the case that michael is making, the u.s. economy is not slowing down. the global economy overall continues to do well and we go further in the path to normalization. again, we don't expect a
soon.ion anytime we continue to believe this will be the longest business and credit cycle that all of us have ever experienced. views said that, if his come about, that's an issue. jonathan: weigh in. michael: the defensive team this time last time as the last time you'll got taxed on the money brought home. this time you get taxed whether you bring it home or not, so why would you bring it home? the only thing that will stop the fed is if we get massive movement and credit spreads. that will knock a rate hike out of the picture. that's the break on the fed. we do think these will see some periodic pressure on things, but a massive gap wider in risk assets. jonathan: i want to wrap things up. if you believe this could be the longest cycle ever, but you think spreads are too tight, then after this, where do you take credit risks that will
generate considerable capital returns? it can't be risk completely. krishna: if you're looking for al returns, by equity for god's sake. you're looking for some level of income and not meaningful capital appreciation. we think within the credit markets the most attractive asset class is emerging-market local debt. that is driven by their high their high rate levels plus the fact that the dollar remains stable or continues to weaken. that is really the best case i can make for that asset class. ,ther than that, credit overall if you took the full plan, you can consider yourself lucky. jonathan: kathy, you have the final word here. kathy: i think most risk assets are highly valued and emerging-market bonds would not be my choice. 36% of that is denominated in u.s. dollars and i think the dollar has some room to move up. the united states is short and
in investment grade. i do not think there's a really great place to hide right now. jonathan: kathy coming from swap, krishna from oppenheimer funds. i want to give you market check of where treasuries have been. to's, tents, and 30's as we go toward the end of the week. yields up on a two-year note by eight basis points to 1.96%. we are zooming into that 2% level. up on the long end as well by seven t 22 point a one. bank earnings in the united states and important data out of the americas coming at the back end of the week. this is "bloomberg real yield." ♪
real yield." on jonathan ferro for audience worldwide. -- i'm jonathan ferro for audience worldwide. time for the final spread. a series of economic reports concluding on friday when we get cpi data and retail sales as well. learning side kicks off big time .t jpmorgan wells fargo in politics, a lot going on is always. keep an eye on the french president as he heads over to china and talks in korea something to keep an eye on as well. final thoughts with michael cloherty, kathy jones, and krishna memani. something you got your focus on? kathy: your usual for the time a month. decent readings on both. the important thing about cpi is that on a year-over-year basis, it's slightly higher for technical reasons. we had a big dip early last year.
looking year-over-year, it will actually outperform what most people's expectations are. jonathan: michael? .ichael: same coul w retail data -- we had so much momentum recently, but even a soft month, we still had impressive quarter. i think we will pay more attention to the inflation data. jonathan: at what point is that story of we got a tax cut i'm going to spend more money kick in? michael: i think it does. when you get tax cuts, it's coming out of recession and everyone's terrified and you don't spend the money. you get one at this point in your much more likely to spend. you will start to get withholding changes going forward so people don't start to see the cash immediately. it's really not until april of next year that people will see the big change in what's in their wallet. jonathan: krishna? krishna: the thing to remember is more corporate tax cuts where the impact is going to be needed to begin with. you will see it, but you will
see it in a very faded way if at all. from an inflation standpoint, retail sales sai standpoint, both of them are looking good at this point. at the end of the day for the markets, it doesn't really matter. we firmly believe that the entire market firmly believes that we are in a growth momentum phase. whatever the data is, we will look through that. attention to't pay the economic data really? krishna: don't pay attention to the economic data for the first half of the. it's bad for a pontificator like myself, but good for the market. jonathan: was get your quick final thoughts and what through a couple of questions. growth poorgh the story. is that regime here to stay -- yes or no? michael: yes. krishna: yesterday kathy. kathy: yes. jonathan: could we hit zero by
year-end? michael: no. kathy: no. krishna: yes. jonathan: would you reduce high-yield exposure to zero, get out, or stand? y in? michael: stay anin. kathy: reduce, but stay in. krishna: stay in. jonathan: that does it for us this week as we kick off a brand-new year and 2018. happy new year to you. we will see you next 30 at 12:30 p.m. new york time. this was "bloomberg real yield." this is bloomberg. ♪ retail.
under pressure like never before. and it's connected technology that's moving companies forward fast. e-commerce. real time inventory. virtual changing rooms. that's why retailers rely on comcast business to deliver consistent network speed across multiple locations. every corporate office, warehouse and store near or far covered. leaving every competitor, threat and challenge outmaneuvered. comcast business outmaneuver. david: it's 1:00 in washington, 6:00 in london, and 2:00 in the morning in hong kong. i am david westin. shery: i'm shery ahn. welcome to "bloomberg markets: balance of power."
with a focus on the intersection between politics and the economy . david: pass the salt. tells bloomberg the government and hav may have. won't back down. michael wolff says he stands by in his book about trump's presidency while the president calls a phony book full of lies. choosing sides. robert and rebekah mercer wants trump and steve bannon, but with the release of "fire and fury," mercer has kept the back of the president while keeping the purse strings with bannon. ♪ david: states like new york, new jersey, and california have reacted strongly to the new tax laws limits on state and local tax deductions, saying they