tv Bloomberg Real Yield Bloomberg April 7, 2019 5:30am-6:01am EDT
goldilocks jobs report and u.s. payrolls bouncing back despite >> businesses have not lost confidence. >> chairman powell's famous words, he is not sure if it is dead or fake but it is resting. >> people said, watch the phillips curve. we will be talking about that every month. it will not happen. >> very little risk of wage inflation. >> huge growth when you look at education, leisure. that shift is a big deal because that means less inflation, more stable inflation. >> all of that points to the fact that things are looking good for the u.s. labor market at the moment. jonathan: continuing the conversation, we have robert mcteer. head of global bonds appeared in fixed
head of global bonds appeared in fixed the driver of that is relatively straightforward. lack of inflation. as long as we have no inflation, whether wage inflation or other sources, that is how things will be. jonathan: robert? robert: inflation is moderate, pce has been coming in solidly 1.6, 1.7 the last few , months. the job number is strong but there is no weighted celebration. unemployment has been stable for six months. many people coming into the workforce. that means maybe it can go faster. i think this is a signal to the fed that may be the president was right, which has to be guiling when
you are doing your best to do your job, and then suddenly slams you, and they are right. we are growing at over 200,000 last year. we were not relating the economy. maybe if they had that hiked rates so much, we would be growing at a rapid rate and have inflation at target. jonathan: a couple of assumptions underlined in this conversation. a number of years ago, this idea that we must begin to the point where payroll decelerates, going back to 100,000. still a healthy labor market, it would just mean we had a mature why have we not gone to one. that point, why is it taking longer? >> one of the things that is frustrating investors and the fed likewise is the traditional models would tell you that from a timeline perspective we should see those things where payrolls start trickling toward the lower -- start matriculating toward the lower run average. the particular element of this recovery which is different is all the rules have been broken. you had a lot of engineering of financial systems, capital is requiring the internal rate of return for projects.
there is still a lot of positive carry to making investments. that is probably one of the big drivers of what is keeping the payroll numbers of bit more buoyant than you would expect. >> i think the payroll numbers are void because there is still a large amount of labor force available that can come in. the number that we should not focus on is the unemployment rate. that is what is probably conditioned people to think perhaps in a misguided way. at the end of the day, the u.s. economy is still growing at trend rate of 2%. as long as we have a trend growth rate of 2% and there is still a large pool of available labor force that can come into the market, if the markets are going to remain resilient, and the economy will be ok. jonathan: robert says we can run this economy harder and faster. you've told me five more years. does this play into that? krishna: this certainly plays into that.
i hope robert tries to stress the economy. that is how we were in 2018. the fed, working off of old formulas of phillips curve, was on the verge of making a policy mistake. the risk is that the fed goes back to its old playbook and slams too hard. i would rather have the current 2% trend growth rate rather than stress it too hard. that is why i am wary of the fed in january or february of this year. effectively they did not have to get to the market all the things they gave. they could have simply stopped tightening and they would have been ok. jonathan: they did, and you look cap your every time i see you. krishna: i am happy because they stopped tightening even on not happy that they basically put everything on the table. jonathan: the president is calling for a whole lot more. take a listen to what he set -- he said about what he thinks
the fed's next move should be. >> the fed should drop rates. i think they really slowed us down. there is no inflation. i would say in terms of quantitative tightening, it should now be quantitative easing. jonathan: so many different ways we could go with all of this. robert, the fed's next move and how the president's calls play into it. >> that was quite expansive call on his part, quantitative easing. to the point that the job growth has been strong, that is to the fed's credit. they have been more cautious than any dead in raising rates, and that's been spectacular for the length of this expansion. the financial institutions are really well-capitalized here compared to past cycles. people are scarred by the past cycles, worried we will have a balloon if we get faster growth. to krishna's point, your population ratio is very low. lots of people on the sidelines
that really need to come into the workforce. given the demographics, savings levels in this economy. i think it has quite a way to go here. i think they could easily -- i'm not saying they would do this, but they did put everything on the table. they took those dots to flat, and howell is not an economist, -- i think powell is not an economist, and he may be open to cutting rates. jonathan: do you think he will, if they think they can run it harder, faster, will they cut rates, even without the typical conditions we associate with a cutting cycle at the federal reserve? robert: this kind of report and the data we have, inflation falling with him target, that is the face of failure. that would signal to me, in my mind, that they should be cutting. krishna: they have demonstrated that given the opportunity they could. they didn't have to do all the things that they did, but they did. however, if they do that, that would be a mistake. much in the way that tightening
in 2018 as aggressively as they did was a mistake. when things are turning up, when things are probably going to get closer to 2% in the second half of the year, that would be a policy mistake. they would hurt their own credibility. the fed cannot afford that. jonathan: let's talk about the perception of independence. operationally, the fed is independent. by definition the administration as previous administrations have done, you can nominate who you like for the federal reserve. i don't think we should be hypocrites about this. once upon a time, barack obama wanted to nominate larry summers, who was once the democrat treasury. this feels a bit different though. herman cain, stephen moore. not quite from the same mold as larry summers. does this compromise the perception of the federal reserve independence? krishna: if you want the fed to say 9-9-9, you nominate herman cain. to some extent it is basically
demeaning the fed. it doesn't mean that you should not take input from the business community. the fed has very detailed processes to incorporate those points. but nominating herman cain to the fed, or for that matter, nominating stephen moore, where he has said so many bad things, i don't think is the right move. jonathan: i don't want to judge the intent of the administration. ultimately, the perception of this matters. if these guys get confirmed to the federal reserve, in your mind, has this federal reserve lost some form of independence? >> i don't know if i would go there from a policy perspective. saying they lost independence. you are seeing an analysis that the fed is doing. typically you have people studying economic cycles. you look at 2004, 2006, gauge the reaction function from the monetary policy side. 17 consecutive 25 basis point
tightening's. i think this administration is putting people in play that have a business cycle viewpoint. that ties into what the president is doing by commenting on policy and calling for rate cycles to decline after they have just accelerated. jonathan: great to have you with us. coming up on the program, further distortions in fixed income. credit with subzero yields into -- yields continuing to pile up. we go to europe next. that conversation is around the corner. this is bloomberg "real yield." ♪
where we begin in the united states with the investment grade market, where low pause sold bonds for the first time since joining the lowest rate tear. the home-improvement chain sold $3 billion of bonds with the longest portion of the offering yielding 1.625 percentage points above treasuries. sticking with investing great and heading to emerging markets tencent with a dollar bond in , the largest dollar offering in asia this year. the $3 billion 10-year bond yielding 1.45 percentage points more than the current 10-year treasury. in europe, spain's auction of 10 year notes was oversubscribed. the euros 2029 1.8 one billion auction priced at an average yield of 1.12%. i want to stay with europe. blackrock's rick rieder looking for a big move from ecb president mario draghi. >> we look at companies weighted average cost of capital. the cost of the
can do in the interim before they get to that step. jonathan: what can i do in the interim? scott: as we are learning the u.s. policy signal can be equally important to policy implementation. a long story on that will be in that were to be put on play, the ecb coming in and playing with the structures on putting more capital into the banking system, there is a limited total rate of return from the ecb's perspective, the transmission mechanism will not be fantastic. they have to extend that facility, have to do it sooner than june. robert: i think that's right. we have a lot of experience with qe. when you look at japan, they have been doing this since the 1990's. when you think about the end game, you strangle your government bond market, basically make it unrewarding and almost unsafe for investors. then they move on to equities. what can happen in the long run is you make the equities unsafe. you make them less attractive, performance vehicle, more
dangerous. i think that's the wrong way to go, lending is the right channel. once you hit 20 lower bound, you have to make the lending have to make the lending attractive enough. jonathan: have we started to normalize the absurd, particularly in europe? where you look at where these markets are priced at the moment. krishna: we are getting used to the absurd, i guess. as i mentioned, in this cycle, everything is possible. even there, there are shades of possible. the germans buying stocks would be something. having said that, what is the purpose of the central bank? the purpose of the central bank is not to support asset prices. the purpose of the central bank is to facilitate credit growth. the credit driven economic growth. buying stocks does not really help much.
jonathan: the central bank believes that as a means to an end, i believe. that is what the bank of japan believes in that is what the ecb is doing, supporting assets. krishna: they are not supporting assets. the purpose of quantitative easing is not to support asset prices. that is what the outcome is. the purpose of quantitative easing is to support credit growth. there are lots of things that the ecb can and will do to support credit growth. jonathan: the result is financial repression, and you have to deal with it. we hear a lot of people ask questions like what is the bond market telling me, what is the signal at the moment. can you take any signal from european assets given where the price is right now? scott: european assets are spiriting a elongated playbook from what we see in the u.s., you strangle the front end, force investors to extend their duration and take credit risk. they are doing that at an extreme level. the return on investment has become total return driven and
less yield driven. the big question is what happens next. is equities where you go? i don't think so, i have to agree with krishna on that. i think that would be one step too far and you would start blurring the lines of what your actual output of policy is supposed to be. jonathan: let's talk about your exposure to the european credit risk. robert: the spreads are substantial. the ecb is basically going from thinking they were going to be ending their buy program to raising rates, and now they are trying to sneak the deposit rate to zero so it does not punish the banks. they are ahead of the curve compared to japan, so they may be stuck here for a long time. investors are going out on the yield curve, dropping their yield targets, going into spread product and that will be , supportive. the fundamentals are strong enough that you don't have it
-- you don't have deteriorating credit quality that would suggest this is going to be a near-term credit blowout. jonathan: you are very constructive on the global economy, but i don't hear that from you, so what have you been doing in terms of managing your exposure on the continent? krishna: the way we have managed our exposure on the continent is recognizing that owning bunds doesn't do much for you. you may get some price appreciation but that is relatively modest. our exposure has been really european credit to make up for the negative yield. i think things have worked out well. at various points, when bunds backup from negative to plus 40, we pay the price. through the cycle, it's been a good trade. jonathan: which segment, sector, investment grade, high yield? krishna: primarily high yield is where we are focused. scott: our exposure is a little different. our more interesting story to play is the brexit story. we found some opportunities
specifically in u.k.-based banks toward the front end. we see yields in the fourth quarter pushed 6.5% to 7%. that has been more of our opportunity. we have not taken up a lot of exposure in the rest of the european union. jonathan: great to have you with me. scott kimball, robert tipp, krishna memani. i want to get a market check on where the bonds have been. yields are higher this week by a basis point. still ahead, the final spread, the week ahead featuring fed minutes, and an ecb decision. this is bloomberg "real yield." ♪
what do you want to say? i think the big contrarian play in europe continues to be the sovereign's. they were beat up in that crisis and i think people are missing that at any given point in time one country will be in the headlines. italy for example now. the in the background greeks are getting a billion dollars released to them. they have a long way to go. spain, portugal. it is a contrarian play but i
don't think this is anywhere near over. jonathan: is there a believe that you think the periphery, which has been treading lately, will start trading like a sovereign again? robert: that's right, i see this is an ongoing trend. have to watch this and see that it plays out, that the improvement is not cyclical. the numbers on the face of it, for spain, they are comfortable -- they are a comparable credit to the united states. there will be some political headlines there, but if they say -- if they stay with the program and europe is one of the few places that has a rulebook on the fiscal side. i think the spreads will be cut in half over the next five years. jonathan: this is certainly a contrarian call. the idea that the periphery has behaved like credit over the last 10 years going back to the u.s. owned debt crisis do you , think that we are making that transition slowly? krishna: not at all. yes, the periphery is a good investment, but thinking that they would start trading like
sovereign bonds anytime soon given the state of the economy in some parts of the continent, i don't think that's a realistic outcome in any investment horizon. scott: i would have to agree with krishna. our position throughout has been that you have to approach the economy and their dead as credit -- and their debt as credit functions. jonathan: a definition of contrarian. we have to wrap up the program. rapidfire round three quick , questions. first questions, does the ecb cut the depot right before the year is out? robert: no. scott: no. krishna: maybe. jonathan: come on. 2.38% on the- 10-year. have we seen the low for the year on the u.s. 10-year yield?
already in 2019 yes or no? robert: no. scott: why not. krishna: yes. jonathan: does more and can get nominated and confirmed by the -- does hermann kaine get nominated and confirmed by the senate, yes or no? robert. robert: no. scott: no. krishna: i sure hope not. jonathan: three big calls from three great guests. robert tipp, scott kimball, krishna memani, thank you. that's it for us. we will see you at 1:00 p.m. new york time. this was bloomberg "real yield." this is bloomberg tv. ♪
>> coming up, the stories that shaped the week in business and around the world. >> the noes have it. >> deadlocked at the deadline, the u.k. government pulls out all the stops to get brexit through parliament. >> today, i am taking action to break the logjam. >> the likelihood of a longer extension has risen quite a lot in the last week. >> data from china surprises to the upside, while prospects brighten for a trade deal with the u.s. president trump: this is the grand daddy of them all. >> let's not think this is all done. there are issues remaining. >> bitcoin show signs of a resurgence.