A. 3 increase in wage growth. You to look at the rounding, 2. 5 over 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. That is what we are really looking at. If you can get wages going, you can get inflation going, which is what the fed wants to get going. I do think you are seeing both pretty solid labor market thats not necessarily extremely overheating, but its 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 its 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. Its not humming. Its slowing and relatively weak. As the economy continues to grow, and as 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 the head of , rate strategy at rbc strategy, kathy jones, and christian memani. Krishna kathy, hot or cold . Do you want to jump up to the debate and help us out . What is it . Kathy i think it is warm. It is solid, moving along. You only need 100,000 or less jobs to keep diminishing the slack in the labor market. Overall, there was some good news. The purchaser participation rates for workers prime age is moving higher and its well above where its 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 its classified as not so hot, it doesnt matter. Enough momentum in the economy and the tax cuts are coming so on the back of it, the markets will see through. Thats what they are doing. After the initial debt, yield is back up. At the end of the day, the economies on a global basis are doing well. Jonathan michael, your thoughts . Michael im in line with krishna. The big news about this is change in sentiment in the markets. A year ago everyone wouldve been looking for the worstcase 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 they were. People are looking beyond any weakness. Jonathan travel below 50 basis points for a little while. What were your thoughts when that happened . How far do the spreads get . Krishna i think that trend will continue. Looking for steepening in this environment is a fools game in my personal opinion. The reason that is the case is because, i think if there is true inflation, then markets will anticipate that the fed is going to slam on the brakes really hard and we are talking about a recession in the nottoodistant future. For a tiny bit, we may see steepening. Overall, a flattening trend. Jonathan is it a fools trend . Kathy a little bit of steepening would not be too surprising. The only reason that they are , the long and has been stuck. I think we get longerterm yields to grind a bit higher and more supply that has to be absorbed by the market in 2018 and beyond. I wouldnt be surprised to see a moderate amount of steepening. Jonathan do you see any of that . Krishna absolutely, and we might see steepening, but i dont 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 im seeing into the output numbers whether it soft 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 dont. Why not . Michael thats one of the great mysteries. Of the last few years. We think we will see higher inflation but nothing dramatic, just a small uptick Going Forward. That said, we do think those Inflation Fears and more importantly the supply issues that you mentioned. In the past two years, supply has not mattered at all. We have gone from 4. 5 trillion of debt outstanding in mid2008. Government debt outstanding. Trillion in the middle of this year. Just because were 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 we will have to have some term premiums come back and the curve steepening in here. I think the next refunding announcement in early february, we will see 30 year auctions increase and that is when people get scared about the supply issue. Jonathan i spoke to gary cohn earlier and he spoke about banking. And deregulation. Do you think there was a reason for the u. S. Long end to sell off sharply if the banking deregulation bill kicks in and kicks in around q1 . As suggested by gary cohn. 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 and the tax changes, im more focused on the highyield market at this stage of the game than i am about the financials. Jonathan we are going to talk about credit in just a moment, i do want to get your thoughts, krishna on the inflation dynamics. Break even rates are picking up. 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 . Krishna i think, as michael was saying, thats the great mystery. Inflation would pick up a tad. I dont think it picks up a lot. If it picks up a lot, we will see a much more forceful response from the fed to get us into a recession. Two phase that out. Counting on breakevens picking up in a big way, i dont think it is in good context. Jonathan a really interesting note from jpmorgan and the basis thats not coming. What is the catalyst to get term premium up and is it coming . Krishna i dont think its coming. I think its coming after recession and not before a recession. Jonathan kathy . Kathy i think there would have to be enough Global Growth to hold global inflation. Theres been enough sluggishness to hold Global Growth throughout this last decade. For the first year in this decade, we have seen all the major countries growth the same countries grow at 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. Any surprise, the market is just not priced for it at all. Krishna her point is a really good one, which is that it has to come from overseas. The challenge there is an emerging markets, where you would expect this to materialize at this point, actually Inflation Expectations are relatively flat and thats one of the reasons why emergingmarket rates are so well anchored at the moment. Jonathan michael . Michael we had two pieces behind this flattening. One has been the low inflation and the fed creeping higher. That has been the longterm structural flattening. But then, since september, we just had this dramatic move in five 30s from 100 basis points to just above 50 basis points. That has been this extreme pension bid. Some of that may be related to tax changes and we think that will fade as the years go on. We are expecting continued support for the long end early in the year, but then we think as that tension bid fades as the supply gears pick up. We think we will have that later this quarter. Jonathan michael cloherty, kathy jones from schwab and krishna. Sticking with me. Next, in a race with emerging market economy, the race for foreign capital. Thats next. This is bloomberg real yield. Jonathan from new york city to our audience worldwide, im 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. About 680 billion of highgrade u. S. Dollar denominated Corporate Bonds are due to mature before year end. Led by the banks. This is likely to be a signal of who will lead issuance of 2018. Outside the United States, there is a race among em countries to secure capital. This week mexico completed a debt sale totaling 3. 2 billion, total amount reaching 15 billion. Argentina sold 90 billion of debt with more than half of investors coming from north america. Both countries taking advantage of the lowest borrowing cost in nearly a decade. Still with me around the table, michael clotherty, kathy jones, and Krishna Memani. I want to take the opportunity to talk about credit and i want to begin with you. Something struck me about last year. Junk etf, you risk assets to perform more broadly and junk lagged. It lacked em and my question is why . Why is highyield not keeping up with the rally you see in risk assets . Krishna the answer is simple. Highyield shares are just too tight. Theres nothing magical about it. Highyield has had a substantial run over the last seven to eight years. We are at a spread level on the cbs indices of some 300, and it is difficult to get yourself to buy high level at that yield and feel good about it. Kathy i would agree with krishna. Spreads are tight and valuations are really high and the credit quality is deteriorating. Then you add the tax bill onto it, which is not favorable for highyield issuers. You just dont have a great case there to be made for being all in on high yields. Jonathan i asked bill gross about his exposure to highyield and junk and whether he had any and what he would advise other to do. Would advise others to do. Have a listen to what he had to say earlier on Bloomberg Radio and bloomberg tv. I am not short highyield. I am short hyg dx. Spreads are very narrow and they follow the stock market. It is almost a one to four correlation. If the stock market goes up 1 , the spreads in the price of the cbx goes up by a quarter of that. Jonathan there is a huge difference between sitting here and saying 2018 is the year for coupon clipping. Youre not going to get the capital returns you got over the last couple of years between that and saying im going to go short. Krishna i have an issue with what he was saying. You know, i dont think highyield spreads are very attractive, but expecting them to widen meaningfully, which is what you have to have to have a short position, i dont think is realistic either. Highyield is ok and you can clip the coupon, but they dont widen meaningfully. If they do, its 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 and high yields therefore does well. Jonathan i asked bill to clarify what are you looking to happen . His reasoning is the front end of treasuries. We will get this real pickup in a 2year note and that at some time will test high yields. What levels are you looking for on a twoyear 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 theres further to go on that. We think they will get more rate hikes next year, too. We think we are going to continue to see pressure on twos. 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 trapped 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. So you have got this massive buyer base and you just dont have a 2. 5 trillion shift in investment mix without leaving a mark. Jonathan they are also the big buyers and the big issuers. When you net that out what are , you left with on the back of the repatriation story . Kathy im not really concerned about the repatriation because i think it may not be as massive as everybody expects. Our past experience has been that its been pretty modest. It has dragged. Secondly, i think the balance will work itself out in the Investment Grade area. Again, highyield is another issue related to not only the spreads but the tax bill and the ratios of interest expense being high. Jonathan thats got to mean something for credit, doesnt it . Krishna yeah, i hope michael is wrong. [laughter] i think markets hope michael is wrong. If that is the case, were looking at a recession in the not so distant future. Jonathan you call that a Recession Risk . Krishna absolutely. If we get four rate hikes this year and we expect two to more three next year, i think were looking at a recession. Jonathan the base case right now is three. An extra 25 basis points is the Tipping Point . Krishna i think with the base case of three, the expectation is the economy starts slowing down. If its 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 dont expect a recession anytime soon. We continue to believe this will be the longest business and credit cycle that all of us have ever experienced. Having said that, if his views come about, thats an issue. Jonathan michael, weigh in. Michael first, on repatriation. The difference between this time and last time, last time youll got taxed on the money brought home. This time you get taxed whether you bring it home or not, so why would you not bring it home . And we think on growth, the only thing that will stop the fed is if we get Massive Movement in credit spreads. That will spook the fed and knock a rate hike out of the picture. Thats the break on the fed. We do think we will see some periodic pressure on things, but a massive gap wider in risk assets and the fed stops. 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 answer this where do you take credit risks that will generate considerable capital returns if this is the longest cycle . It cant be risk completely. Krishna if youre looking for capital returns, buy equity for gods sake. What credit is supposed to provide you at this point in the cycle is some level of income and not meaningful capital appreciation. We think within the credit markets, the most attractive asset class is emergingmarket local debt. That is driven by their high level, 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. Other than that, credit overall, if you clip the coupon, you can consider yourself lucky. Jonathan kathy, you have the final word here. Kathy i think most risk assets are highly valued and emergingmarket bonds would not be my choice. Jonathan what would be . Kathy 26 of that is denominated in u. S. Dollars and i think the dollar has some room to move up. I would say at the shorthand in Investment Grade, i dont think theres a really great place to hide right now. Jonathan kathy jones, sticking with me from schwab and Krishna Memani from oppenheimer funds. I want to get you a market check of where treasuries have been. Twos 10s and 30s as we go toward the end of the week. Yields up on a twoyear note by eight basis points to 1. 96 . We are zooming into that 2 level. Up on the long end as well by seven to 281. On a 30 year. Still ahead, Bank Earnings in the United States and important data out of the americas coming at the back end of the week. That is coming up in just a moment. This is bloomberg real yield. Jonathan this is bloomberg real yield. Im Jonathan Ferro for audience members worldwide from new york city. Time for the final spread. Coming up over the next week, we get a series of economic reports concluding on friday when we get cpi data and retail sales as well. Plus, on the earnings side, it kicks off big time at jpmorgan and wells fargo. Bank earnings start to come through. In politics, a lot going on is as always. Keep an eye on the french president Emmanuel Macron 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. Kathy, retail sales, psi, 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 yearoveryear basis, its slightly higher for technical reasons. We had that big dip last year early in the year. If you are looking yearoveryear, it will actually outperform what most peoples expectations are. Jonathan michael . Michael same. The Regional Sales data we have had, we had so much momentum recently, but even a soft month, you still have a very good quarter. An impressive gdp number. I think we will pay more attention to the inflation data. Jonathan at what point, michael, does that tax cut, im going to spend more money kick in . Does it at all . Michael i think it does. Normally, when you get tax cuts, its coming out of recession and everyones terrified and you dont spend the money. You get one at this point in and you are much more likely to spend. You will start to get withholding changes Going Forward so people dont start to see the cash immediately. Its really not until april of next year that people will see the big change in whats in their wallet. Jonathan krishna . Krishna the key thing to remember with respect to that is more Corporate Tax cuts where the impact is going to be muted 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 standpoint, both of them are looking good at this point, but at the end of the day for the markets, it doesnt really matter. We firmly believe that the entire market firmly believes that we are in a growth momentum phase and whatever the data is, we will look through that. Jonathan is that the takeaway, really . Krishna dont Pay Attention to the Economic Data for the first half of the year. Its bad for a pontificator like myself, but good for the market. Jonathan lets get to the final round where we get your quick final thoughts and what through and whip through a couple of questions. We get through the growth poor story. Is that regime here to stay yes or no . Michael yes. Krishna yes. Kathy yes. Jonathan twos, tens on treasuries, could we hit zero by yearend . Michael no. Kathy no. Krishna yes. Jonathan final question. Would you reduce highyield exposure to zero, get out, or stay in . Michael stay in. Kathy reduce, but stay in. Krishna stay in. Jonathan my special thanks to all of you. Thank you. Michael, kathy, and krishna. That does it for us this week as we kick off a brandnew year in 2018. A happy new year to you. We will see you next friday at 12 30 p. M. New york time. 5 30 p. M. In london. This was bloomberg real yield. This is bloomberg. Retail. Under pressure like never before. And its connected technology thats moving companies forward fast. Ecommerce. Real time inventory. Virtual changing rooms. Thats 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. Scarlet im scarlet fu. This is bloomberg etf iq. We focus on the risks and rewards offered by etf. Scarlet is the tide turning for commodities, with oil back at 60 and the bloomberg Commodity Index trading in an 11 month high. What are the best etfs to play this recovery . We sit down with marc levine on why he soured on hedge funds and throughout almost all of his weight behind index funds. New year, new trends. What happens when big