Is decelerating. It is consistent with some slowing. The economy is slowing. The manufacturing slowdown is continuing. But it is happening at a very gradual pace. We are slowly pressing on the break here. It is not a falling out of bed moment. It is not like a flashing red, the economy is falling off a cliff number to me. Definitely not falling off a cliff. Not enough to do anything. The market is priced in for an october rate cut. We have to pencil in a fed cut in october. For those looking for a decisive message, a deterministic one, they did not get it. Jonathan joining me around the table to discuss here in new york are our guests, oksana aranov, lisa hornby, and Gershon Distenfeld. I want to begin with what changed this week for all three of you. Did anything change for you, oksana, given the data we had . Oksana nothing has really changed on the economic backdrop. We did have some weak ism number there, but an ontrack jobs number and an upward revision for august. We have been in this trend for a while, where revisions have been up. It is a weird environment we have been in where the employment continues to be strong and in terms of the fed, the probability of a cut went down slightly, from around 90 to 75 or so. Again the fed is continuing to walk a really tight rope here. The economy, you could call it a slowdown or continuing to grow at a slower pace. Does it warrant a return back to extraordinarily accommodative measures, we think not. The fed is caught in a tough spot. Jonathan what is your take lisa . , lisa i agree with everything oksana said. Our view has been for a while the u. S. Is going slow from the previous pace we saw last year. It was clearly tax induced growth. We have come down closer to 2 for this year. Our view for the rest of the year is 1. 5 to 2 , give or take. This is exactly what we are thinking. You know manufacturing is , clearly in a recession, that is a global phenomenon. It is not aided by trade in the u. S. , but Everything Else seems to be fairly stable. Yes, had the weak Service Number and we have to see if that continues, but for us, this is a 1. 5 , 2 u. S. Economy. Jonathan that was the story coming into 2019, gershon. Many, many people forecast we would return to trend growth. Many people said that payrolls growth will decelerate. But when you get punched in the face by a growth scare, you get gripped by end of cycle dynamics, end of cycle anxiety. What is your message for people that are going through that right now . Gershon i think get back to what did we learn this week . We learned that manufacturing is a lot weaker than we all thought. Maybe it is not a matter of a trade war or not, it is all the uncertainty, because we do not know what tomorrow will bring under the Trump Presidency and businesses ceos are , hesitant to spend money. The billion dollar question is does it start to spread to the consumer . Payrolls will not tell you anything because that is going to be a lagging indicator. The other thing we learned this week, where i might disagree a little bit, despite what the market is saying, i think this ensures the fed will cut in october. If you listen to what chairman powell said last time, he said they were good for right now. There was no reason based on what they knew to cut further, but they would react and consider the incoming data. I think this is a very clear sign that they will continue to cut. Jonathan there is a little bit of tension at the moment. The data certainly says maybe now you should be cutting again, but listening to the officials for much of this week, and we closed out the week with chair powell, the officials not showing their hand here, not showing their hand here at all. What gives you the conviction that in october, the end of this month, they will make another move . Gershon they did not say that it is not clear we go into a recession i hate using that word because we do not know what it means anymore but if we have a protracted slowdown, lets say it is not clear how , much legroom they have using conventional policies, maybe go to qe again. What they have said is that they think being preemptive can avoid a slowdown. And if they are starting to see weak numbers, even a little part, they will say, we do not know if it is spreading to the consumer. We might not have that data anytime soon as an insurance policy. We will continue to ease. Jonathan oksana. Oksana the problem with being preemptive is we have seen it not work across the pond in europe and japan. The big issue is, is the fed frittering its ammunition away for a time when it may need it and wont have it . In terms of Consumer Confidence, that is an important piece that we are watching very closely, because of course the u. S. Consumer is 70 of the u. S. Economy. Now what we are seeing is the Consumer Sentiment index is starting to move down, Business Confidence starting to move down. In spite of some of the economic you know positive surprises, frankly, we have seen if you look at some of the economic surprise indices, they have actually trended up. But consumer and Business Confidence is trending down. This is a really kind of tough road. Lisa although we have a little bit of a disconnect between the survey data, the confidence data, and the hard data. When you look at hard data, retail sales last month was extraordinarily strong. Oksana and that is consistent with strong employment. Lisa we will continue to see strong retail numbers, but Consumer Confidence is important. We have seen it hit across the pond, where the savings rate is starting to move up to precrisis level in europe, in spite of the fact that rates are negative. Consumers are really gaining anything. Gershon to be fair, i do not think the fed necessarily should cut. I am listening to what they have been saying. I agree, there is a danger when you get to a point where europe is where japan has been forever, you have to be unconventional or it will be too late. Jonathan lets have the conversation the bond market quite clearly taking up on the idea that they are taking another step towards a rate cut. The statement through this week, just a massive outperformance we saw at the front end of the treasury curve. What did you think about that . Because if i thought we were going to get some really bad data this week, i would have thought duration what have done well this week. I would think we would see a bund market move as well. I would not think treasury yields would do with a have done and bund yields would do nothing, unchanged over the past five sessions. What do you make of that . Gershon it gets to the discussion we have had for a long time, is it justifiable that bund yields are so low . Either we go into a deflationary spiral or you are going to have negative real rates and no inflation for a decade. I think the more interesting thing in the u. S. Was the implied breakevens and tips, which hit a 10 year low of i think 1. 47 early in the week. Essentially, rounding error, you are at 0 inflation, 0 real rate baked in for the next 10 years. That is a very pessimistic sign. I continue to think one of the markets is wrong, either the treasury market is wrong or the equity markets are wrong. If we are really going to get not get real rate of return, growth, or inflation, equities are way too high. If things are fine, yields should be higher. Jonathan if you had to take optionality on the options right now, what would the base case be . Gershon i should say this, but i think our base view is that we are going to have a slowdown here. I do not want to use the word recession because i do not know what it means, but a protracted slowdown. The fed is probably going to have to eventually react. Is that really a bad thing . We are 11 years into an expansion. I get it that in theory, Central BanksMonetary Policy is , supposed to keep the economy as level as possible, but that is really only in theory. We have not repealed the laws of economics, there are shocks all the time. And i probably should not say this but maybe a mini, tight recession clears out some of the businesses that should not be there and sets us up for a better path for the next decade. Jonathan you used that word, you used that word, recession. Gershon it is a dirty word in our firm. We dont like to use it and we dont actually know what it means anymore. We pretend there is a line, two negative quarters in gdp, doesnt apply internationally because china is still growing, getting a lot of global growth. A little bit to the left of this line, it is a big problem, but a little bit to the right, we are fine. Thats not how it works. It is a continuum, and that is what we are seeing right now. Lisa could not agree more. The fact that you can go into a shallow slow down or a mini recession is anaethma, and the markets keep going back to the banks and saying hey, help us make this go away. And we are seeing perhaps the limit of centralbank policy, because not only have u. S. Rates, bunds have not really responded dramatically. If you think back to when the ecb threw everything and the kitchen sink at the market, lowered the deposit rate, bund rates are actually higher today than they were at that point in time. Perhaps we are seeing kind of the limits of centralbank policy, and that is important for portfolios. Lets bring it back to what is happening in portfolios. Portfolios are chockfull of duration that is entirely Interest Rate risk and moves entirely on what happens to the 10year here, and i think the return potential is extremely limited. Jonathan final word lisa . , lisa i think there is a floor on bund yields, that is what i was going to say. The ecb basically said they are done with Monetary Policy. There is nothing more they can do, which kind of puts a floor to where they can go. Yes they hit 80 basis points, but 60 is still an unreasonable level, in my opinion. You know, i think we are kind of reaching the end, and now you are starting to hear talk about more fiscal stimulus. Even in germany this week, there was talk about dropping the black the ability to have any zero, sort of budget deficit spending. I think we will hear more from that in the coming weeks and months. We need to move into a world of fiscal. I think that is what people are coming around to. Jonathan i think a lot of people agree with you. Lisa i think that is negative for bond yields. Jonathan guys, you are going to be sticking with me. Coming up, the Auction Block, the primary market remaining open despite a week of volatility. Thats coming up next. This is bloomberg real yield. Jonathan im jonathan ferro, this is bloomberg real yield. I want to head over to the Auction Block and begin in europe, over on the continent where the Fourth Quarter is off , to a hot start. A greek phone operator became the latest junk rated borrower to capitalize on investors hunger for high yield, selling debt to pay its owners dividend. In the u. S. , issuance of Corporate Investment grade bonds was more subdued, with under 10 billion sold so far this week, a stark contrast to early septembers heavy volume. In high yield, markets shrugging off concerns about an economic slowdown, three deals priced on wednesday alone, including a wellreceived triple c credit from allianz holdings. Sticking with corporate, credit finding some relief in the payrolls report, but not before highyield bonds recorded their longest losing streak in 2019. Mohamed elerian, weighing in. Mohamed when you get to really low spreads and especially when the riskfree asset is low, at some point the investors say, i am not getting compensated for the forward risk. And then you get a blowout in spreads, and then you look at highyield relative to every other asset class and say wow, that is attractive. What is underlying that is the shift between absolute and relative mindsets. And i think that is going to continue for a while. Jonathan weighing in around the table here in new york, oksana aranov, lisa hornby, Gershon Distenfeld. Gershon, i want to begin with you. The third mini scare in markets in 2019. Highyields captors it perfectly just captures it perfectly. If you look at u. S. Highyield spreads, the fourth of the year around 3. 50 , the top, the ceiling, in around 4. 50 . Is this any different than the previous two scares we have seen through 2019 so far . Gershon all of them we talked about in the last segment with a weaker economy it is no , different. Investors keep coming back to they need yield and the bottom is not falling out, there are not a lot of defaults. That is what is going on at the surface. You dig a little deeper and you see a bifurcation. If there is a good, solid, double b deal, it flies off the shelf. Equities were down at 2 . 4. 75 they traded up in the aftermarket. Then you have a deal like shutterfly earlier this week, marketed for two or three weeks at 7. 5 with no buyers. The final price with was 8. 5 and traded down in the marketplace. Investors are willing to buy things of that they dont have the greatest yields, but better than riskfree yields and they feel better about it but they are not willing to step out and buy the riskiest in the cycle. Jonathan isnt that the biggest difference between now and q4 of last year . December 2018, the primary market just shut down. The idea that we got some of these deals done on wednesday. Everyone was freaking out over an ism. Is that encouraging to you, gershon, this market is still functioning . Gershon it is encouraging, but the reality is that investors are showing again the need for yield. That is not going to change it is not just the new cycle. It might pause for a day or two, but money is still coming in and that is just not going to change until it is apparent that we are in the rword i dont say it anymore or jonathan the mini rword. Gershon the mini rword. Whatever that means. Or we see losses and default. Jonathan oksana. Oksana on the surface, we have a tremendous amount of inflows into the highyield, about 15 billion, and that continues to support asset classes, the tremendous need for yield. If you look at under the surface, you are seeing some red flags, at least red flags for this price level, because everything is price dependent. What you are seeing is the default rate and high yield is starting to come up, about 2. 5 at this point. Last year was at about the high ones. We are seeing slow recoveries of the defaults that we have seen coming in at . 36 on the dollar, and a very interesting dichotomy has developed an highyield market. Triple cs tend to lead on the way up and on the way down in doubledigit years, and this has been a doubledigit year for highyield. We are seeing that diverge. In the third quarter, triple cs were solidly negative, down 2 to 3 , and the higher part of the market was very positive. That is a bit of a warning sign to me, because typically, whether you look back at 2016, 2017 or pretty much back to history, triple cs tend to be the on the way up, the second is first ones on the way down. The dichotomy we have broadly in fixed income, you mentioned equities versus bonds, but credit spreads are saying everything is great, and rates are telling us that the check engine light is on, so to speak. Right . So one or the other has to dominate, either rates are right and then spreads have to widen to reflect the r word or slow down. Or credit spreads are right and rates have to come up to meet the sentiment that look, everything is fine. Jonathan to put you on the spot then, what is your base case . What needs to happen . Oksana we think everything across the board is very, very richly priced. Even the things that perhaps fundamentally we are not seeing fundamentally are not terrible, we are not seeing anything from a fundamental standpoint, but pricing is very rich. Double bs in the 200s, no thank you. Jonathan lisa hornby . Lisa double b to triple b, or double b to triple c, those are the most expensive that you could possibly find. For us as multisector investors we are staying away from , highyield at the moment. Our Portfolio Managers have more Investment Grade than they have had a number of years. We are looking at Investment Grade, Higher Quality i was discussing this last time i was on your show, 450, 430, 450 has been opportunities in buying yield spreads. I think we are in a more uncertain economic backdrop than we were before. You know, there is, the vulnerabilities have clearly increased in the u. S. , i will not use the rword. Jonathan everybody is afraid of the rword at this table. Lisa it is not an on or off, it is a slowdown. You want to become more defensive and liquid in your portfolio. Gershon there is a left in here for investors. Either you are buying a credit fund or you are buying a highyield duration fund. The credit people are never going to tell you that high yield is not a good place to be, and duration people are never going to tell you that you should not buy duration. That is why i will say the same shameless plug as last time. Acgyx. We balance. Half of it is credit risk, half of it is rate risk. Given that we do not know which one is overpriced, balancing the two is good. Its just not how people infest. Oksana the problem is both of them are viciously overpriced. Betting on rates to go from alltime lows to new alltime lows is a gamble. No one knows markets have gotten , this consistently wrong time and time again. Today when the curve looks the way it does and you can still earn 2 on the front end of the curve, and the 10 year is offering you 1. 6 with Duration Risk you can buy the japanese bonds and then like hedge them back to the dollar, you end up with the rate of u. S. Cash, essentially. Why would you take all that risk . So gershon your returning your investors money. Oksana we are being very cautious and focusing on safe carry, and a big part of that are liquid floating structures. You can continue to be there and clip a very conservative coupon and be ready for volatility, which is coming, because what is going to bomb everyone out at the end of the day, rates and credits, is math. That is the new word i am introducing here, because fixed income is a mathematically bound asset class, and we are getting very close to those bounds. Oksana, lisa, gershon, sticking with me. Up next, the week ahead, featuring a new round of u. S. China trade talks just around the corner. This is bloomberg real yield. Jonathan im jonathan ferro. This is bloomberg real yield. It is time now for the final spread. Coming up in the next week, a ton of fedspeak for you, including from chair jay powell. Through to monday, we get pmi data from china followed by another appearance from chairman powell on tuesday. On the fed releasing minutes wednesday from its september fomc meeting, and on thursday, it is the main event. U. S. China trade talks resuming in washington. A final word from everyone, oksana aranov, lisa hornsby, and Gershon Distenfeld still with us. Gershon, what are you looking for next week in the trade talks . Gershon i would rather they not go well, but we learned from manufacturing before the , confidence that we have a coherent policy, that it cannot just change on a dime is there. Not to mention, dont want to talk politics here, but with the impeachment talks and who is going to be the president , what is going to happen in the election in 2020 is going to weigh on the uncertainty and it does not bode well for people making longterm decisions. Oksana not expecting much of anything at all. It will be a continuation of the current one step forward, two steps back. There is really incentive no incentive on the part of the chinese to do anything more here. Focus on the Economic Data and that is going to drive the markets. Jonathan lisa hornby, your take . Lisa i wish i could Say Something that has not already been said by these two, and we want something positive to come out, but we notice whenever something positive comes out, we get something bad. Last week it was restricting capital flows into china. So i do not have high hopes. I think that if something definitive, concrete, maybe a minideal did come out of it, that would be tremendous for markets. Jonathan a minideal and more tariffs potentially in the middle of october. Do you think those are avoidable at this point . Lisa we have seen that anything is possible. There was a time a few months back where we were talking about putting tariffs on mexico, it over the weekend was going to happen on monday, and it got rolled back on friday. Certainly anything is possible up to the last minute. I think the president is trying to use these various negotiating tactics. I think he feels that he is more in a perilous spot given the impeachment talks and given the fact the one main thing he has had is a very strong economy. I think there is starting to be some recognition that things are slowing a bit, and i think you are hearing more of that out of the white house. It could potentially mean they are willing to do some sort of minideal to say we have done something and stop the lean we have seen this year. Jonathan trying to read the political tea leaves that is a tough one. The rapidfire around now. Three quick questions, three quick answers. And of october, fed meeting, another cut . Gershon, yes or no. Gershon yes. Jonathan oksana. Oksana yes. Jonathan lisa. Lisa yes. Jonathan spread widening in u. S. High yield do you buy, like you should have bought last two times, or is it different this time . Do you buy or is it different this time . Lisa . Lisa no, dont buy. Oksana not cheap enough, dont buy. Jonathan gershon . Gershon it is not a buy in the long term, but it will be in the shortterm. Jonathan final question. The german tenyear u. S. Spread has narrowed quite a lot. We are around 200 basis points. Is that spread going to be wider or narrower by the yearend . Wider or narrower . Lisa . Lisa narrower. Jonathan oksana. Oksana wider. Jonathan gershon. Gershon narrower. Jonathan we have to leave it there. Oksana aranov, lisa hornby, Gershon Distenfeld. Thank you very much. From new york, that does it for us. See you again next time, same time, same place. This is bloomberg. Taylor im taylor riggs and this is the best of bloomberg technology, where we bring you all of our top interviews from this week in tech. Coming up, wework rework, the Company Finally puts an official pause on its ipo plans. What changes need to be made before hitting the public market. Plus, record rollout. A new record high for tesla deliveries, but they did