Dominates in terms of the overall gdp number. Headline gdp growth is in line with what everyone expect it. Wage growth, Income Growth has been relatively strong. Government spending data, quite strong. There is some upside risk to the economy. The consumer side of things and the labor market side of things, but the manufacturing is under pressure. Pretty significant dislocation between the industrial economy and the consumer economy. It is the composition of the data here that is worrying the fed. Potential pockets of weakness. We do see a further deceleration in the u. S. Economy going forward. Ultimately, we are moving back towards a lousy trend. Jonathan joining me around the table here to discuss in new york marilyn watson, bob michele , of jpmorgan, and george bory. Of wells fargo. Maryland, lets again with you. You know how this works. You pick your bias, look at your data, and confirm the price. There is something in this for everyone. Marilyn thats right. The data was as expected, shows an economy that is still very, very healthy and is decelerating to trend. It is above the feds own expectations of longterm growth. I think you saw obviously very healthy consumption, so i think it is pretty good data, and looking at the fed next week, it will be hard to see how the fed will cut by 50 next week. Jonathan we have got to work out if it means anything to the fed at all. Bob, your take. Bob if i want to nitpick, i could say the revisions brought gdp sub 3 , 2. 5 at the end of the fourth quarter. You average the quarters, it is 2. 9 . There is some slowdown there from what was expected. But marilyn is right, a solid number. The fed could not care less. That is not their issue. They are concerned about Inflation Expectations. Jonathan george. George if you look forward, the Inflation Expectations, they look like they have bottomed and picked up. Relatively healthy numbers, the consumer looking pretty good. Many of the feds targets seem to be trending in the right direction. As my colleagues have said, it is difficult to justify an aggressive move, but we will see what, you know how they comment , around it. That is the important thing. Jonathan gdp today comes in at 2. 1 on the money in terms of the forecast from the Federal Reserve itself for 2019. For gdp growth. You said inflation looks like it might start to pick up. How so . George well if you look core , cpi looked like it kind of bottomed out. It is starting to trend higher. The consumer is in pretty good shape, earnings are picking up a little bit. There has been some backward provisioning to the inflationary data. Revisiting to the inflationary data. The broadbased trend looks like it is showing some form of a bottom. It is the downward trajectory that looks like it has stopped. Whether it is a sharp rebound, that is hard to say. Jonathan do you agree with that, marilyn . Marilyn yeah, i do. I think inflation may start to trend up from here. At 1. 4 . At core pce is i think we will see a trend up from here. We have seen it trough. That is pretty much as the fed has been saying. Jonathan can we get to bob micheles they call . I mean, we had to get to it sooner or later. We are heading toward 0 on the u. S. 10year yield over the next two years. Bob, just walk us through it, then we can have a conversation on it. Bob we are speeding there without anything happening. If you think about the highend yield, it was the first week in november, 3. 25 . A few weeks ago we hit 3. 93. 40 of the yield on the 10 year disappeared without anything happening. If you look at the fed may begin to raise rates, may end the Balance Sheet runoff, they have not done those things yet. You look at money market funds, they are at record highs. You look at other asset classes, they have appreciated. Where is the money coming from . Well, it is coming in from overseas, because guess what most of those markets are in , negative yield. They are hunting around for yield. They see a Global Economy which is slowing down. I disagree with the expectations on inflation. The fed is right, they should be wary. Remember their old reaction function when doing qe was anytime the fiveyear, fiveyear breakeven inflation rate dropped below 2 , you got a round qe or you got operation interest. We are below 1. 80. They have failed to create Inflation Expectations. Their concern, they are becoming unanchored. I see them cutting rates and i see money pouring into the market. Jonathan your call essentially though is they are going to do all of these things and it will not work. If you believe that it will work, shouldnt we also simultaneously believe that the yields on 10, 30 yields should be going higher, not lower . Bob in the prologue, somebody said, well, growth will slow down to below trend. We are above trend. How can we be operating above trend from a gdp perspective and have low unemployment the equity , markets are high, and we cannot get inflation to 2 . That is telling you that perhaps trend is a lot higher than people are telling us it is. And i think we are actually going down from there. You are right. I think the fed and the other Central Banks will do what they can, and they should. They should try to bring rates down as rapidly and as low as they can and create Inflation Expectations that steepen the curve and then shake People Like Us out of the long end. Will it work . I dont know. I am skeptical. Because if centralbank policy in and of itself were enough, we would never have recessions, but it buys some time for something to break on the fiscal side or on the political side with trade. Jonathan what do you think, george . George i think in the u. S. , the fiscal side has broken. If you look the u. S. Is spending , roughly the deficit is roughly 5 of gdp. The government is spending pretty aggressively. It is a stark contrast to whats happening in europe. I think what bob is talking about, and i think one of the Biggest Challenges is the difference between the fundamentals and the technicals. The fundamentals from our opinion would tell you that we are kind of close to trend, inflation is starting to bottom, the corporate sector is healthy. The consumer is actually doing ok. All those things are good, strong fundamental positives. It is sort of the negative yields externally and the excess savings that continue to flood into the u. S. That will put downward pressure on u. S. Yields overall, but the drive to go dramatically lower would have to come from a big compression in spread and growth differentials between the u. S. And the rest of the world. And that is where we see some limitation. And that is where i think, why i think the u. S. 10year has had a hard time breaking through 2 . There is roughly a lets call it a 170basis point difference between the u. S. And germany, and it has kind of held there. Its been very consistent with the growth pattern between the two regions. Jonathan bob. Bob we will see what happens when the fed begins to cut rates. And suddenly, that near record amount of money, absent the financial crisis, starts to come out of money market funds because investors want to lock up some yield. And then when Central Banks began to expand Balance Sheets again, we know what that does to bond prices. It pushes them up. If there is any derisking because the trade wars actually lead to a much higher probability of recession, and that becomes a present danger, we will see where that derisking goes. It will go into the bond market. I think there is nothing but the downside to yields. Jonathan lets explore one of those concepts you just mentioned the amount of money in , money market funds right now, and when the fed begins to cut Interest Rates, the money needs a home, and the money is going out along the curve, going into the 10year and maybe even longer in treasuries. Marilyn, your thoughts . Marilyn we see a structural shift in the u. S. Economy. Not only this shift we saw in gdp today, manufacturing for services, tech earnings, that has all, i think, been playing up for some time. But also quite right, we are seeing Foreign Investors buying u. S. Assets because they want the yield. We are also seeing in terms of demographics you also saw a , decent savings number in the gdp numbers today. You do see this aging population, and they do need to essentially save more if they want to have the same income that they would have had 20 10, years ago. Rates are so much lower now. They need to be saving more to get income they want for their retirement. Jonathan does this put a ceiling on how steep these curves, how wide that spread can be from the front end to the long end . The kind of dynamics you are thinking about, bob . Bob if the Central Banks are as patient in cutting rates as the fed was in raising them, without question. Then we and probably a lot of investors are just going to sit on the long end of the curve, and it will be as flat as a pancake. They need to do something that is shock and awe. I think we heard that from John Williams last week. They are prepared to do that. They need to get in there and create enough stimulus that Inflation Expectations do go up a lot. Jonathan in the end i am not sure what we heard from John Williams last week after the walk back. Everyone sticking with us. Coming up on the program, the Auction Block. The richest highgrade bond deal of 2019 and investors could not enough. This is bloomberg real yield. Jonathan im jonathan ferro, this is bloomberg real yield. I would like to go to the Auction Block now, beginning right here in the United States in the treasury market where investors shied away from the sevenyear treasury auction. 32 billion offering resulted in the 32 billion offering resulted in the lowest bid to cover ratio february 2016. Pepsico delivered the richest highgrade bond yield in 2019. Investors could not get enough with interest growing to the 32 billion deal size. In europe, expectations for new ecb stimulus fueling investor appetite for highyield, interim maybe upsizing its sevenyear deal to 8 million euros, priced to yield, 3. 5 . Lets stick in the eurozone where ecb president mayor draghi painted a gloomy outlook for the european economy. Draghi generally speaking, you have resilience in the service sector. At the same time, this outlook is getting worse and worse. And its getting worse and worse in manufacturing especially, and it is getting worse and worse in those countries where manufacturing is very important. But because of value chains, this propagates all over the eurozone. Jonathan still with us are marilyn watson, bob michele, george bory. I want to pick up on those lines from ecb president mario draghi and bring you a quote from the president over in germany earlier this week, saying the following. What is worrying is the weakness in manufacturing continues but it is now spreading, so we see numbers worsening in the services sector. It is certainly not getting better, and it is starting to affect the labor market. This is the big fear here in the United States. Believing that manufacturing bleeding into services and we have some people in germany now, some officials, essentially communicating it has already started in europe. How much of a concern is that . Marilyn the data that we saw this week from germany was weak in terms of business sentiment, in terms of the outlook for the rest of the year, particularly manufacturing. It was very weak, and it is a big concern. But we are seeing a very different dynamic in the eurozone to what were seeing in the u. S. So you are not seeing the capex, investment, you certainly dont have the fiscal stimulus in europe that you have here. One of the things weve been saying very recently is you need to have some form of stimulus. Because essentially, lenders are not paid to lend right now. Right . You are getting zero or even negative rates, so there is no incentive for you to lend. If you want to get income, you have to go sort of into equities or private equity. There needs to be some mechanism to really get this money flowing again, get capex, investment in technology, start to regenerate and then build in terms of innovation in the eurozone. Jonathan not sure a low rate will necessarily help that. For the credit investor, it is difficult to sit here and say park the fundamentals and focus on the supply story, and the fact that theyll be eating up a lot of the supply, limited supply already in the european fixed income market, and just keep buying. How hard is that to swallow . George i mean, we are going to see the same playbook that we saw a few years ago and just a few months ago, the ecb will once again crowd out fixed income investors. You just look at sort of year to date, when we have seen in eurozone, where yields started yields are almost at 100 basis points lower. If you started with an asset class yielding 1. 75 , do you think you would have the 7 return by the end of the year . The answer is no, but that is precisely where we sit today looking at european fixed credit income. I think this incremental reach for yield, this yield enhancement, a japanese phenomena, it is a european phenomena, it is certainly a u. S. Phenomenon, will persist. While it may not be a great time to be a lender, its a great time to be a borrower. We continue to see that ongoing borrowing trend. It is much more tepid in the eurozone than it is here in the u. S. , but big, healthy large corporations and entities, governments, you know, are very incentivized to basically kind of continue to borrow, continue to lever up. And that trend does not look like it is about to change given the existing backdrop. Jonathan bob, you have been constructive. You have talked to me multiple times about being a seller. Less constructive in the United States. What about europe . With these technicals, with the idea the ecb is setting up another round of bond buying, what are your thoughts . Bob well i think you have to , run the technicals for a while. When i listen to draghi, and the market started to rally, i thought, darn, we missed it. Maybe he will mingle at the press conference, and he did. He kind of bobbled it, we had a backup, and that was our opportunity to get in. We used that little backup to get into the market. Absolutely. So i think yields are going a lot lower. I think he has set the stage to bring yields lower. I think everyone in europe is scrambling to find positive yield wherever they can get it. I think he was brilliant, by the way, because he laid out exactly what everyone is observing, things are slowing down. There is absolutely no inflation impulse. And you know what, fed, you started all this. You finish it. You are the guys that raised rates and started the Balance Sheet runup. We have not. We have not raised rates at all, we have been run down our Balance Sheet. And by the way, trade problems did not actually start in the eurozone, so you guys move first, then we are after you. Jonathan so anyone that may have missed the minolet reference, a goalkeeper made a very big fumble in the match area that reference cleared up for you in case you are not following the football. Europeanurope and on fixed income, potentially moving toward a much lower Interest Rate at the ecb than we would have thought of a year ago. If you look at the s p, it came down to 75 basis points. They have tiering. If you look at the swiss curve, the swiss curve, it is trading more negative at the front end than the deposit rate over at the smb. Do you see a dynamic developing where the whole yield curve in germany just chases the depot rate lower . What i mean by that, touching on a conversation we had earlier in the Program Lower rates at the , ecb, more stimulus does not regenerate Inflation Expectations. It just pulls yield curve down all across the eurozone. Is that what you see happening . Bob we see some of that happening. I think it is all about messaging as well. It is the ecb telling Market Participants they are serious. They are going to do whatever it takes, and this time they will be more thoughtful. It will not be as punitive to banks. If banks want to leave money on deposit with them, they will cap them out at zero. They will not take them negative area that does leave them the capacity to bring the front and down. Will it work . I dont know what i agree with george, you probably need something on the fiscal side. It seems like the theory of having fiscal austerity, which was so popular eight, nine years ago, does not work. You cannot shrink your way to growth. And so now they need to find the sovereign that has both the ability and the courage to deficit spend. And that is going to be difficult to come by. The ecb is the only game in town in europe. Jonathan bob michele, sticking with us alongside marilyn watson, and george bory. A look at the treasury market. Remarkably stable by the end of the week. Yields up by a couple of basis points on the 10 year, 2. 07 . At the front end, five basis points to 1. 86. Still ahead on the program, the final spread. The week ahead featuring a Rate Decision from the Federal Reserve. The main event with chairman powell in the spotlight. This is bloomberg real yield. Jonathan im jonathan ferro. This is bloomberg real yield. It is time for the final spread. Coming up over the next week, what a week we have got coming up for you. U. S. Officials heading to shanghai for trade talks with their chinese counterparts. Plus a central bank bonanza. The boj on tuesday, the fed delivering an Interest Rate decision of its own on wednesday. Thursday, mark carney at the bank of england. Plus we get u. S. Isn manufacturing data. Then payroll fridays in the United States. Marilyn watson is still with me, bob michele, and george bory. The boj not even a part of the conversation going into next week. Marilyn should it be . ,marilyn it has been on the sidelines for quite some time. Expectations were high,