Guy ok, look at this board and tell me if we just got a massive, almighty blowout payroll number. You look at these numbers and you are thinking, and of the week, nothing really to see here, we can move along until next week. We just got a huge print out of the United States. This is a big piece of data and it was massive. The market in many ways shrugged its shoulders. Maybe we already had the move. Maybe we are thinking about the cpi data next week. The stoxx 600 is up by. 5 . The pound is barely budging against the dollar. German yields are a little bit higher, but we have been off of 3 this week. You look at this board and i do not see a big blowout payroll number. But thats what we got. Alix same deal in the u. S. , with the exception of the bond market. Two year yield up nine basis points. All of that feels very dramatic, but the nothing else at the same time. In the middle of the week, the s p, we were talking about the 200 day moving average, 26 points away from that. We are well that level now. We are down by. 1 . Out of the reason that indexes doing well is pioneer natural resources. The best performing on the s p over takeover rumors between exxon and pioneer. We got a pop higher for the bloomberg dollar index. Then we kind of paired some of that. Now the currency is a little mixed. Just up. 2 . Guy yeah, but this was the number we have been waiting for all week. This was going to be the huge moment. Im not entirely convinced that the market is taking it that way, which is a little disappointing on a friday. We were expecting fireworks this afternoon. We are, after all, in the volatility business. German 10year. Wednesday we get 3 . We fade that pretty quickly, and as you can see, that is the pickup there on the payroll number. That is wednesday. There is all kinds of other things going on earlier in the week. It was a massive move on the data we have seen. But maybe the market has already gone through that and has and is thinking it has priced this. Im confused. Alix i dont know either. That is why we are not the experts. The fear derosas, we talked to her earlier about the high payrolls number and what it means for the fed and growth. Sophia inflation is starting to make downward progress. I think another important aspect is we are seeing wages moderate and we are also seeing supply come back into the labor market, so it will give the fed an opportunity to stay on the sidelines and see how things develop. Guy yeah. Wait, watch, see what happens. At the moment this is an economy that feels like it is riding high. She just upgraded her thirdquarter quarter gdp forecast significantly. Fourth quarter we are going to hit a speed bump, but maybe we get through that, but we dont get a significant recession. That takes us to our question of the day. What landing . Joining us now to discuss, eddie, you are standing next to me. What landing . Eddie to me this is what a soft landing looks like. C what we got from the jobs number, we got a hard reading saying the economy is growing strong. At the same time youve got inflation coming off, Wage Inflation coming off and you still have some room for the Participation Rate for workers coming back. What are you seeing . You are seeing yields having to build in. You are seeing bears steepening and you see the stock market saying we can cope with that because the economy is strong. Below going to keep buying. To me this is the perfect reaction. I think the initial action reaction was what you would expect. I inflation, or a fear that a fed that is going to hike. I think people are looking at it now and saying, this is actually really exactly what the fed is aiming for. Alix the bond market is still selling off. Do you agree with what eddie was saying . Ira we have talked about this. If the Federal Reserve does not cut Interest Rates in 2024, which is our base case at Bloomberg Intelligence rate steam. Rates team, the bond market needs to be flatter. What is the interesting trait to me not happening is you do not see the fiveyear sector selling off more than the rest of the curve, because that is the adjustment that has to take place if the fed is on hold even longer than what we think. You keep on getting data like this and you have to keep pushing out when you think the fed might have to cut rates. That is no time soon. At least based on this data. Guy was interesting, kind of the biggest moods initially did come in the fiveyear. That move has retreated. Are we at the point where the fed and the market are aligned . Have rates come up enough to align themselves with what the fed is thinking . If rates go further from here do you think the fed will be worried . Ira i think we were at what the fed was thinking if you just take the dot plot as gospel, which you cant. If it worked then 10 year yields should be about 40 basis points lower. Basically where we were two weeks ago is about fair value based on what the fed thought. So, the market is basically saying the fed is going to have to shift their opinion in particular, because the data has been much stronger than just about everyone has a suspected. Look at the jobs numbers today, you have pointed this out on tv all morning, that it was almost 100,000 above the most optimistic estimate. I think as the economy changes the market is going to instantaneously shift what he thinks the fed is ultimately going to do. Alix citi upgraded their call on global stocks to abide, saying we have balanced accra balanced macroeconomic risks. Does this make sense to you with that call . Eddie i think so. Unless you are seeing some sort of major correction brought on by higher yields which triggers been which triggers an event the fed has to cut, which is a bowl steepening and a different scenario. That is the steepening markets are used to trading. In this environment as long as the economy remains strong it makes sense. Why not go for the nasdaq, one not go for the speculative stocks . We are inverted on the two stands at the moment, right . Twostens at the moment, right . How much of curve uninversion do we get . If that goes much further, i dont think a lot of people know just how much higher 10 have to go. Guy in europe we are scratching our heads. The fed in the past has had to react to global events. It is theoretically the central bank of the United States, but in the past events have forced the fed to react from outside of the United States. Are we setting ourselves up for that scenario again . In europe the Economic Data is not good. Many parts of the emerging markets are already seeing cuts going through. They are yields in the United States, but is it our problem . Is that where the problem is going to start . Eddie and then exported to the circular . Its possible. The pmis in europe still look like stagflationary economy, right . The pmi numbers are very weak. It shows there is not growth. But they appear to be bottoming out. Guy that is before this big rise in the cost of capital came through once again, exported by the United States . Eddie it is a problem for europe. I think that will remain a problem for europe. I think the u. S. Is fairly immune to contagion risk unless there is some sort of banking crisis again, right . We had better earlier in the year. But i do not see that with higher, steeper yield curves. I dont think that is a problem for the bank. Alix again this out for me on the short term. What if we get a hot cpi on friday . Happens . Ira i think we could have even more of a flat yield curve. I think there is a limit, just talking about the curve discussion. I think there is a limit to how steep the curve can get in a bear market. With 5. 1 as more or less the yield on the twoyear note, if the fed is on hold for the next 18 months is going to be difficult for tenyear yields to get above that level. You could have a pancake yield curve, but eventually the next big steepening of the curve has to come more from a significant bowl steepening. So, twoyear yields being lower in anticipation that the fed is going to cut. We could get to a pancake yield curve in a hurry. That could be one trait after we get a hot. 5 on cpi next week. Guy . Gappy very gappy markets. What is the relationship with europe going to look like over the next few weeks . Well has come down sharply this week, and im wondering if that persists, what impact that is going to have back into bonds . Ira it has some effect because of the expectation of inflation. Keep in mind all of this move has not come from the Inflation Expectation side of the rates markets. It has really come from real yields coming up. People think the economy is going to be hotter. That means things like our star is probably even higher than we had suspected it was just a few weeks ago. So, it is really the real yield move here that is dramatic. We are talking about fiveyear real yields potentially hitting 3 , we have not seen since it has been almost 20 years since we have seen that type of level on shortterm real yields. Alix it is such a good point. We keep forgetting it is not inflation breakevens that are moving higher. Thank you so much, ira jersey and eddie van der walt we are going to get more insight into the question of the day. What landing . Gerry fowler, ubs head of equity strategy, is joining us next. This is bloomberg. I think we are still likely to see a mild recession at some point next year. Probably going into midyear, first half. I think that because we are going to see the fed, as it has been trying to get the market to believe, now they finally leave it, they are going to have to hold rates higher for longer. This tightening pressure is going to feed through to the economy, consumers and businesses. Guy rebecca patterson, bridgewaters former chief investment strategist speaking to alix to be asking, what landing . Gerry fowler, head of ubs equity strategy. If you are a European Equity strategist and looking at the data coming out of the United States, how do you answer the question about u. S. Having no landing and the european economy may be having a landing . What does that how does that manifest itself in your world . Gerry there has definitely been some divergence. Has been a surprise how weak the european economy has been, both in terms of the economic surprise through the second quarter, some of the retail sales data we have seen with the august data coming out and surprising to the downside, but also very much in the surveys. We are not just talking about the headline pmis. Probably the most interesting thing at the moment is that the backlog of work, particularly in industrial sectors, seems to be deteriorating rapidly in europe. It surprising that europe is looking week in contrast to i wouldnt necessarily say acceleration in the u. S. , the resilience we are seeing in the u. S. Is a marked contrast. Alix hsbc early in the week was saying, i get all the bad news, but that means growth expectations are so low, earnings expectations are so low that the bar to be is low. Does not hold any water for you . Gerry not really. Here we are talking about europe the expectations are pretty inflated. Still got earnings expectations, and particularly margin expectations that are near record highs. And weve got a very good chart that looks at nominal gdp and its growth rate through time. And it is very clear that when you get decelerations in growth, and that applies whether it is a demand driven week is in growth, or whether it is disinflation, which is more the driver at the moment, in both cases you get margin contraction. While we are not seeing more analysts take an ax to their margin expectations is a surprise to me. Margins are going to be far more important in 2024 versus what is happening to revenue. Theyre easy to have a soft landing in revenue, especially when you have elevated inflation. It is also very easy if margins come down for that to be a hard landing in earnings. Our motto was suggested 2024 earnings for the European Market are going to be 17 . Guy so walk me through what that is going to look like in the upcoming earnings season. How attached you think most of the street is . Gerry it is all pretty imminent. We are starting to see a player. In europe lots of companies bidding. About 80 of Companies Beat expectations because winter was not as bad. Q2 was roughly the same. That was in an economy where surprise was significantly negative. That was from inflated expectations. Through q3 the data has looked weak and importantly big sectors like the mining sector, the auto sector, particularly the capital goods sector, are starting to report that they are running out of work new orders have been weak for a long time and now they are reporting that the backlog is also weakening. All stone is a great example of this. You get a big share price reaction when a Company Comes out and says we are not doing as much work as we thought. Our cash flow has significantly deteriorated. The shares will get hit. I suspect in this season we will see more of that from more the cyclical sectors in europe, just from the way they are reporting their pmis and more of the Economic Data. It will not necessarily hurt the revenues, but potentially be consequential for the Pricing Power and margins. Alix what gets hit the hardest . You mentioned cyclicals. Other other sectors that are going to get hit just as hard . Is it really this manufacturing cyclical story that worries you the most . Gerry definitely still is. If you look across the Services Sectors they have been weakening. But nonetheless they are weakening from a high level and starting to look like they are troughimg at more normal levels. Nonetheless, i think the broad market will suffer in various ways because there are three things we are worried about. One is yields. So for that is the dominant factor driving markets in europe. Much all european performance between sectors and stocks can be put down to the significant shift in the yield environment. That has impacted valuations. Probably has not impacted them enough you. We think the European Market is overvalued because it has not reacted enough to yields. But after yields you need to think about margin. We have been talking about that. Obviously cyclicals are going to be hurt most on that front. But also because we are getting more correlation between stocks volatility is going to have a consequence as well and high valuations do not like volatility. Things like the luxury sector, semiconductor equipment, some of these higher valuation sectors that are suffering from crowding as well as some earnings risks still the most vulnerable to us alongside those industrial cyclicals in the space. Guy im now looking for a place to hide. Given what you have just told me. Is there such a place . Gerry i must admit we did not predict this yield moved to be as dramatic and quick as it has been. We did think it was going to be defensible defensives along the lines of utilities. Guy that has been a tough call this week. Gerry that has been a very tough call. Many because we were focused on profits and volatility being the focus. But so far yields have been the driver. Nonetheless i think you need to look for defensive value. It is just that within offensive value it is hard to also avoid duration. This yield sensitivity has been consequential. We view yields as likely peaking at this point because we have a negative outlook for profits. We think weakness in employment will follow. We think we are heading into a fairly normal Business Cycle and the yield move we have seen is actually more technical relating to the fed basically saying theyre going to keep real yields higher for longer. A real technicality is there is more risk in longterm bonds now that the term premium has risen. That has consequences for equities and equity valuations that are reasonably permanent. But to some extent if the move has happened it could be a oneoff. That term premium is back to its 20 year average. It could go higher, but at least we have washed out what has been a historically low level of term premium in Interest Rates. Alix a not very optimistic shortterm view on equities. Thanks for that. Gerry fowler of bs. Thanks for that. This is bloomberg. Of ubs. Thanks for that. This is bloomberg. Is it possible to fall in love with your home. Before you even step inside . Discover the Magnolia Home james hardie collection. Available now in siding colors, styles and textures. Curated by joanna gaines. Was also the first time you heard of a town named dinosaur, colorado. We just got an order from dinosaur, colorado. Start an easy to build, powerful website for free with a partner that always puts you first. Start for free at godaddy. Com alix here is one story i am watching. Walmart, shares are down the most in seven weeks. Is today the company said mozambique is hitting shopping demand. You can see it reflected in europe as well. Have chocolate and blues manufacturers saying they are suffering. Anheuserbusch inbev, unilever, they are all sliding today as well. We know the story. If you take this drug and it suppresses your appetite and your thirst for alcohol, but i dont know, are we getting way ahead of ourselves as to the longterm impact of this . Guy i think maybe, but it is a fun exercise to work your way through. You look at nestle today, under significant pressure. Nestle has been trying to move away from the unhealthy to the healthier stuff. So maybe it does not get hit quite as hard. You could see a reaction above all of this. The market is meant to be a forward discounting mechanism. It is meant to do what it is doing right now and think about the impact of potentially all of this. In some ways this is a yield move. In some ways this is an area you would think you would see more defensive strategies coming in. I think it is fascinating. If you were going to eat chocolate maybe you want to eat highend chocolate. That would be my strategy. Alix talk about it as junk food is what is going to be cut, but that might not be true. You are also eating smaller portions in general. It could hit all of the main players. Inflation is still high. That is still going to bite into the bottom line for these guys and topline. Maybe that is there too. Guy in some ways these are yield proxies. These are cashgenerative companies. We have seen what happens in the bond market. Maybe you eat better, maybe you make more discerning choices. I dont know how this is going to play out. It is a fun exercise to work your way through it. A