ASH BENNINGTON: Welcome to Real Vision Daily Briefing. It's Wednesday, March 2nd, 2022. I'm Ash Bennington, joined today by 42Macro's Darius Dale. But first, here's what's happening right now. Seven days in the invasion of Ukraine, continues to broaden, Russian troops closer to the capital of Kyiv. Overnight Russian troops also surrounded Mariupol, the city in Eastern Ukraine. We're here to talk about markets and macro today, obviously, but this is a major humanitarian crisis.
There are conflicting reports about civilian death tolls, Ukrainian officials now are reporting 2000 civilian deaths, the United Nations High Commissioner for Human Rights confirming over 130 deaths from civilians. There are now also more than 800,000 civilian refugees, also according to the United Nations. As I said, we're here to talk about markets. Obviously, it's a difficult day to do that, but let's go through what's happening in US equity markets today.
By and large across the board, there's a lot of green on the screen today. S&P 500 up 1.86% on the day, closing out looks like still bouncing around a little bit at $4,386. NASDAQ up 1.6% on the day, closing out the day at $13,752. Dow Jones Industrial Average also up about 1.8% on the day, closing out the action at $33,904. Let's bring in Darius Dale into the conversation. Darius, as always, it's a pleasure to have you here on Real Vision Daily Briefing.
DARIUS DALE: It is a pleasure to be here, my friend. How are you doing, Ash?
ASH BENNINGTON: I'm doing well. Obviously, a lot going on here today, both in and out of markets, comments from Chair Powell and other actions happening right now. How are you thinking about this? What's at the top of your screen? And what's your broad frame looking at these markets?
DARIUS DALE: Yeah, absolutely. I think in order to understand what happened today, you have to go back to yesterday. Obviously, massive move down and interest rates, massive move down in monetary policy tightening expectations. If you look at overnight index swap forwards curves, big, big repricings lower. That tells you one thing. When we ever have interest rates, in particular interest rates in the short end of the curve that are positively correlated with the market, either to the upside or to the downside, that tells you that the market itself has a positive growth bias.
And that's exactly what we saw today in terms of unwinding that. And ironically, a lot of that unwind came on the heels of Powell being slightly dovish relative to what I guess would have been the hawkish right tail of policy from a near term perspective. Yeah, we can get the 50-basis point hike in a couple of weeks. As we said, it will tighten policy in a measured pace. They're going to be very deliberate about it. And obviously, data dependent.
To some degree, you could say that they're-- things of that nature. right tail from a longer-term perspective as well. That's March, possibly low bond yields, policy rate expectations, stocks, credit, all those types of exposures in the market to reflate in the near term. Because, again, this is something we've talked about in the program [?], the growth dynamics in the US and global economy are still fine right now.
There's really no risk from that perspective, and you really do need to see a more material deceleration or degradation in the growth outlook in order for asset markets, risk assets, in particular, to sustain declines from Treasury bond prices to sustain rallies,
ASH BENNINGTON: Darius, let's break that down, simplify it a little bit. This expectation, Chair Powell saying that he would support a 25-basis point hike, obviously, some of the speculation had been a 50-basis point hike going into today's commentary before the House of Representatives. This is, as you said, a relatively dovish tilt to expectations. Give us a little bit of a sense, is this almost a Goldilocks scenario, Darius? Is the chair saying effectively that growth is high enough to sustain a 25-basis point hike, but that some of the potential headwinds, I guess, from the conflict in Ukraine and other global headwinds are impinging on markets in a way that 50 basis points might be too much?
DARIUS DALE: Yeah, absolutely. I wouldn't necessarily call it a dovish surprise because they're not pricing to the downside with respect to the central tendency of where market pricing is. They're basically confirming where markets have moved in terms of pricing in the rates curve. The issue in terms of what Powell said today about the growth outlook, he's just confirming what the data are already confirming. Obviously, we got the ADP numbers this morning, continue to show very positive, high degree of positive momentum in the labor market.
We got the ISM data yesterday continue to show a high degree of positive momentum in the industrial economy as well. In terms of the most recent updates, again, we're continuing to be in this part of the process where the growth dynamics are generally picking up steam into the spring. And as a function of the economy recovering from the impact of Omicron, Omicron had a pretty material impact. We saw at the lows in terms of real consumer spending in December, it was contracting at 12% annualized pace.
Now, we've since rebounded from that, but the reality is we do have a little bit more hay to bail to the upside on growth before we really start to get to a place where growth decelerate more meaningfully in the middle to the back half of the year.
ASH BENNINGTON: Yeah, and Darius, let me double click on expand on something that you said at the beginning of that, this idea of what's happening with the ADP employment numbers, I know that this is something that you live with, you think about this stuff all the time. For people who aren't familiar with the ADP numbers, tell us what they are, what they represent, and how this 400,000-print coming out today impacts your view of what's happening in the labor markets.
DARIUS DALE: Yeah. It doesn't really change the story, but it just confirms the already cemented story that we were well aware of as investors, which is the labor market is on fire. There's really- obviously, it's not a particularly scientific characterization, but you look at the revisions we saw towards the end of Q4, and obviously, the strength we saw in January, the continued strength we're seeing in the ADP numbers and those track actual realized private payrolls, so it's not quite the same as the survey we're going to get on Friday in terms of the broader labor market update, but generally, those time series are pretty cointegrated.
And on medium term durations, they tend to be highly correlated as well. Yeah, it's very likely we continue to see a robust labor market. And again, let's not forget that employment is a lagging indicator. If you look at the yield curve, you look at the-- in terms of our projections for growth on an annual basis and over the multi-quarter basis, it's likely that growth really starts to peter out around the springtime, it starts to decelerate again in terms of those inputs.
And if you are going to start to see the labor market decelerate and start to deteriorate on a lag to that, multi-quarter lag that process, but again, I think we're pretty early in that.
ASH BENNINGTON: Darius, one other thing I wanted to talk about here is energy markets. Right now, WTI, trading at about $111 a barrel, it is up considerably on the day, up about 7%. This is WTI crude. If we flip over to Brent, which is the global price of oil, WTI, of course, is the price at Cushing, Oklahoma. WTI, the thing we use here in the United States, but abroad, it's Brent. Brent up about 8.7 call it on the day, $114 a barrel on ICE Brent crude May 22 futures, obviously, this is some significant upward price momentum on energy, on the oil markets. What are you seeing there? And also, how do you frame it more broadly?
DARIUS DALE: Yeah, absolutely. Let's start by saying, this is a real true energy price shock that will have ramifications for the US and global economies, not necessarily today or on a short-term time horizon, because again, we still have these positive growth impulses associated with "ending the pandemic". Once we lose that positive growth impulse and we're left with a much slower pace of true organic growth, then the energy price shock is likely to really start to weigh on, on consumer spending.
We're already seeing consumer real disposable personal income per capita is contracting at down near 4% annualized pace in the month of January. Clearly, the inflation that we're seeing, again, all time high and the sequential momentum and median CPI, 30-year high in the sequential momentum, in sticky CPI. All these inflation dynamics, throw out the year-over-year rate of change, the inflation momentum is something that is very much likely to come home to roost and put the consumer at a really negative path on a [?].
But again, the short term is quite positive. Going back to oil. Brian, if you'd mind putting that crowding trade up, this is something we wrote about on our morning note today, which is you look at the location of where the USO dot is and that chart, the scatterplot on the x axis are showing the one-year Z score, two-month 25 delta skew. On the y axis, we're showing our proprietary calculation of the volatility risk premia, and you're in the upper left quadrant of that chart.
What tends to happen is that the market is really-- a bullishly positioned market is really starting to get extremely nervous about downside risk, predicting immediate term downside risk. And whenever deals are hedged, and you start to see that-- or sorry, whenever dealers are short gamma, and you start to see that build up in volatility risk premium as we have at this current juncture, you have to be quite concerned about a pretty significant pullback in the near term.
Now, that won't change the fact that oil will still be ragingly bullish from a price perspective, and I do believe that dip should be bought. But I think if you're long crude oil here, particularly the commodity, you do well to be booking some of these gains, because it's very unlikely that we continue to see price appreciation at this pace without some profit taking.
ASH BENNINGTON: Darius, let's zoom the camera out a little bit. Talk a little bit about your process and how it impacts obviously, when geopolitical events like we're seeing today, impinge on markets. Tell us a little bit about how you attempt to work in the daily news cycle. I know that you're obviously very quantitative as people can see from these charts. You have a methodology that you stick to, how do you process it? How do you bring in some of the new cycle events, particularly when you see these things that are breaking very quickly?
Obviously, we mentioned a significant humanitarian crisis, but also a macroeconomic story as well. How do you process it? How do you integrate it? Or do you try and not pull it in until you actually see it in the data?
DARIUS DALE: Yeah, the reality is you always have to relate any catalyst, be it geopolitical, be it climate, be it hurricanes, all this stuff, you have to understand where you are in the growth and inflation and policy cycles. Those are the three most important variables that you need to solve for and actually profitably predict dispersion in and across asset markets. Right now, we've been trending lower in growth, but we're having this countercyclical bounce as a function of recovering from the impact of Omicron.
But eventually, that cyclical bounce will return back to that trend of deceleration in a matter of a few months at the most. We're also having a cyclical, we're at or near a cyclical high inflation. It's according to our models, that core PCE chart up, according to our models, core PCE should peak out sometime around the February to March timeframe, and ultimately began its, its deceleration lower.
And then lastly, it's pretty well telegraphed with respect to what we're going to have from a monetary policy perspective, and monetary and fiscal policy, I think fiscal policy is equally important in 2022 as well. Clearly, we're going to have some series of interest rate hikes, at least over the next couple of quarters until financial markets tell the Fed that they have to back off, which we do believe will happen at some point this year.
The fiscal policy dynamic continues to be quite unsupportive as well. We have a near record fiscal contraction coming for us in terms of in one fiscal year window. When I add up all those factors together, the geopolitical situation, it could be a bunch of puppies laughing and blowing bubbles. It doesn't matter if it's a war in Ukraine, obviously, it's a horrific incident. But politics takes a backseat to these growth, inflation, and policy fundamentals.
It's about how do the geopolitics impact growth? How do they impact inflation? How do they impact policy? The markets are telling you that inflation is going to go higher as a function of geopolitical concerns. The market is also telling you in terms of the repricing we've seen in growth, or in the bond yields and in rates markets that growth is probably going to be lower over the medium term as well. And as a function of those two dynamics, it's likely to be that policies is less aggressive in normalizing and that today, it's celebrated by markets, but ultimately, those dynamics are likely to be not good.
ASH BENNINGTON: I always admire Darius, you are a definitely a methodological systemic thinker. And yet you have a system that's flexible enough to account for new data coming into it, which of course, is very important. One of the things that we talked about at the top of the show was energy markets, talking about oil. I wanted to also switch here a bit to natural gas and to go to a clip that we have from today, actually, on Real Vision platform. This is for the Essential Plus and Pro tiers. It's an interview between Tony Greer and Doomberg talking about arbitrage opportunities for US manufacturers with natural gas inputs, let's take a look at that clip.
DOOMBERG: One of the real fascinating things is if you're a US-based manufacturer that uses natural gas, and can price your products globally, and export globally, you are a de facto exporter of natural gas and you can participate in the huge arbitrage that has opened up between US natural gas and natural gas in Europe and in Asia. Just to benchmark our listeners, as we sit here today on Monday, US natural gas is 450 and Dutch TTF is trading at $34 per million btu, that ratio is what? It's seven and a half, eight times the price.
If you're a company that sits on the end of a US natural gas pipeline, and you could sell your products at global prices, you're literally just printing cash. That's one category. Examples of companies in that space would be obviously fertilizer producers, CF Industries just reported an unbelievable quarter, 1.5 billion roughly in free cash flow, I think. And they look set to just bring the register because if you look at the forward curve of Dutch TTF, that's priced out basically at $30 per million but all the way to December. And the US natural gas curve is pretty flat, and so the term structure of natural gas futures is a huge arbitrage that looks set to stay.
ASH BENNINGTON: A little bit of context on natural gas. By the way, for those of you who may have noticed there was a cartoon chicken on your screen, that's DoombergT. You can follow him on Twitter. Don't worry, your coworkers have not slipped mushrooms into your coffee. But the point here, Darius, actually is a serious one. What's your thought about the significant rise in natural gas prices, and how does that integrate with your methodology?
DARIUS DALE: Yeah, it's the supply shock. Look, we've been dealing with supply shock after supply shock throughout this pandemic, and just at the time where we're seeing the supply chain disruptions ameliorate and unthaw, and this is something we've been talking about in the program, we're actually getting a secondary shock in energy prices. And obviously, it's filtering and feeding through to other commodities, obviously, net gas would be an energy, but fertilizers, agriculture, precious metals, base metals, there's a real inflationary impulse that is building here, and I'll take a step back.
And I certainly am one of these economists as well, and pretty much every economist on Wall Street, including the Fed has the same forecast that inflation is likely to trend lower over the medium term. I don't disagree with that in year-over-year rate of change terms. The problem with that is that we might not see the dissipation in the momentum of inflation that we need to see. I mentioned this earlier, but median CPI at 7.1% on a month-over-month annualized basis, that's the fastest moment we've seen this the month of January.
Those are the most recent datapoints, we've never seen median CPI, the broad basicness of inflation pressure, ever. The data going back to 1983 and with the sticky CPI as well, that's a 7.5% month over month annualized pace in the month of January, as well. Not only are we still seeing elevated rates of inflation from a momentum perspective, we're actually building that momentum to third year and into the month of February, we'll get that data next week.
To me, it's a real dangerous setup here, because I think a lot of investors are very much positioned-- not position for it yet, because you certainly don't see that long duration trade yet fully baked in the cake in terms of asset markets, but a lot of investors are having at least particularly on the long side, have a sanguine view on the direction of travel and the magnitude of change and inflation.
And the reality is, they could very much be right on the direction of travel. But if the magnitude change back to the deceleration is not consistent with the Fed's forecasts, and everything that Jay Powell just told you about being gradual and measured, and don't worry about it, we're not going to tighten the economy, no recession. Well, guess what, he's going to be wrong on that. And that, to me, is the ultimate medium-term risk.
Because by the time you get into the spring and the summer months, where everyone expects inflation to be much lower, it might be lower, it should be lower, it most likely will be lower in terms of our models and everyone else's models. But what if it's not that much lower? And that to me is a real big issue for the consumer from an income perspective. It's also a real big issue for asset markets in terms of investors really having not sold as a function of the big decline in the economy.
ASH BENNINGTON: It's interesting Chair Powell retired the phrase transitory, but it certainly seems that the transitory framework is something that's still very much on his screen right now based on what he said today before the House Committee.
DARIUS DALE: Yeah, he keeps saying they're data dependent. But for whatever reason, with inflation statistics, they're not. Again, everything I just said about