#1007 - What Will Push Powell to Cut? | with Darius Dale

0:00Kraken Pro is the powerful crypto platform for experienced traders who demand the best. With advanced charts, real-time market analytics, and lightning-fast trade execution, Kraken Pro empowers you to trade your way. Customize your setup and make every pixel count by rearranging and stacking trading modules in a way that makes sense to you. On Kraken Pro, you have the freedom to put your favorite market analytics and execution tools exactly where you need them. And whether you're a seasoned pro or just starting out, Kraken Pro has everything you need to navigate over 210 plus assets with confidence.

0:38Join the thousands of seasoned traders who trust Kraken Pro. Visit realvision.com slash Kraken Pro.

0:54What will push Powell to cut? Hi, everyone. Welcome to the Real Vision Daily Briefing. I'm Maggie Lake. With me today is Darius Dale, founder of 42 Macro. Hey there, Darius. Hey, Maggie. How are you? It's good to see you again. Good to see you too. Thanks for having me. Yeah, just looking across the market, what a difference a couple of months make, right? Investors started the year pricing in a series of Fed rate cuts, and those expectations really seem to be in play now. We had a Fed official speaking today. We had some economic data. How are you thinking about the economy here as you look across all your indicators?

1:26Yeah, great question. So still resilient. In our opinion, the primary reason that asset markets have responded generally well and favorably to the backup in interest rates, both across the long and short end of the curve, is because the economy remains resilient. Recall that we authored the resilient U.S. economy theme back in the summer of 2022. The preponderance of data suggests that theme is persistent. On top of that, we have a Fed that continues to guide towards easing monetary policy over the median term. So you have an at or above trend growing economy, and you have a Fed that's likely to bore more sort of kerosene on the fire there over the median term.

2:04And that's obviously been a bullish top tail for asset loans. Are they, can they ease, though? or what would enable them? We said what would push him to cut, but what would lay the groundwork where they can do that? Because they presumably, if the data stays this way, it's going to be awfully hard for them to do that. And I think that's what an increasing number of investors are getting worried about based on what's coming in. Do you see the data changing? Are they going to change their parameters? What would enable them to actually deliver on that easing? Yeah, that's a phenomenal question, Maggie.

2:37And I don't think we learned anything particularly new in Powell's fireside chat today. It sounded like, quite frankly, it sounded like he was just reading off today's leadoff morning note, which we published this morning. The reality is we've seen a sort of temporary pause or reprieve, if you will, in the immaculate disinflation theme, which has also contributed to the upside risk that we've experienced a bit of it from here in asset markets. In terms of what we're pushing to cut, we need to get back to data on a trending basis that says immaculate disinflation is here. We are moving towards a sustainable, we're on a credible path towards sustainable 2 % inflation.

3:14Now, we don't think we're ever going to achieve that credible path, a sustainable 2 % inflation. But again, that's multiple quarters away in terms of having to deal with that as asset market participants. Right now, we're continuing to deal with some evidence of sticky inflation. In fact, I put together a few charts for you guys. Brian, if you go up slide one this week, so obviously the last few CPI-PC deflator reports showed pretty significant accelerations in the three and six month annualized rates of change of CPI, PC deflator, inflation. That's something we talked about the last time I was on the show.

3:45So what we've learned since then here in slide one in particular is that immaculate slackening in the labor market, i.e. the loosening of the labor market continues to remain ongoing, but we're actually starting to get worried about this apparent bottoming and turnover. So if you look at the second and third panels of this chart where we show the private sector hires rate that actually ticked up from its cycle low to 4.4%. And then we have the private sector quits rate, which is now turning sideways unchanged at 2.4%. Now, these are good levels. From a levels perspective, they're at or below trend.

4:18And the reason that matters is on slide two is because we know that workers that change jobs tend to experience much faster race growth. So in the top panel, we show the Atlanta Fed's wage growth tracker for job changers, blue line and job stayers, red line. And then on the bottom, we show the ADP wage growth tracker for job changers and job stayers. And as we can see in both panels, the longer I meet in both time series of each of those time series indicates that people who change jobs, i.e. who are actually in the labor market, tend to experience faster rates of wage growth. So the fact that we're starting to bottom, going back to slide one, a decent level from a turnover perspective, but the fact that we're no longer improving from a turnover perspective tells us that we might be running out of steam with respect to the disinflation we've observed in wages.

5:04So that's a bit concerning, which means we do need to start seeing data on a very near-term basis that says, okay, that was a temporary blip. We're getting back to the fact that disinflation, and we do believe that is likely to be the case. So you do see, is it going to come from the labor market? Will that be comforting enough from the Fed? Are we likely to get this mixed picture? Because now Now it seems like we're back on potentially having a market that's going to react to that inflation data or price data because they're worried about whether we get the easing. In fact, Bob is saying in the chat, I doubt any rate cuts this year.

5:39And that does seem to be the concern that's bubbling up. Yeah, and that's the appropriate concern to have. The reason it hasn't had a material impact on risk asset markets is because the economy doesn't need ratings. This is a very resilient economy that's getting, again, the economy's on fire and the Fed is talking about pouring gasoline on the fire. If they take away the gasoline, the fire still persists. It's just not going to be as big as it would have been had they poured the gas off. But the reality is we experienced the rate cuts already, by the way. They got priced into the forward rate curve.

6:09They eased financial conditions. The easing of financial conditions caused this pickup and growth in inflation that we're currently observing in the data. And this moderate, I mean, modest tightening of financial conditions since the lows of what was priced in from a policy rate cutting perspective is going to, it's likely to cause inflation to slow in the coming months and quarters. And the reason we have confidence in that is for three specific reasons. Number one reason is on slide three, Brian, where we show non-farm productivity growth that remains above trend, whether you look at it on a quarter-over-quarter SAR basis or on a year-over-year SAR basis.

6:41And the reason that matters is on slide four. if sustained, that productivity growth, that above-trend productivity growth should continue to perpetuate that immaculate disinflation. And the reason we say that is because productivity growth is sort of the key that unlocks the potential of the economy in a way that allows at - or above-trend economic growth to not be inflationary. So in this chart, we show the blue line in this chart as a private sector, average hourly earnings, year-over-year rate of change of that minus non-farm productivity. And what we see is that it's typically noise, but whenever you have a big spike in that metric, i.e.

7:15wages are growing much faster than productivity growth, you tend to have big spikes in inflation. That's the red and blue lines in the chart. And so as long as productivity growth can stay at or above trend, we have continued disinflation in wages, which we should based on the level of turnover in the labor market, that should keep the trend of a macular disinflation intact. The number two reason we have of the three reasons that we believe that a macular disinflation is likely to persist, Maggie is on slide five. We have a tremendous amount of sheltered disinflation in the pipeline. And so if you look at the observed home price index, you know, the values on a lagged basis, or sorry, you look at the observed home price disinflation that we've seen on a lag relative to observed shelter CPI or observed PC housing deflator inflation, you look at the 18 to 24 month lag, we're kind of on the precipice of when shelter of disinflation should really start to materially show up in the reported time series.

8:12So that's another data point that gives us, or at least another fundamental dynamic in the economy that gives us confidence that immaculate disinflation, which is on the ropes, is not quite dead. And then lastly, we just have a series of high-frequency leading indicators that give us confidence in this view as well. So we'll start with what we got today on slide six, Brian, which is the ISM services report. So we have a leading soft data. So the 42 macro, one of the things I think we do that's very different and very helpful for our clients is we sequence every single economic variable that gets released for not just the U.S.

8:44economy, for all the global economies. And we try to piece the qualitative puzzle together in terms of what's likely to happen on top of actually having some very, very robust forecasting tools. But in terms of piecing the qualitative puzzle together, you know, today we got the ISM services PMI report. We saw the prices component of that tick down. That's the top panel there to the four-year low. It's now below its pre-COVID trend, which suggests that we should see services inflation kind of catch down to that on a lag. And then we saw we look at the percentage of respondents reporting some lower supplier delivery times.

9:18That number hit the lowest level we've seen since 2020. It's a four-year low as well. So we're seeing this sort of disinflation in leading indicators. You see the same thing in the NFIB survey on slide seven. You see the same thing in consumer inflation expectations on slide eight. And so when you sort of piece together that puzzle, productivity growth remains above trend, and we have at or below trend turnover, which is to sustain disinflation of wages, and at the bare minimum, wage inflation not being inflationary from a price inflation perspective. Number two, sheltered disinflation should accelerate over the next couple of quarters.

9:52And then finally, the leading indicators continue to point arrows down with respect to reported inflation. This is why we continue to have confidence in the back of this inflation is on the ropes, but not dead. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing. Kraken Pro is the powerful crypto platform for experienced traders who demand the best. With advanced charts, real-time market analytics, and lightning fast trade execution, Kraken Pro empowers you to trade your way.

10:24Customize your setup and make every pixel count. by rearranging and stacking trading modules in a way that makes sense to you on kraken pro you have the freedom to put your favorite market analytics and execution tools exactly where you need them and whether you're a seasoned pro or just starting out kraken pro has everything you need to navigate over 210 plus assets with confidence join the thousands of seasoned traders who trust Kraken Pro. Visit realvision.com slash Kraken Pro.

11:20So plus 500 gives you access to a wide range of instruments, S and P 500, NASDAQ, gas, and much more. Explore equity indices, energy, metals, Forex, and beyond with a simple and intuitive platform. You could trade anytime, anywhere experience the fast accessible futures trading. You've been waiting for with plus 500 with over 20 years of experience. Plus 500 is your gateway to the markets. Visit us.plus500.com to learn more. Trading and futures involves the risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500. It's trading with a plus.

11:58Yeah, I like that on the ropes and not dead because it is kind of a fluid situation. And so, you know, bears watching, which I know you always do. And I love that you bring up productivity, Darius, because it's so important and not enough people are talking about it. And I know, again, the jury's out, right? Can it continue? Is it here? Is it really coming from technology or is this something that might roll over? We don't know. But I think it's so important to bring that up because that's like one of the really important ease here. And you know it's something the Fed's watching as well. So what does this mean for bond rates?

12:33Because this is the, you know, the higher for longer camp is having a resurgence right now because of the kind of scares we see in inflation, because people are starting to ratchet back those Fed expectations. And we've seen that 10-year yield creep back up to 4.38 at its highest for the year. And Christopher in the chat commenting, decent chance that Jim Bianco will be right about a 5 % 10-year yield this year. Do you think we see enough either concern or actual reason to push those yields higher? Or are we likely to range here as we wait to see about that immaculate disinflation storyline? Excellent question, Maggie.

13:14Excellent question. And so the answer, you know, without knowing, you know, the sort of, I don't know the river card on all the key data points we're likely to receive as investors over the next month or so, I would say we're probably range bound and maybe even flat to down over the next, over the next maybe quarter or so because of the persistency of the immaculate disinflation thing. However, we are going to, we believe, and much like Jim Bianco believes, is that the longer term trend in trades is probably higher. Because again, we have this fundamental view that's based on the confluence of our quantitative research and our econometric forecasting tools that says inflation is probably going to bottom at a level that is inconsistent with 2 % inflation.

13:52That's probably a Q3, Q4 event. We expect markets to start to snip that out and price that in Q3. And so we think a year from now, bond yields are probably higher. but over the very immediate term, maybe flat the down. If the next series of data points we get, which we'll all sequence a report and unpack for our clients at 42Macro, if those data points support immaculate disinflation, flat the down. If they do not support immaculate disinflation, you've got to pull forward your expectation of a market regime transition from the current risk on reflation regime that we're in to something like risk off inflation, which we ultimately expect to come anyway.

14:27You just might have to pull that forward. Yeah, this is where time frame is super important. So thank you for laying that out, Darius, because Darius is servicing clients and thinking about it himself on a, you know, not necessarily looking out long, having to sort of think about the transition to that. But if you do have a longer perspective, you can take that into consideration. A hundred percent. A hundred percent. You always, I think you're among the world's best at coaching investors to think about investing from a time horizon perspective, understand your time horizon, understand the catalysts that are going to impact investments on your time horizon.

15:00Make sure that the risk you're taking in your portfolio are correlated to the catalysts that are going to occur on that time horizon. You never want to have time horizon mismatch. Long-term position with short-term catalysts, short-term catalysts with long-term positions. That's how you can blow yourself up as an investor. But just one final thing on this particular topic, we are on the precipice of a significant a series of inflation data points that could give us some, because the Macla disinflation is on a rope, I think the next month or so of data is really going to may have material market impact more so than it otherwise would.

15:33And so I'm just kind of rattling this off. Next week on the 8th, we get the New York Fed's inflation expectations as a leading survey data point. We get the NFIB survey on the 9th as a leading survey data point. Obviously, CPI on the 10th, CPI on the 11th, those are hard reported statistics that will confirm or disconfirm the nascent uptrend in annualized inflation. We get the University of Michigan inflation expectations on the 12th. We get the PC report on the 26th, followed by the Conference Board inflation expectations on the 30th. So any one of these data points or the collection of those data points will either push immaculate disinflation through the ring, off the ring, through the ropes, or allow immaculate disinflation to start battling back and really start to regain some mind share amongst market participants.

16:17And if it does that, then the sustainability of the current risk on market regime will be enhanced and, you know, get back to making money to get this investment. That's amazing. Hope you all wrote those down. Don't worry if you didn't, I did. And we will obviously cover them and remind you all, but that's going to be a really, really important week. And I think you're right because the conversation has shifted. So you're going to get momentum either one way or the other. And we're kind of like teetering there right now. And that's something that we've been pointing out and flagging throughout, as I know you have as well.

16:47I just want to point out a comment that Paul made. So we know Darius is among the best with these amazing charts that he has that they put together at 42 macro. And Paul just pointing out, Brian, whatever RV's paying you, it's not enough because Brian can keep track and keep up with Darius Dale, who we know is a fast talker. So it's a beautiful combo we're seeing on air right now. That warms my heart because Brian is the MVP, man. And especially you, Nick. I don't know if you can see Darius, but he's keeping pace of you as you're calling him out. And Nick is also behind the scenes making the magic happen.

17:20So by the way, totally sidetracking us here, but apologize for this. But congratulations. You know, I saw the tweet. It was like the thousandth episode. Yeah, yeah. Big time, man. You guys have done a real service for the global investing community. And you, Maggie, Nick, or you, Maggie, Brian, and Nick, you guys have just been awesome. So thank you. And I appreciate being here. Yeah, absolutely. I think the team tweeted it out too. You're one of our MVPs who's been on a lot. They did a little like number thing of all the different episodes and guests we've had on and all that kind of great stuff.

17:53Not to mention the heads up that you've all given people because you're always, all of you are ahead of the curve all the time and really flagging stuff to people that you just don't see in a lot of traditional coverage, which is amazing. And it's given a lot of people a great sort of advantage to take up, which we all need, right? We all need a leg up because we got to make that money and keep it for the future peeps in our lives. So we're doing the most we can. I'd be revist if I didn't mention that we do this six days a week for 42 macro clients. So just - Yes, absolutely. Right. We know that.

18:27You never stop working, Darius. So we went from talking about bond yields where there's really critical point. And the reason, of course, that's important is because that's going to affect a lot of other markets. So let's talk about those flows. And we have some questions as well. But one of them is, of course, I want to get your thoughts on what's happening with Bitcoin, because we know we have the ETF. There have been some questions about what it's correlated to. Is it going to move like a risk asset or not? We saw a sharp drop. I want to get your thoughts on the price action there. But before that, Ralph sat down with Arthur Hayes last week, very end of last week, and he made a really interesting point about these huge inflows we've seen into the ETFs that I really haven't heard people talking about into the spot, Bitcoin ETF in particular, all of the new ones that are out.

19:14Let's have a listen and we'll talk on the other side. There's obviously this zeitgeist of too much federal spending. I mean, Jamie Dimon rages on about every fucking quarterly report. Oh, yeah, the U.S. is spending too much money. well, instead of them getting fucked by them being forced to buy bonds that are negative real yielding, well, let's have a product that we can throw our clients into and make fees that's still within the system. And that's why I think these ETFs are now being embraced, which is, hey, here's this crypto derivative. You don't actually get to use Bitcoin because you can't withdraw it.

19:49You can't even redeem it. You want to redeem, you get dollars back in these ETFs, not Bitcoin. And so it's just a way to put all these people who want to get into this crypto life raft, but don't want to put in the real work and deal with private keys and OPSEC and all those things. I mean, it's annoying, but again, freedom isn't free. And here's this ETF. You can subscribe to your retirement account, your pension fund. You can buy it on a stock exchange. You've got all these respectable-looking folks selling this to you now, saying this is a way to diversify against inflation. And the banking system reaps fees.

20:28And we've seen how successful it's become. So I think there's going to be a Bitcoin ETF, an Ethereum ETF, a Solana ETF. Regardless of what any politician says, the banks know this is their way to stave off the effects of being forced to buy these bonds that are bad deals for them. It's such an interesting perspective. We've been talking a lot about either why individuals might want in or why the SEC doesn't will it or won't it. This was a kind of an interesting take on why the banks are running toward this business. That full interview, by the way, and they cover tons of stuff, is available on our website.

21:01If you are not a member, sign up now. Brian will drop a link in the chat and there might be a QR code that we'll put up. But lots of ways to get your account going. So Darius, we've seen, we saw that, you know, a little sloth first, and we saw that big run up on the back of the success of the ETFs partly. And now we did see a big pullback right at the beginning of this week, back down to$65 ,000 for Bitcoin. Does it feel like this is consolidation? Is it part of risk off? Do you feel like there's a more serious correction coming? How are you thinking about that? Yeah, I mean, look, we're very much in a correction.

21:39I mean, it's obviously been very muted in the equity markets, but we've seen people pullbacks in different asset classes, notably a big point over the last few weeks. You know, one of the things we've been highlighting over the past month or so in terms of our positioning model is some of our tactical positioning indicators got stretched. Think of things like the AI bulls bear spread, the AI survey. If you look at, you know, sorry, sir, implied correlations, you know, getting to, you know, basically all time lows, all these sorts of things that give you an indication that, hey, markets are a little bit over their ski tip.

22:09So we'll take much to cause a catalyze a correction. And this is why we're so hyper-focused on sort of the next series of data points. Because again, if immaculate disinflation gets knocked out of the brain, this correction is going to become material and deep because it ultimately means that we're going to start to lose not just the will they, won't they on three rate cuts this year, or is it July, that parlor game, which is in my opinion, which is the complete sideshow. The real show is about where is the former rate curve going to be 2025 and 2026 by the end of this year and by the end of next year.

22:41And so in our opinion, we think that full rate curve is going higher, but we don't necessarily think it's going higher from this data point, from this starting point today, because we ultimately believe that immaculate disinflation will survive that gauntlet of economic reporting. If it does not survive the gauntlet of economic reporting, you've got to pull forward your expectations of a transition from a risk-on reflation market regime to a risk-off inflation market regime. And that's a big, big change in factor leadership that I think a lot of investors will be overbearable. We're going to take another quick break to hear a word from our partners.

23:12We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.