Speaker 1:
Hello, and welcome to Macro Minutes. During each episode, we'll be joined by RBC Capital Markets experts to provide high conviction insights on the latest developments in financial markets and the global economy. Please listen to the end of this recording for important disclosures.
Simon:
Hi everyone. Welcome to the April 5th edition of Macro Minutes. The past two weeks have been characterized by continuing hawkishness from the Fed and BoC, sending front end bond yield surging and curse flattening to inverted levels.
Simon:
The dollar has remained strong and commodity markets remain in focus due to the ongoing Russian invasion of Ukraine and the recent SPR release announced by President Biden.
Simon:
To help us navigate this landscape, we have a full slate of RBC experts on the agenda today. Tom will discuss the updated Fed call with more hikes near term. Blake will talk about the FOMC minutes and balance sheet expectations. Elsa will discuss the increase in dollar/yen. I will talk about the Bank of Canada meeting on April 13th and the expected policy path going forward. Jason will elaborate on updated bond yields and Canada-US rate differentials. Peter will discuss the impact of the war in Ukraine and escalating sanctions in the context of central bank tightening. Sue Lynn will provide immediate analysis on the hawkish RBA overnight and cross market trade ideas. And Michael Tran will discuss the oil market in light of last week's SPR release. With no further ado, we'll move on to Tom Porcelli.
Tom Porcelli:
Great, thanks so much Simon. Appreciate it. Good morning, everyone. Look, as we were last week, Powell's tough talk has obviously gotten the entire forecasting community to buy into the idea of at least a couple of 50 basis point hikes to come and then hikes at every meeting. But look, we maintain, we have our doubts that this aggressive posture will be realized just given the fact that there's some economic obstacles forming. Some of the, we've talked about, the plight of the low-income consumer. The reality that they've used up an enormous share of what they were given through fiscal stimulus. In fact, they've actually used that and then some. And even just last week with the payroll report, again, some of these things are nascent, but it bears watching.
Tom Porcelli:
If you look at average hour earnings, on a three-month average change basis, it looks like you're starting to slow down here. Housing is another great example. We wrote about that recently too. It looks like there's some cracks starting to form in the housing space. Manufacturing seems to be slowing. If you look at new orders data, delivery times, it that you're starting to see some slowing.
Tom Porcelli:
Again, it does not necessarily mean that a recession is upon us, but as we've also said, if the Fed is going to continue to raise rates and get into restrictive territory, I mean the map on that one is pretty simple. If they're able to achieve that, what Powell is talking about here, then you raise the odds of recession in a very dramatic way.
Tom Porcelli:
And I think given some of the cracks that we're talking about here, the odds were already elevated from our perspective, as we've been saying. I was speaking with a client yesterday and they were saying... The conversation was pretty dour, I guess. And he said to me at the end, Tom, give me some hope. And I said, here's your hope. The hope is that you have the doves that finally wake up. It's really easy to be a hawk because let's be clear, every Fed official is a hawk right now. But it's really easy to be a hawk in the face of inflationary pressure when the labor backdrop is seemingly humming. I think as the economy slows down over the balance of the year, again, a long standing call, you're probably going to see some softness build into the labor backdrop.
Tom Porcelli:
And if all of a sudden, as things are slowing down, because again, you're not going to print 450,000 jobs on average over the balance of the year, it's going to be a lot lower than that. We think it could be closer to 200,000 over the balance of the year. That is a surefire way, like softness building in at the edges, that's a surefire way to wake up these sleeping doves. And what you can hope happens is that as the year progresses, they pull Powell away from this very hawkish approach. Keep in mind, this is exactly what happened last year, the mirror image of that happened last year. You had all the hawks basically pull Powell into a reality of, hey, it's time to remove accommodation. I wouldn't be the least bit surprised if you see a dynamic like that as the year progresses, again, as these doves start to wake up from the slumber that they seem to be in. So I think that's probably the best that you could hope for, but again, for the immediate term, Powell is on a mission and you're going to see at least 250s over the next two meetings. That's it for me.
Simon:
Thanks Tom, for that interesting context. Blake, over to you on tomorrow's FOMC minutes and balance sheet expectations.
Blake:
Yeah. Thanks Simon. And before I run down the expectations on the balance sheet, just real quickly to follow up on what Tom said and the rate side of that, markets have definitely taken this hawkish messaging that we got in March [inaudible 00:05:13] on board, and even push beyond what the Fed was telling us as per the dots. I think for terminal Fed funds rate is about 80 basis points higher than it was as prior to the March FOMC. And it's been pulled forward by several months in time. So we now see a peak in the Fed funds rate in June. Interestingly, after that, we start to see cuts being priced in the Fed funds rate over about a year-long period into '24 and even '25 pulling back down to that 2% range and flat lining there.
Blake:
Even if we are able to continue moving in this hawkish direction and keep pushing this terminal rate higher, my expectation is that the higher you push the terminal rate, the farther that backend continues to fall as markets just get more pessimistic about the economic outlook and continue to price in a more aggressive path of hikes after reaching that terminal.
Blake:
Because of that, I think this flattening pressure can continue for the time being whereby we price more into the very front end, but pessimism about the economic outlook continues to serve as an anchor on back-end yields. Add on to that the fact that we've got flowing demand from banks as deposit growth starts to slow, slowing demand from Japan and overseas accounts, which I sent out a note about a week ago on. And at the same time, you have increasing demand in my view from pensions at the long end.
Blake:
I think those forces are all going to serve to continue pushing per splatter, even though we've gotten a slight relief in the steepening direction this week. I think the direction of travel is still towards flatter curves. The problem with that is that obviously positioning is very, very crowded. It's difficult for them just a carry rural perspective, to hold those positions. So still not very attractive to get into those flattener positions, so just ride it out from here.
Blake:
Turning to tomorrow's FOMC minutes, as Tom said, I think a 50 basis point hike is pretty much baked in. So I think most of the attention is probably going to be on balance sheet conversation in those minutes given the markets don't really need to see much more to convince them about this 50 basis point hike. Recall that Powell, in the press conference in March, did tee up these minutes and specifically mention that they would quote, lay out parameters that they're looking at.
Blake:
I'm not really sure what details they plan to give here. I found that statement weird just given that if he had more details, I'm not sure why he didn't go over them at the meeting. And also just given that they did lay out the high-level plan at the January meeting and any additional details is essentially just an announcement of the program. So we'll see what we get. But just as a review, our expectations, I now see runoff starting in May. That has been pulled up in line with the Fed's urgency to normalize policy that Tom and I have both been discussing. I think there's going to be a phase-in period where the caps are gradually increased by 10 billion, 5 billion each. That's treasuries versus mortgages. That's going to last for about six months to phase-in the balance sheet runoff. That will leave the caps at a steady state of 60 billion per month on the treasury side, 30 billion per month on MBS side. Both of these are essentially uncapped programs. That 60 billion cap for treasuries will only really be binding in quarterly refunding months that see very large maturities.
Blake:
And as for the MBS side, prepayments have really started to slow. And with mortgage rates moving higher, I would expect those to drop below 30 billion a month. So 30 billion really is just a fail safe that if we see some big spike in prepayments, that would block there, but essentially both of these programs would be allowed to run uncapped in their steady state. Also, I am now expecting the Fed to allow their bill portfolio, which is about 326 billion to fully run off with no caps. Most of that portfolio would be run off in about a three, four month period. But I would expect treasury to match that with increases in bill issuance.
Blake:
And lastly, and perhaps most importantly, I am not expecting any type of asset sales. There is some possibility that we see MBS sales down the road, but those would be quite a ways into the program, and I think relatively small if they were to occur. But at least at this beginning point, no sales. And as I said, maybe some MBS sales later down the road, but treasury sales, I do not see it at any point during this roll off period. And that's it for me.
Simon:
Thanks very much, Blake. I will now move to Elsa on the breakout in dollar/yen.
Elsa:
Thanks, Simon. So we've had a very interesting move in dollar/yen. Having spent the year, pretty much just grinding around the 115 level and actually going back to late October, we've been more or less at or around that level. Dollar/yen really took off in March. We're off the highs, which were just above 125, but we're still up about 7% on where we were a month ago. And I think that's prompted a lot of questions for where we go next. We went straight through our 12-month target of 120, and a lot of people have been talking about the seasonality in dollar/yen ahead of fiscal year end and so on. My colleague Adam Cole has done quite a bit of interesting work around this, looking at both the deterioration in Japan's trade and current account balance. We don't think it plays an important role.
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Elsa:
... Japan's trade and current account balance, we don't think it plays an important role. There's also very limited evidence of seasonality around fiscal year end. I think it's enough to say that in the past, people have argued that it would be yen positive, now you find people arguing that it's yen negative. The bottom line is there's no consistent simple seasonal factor that you can point to. But what is important is that we think the hedging behavior of Japanese investors has not yet really started to change. If you look at their historic behavior, they only really start to adjust their hedge ratios once the cost of hedging actually moves up materially. And what drives that cost, it's not two year rates, but it's actually more like three month rates. And there, you can see that those really haven't started picking up yet. But if they do in line with the forward curve, a year from now, the hedging costs are going to be materially higher than they are at the moment.
Elsa:
So bearing that in mind, there's potentially a lot more dollar yen buying still to come from the Japanese domestic investor base. And while the national investor community has front run that flow and speculative positioning is fairly crowded and high, we do look at any dips in dollar yen as opportunities to buy and positioning for that longer term, move to the top side.
Elsa:
I'll leave it there on dollar yen. I'll just say a quick word on the Euro because I know my colleague, Peter will be talking a little bit about the French election potentially. We have the first round this Sunday, and then the second round on April 24th. We have in the last few days seen a lot more interest from a number of clients around the second round and the potential for a shock outcome. I will say that there are a wide variety of views on this. Certainly Le Pen's stance on the Euro is a lot more neutral, a lot more conservative than it was in the past. She's not been actively campaigning on taking France out of the Euro. But we would still argue that a shock result, an unexpected victory for the National front would be Euro negative. And even though that's not anybody's base case at the moment, we may well see more of a risk premium building up between now and the end of April.
Simon:
Thanks very much Elsa. Now I'll talk about Canada and before getting into the BOC, I'll just note that the federal budget is on Thursday and so we are expecting gross bond issuance in upcoming fiscal year or the current fiscal year that just started to be about 208 billion. That's roughly unchanged from where it was in the previous quarter so the January to March quarter. Although with the bank expected to move to QT at the next meeting on April 13th, net issuance should be rising. So for the BOC more broadly, we did update our policy forecast on Friday, and we do see more near term tightening from the bank for next Wednesday's meeting alongside QT. We are looking for a 50 basis point hike, but do think it is a closer call than what the market is pricing currently. Market's about 80 to 85% for a 50 basis point move versus 25. But we do think 50 basis point is ultimately more likely.
Simon:
Arguments for a 50 basis point move inflation already well above target and likely to rise further near term. Suggest rising risk of inflation expectations de-anchoring. We've seen some of that in the business outlook survey though not over medium term inflation expectations. Growth and demand coming in stronger than projected in the January NPR. And four, a need for accommodated policy not there and they want to accelerate the move to a more neutral stance.
Simon:
Arguments for 25 basis points. The bank could see 25 basis points plus the QT start as sufficient policy tightening at one meeting. Another no March inflation report pre-meeting so this is unlike the Fed, we don't get the Canadian CPI report until April 20th. And three, could wait for the fed to go 50 basis points first, before they decide to.
Simon:
I said on balance, we do think the 50 basis point move is more likely. And after next week we see the bank hiking 25 basis points at the following four meetings so that's taking the overnight rate to 2% by October. And there is a risk of another 50 basis point during that time as well. By the end of this year, we do expect inflation risk to be more balanced. So in headline inflation flowing, downside growth risk emerging from from tightening already. And we don't see any hikes at all in 2023.
Simon:
So this is well below market pricing for terminal so 2% versus above 3% in early 2023 if you look got market rates. And although our 2% terminal forecast would be just 25 basis points above the previous cycle, given the Bank of Canada's estimate of a long term retro rate has declined since then, it would actually be 75 basis points higher relative to neutral than last cycle. So just some context there on our updates for the Bank of Canada and I'll shift over to Jason to discuss updated bond yield forecasts and Canada-US spread differential.
Jason:
Okay, thank you Simon. So there's three items I want to discuss today. One, our outlook for Canada bond yields. Second, the Canada-US policy rate differential, and third, Canada-US bond yield old differential. So our theme since last November of higher rates and flatter curves, that has played out as expected. But now with so much priced into the Bank of Canada, which we don't think will be realized that Simon alluded to, the upward risk to bond yields have become more balanced. So we now believe that yields have essentially peaked from a structural perspective and while the current elevated levels of volatility could push them higher in the short term, that's unlikely to be sustained.
Jason:
So the front end of the curve that could fall slightly in the second half of the year, if the BOC stops at 2% in October, as we expect, and the 10 year yield is unlikely to rise from here, unless there is a material repricing higher in the Bank of Canada terminal rates, which we think is unlikely because the market's already priced for that to be around 3% already. The Canada curve, that should have more steepening in the US curve, given our relative expectations for the Bank of Canada and the Fed.
Jason:
Which leads to my second point on the Canada-US policy rate differential. So our forecast, as Tom and Simon outlined before, have the Feds finishing the cycle with a rate that's 75 basis points over Canada. So two and three quarters in the US, 2% in Canada. And this would be consistent with what we've seen in the past few cycles, where in two of those, the Fed has ended 50 basis points higher, and in one it ended 100 basis points higher.
Jason:
Now, yes, both economies are showing strong growth, elevated inflation, but we think it's highly unlikely that Canada can have higher policy rates than the US given relative household debt levels. So to put this in perspective, even before the GFC, when Canada and the US had similar levels of household debt, the Fed did tighten by more. And right now, Canada has a household to debt to GDP of 115% while in the US the ratio 75%. So I think this alone argues for Canada's rate tightening cycles to be more muted on a relative basis.
Jason:
Lastly, these policy rates differentials that we expect should eventually feed through to the entire yield curve. So a year from now, we see Canada two year 80 basis points below the US, the five year 50 basis points below, and the 10 to 30 year sector around 30 basis points below. That compares to right now where there's very limited spread differentials across the curve.
Jason:
The best opportunity right now we think is receiving Canada five year five versus paying US, that's near historical wides. And that spread has never been dislocated at the start of a tightening cycle when both the Bank of Canada and the Fed have been in tightening mode.
Jason:
Furthermore, if we're right on the Fed funds rate ending 75 basis entire than the Bank of Canada, the five year, five year should trade negative on the LIBOR leg for the US or closer to 25 to 50 basis points if you're using a SOFR leg for the dollar swap. That's a fundamental trade, we have liked it in the past. And the recent significant widening that we've seen is probably a lot related to crowded positionings being unwound, and so I'll put to that levels that are worth thinking about reentering.
Simon:
Thanks, Jason. Now we shift to Peter to talk about the impact of the war in Ukraine and sanctions on Central Bank tightening.
Peter:
So I would like to talk, first of all, I'd like to give you a bit of an update about the things that were announced earlier today. Secondly, I'd like to touch upon the question about recession probability in Europe. And then thirdly, about what the market is implying going forward. And I very briefly, as Elsa was alluding to, will in the end of my comments, touch upon the French election that are coming up this weekend.
Peter:
So, first of all, obviously the pictures that were coming out of Ukraine earlier this weekend, over the weekend are quite atrocious and the European leaders have promised that they will react to that. And earlier today, they have announced further tightening measures of the sanctions. In particular, what they have announced is banning of imports for coal and potash in particular. And I mean, it is a meaningful one because we are quite large importers of both of these products. But as I will argue in a second, it is not as meaningful as it would be if it were to go towards gas. And this leads me directly into the question about, or that I discuss-
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Peter:
This leads me directly into the question about, or that I discuss with clients the most, which is about the downside for the economy. And particularly, as far as the recession probabilities are concerned. So as I've said before on this call, and previous conversations, we are much more exposed directly and indirectly because our gas prices are rising faster. And then, there are North America, we obviously have closer trade links and we are geographically closer and so on and so on. And we have already taken our growth forecast down by around about a percentage point, particularly sort of in Q2 and Q3.
Peter:
We currently still see small, positive growth numbers, but we clearly have a significant stagflationary shock over here that's going to slow down our economies in the near term. Now, the question about recession keeps coming up and particularly, now that the sanctions have been tightened even further. I mean, I'm the first to say that downside risks to our forecasts is clearly there, but I would also stress that the forecast that we are seeing in the marketplace and that we're seeing from the central banks are still significantly above where we are forecasting the economy.
Peter:
So I think the downside implied in markets is probably higher. Now, whether or not we'll see a recession in my mind is not the right question to ask. In my mind, whether we get a very small, positive growth number for two quarters and then bounce back or maybe a small negative growth numbers and then bounce back, doesn't really make any difference. What really makes a difference in my mind is whether we start venting labor market quite significantly. There is currently very little indication of that. In fact, most of the leading indicators for the labor market that we have such as hiring intentions, stay relatively elevated and relatively strong. But looking out for any weakness in the labor market that potentially sort of starts to weaken the domestic economy, not through the trade links or the indirect impact that we get through disposable income, but through the labor market, that in my mind would potentially cause a rethink for central banks.
Peter:
That leads me to the last point I would like to make. What about central banks? Now, one of the things that we're seeing, particularly as far as the ECB is concerned is that inflation expectations have been rising in the market. And it's one of the key elements that the ECB has previously said is holding them back from tightening was that inflation expectations were not high enough. And I have mentioned this on this call as well. Now, when you look at where they are, whether that's in short rated spot, in long rated spot, in short dated futures, in long dated futures, pretty much on every maturity level that you look at, inflation patients are either a bit or quite meaningfully above the ECBs 2% target. So there's absolutely no excuse for the ECB from that front anymore. And I think that will keep the governing council of the ECB on their toes.
Peter:
They have announced already that they want to stop their asset purchases in Q3 and that they want to high grades. The market is implying it. And I think they will march towards that direction pretty undeterred. We have the ECB meeting next week. I don't really think that anything new will be coming out here and the key meeting where they potentially give us more details about what they concretely want to do most likely going to be the one in June, because this is also where they present their staff forecasts. So this is the way I'm looking at it currently. But if you look at what the market is implying, we are priced quite aggressively and that's for sure. For instance, we're pricing for the end of this year to get north of 0% in the deposit rate already. Now, last but not least, on the French election, as Elsa was alluding to, we had a narrowing of the polls.
Peter:
And one of the things that you have seen is sort of a creep into bond spreads into the Euro, as Elsa was saying, but also into bond spreads. France, Germany spreads have been widening already much more than other spreads. And if we get on Sunday, when the election results come out, a very narrow result, I would expect that we get a little bit more of the same going into the second round, which then takes place in two weeks time. And as Elsa was saying a shock result would probably just exacerbate that. So it's definitely one to watch out for. And with that, I'll hand back to Simon.
Simon:
That's great, Peter. Thanks very much. Now we head down under for the latest on the RBA and cross market Aussie ideas. Over to you, Su-Lin.
Su-Lin:
Hi everyone. We had a very significant RBA board meeting today. There was quite a deliberate shift in the bank's language and we took it very much to signal the start of rate hikes sooner rather than later. So there was a couple of key phrases that were noteworthy. They basically, dropped the patient language. So the RBA for some time now, has noted that it's prepared to be patient in terms of lifting rates because wages were low and inflation, they were not quite sure would stay sustainably in their target range. They've dropped that language and they also drop the commitment to maintaining highly supportive monetary conditions. So when we look at that and we also see some of the recent developments in terms of the Australian economy, we thought that was really quite significant. We had been expecting some shift in language, a June liftoff for the Reserve Bank remains our base case.
Su-Lin:
We think they'll move, firstly by 15 basis points, then two lots of 25. Taking cash to 75 basis points by the end of the year. So back to that pre COVID level with a couple more hikes in 2023. We've talked about it, I think through our research and on this call, a number of times that the more aggressive outlook for global central banks, and it's already been discussed on this call, particularly the Fed. The much stronger Australian economy, particularly the labor market, which is effectively at full employment, as well as increasing inflationary pressures. Plus, what was a fairly stimulatory budget next week suggests that it really would be prudent to start hiking sooner rather than later. And that emergency settings, 10 basis points in cash really increasingly appropriate. So from that perspective, we think the case is building for a liftoff. Our view very much is has been that if the bank gets going sooner, rather than later, it should be a fairly measured cycle.
Su-Lin:
We have cash peeking out at one and a half percent in early 24 for a number of reasons. But I guess, you know what Jason highlighted in terms of household indebtedness, Australia's is even higher than Canada's. And that we think will act as some restraint on bank over this cycle. So markets continue to price in much higher terminal cash, even above what they're pricing for the Fed. At times, over the last week, we've had terminal here in Australia price somewhere between three and a quarter and three and a half percent. So a market that is very aggressive into terms of the outlook, reflecting a bunch of factors. A bit of that global central bank outlook, but also I think a worry that the RBA risks getting behind the curve until maybe that language changed today. So from a trade perspective, we very much continue to favor cross market compression.
Su-Lin:
They are trades that we've flagged on a number of occasions, both in this call, as well as in our research. We've highlighted three trades for a little while now. All compression trades. Two year, two year Aussie US, two year, two year Aussie CAD and 10 year Aussie US in bond. The two year, two year Aussie US is probably our preferred out of the three. It has moved around a lot, but last week it was out at about 80 basis points. It's very unlikely Aussie cash is going to end up that far above the US and on our forecast should be well below the US. Probably, a good a hundred basis points.
Su-Lin:
So that we definitely suggested longer term investors to scale in last week, up at that 75, 80 area. It has whipped around a lot over the last week or so. We were a bit cautious because we were expecting some hawkish rhetoric out of the RBA. And so we didn't actually enter it from a trade wreck perspective, but we do think there is value emerging there. Around 70, 75 does look like good entry. We would target flat on that trade and think that it's a good trade to capture. I think, aggressive pricing and the likelihood that Aussie cash peaks well below the US. Back to you, Simon.
Simon:
Great, very interesting idea. Thanks very much, Su-Lin. Now over to Michael Tran for an update on the oil market.
Michael Tran:
Hey, good morning. I'll jump right in with the three pressing issues in the oil market currently. So the first is price, the second is SPR and the third is demand. Now on price. Look, it's hard to not be constructive on energy outlook, currently. Short term biases, I think have led a lot of casual oil market of observers to really forget that this global oil market was the tightest in a decade or longer, even before the Russian invasion. So let's not make the mistake to think that Russia catalyzed the fundamental framework. In fact, I could even make the argument that the invasion may end up deterring the sentiment around the path forward because of SPR action and the sticker shock of surge gasoline prices. So we saw a rapid move higher in pricing. This escape velocity really hit the market early last month, but that, I think could be something that plagues the market rather than the slow growing higher, that many fundamentalists in the market would've been expecting. That said, I think the market is moving away from this max fear levels that we saw last month and really moving back towards strong fundamentals.
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Michael Tran:
... that we saw last month and really moving back towards strong fundamentals. Now, sentiment, liquidity, and navigating some of the major headline risks means that prices will likely remain quite volatile. But we still think that there's upside to oil prices from here, $115 a barrel by peak of summer because regardless of headlines and policy look, the fact of the matter is that the major problem in the oil market right now is that we're tight on both crude and refined product inventories globally. Historically, that problem is a really difficult one to solve without prices going higher. Over the summer, the market will be searching for a degree of demand destruction, and that's a really bullish framework. Now the second theme is the release from strategic reserves. So the Biden Administration announced a drawdown of 180 million barrels from SPR late last week. Barrels will be distributed at a rate of about a million barrels a day for the next 180 days, which effectively bridges us to U.S. midterm elections.
Michael Tran:
Now as expected, we saw knee-jerk reaction lower, the market took WTI prices down 8%, but we've seen a rebound, we're back within 3% of pre-announcement levels. And I think what's more important is that the term portion of the forward curve is actually up over 4%, since the announcement as the market starts to price in scarcity. Look, the global physical oil flow is a rapidly evolving development given the Russian invasion, but our math still suggests that global inventories will draw by one and a half to two million barrels a day on average, through the balance of the year. Even in light of the extra one million barrels a day of SPR barrels hitting the market and assuming one and a half to two million barrels a day of Russian crude, continuing to struggle to find a home. I think the bottom line here is SPR could cause some mild near term downward pressure as the market tries to absorb the additional barrels and the global trade flow is upended to a certain degree.
Michael Tran:
But the absorption rates we think will be quite strong, dips will still be bought and the constructive term outlook remains quite undeterred. The last theme I'll touch on is gasoline demand. Now our real time indicators of mobility, so our get out and travel, our get out and live indices, so our goat and gold indices are very strong and the forward looking components to those indices suggest that we're still likely in for a pretty healthy driving season, healthy travel season, despite record or near record pump pricing. So with that, we built in some real time checkpoint. So what we did in a report that we published last Monday is we drew geo boundaries around nearly 135,000 individual U.S. retail gas stations across the country. And we utilized geolocation data to monitor foot traffic flow through each of the individual gas stations.
Michael Tran:
And we also looked to monitor variants of gasoline demand across different income brackets. So we superimpose median household income data across each of the individual gas stations. And so by doing that, we can effectively monitor the refueling habits of individuals and how that changes across different income brackets. The bottom line is the less affluent you are, the more often you visit the gas station in a rising price environment. That sounds a bit counterintuitive, but bear with me for 20 seconds and we'll give you the rundown on why. Now to this point, we have not detected clear signs of demand destruction yet. And like I said, what we found is that as gasoline prices have surged through $4 a gallon and hit record levels, our work is showing that average American is visiting gas stations more frequently as pump prices rise. We're finding that with gasoline prices at or near record levels, call it four and a quarter per gallon, we're seeing visits to the pump arise by 22% from normal levels.
Michael Tran:
So in other words, if you used to go to the gas station once a week, you're now going once every 5.7 days. What we found is the U.S. consumer filled the gas tank to the same notional price level during each visit, irrespective of what the cost per gallon is, despite filling up less of your tank. What we found is the average American fills up their car between 25 and $30, so the actual number that came out is an average of about $27.5 per gas station visit. Again, irrespective of what the price per gallon is. Now, since your dollar does not go as far as when oil prices rise, you have to revisit the gas station more often. We think that this could be a function of two things.
Michael Tran:
Look, a big part of this country lives paycheck to paycheck, and you're trying to match expenditures with cashflow. You're just trying to make it to the next payday. That could be one. The second one is you fill up a portion of your gas tank, when prices are high, hoping that the next time you drive through past the gas station three or four days later, you're hoping, you're wishing that prices will be a little bit lower and you can dollar the cost average in at a lower price. Look, there's a ton of stats that I can get into, but in the interest of time, I'll draw your attention to the piece from last Monday that we titled Full Tank, Empty Wallet. But with that, I'm happy to leave it there.
Speaker 2:
Thanks very much, Michael.
Speaker 3:
Thank you for joining us today here on Macro Minutes. We'd like to thank you for tuning in. I'm Jason [inaudible 00:35:43] and I look forward to seeing you next time.
Speaker 4:
This content is based on information available at the time it was recorded and is for informational purposes only. It is not an offer to buy or sell or a solicitation and no recommendations are implied. It is outside the scope of this communication to consider whether it is suitable for you and your financial objectives.
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