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Chart of the Day: May 25, 2023
Divergence in Copper-to-Gold Ratio and 10-Year Treasury Yields
Today’s Chart of the Day presents a fascinating divergence between the copper-to-gold ratio and the 10-Year US Treasury Yields. It invites us to consider a potential future shift in economic conditions.
Our line chart, starting from 2008, displays two data series: the copper-to-gold ratio and the 10-Year US Treasury Yield. Until January 2022, these two maintained a significant positive correlation. However, a clear divergence is visible since then, with yields climbing from 1.8% to 3.8% and the copper-to-gold ratio falling from 0.0025 to 0.0018.
The divergence is particularly notable since late-February 2023, reminiscent of a similar divergence near the end of the Fed's previous hiking cycle in late-2018. This divergence could be a signal that the copper-to-gold ratio is pricing in a potential economic slowdown, prompted by the Fed's rate hikes.
Impact on the Economy/Financial Markets:
Historically, a high copper-to-gold ratio indicates a strong economy, and a rising 10-Year Treasury Yield indicates increased investor risk appetite. The current divergence could be a warning of a potential slowdown in economic growth, mirroring the outcome seen in late-2018.
For investors, this divergence could suggest a re-evaluation of risk in their portfolios. While the yields rise, the copper-to-gold ratio's decline might be signaling caution. Watching for the Fed's actions and their impact on the economy will be key in the coming months.
This chart demonstrates the often intricate interplay of commodities, bond yields, and economic health. It showcases how the copper-to-gold ratio, a measure of economic sentiment, and bond yields, a measure of investor sentiment, often move in tandem reflecting broader economic trends.
Could the Fed's hiking cycle lead to an economic slowdown, as the copper-to-gold ratio seems to be predicting? The divergence between these two indicators is definitely something to keep an eye on.
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