Chart of the Day: May 25, 2023
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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.
Chart Description:
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.
Key Takeaways:
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.
Actionable Insights:
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.
Educational Aspect:
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.
Conclusion:
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.
— Brant
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