Previous Research Margin Debt: A Key Indicator for Market Consensus
The relationship between the copper-to-gold ratio and the 10-year US Treasury yield has been extensively studied due to its predictive potential for yields. This relationship stems from the distinct characteristics of copper and gold in response to the business cycle.
Copper, being an industrial metal, experiences price fluctuations closely tied to the business cycle. During an expansionary phase, copper prices increase alongside inflation, which subsequently leads to higher bond yields. Thus, a direct relationship exists between copper and bond yields.
Conversely, gold exhibits an inverse relationship with bond yields. During periods of economic distress, investors flock to safe-haven assets such as gold and bonds. This surge in demand for gold and bonds causes their prices to rise, ultimately resulting in a decrease in bond yields.
By calculating the ratio of copper to gold, one can effectively capture changes in the business cycle and their subsequent impact on bond yields. Plotting the copper-to-gold ratio against 10-year yields provides a valuable tool for forecasting the direction of bond yields during periods of divergence. Given the high correlation between these two series, their Year-over-Year changes should also move in tandem, as depicted in the accompanying plot.
At present, the divergence between the copper-to-gold ratio and bond yields has narrowed after reaching historic highs. Consequently, it is reasonable to anticipate their convergence moving forward. The question lies in whether yields will converge in a manner consistent with historical patterns or if the copper-to-gold ratio will adjust upwards to align with yields.
Can US Skip the Recession?
The most recent labor market data paints a concerning picture of overall weakness. Typically, the effects of changes in interest rates take some time to ripple through the economy. Historically, this lag has been around 18 months. Interestingly, this pattern held true as, precisely 18 months after the initial rate hike in March 2022, we are now witnessing the visible impact this month. The Federal Reserve consistently raised rates throughout 2022, suggesting that the consequences of these consecutive hikes will continue to materialize as the year unfolds.
SP500 & Inflation Update: Aug 2023
Airtham Macro Research: The July headline CPI release followed predictions of a slight increase, yet the actual magnitude was less significant than anticipated. This outcome sparked optimism within the market, leading to a surge in activity and speculation of a potential pause in rate hikes. However, this optimistic rally was short-lived as market participants quickly adjusted their expectations. The weaker-than-expected inflation reading meant a potential decline in economic demand. This perspective gains support from jobless claims data released a few days back, that showed claims rising to a 1.5-year high. Consequently, there's now a debate over whether further inflation reduction is beneficial or detrimental to the markets.
What’s Happening to US Tax Receipts?
One of the most crucial indicators for gauging the health of a country lies in its government tax receipts. When tax receipts rise in tandem with economic growth, it signals a thriving nation. Conversely, economic downturns often witness an accompanying decline in tax receipts. However, what's truly concerning is when tax receipts decline despite a healthy and expanding economy.