Chart of the day
>> in recent decades there has been a close correlation between gold and the yield on the 10-year treasury note but it’s a hinck that has weakened. the higher gold prices, we have not seen higher yields. here with an in-depth look in our “chart of the day,” editor-at-large tom keene.
>> this is a great piece, david cotack at cumberland advisers talks about the barbaric relic, he took that from john maynard keynes and also percy bishop, a poet. the white line is gold and the red line is the yield on the 10-year note and they’re very well correlated going back 15, 10, even five years and something happens in 2002. gold goes up, exploding up touching $480 today and the treasuries stay down. will gold come down, are interest rates going to go higher ands you heard from conrad dequadros of bear stearns, their bet is that the yield will go up 4.75%. that’s where david kotok is, too, he thinks the fed is signaling higher interest rates.
>> is that that simple, higher gold means higher yields?
>> it’s not that formulaic. with the chart, as you look back 10 years, there was a great correlation but it’s always a mix of issues and kotok is clear that this is one of the indicators of higher rates. part of it is where we are in the cycle, the fed is raising rates, he thinks long rates will pick up with the short rates that the fed influences but it’s a mix of things the economists are looking at.
>> but the fed rarely speaks of gold yet they hold gold. why?
>> our fed reporter craig torres told me that in wyoming at the recent jackson hole meetings, of course, they don’t talk about gold, but off the podium, they’re aware of where gold is moving. but it is an interesting thing and i would suggest and certainly what i’m reading from economists is it has to do with the behavior idea. the fed doesn’t want to rock the boat and create the kind of fare that can come up with too much talk of higher gold prices.
>> your chart indicates about a 7% 10-year yield.
>> over here, absolutely, popping up there. sobering.
>> if the 10-year yield was to catch up with gold, is that possible?
>> it’s one of the scenarios but not what everyone is expecting and kotok is not suggesting you’ll get that perfect correlation again with yields returning to 7%. it could be gold comes back a little and yields come up a little but all in all, the idea is this is just one correlation, the gold bugs will tell you, kotok is not a gold bugs, but it’s one idea out there.
>> thank you very much, tom keene, editor-at-large with the “chart of the day” talking gold and the 10-year note. we’ll catch up with the latest world and national headlines when we return and in our alibaba.com, we will―the “world’s biggest mover,” we’ll talk about the russian stock market .
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Listen Interview: Senior Economist at Bank of Bear Stearns
>> fed officials continue to cite concern about potential inflation pressures. the speech came a day after minutes of the fed’s september meeting were released. the question is how far will the fed go? joining us with a closer look at remarks and outlook for interest rates is conrad dequadros, senior economist at bank of bear stearns. welcome, conrad. fed chairman alan greenspan said earlier today the u.s. economy has “weathered reasonably well the steep rise in energy prices.” do you agree?
>> i would agree with that. most of the data suggests that outside of the short-term impact of hurricane katrina, the economy is still performing quite well. we saw evidence of that in last friday’s payroll report and we’ve heard other fed officials discuss similar issues. recently governor olson spoke and he said that it appears job creation outside of the hurricane-affected areas is performing quite well.
>> yesterday we got minutes of the september 20 meeting, do you think the fed’s view of the economy has changed since the september meeting?
>> i don’t believe so. i think that the fed realizes that there is a significant increase in the amount of uncertainty about the outlook but i think their baseline view is that the underlying economy is still expanding at a reasonably robust pace. i think the minutes do suggest they are concerned about the potential inflationary impact of the,hurricanes. they note that inflation expectations have picked up and even called that troubling and suggested that there’s been a pickup in potential inflation pressures and coupled with the fact that the fed funds rate is still, in their view, too low to potentially maintain stable inflation going forward, they suggest that there’s more rate hikes to come.
>> now, the fed meets again in november and december. what are your expectations?
>> our view and our view, it’s been our view for quite some time, that the fed will not pause in its rate-hiking campaign and we’re looking for another 25 basis point rate hike at both the november and december meetings. this is largely priced into the fed funds futures market , although it was about a month ago. i think given the various speeches from fed officials and somewhat hawkish commentary from the minutes that were released, i think the market has shifted its view and now is also looking for those rate hikes in november and december.
>> what about the treasury yield curve? how do you expect the yield curve to change through the rest of the year and how is that view influencing your investing?
>> our view is that there is a risk that we see an inverted curve as the fed continues to push up yields at the front end of the yield curve and non-fundamental factors are holding down yields at the back end of the yield curve. our baseline view is that the yield curve will not invert. we are looking for a backup in yields on the long end of the curve, as well, looking for a 4.25% fed funds rate at the end of the year and our expectation is that the 10-year will be around 4.75%.
>> this is a busy week for economic data, c.p.i., consumer sales, consumer confidence. which one is the bond market watching most closely and which in your view best tell the tale of our economy?
>> i think in terms of the sensitivity of the bond market , i think it’s clear that the data on friday are by far the most important report, especially given the fed’s heightened concern about inflation and given the fact that that c.p.i. report might show a significant rise in the inflation rate, particularly the overall inflation rate. our view is that the core inflation rate will trend a little bit higher. i think that’s a report the bond market is most sensitive to. in terms of the state of the economy, industrial production and retail sales reports are important. i think the retail sales report will show that despite the hurricanes, consumer spending advanced at a moderate pace for the quarter and consumer spending was probably 3.5% in real terms but i imagine the industrial production report will be significantly negatively impacted by the hurricanes and we might see a reduction of .7%.
>> which do you see as a bigger concern for the u.s. economy?
>> our bigger concern on the inflation side. we think that the underlying fundamentals point to solid growth going forward. we believe that we’ll continue to see growth somewhere between 3.5% and 4%. once we’re outside of the near-term negative impact of the hurricanes on some of the september data but our belief is that the economy is still on a fairly firm footing. we’re concerned that inflation will rise in the month ahead although we believe that the fed will do everything in their power to prevent an inflation problem and we expect the fed to continue to raise rates.
>> what is the outlook for the economy for the rest of the year?
>> we’re looking for 3.5% real g.d.p. growth in the third quarter to be reported towards the end of this month and we’ll see a rebound in real g.d.p. growth in the fourth quarter, somewhere between 4% and 4.5%. for 2006, we think real g.d.p. growth will average 3.8%. conrad dequadros, senior economist at bear stearns, thank you for joining us. gold touches $480 per ounce. does that signal higher inflation or higher interest rates? that’s the subject in our “chart of the day” next.
