Bond Yields Beginning To Ease

Markets were slightly higher near the open but have since faded into negative territory.  Yesterday's action was very positive.  The market gained strength all day and finished with what we call an outside reversal.  That means the low yesterday was lower than the previous day, but then the rally carried the indexes to a higher high than the previous day as well.  So the range expanded on both sides but finished at the highs.

One positive today is the action in the 10-year yield.  After hitting 2.25% on Tuesday, yields continue to ease back.  The 10-yr yield today is at 2.10%.  This should give some breathing room to bond funds that have been hit hard in recent weeks.

Some of this morning's softness is being attributed to the Univ. of Mich consumer sentiment reading falling to 82.7 in June from 84.5 last month.  But last month's reading was very high and anything around these levels is indicative of positive consumer sentiment.  So I am not worried there.

May industrial production was unchanged and capacity utilization actually fell to 77.6% from 77.8%.  Capacity utilization probably needs to rise before we start to worry about more inflation.

Asian markets were higher overnight.  Japan bounced back +1.9% amid reports the govt is expected to implement a corporate tax cut.  There are also rumors the Peoples Bank of China may cut interest rates over the weekend.  I find this one less plausible given its property bubble.

Commodities are trading higher with crude prices nearing $98 and gold prices higher to $1388.  Folks must be surprised to read on the cover of the Wall St. Journal yesterday that oil and gas production in the US is hitting record levels but at the same time oil prices are hitting $98 and look like they could get to $100.  Frustrating.

The volatility index reversed sharply lower yesterday which is another positive.  This morning it touched 16 before bouncing to 16.65 currently.  We are still watching for a potential move below the 15 level.

Trading comment: Yesterday's action was very positive and lends itself to our thesis that we could see another push higher in the markets as we move into quarter end and portfolio managers look to get more fully invested.  There could also be some performance chasing if and when.  But we also need to watch the SPX 1687 level that marked the highs at the end of May.  If the market is unable to break above those levels that could set things up for a deeper pullback as we enter the summer.