MAY DATA PUSHES BOND YIELDS BELOW 4% AND SPARKS BOND AND STOCK BUYING

PLUNGE IN PRICE DATA PUSHES YIELDS LOWER... This morning's report that prices paid by manufacturers during May saw the biggest drop since the early 1970's helped push bond yields well below 4% and to the lowest level in a year. Chart 1 shows the 10-year T-note yield falling below its October/November lows. The weekly bars in Chart 2 help us to locate the next downside target. We do that by looking for the next prominent low point in Chart 2, which was reached in early 2004 at 3.65% (see arrow). The May ISM report also reported a drop in manufacturing activity. Today's bullish reaction in the bond and stock markets is predicated on the belief that the Fed's tightening cycle may be almost done. Not surprisingly, rate sensitive stocks (financials, homebuilders, REITs, and utilities) are among the day's strongest groups. The energy sector is also strong as are gold stocks. Oil stocks are benefiting from stronger oil prices. Gold stocks are benefiting from lower rates. Stock indexes are trading sharply higher. MORE LATER.

Chart 1

Chart 2