The winds of change have once again blown through the financial markets.  Just last week, analysts were talking about skyrocketing unemployment, consumer sentiment sliding, and stocks looking to retest the March bottom.  Today, it’s all about the recession being over and stocks having not a worry in the world.  Reality is somewhere between my last two statements.

CPI, inflation at the consumer level, hit the tape plus .7% with the core index up .2%.  The gains were once again all about petroleum products.  Strip out the energy component as it looks like we are neither inflationary or deflationary, operating close to the sweet spot for now.  July Empire State Manufacturing data was also released, improving from -9.41 to -.55.  Overall business conditions improved sharply in both new orders and reduced inventories.  Last to the dance was Industrial Production/Capacity Utilization.  IP dropped .4% followed by a revised 1.2% fall in May.  CapU fell to a record low 68.0%.  In our opinion, this is a true reflection of the economy.

One that has manufacturing falling hard and fast, coupled with increasing unemployment.  I guess the stock market isn’t listening.  Currently, the 10 year note is off 28/32’s to yield 3.55%.  We talked about any close (yesterday) above 3.45% being trouble and true to form, we finished the day at 3.47%, opening the door for continued technical selling.  We are near the next target of 3.57% and becoming very oversold on the chart.  We feel that support will show up soon and give us a little bounce.  However, if stocks continue to defy the odds, a bottom may not show up until we touch 3.75%.  Mortgage backs are taking a bath as well, down another ½ point on the day.