Market Holds Record Levels on Positive Economic Reports; Bullish Sentiment Returns; 10 Year Treasury Yields Approach 5%

Lot’s of good economic news, or economic news that has been interpreted as good, the last couple of days.

Yesterday (Thu) before the open, The Commerce Department reported that preliminary estimates for 1Q 2007 GDP had been revised down to .6% annualized growth from the advance estimate of 1.3% issued 5 weeks ago (Fri Apr 27). 

But it’s no problem The Wall Street Journal reported this morning in an article entitled “Slow Growth May Presage Pickup” (subscription required).  It’s the worst GDP report since the 4Q 2002 – but no worries: It’s all good. 

The S&P was flat and the Dow down only about 5 points on the news yesterday.

Today (Fri June 1), the numbers were much better.  The jobs report releasted today before the open showed non-farm jobs up 157,000 in May – ahead of economists expectations of 135,000.

In another report on Personal Income and Expenditures for April, the core Personal Consumption Expenditure (PCE) index, said to be the Fed’s preferred inflaiton measure, was up only 2.0% from last April (pg. 13, Table 11 “Price Indexes For Personal Consumption Expenditures: Percent Change from Month One Year Ago”) pushing it down to the top of the Fed’s “comfort range”.

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In response, the market has held and even added a little to its big gains from Wednesday – when the S&P 500 hit it’s all time closing high, eclipsing the previous closing high set more than 7 years ago on March 24, 2000 (“S&P 500 Breaks 7 Year-Old Record” – subscription required). 

Bullish sentiment seems to have returned after a tough week last week (Barron’s Trader Column, “When Records Prove Elusive” (subscription required)).

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One of the more interesting and important stories continues to be rising interest rates. 

10 year treasury yields are up again today on the strong job reports, currently yielding 4.95% (3pm EST).  That’s higher than they’ve been at any time since last August – when the Fed stopped it’s two year campaign of raising interest rates on August 8, 2006 (Also see my comprehensive “The Significance of the Fed Pause: Interest Rates, the Economy and Inflation” blog post on that significant event). 

David Gaffen has a good post, including the 1 year 10 year treasury yield chart you’ll want to look at, “Five Alive”, over at the WSJ’s MarketBeat blog.

As I wrote last Thursday, I’m not too worried about rising interest rates as I can’t see the 10 year getting too much above 5%.  The reason is that the Fed is on hold at 5.25% and even if no interest rate cut seems imminent it still seems likely that that will be the next move and a rate increase highly unlikely. 

Plus, the 10 year hasn’t been above 5.5% since 1999-2000 and it’s high for the last 4+ years (since 2003) is the just over 5.2% we saw last June (10 Year Treasury, 5 Yr. Chart).  Anything above that level seems completely out of the question and I expect yields to peak in the next month or so and eventually start to head back down as the economic data continues to show weakness.

UPDATE (Mon 6/4, 8:50am): Rising interest rates are on everybody’s mind right now.  Randall Forsyth noted this in his weekly “Current Yield” column in the in the Market Week section of Barron’s: “Return of the Bond Vigilantes?” (subscription required).