Lost amidst all of the cheering about the stock market's performance today - the S&P was up 2.2% - were a couple of key facts.

First, the Empire Manufacturing index fell (to -7.72), rather than rising as expected. Empire isn't a key release, but it has been growing in importance as economists get more experience with the series and its relationship to national manufacturing indices. The -7.72 nearly matched June's -7.79 and is in roughly the range it inhabited throughout the middle half of 2008. Second, the volume on the equity rally was very light - much lighter than on any day last week, and more consonant with the light-volume trading of the rest of the year (just squeaking over 1bln shares in the minutes after the close). This is not good behavior; if these levels represent bargain prices, then there should be robust buying. The buying was steady, but light.

To be sure, much of Europe was absent due to the Assumption Monday holiday (and...August), but if Europeans are net sellers then all that says is that there will be two days' worth of selling on Tuesday.

That might not be terribly far-fetched anyway, since France's Sarkozy and Germany's Merkel are conducting a high-profile summit tomorrow. I am not sure how much Sarkozy is likely to bend to Merkel (let's be honest, we know who is in the driver's seat in this meeting), but if there isn't a major announcement of some kind then there will be a selloff!

Commodities rallied again, led by energy markets (Crude was +2.9% and gasoline +1.9%) although Grains and Softs also rallied ~1% and Precious Metals were +0.8%. The dollar weakened back to the bottom of the recent range, and with interest rates (both real and nominal) low, equity markets expensive, and plenty of money cascading forth I can't help but think we could be on the cusp of a significant break lower in the dollar unless Europe breaks first. What a lovely choice! Italian and Spanish yields remain just barely on the sunny side of 5%, and it's clear where the ECB bid is sitting. The ECB also reported that it bought about 50% more bonds last week than it had previously announced (around €22bln), which is either a sign of resolve or a sign that the selling was stronger than expected.

Despite the strength in commodities and the weakness in the Empire Manufacturing index, nominal bonds sold off and TIPS actually sold off more (5bps for nominal 10y rates, 7bps for TIPS, putting yields at 2.31% and 0.05% respectively). This implies that inflation compensation actually fell slightly although it remains high. This may be because the Treasury is planning to sell 5y TIPS this week, and dealers are setting up.

While I am skeptical that the equity rally will continue, the fact that the S&P managed to close above 1200 means that I'm ready to be actively short the bond market. With the amount of data due this week, I suspect there is no hurry but if the stock market trades higher overnight then I'll sell bonds (or some positional equivalent) in the morning.

Economic data due tomorrow includes Housing Starts (Consensus: 600k from 629k) and Industrial Production and Capacity Utilization (Consensus: +0.5%/77.0%).

.

This is a short article, followed by a quick note: If you missed the commentary published Sunday night because you are reading the commentary syndicated on another website where it was not produced, it is available here. Note that you can subscribe to email updates, or follow me on Twitter at @inflation_guy, to get the updates as soon as they are posted.