After rallies that lasted a little over two weeks, selling began on major US equity indices last week right at important resistance. This likely continues near term.

US capacity utilization in March rose 0.4 percent month-over-month and 3.3 percent year-over-year to 78 percent. In the current cycle, utilization peaked before reaching 80 at 79.6 percent in November 2014, and has risen since bottoming at 75 percent in November 2016 (Chart 1).

After leaving the fed funds rate near zero – between zero and 25 basis points – for seven long years, the Fed began hiking in December 2015. The second hike was one year after that. The rise in utilization, among others, gave the Fed ammo to raise four more times. Since December 2015, fed funds has gone up by 150 basis points, to a range of 150 to 175 basis points.

The FOMC's dot plot from March foresees two more 25-basis-point hikes in the remaining six scheduled meetings this year. Thus far, capacity utilization is in agreement with this scenario – and reflected in two-year Treasury yields.

Two-year yields are seen as a proxy for monetary policy expectations. Last Friday, these notes were yielding 2.46 percent – the highest since August 2008.

In keeping with the rise in the fed funds rate, as well as future expectations, the rise in short rates has been quite steep. Not so in the long end. Ten-year yields (2.95 percent) have struggled to take out resistance at three percent. The last time they were above that threshold was in January 2004.

Consequently, the spread between the two has persistently shrunk. In December 2016, when the Fed hiked the second time, it stood at 134 basis points.  In fact, as early as February 9, the spread was 78 basis points, which last Tuesday contracted to 41 basis points, with the week closing at 50 basis points.

If the Fed ends up moving two more times this year, the Fed funds rate would have risen to between 200 and 225 basis points. Assuming two-year yields keep up, the yield curve probably narrows further.