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Federal Reserve Chairman Ben S. Bernanke didn’t call it a recession today, but he might as well have.
In his semiannual congressional testimony on the economy, the Fed chief delivered a sober assessment that left no doubt about the central bank’s priorities.
Remember his tone in June, hinting that the Fed might soon raise interest rates to battle inflation pressures? Forget that -- despite another scary inflation report today.
 Bernanke’s speech "strongly suggests that Fed officials do not have their fingers on the tightening trigger," Goldman Sachs economists said in a note.
The Fed chief said policymakers felt that "considerable uncertainty surrounded their outlook for economic growth and viewed the risks to their forecasts as skewed to the downside."
Asked whether he thought the country was officially in recession, he said: "People are very worried, so I certainly would never make the claim that even if we were not in a technical recession, that it wasn’t a serious situation."
The stock market took this hard at first, with the Dow Jones industrial average diving 227 points early on. But the market has since rebounded, helped by a drop in oil prices that also appears to be driven by Bernanke’s recession-like tone.
Near-term crude futures in New York were down $6.71 to $138.47 a barrel at about 11 a.m. PDT. The Dow was basically flat at 11,060.
But Bernanke’s comments brutalized the dollar. The euro spiked to a record high of $1.604 today from $1.592 on Monday.
Photo: Ben Bernanke before the Senate Banking Committee today. Joshua Roberts/Bloomberg News
A few notes from around the markets today:
-- As Federal Reserve meeting days go, this one was fairly uneventful for markets. Blue-chip stocks finished modestly higher and Treasury bond yields were mixed after the Fed, as expected, kept its key short-term rate at 2%. It was the first Fed meeting without a change in rates since August.
The central bank suggested in its post-meeting statement that the economy wasn't in such bad shape after all. "Although downside risks to growth remain, they appear to have diminished somewhat," the Fed said -- obviously discounting the abysmal consumer confidence survey results reported Tuesday.
-- "Inflation has been slightly higher than expected and there are prospects that inflation will move up further," the central banker said. "We give weight to preventing the higher rate of inflation from becoming entrenched."
 The Fed's Ben S. Bernanke? No, that was the Norwegian central bank's deputy governor, Jan F. Qvigstad, in a statement today after the Norges Bank raised its benchmark interest rate to 5.75% from 5.5%.
Bernanke & Co. continue to talk a good game about inflation concerns, but other central banks are taking action by tightening credit, the usual step to show you're serious about damping price pressures. Norway's rate hike followed similar moves recently by China, Mexico, Turkey, Brazil, India and South Africa.
Who cares what other central banks do? The dollar does. It slid today against many other currencies after the Fed's statement. (There go your hopes for that Oslo pub-crawl tour.)
It was just a few weeks ago that Bernanke strongly signaled the need for a rebound in the dollar to combat rising prices of imports, including oil. Yet there was no mention of the greenback in today's Fed statement, notes Joe Battipaglia, chief investment officer at brokerage Stifel, Nicolaus & Co. in Florham Park, N.J.
Never mind, Dr. Bernanke?
-- The Fed's relatively upbeat take on the economy must not have been persuasive to investors in financial-company shares, which have been battered by expectations of mounting loan losses. The BKX index of 24 major bank stocks jumped as high as 65.44 early in the session, a 4.9% leap from Tuesday's finish. But the index gave almost all of that back by the closing bell, ending at 62.62, up just 0.4% for the day.
That's still above the 10-year closing low of 60.87 reached Monday. But as Jay Shartsis, head of options trading at RF Lafferty & Co. in New York, reminds: "Every time the financial stocks look like they can't possibly go any lower, they go lower."
The BKX is down 29% year to date, compared with a 10% drop in the Standard & Poor's 500 index.
Like a hypnotherapist, the Federal Reserve keeps trying to talk us into an economic recovery.
"You will not need lower interest rates to feel better," Chairman Ben S. Bernanke tell us in so many words -- something he and his fellow Fedsters are likely to repeat again today as they gather and, almost certainly, hold their benchmark rate at the current 2%.
But the latest survey of consumer confidence shows that the Fed's relatively hopeful message isn't registering. Americans feel downright terrible about the economy as it is, and their expectations for the near future are even more depressed, according to the Conference Board's June consumer confidence report, issued Tuesday.
The overall confidence index, derived from questionnaires sent to 5,000 families, fell to 50.4 this month, down from 58.1 in May and the lowest since 1992.
 Worse, the expectations index in the survey -- how people figure things will look in six months -- dropped literally off the chart, to 41.0. That was the lowest figure in the 40 years of the survey, and broke through the previous low of 45.2 reached in December 1973 -- just as the economy was beginning to plunge into recession from the effects of the surge in oil prices that followed the Arab embargo announced that fall.
But something else in the latest survey really disturbed Lynn Franco, director of the Conference Board's consumer research center in New York, she tells me: The percentage of people who expect their income to drop in the next six months jumped to a record 15.9%. Even in December 1973, when consumers' overall expectations for the economy were dismal, only 10.8% expected their income to decline in the following six months.
Just 12.3% of consumers are expecting a rise in income over the next six months, compared with 19.4% a year ago.
It's true that consumer spending hasn't collapsed in recent months, thanks in large part to the federal tax rebate checks most families received. But once that money is gone, how do you have a consumer-led economic recovery in the second half with so many people feeling so bad about the big picture and about their personal financial situations?
Would lower interest rates help at this point? Maybe not. But in times of serious trouble it's always better for the Fed to have more bullets in the gun than fewer -- and right now, with its key rate at 2%, there aren't many bullets left.
What's more, with energy and food price inflation showing no signs of abating, Bernanke and other Fed officials have been talking in recent weeks about the need to begin raising interest rates as early as this fall to beat back price pressures.
Hike rates on consumers who are struggling to fill their gas tanks and have enough cash left over for groceries? It's true that quite a few other central banks around the world already have taken that unpopular policy route this year. But they're operating in economies that, for the most part, still are growing at a healthy pace.
The U.S. economy, by contrast, may not officially be in recession, but as Franco put it, never mind the terminology -- "to the consumer right now it feels like a recession."
Photo: And they thought they had it bad! President Nixon, right, listens to his energy policy advisor, John A. Love, in November 1973, one month after the Arab oil embargo was announced. Credit: John Duricka / Associated Press
Congress' current favorite definition of an Enemy of the State: anyone who’s using his or her money to speculate in oil -- as opposed to those who invest to get it out of the ground for sale, or those whose money goes to pay for it at the Quickie Mart.
Both the House and the Senate have previously waded into the causes and effects of record energy prices, but this week on Capitol Hill it’s looking like open season on the speculator ranks in oil and other commodities. Four different congressional committees are taking up the question of why oil is so high -- and two of the committees are specifically looking for ways to limit the influence of speculators (some of whom insist they're really long-term investors, but no matter).
And conveniently for Congress, crude is refusing to come down on its own, closing at $136.74 a barrel Monday, not far from its recent peak of $138.54 on June 6.
 Earlier Monday, speculators were skewered at a hearing of the House Energy and Commerce Committee, where Chairman John Dingell (D-Mich.) declared, "Energy speculation has become a growth industry and it is time for the government to intervene."
If you have the time, I recommend perusing the witnesses' testimony -- both the anti-speculator testimony and the comments of those who defended the speculators. You can find it all here.
The best overall roundup from the Dingell hearing may be this one, from MarketWatch.com. It begins: "The price of retail gasoline could fall by half, to around $2 a gallon, within 30 days of passage of a law to limit speculation in energy-futures markets, four energy analysts told Congress."
Do you believe it?
In the last few weeks I’ve read nearly everything I could find on the issue of the possible investor/speculator influence on commodity prices, and here’s my unsatisfying conclusion: You can’t prove unequivocally that they are responsible for a big chunk of the price run-up in oil and other raw materials -- nor can you prove that they're having no real influence.
Of course fundamental supply and demand issues are largely behind record oil prices; the market fears a shortage, if not now, then later. But every asset bubble has a fundamental grounding. And in every bubble, it’s inevitable that buyers feed on one anothers' bullishness. Why shouldn’t that be true of the current wave of investor/speculator interest in commodities?
Whether Congress would just make things worse by intervening in markets is the question now. Speculators' presence makes markets more liquid. Kick too many of them out at once and you risk more volatility -- and perhaps even higher prices. You just don't know.
Here's what's on the Capitol Hill calendar the rest of this week:
--On Tuesday, the Senate Homeland Security and Governmental Affairs Committee, chaired by Sen. Joe Lieberman (I-Conn.), holds a hearing to discuss legislative options for "ending excessive speculation in commodity markets." I previewed the hearing here last week.
--On Wednesday the Senate Small Business and Entrepreneurship Committee will hold a hearing on home heating oil prices.
--On Thursday, the topic of a hearing of Congress’ Joint Economic Committee will be: "Oil Bubble or New Reality: How Will Skyrocketing Oil Prices Affect the U.S. Economy?"
Isn’t it a little late to be wondering about that?
Photo: Balloons attached to cars at a car dealership sway in the wind near a Shell station in San Bruno, Calif. Paul Sakuma /Associated Press
The Federal Reserve talks a lot about inflation.
The Bank of Mexico does something about it.
The Mexican central bank today surprised markets by raising its benchmark short-term interest rate to 7.75% from 7.5%, the first increase since October.
The bank said it tightened credit because "the recent inflation dynamic is worrying."
 Like most of the world, Mexico is battling rising cost pressures, particularly in food products.The country’s consumer price index rose 4.95% in the 12 months through May, well above the central bank’s target range of 2% to 4%, notes Nick Bennenbroek, head of currency strategy at Wells Fargo & Co.
Still, the bank’s move was unexpected because the government on Wednesday announced a deal with major food companies to freeze prices on more than 150 pantry items through the end of the year, in an attempt to ease the squeeze on consumers.
That was supposed to forestall an interest-rate hike. Instead, it looks like the Mexicans are taking the inflation battle seriously enough to risk slowing their economy with higher interest rates.
In the currency markets, at least, the Bank of Mexico’s decision is a hit. The peso has edged up to a five-year high against the dollar. The buck is worth 10.27 pesos this morning, down from 10.32 on Thursday and 10.36 a week ago. That’s not a big move, but it’s the trend that counts.
Interestingly, the Mexican stock market is suffering less today than the U.S. market. The Mexican IPC index was down about 0.6% at 10:45 a.m. PDT, compared with a 1.6% drop in the Dow industrials.
The U.S. inflation rate -- 4.2% for the year through May -- isn’t much lower than Mexico’s. But when Fed policymakers meet next Wednesday, they’re almost certain to leave their key rate at 2%, despite the recent barrage of rhetoric about being inflation-vigilant.
Given this week’s renewed carnage in bank and brokerage stocks on Wall Street, it’s clear the Fed is boxed in: Tighter credit could be a certain death sentence for many financial companies that are teetering on the edge.
Photo: Guillermo Perea/EPA
No more wondering why stocks are back in a funk: It’s because the people who invest the big money now have a truly dismal view of the equity market’s prospects.
That’s the takeaway from Merrill Lynch & Co.’s latest monthly survey of about 200 professional fund managers worldwide who control more than $700 billion in assets.
 The June survey, conducted the 6th through the 12th, indicates that the risk of stagflation -- rising inflation, rising interest rates and weak economic growth -- "is beginning to create a major headwind for equities," Merrill says.
Fund managers "have reacted to this unpalatable combination by reducing their exposure to equities and raising their cash positions."
Three numbers from the survey show just how dramatically investors’ perceptions have shifted:
-- The net percentage of managers who say they now are "underweight" in stocks (meaning they’ve cut back much more than normal in asset-allocation portfolios) jumped to 27% from just 5% in May. The June reading is the most bearish in a decade of survey results, Merrill says.
-- The net balance of managers who believe stocks to be "undervalued" plunged to just 1%. It had been 25% in the March survey. "This seems consistent with a world where growth is set to disappoint and where both long- and short-term interest rates are expected to rise on the back of inflation concerns," Merrill notes.
-- A net 81% of managers believe that analysts’ consensus corporate earnings estimates for the next 12 months are too high.
Is there a silver lining here? We all know that it’s often precisely when the crowd is at its most pessimistic about stocks that the market is likely to rally.
But that isn’t always true. Sometimes, the crowd is right, at least for a while -- if for no other reason than that investors, by engaging in group-think selling, can make a bear market a self-fulfilling prophecy.
Photo: Edvard Munch's Expressionist masterpiece "The Scream." Solum, Stian Lysberg/AFP/Getty Images
Central bankers have been busy over the last 24 hours trying to fine-tune markets’ expectations for interest rates.
The gist of their revised message: "We aren’t expecting to boost rates aggressively anytime soon." That is helping to pull government bond yields down modestly today after their recent surge.
Federal Reserve and European Central Bank officials have been talking tough on inflation for weeks, strongly hinting that they would tighten credit sooner than later to combat rising price pressures.
But they now appear to think that they put too much of a fear factor into financial markets, particularly in light of the fragile state of the U.S. economy.
The Wall Street Journal’s lead story today carries the headline, "Fed Mood Tilts Away from Rate Increase." It says the Fed could consider raising its benchmark short-term rate (now 2%) in August, but that policymakers would prefer to wait until fall.
Reuters has a good story here that wraps in the Fed’s attempt to calm markets and similar efforts on Tuesday by the ECB and the Bank of England.
The suddenly less hawkish tone on interest rates is bringing buyers into the Treasury bond market today. The two-year T-note yield fell to 2.92% by about 9:30 a.m. PDT, from 3.04% on Monday. The yield has jumped from 2.38% on June 6.
Not that the inflation news was cheery today: The Labor Department said its wholesale inflation gauge (the producer price index) soared 1.4% in May, the biggest rise since November, stoked as usual by surging food and energy costs.
The core inflation rate, excluding food and energy, was up 0.2% in May. While that looked tame enough, Bank of America Economist Peter Kretzmer notes that the 12-month change through May was 3% -- the highest core wholesale inflation rate since 1991.
Longer-term bond yields, which are highly sensitive to inflation expectations, remain sticky today. The 30-year T-bond yield is holding at about 4.78%, compared with 4.79% on Monday.
From your grocery bill to their ears: Finance ministers of the Group of 8 wealthy nations, meeting in Osaka, Japan, on Saturday, declared that soaring food and energy costs had become the world’s biggest economic challenge -- apparently eclipsing the credit crisis in importance.
"Elevated commodity prices, especially of oil and food, pose a serious challenge to stable growth worldwide, have serious implications for the most vulnerable and may increase global inflationary pressure," the ministers said in a statement after their gathering.
The finance chiefs, including Treasury Secretary Henry M. Paulson Jr., are meeting ahead of the July 7-9 summit of G-8 heads of state in Hokkaido, Japan. The G-8 comprises the U.S., Britain, Canada, France, Germany, Italy, Japan and Russia.
 Just what their recognition of the obvious in commodity prices will mean in terms of a policy response, if any, isn’t clear. Bloomberg reported that the G-8 planned to press oil producers to boost output.
The New York Times reported on its website late Friday that Saudi Arabia would raise its output by 500,000 barrels a day in July, to 10 million barrels.
Oil prices pulled back on Friday as the dollar continued to strengthen, a relationship I explain here. Near-term oil futures in New York slipped $1.88 to $134.86 a barrel. The price was down 2.6% from the record closing high reached a week earlier -- offering a ray of hope (although every other pullback in recent weeks has been a head fake).
Even if oil retreats further, however, the upward pressure on grain and soybean prices may not abate soon, given the devastating flooding in the U.S. Farm Belt.
Corn futures in Chicago rocketed to a record high of $7.31 a bushel on Friday, up 22 cents for the day and 80 cents (12%) for the week.
Soybeans also reached a record, at $15.60 a bushel, up 23.5 cents for the day and $1.03 for the week. Wheat futures rose 31 cents to $8.82 a bushel, resuming their climb after tumbling in March and April amid projections of a bumper crop this year.
The strength in grain prices more than offset oil’s decline for the day within the Reuters/CRB index of 19 major commodities. The index closed at a new high of 445.87, boosting its year-to-date gain to 24.3%.
Bloomberg reports that "as much as 12 inches of rain fell in the Midwest this week, and some fields had five times the normal amount of precipitation since the end of May," rotting crops.
Grain prices already have become a serious source of inflation at the grocery store. The flooding threatens to make the situation worse.
The cost of cereal and bakery products within the U.S. consumer price index jumped 1.7% in May from April and was up 10.5% over the last year, more than twice the rate of inflation in general, the government reported on Friday.
Maybe you can start dusting off those overseas vacation plans, after all: The beleaguered dollar suddenly is on a hot streak.
The greenback is rallying today against the euro, the yen, the Canadian dollar and other major currencies, lifting a closely watched index of the dollar’s value to its highest level since February.
The DXY dollar index, which measures the buck’s moves against six key currencies, was at 74.13 at about noon PDT, the highest since Feb. 27. The index has jumped 2.4% this week, a big move compared with its usual shifts.
 The euro has slumped to $1.535 today from $1.542 on Thursday. The European currency peaked at $1.599 in mid-April.
Just a week ago the dollar was hammered by the government’s report of a jump in the unemployment rate in May to 5.5% from 5%. Anything that dims faith in a country’s economy usually is bad news for its currency.
But this week, sentiment toward the buck has rebounded sharply -- although not necessarily for reasons that will make average Americans feel good.
One factor is the growing belief that the Federal Reserve will begin raising short-term interest rates this fall to combat inflation. The Fed has encouraged that idea with tough talk on inflation, including a throw-down-the-gauntlet speech on Monday by Chairman Ben S. Bernanke.
"There has been a pretty significant shift in expectations on rates," said Kathy Lien, currency strategist at DailyFX.com. Higher interest rates could attract more global investors to U.S. bonds, underpinning the dollar.
Today, although the "core" rate of inflation in the government’s May consumer prices report remained relatively tame, Treasury bond yields are mostly higher after dipping early in the session. That’s a sign investors continue to bet on a credit-tightening move by the Fed later this summer or early in fall.
The dollar also is getting a boost today from a blow to the euro’s image, after Irish voters rejected the European Union’s new governing treaty -- raising new doubts about prospects for greater political unity to tackle Europe’s problems. Bloomberg has a good story here.
The Irish vote "weakens the appetite foreign investors have for euro-denominated assets," said Michael Woolfolk, currency strategist at Bank of New York Mellon.
For the Bush administration and the Fed, almost anything that strengthens the dollar is welcome at this point, because a healthier buck could put downward pressure on prices of oil and other commodities, as I explain here. Crude oil today is trading lower, off $1.86 to $134.88 a barrel around noon PDT.
Photo: Michael Probst/Associated Press
Wall Street woke up this morning determined to have a nice day. But by the closing bell, the drugs had worn off.
You can thank the usual buzz killers: oil and the Federal Reserve.
The next test for rickety markets comes on Friday with the government’s report on May consumer price inflation.
Today, the Dow industrials were up as much as 186 points early on, nearly recouping Wednesday’s drop, after the government said retail sales rose 1% last month, the biggest jump since November. That was a clear sign that many consumers were spending their tax rebate checks, just as the Bush administration had hoped.
What’s more, a $46-billion takeover bid for Anheuser-Busch Cos. by Belgium’s InBev left the impression that foreigners, at least, may believe that U.S. stocks are cheap.
 And even oil cooperated, for a while, with near-term futures falling as much as $4.83 a barrel, to $131.55.
But there seems to be no way to keep the oil bulls down for long these days. The price rebounded by the end of trading, closing up 36 cents at $136.74 a barrel -- even in the face of a stronger dollar, which usually pulls commodity prices lower. As oil recovered stocks sank. The Dow closed at 12,141.58, up 57.81 points, or 0.5%; broader indexes were weaker.
Wall Street also was spooked by the latest Fed missile launched in the war of words on inflation. Charles Plosser, president of the Fed’s Philadelphia bank, said on CNBC that the central bank must "act preemptively" to damp inflation pressures. That added to the growing belief that the Fed will begin boosting short-term interest rates by fall. (And if the consumer keeps spending, that gives the Fed more cover to make a move.)
"It looks like they do want to start raising rates," said Ray Remy, head of fixed income at Daiwa Securities in New York.
Plosser’s comments helped spark another big sell-off in Treasury bonds that pushed the yield on the two-year T-note to 3.04%, the highest since Dec. 31. (How much have investors’ rate expectations changed in the last week? Just last Friday they were willing to buy two-year T-notes at a yield of 2.38%. D’oh!)
The Fed’s new inflation paranoia places more than the usual importance on the May consumer prices report due Friday. Most analysts figure prices were up 0.5%.
But Ian Shepherdson of High Frequency Economics warned in a report today that "the unpredictability of food, home heating oil and utility prices means a slightly bigger increase is also possible."
Get the drugs ready.
Photo: Charles Plosser. Federal Reserve Bank of Philadelphia
Tuesday is setting up to be a lousy day for investors who own bonds.
Federal Reserve Chairman Ben S. Bernanke triggered a jump in government bond yields in Asia early Tuesday morning by declaring in a speech that "the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."
Despite what Wall Street on Friday viewed as a troubling jump in the U.S. unemployment rate in May (from 5% to 5.5%), Bernanke, speaking in Massachusetts on Monday evening, said that "recent incoming data, taken as a whole, have affected the outlook for economic activity and employment only modestly."
 What’s more, he repeated a warning he made on June 3 about the risk of rising inflation pressures -- a not-so-veiled hint that the Fed’s next step with interest rates was more likely to be an increase than a cut.
The Fed "will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation," Bernanke said Monday.
In Japanese trading early Tuesday the yield on the two-year U.S. Treasury note rocketed to 2.93% from 2.71% at the end of U.S. trading Monday. As market yields jump, remember, the value of older bonds drops.
Government bond yields have been on the rise in the U.S., Europe and Japan since mid-March as investors have become less fearful about a global economic slowdown -- and more fearful of inflation, given soaring energy prices.
In terms of acknowledging inflation risks, the Fed is behind the curve compared with the European Central Bank. ECB President Jean-Claude Trichet warned again on Monday that the ECB might raise its benchmark short-term interest rate (now 4%) as soon as next month to combat inflation.
Some Europeans may think he’s bluffing, but bond investors on the Continent evidently don’t: The annualized yield on the two-year German government bond jumped to 4.69% on Monday, up from 4.64% on Friday and the highest since -- believe it or not -- December 2000.
Michael Darda, economist at investment firm MKM Partners, noted earlier Monday that interest-rate futures markets have in recent days boosted their bet on when and how quickly the Fed would begin to raise its benchmark rate, now 2%.
The chance of a 0.25-point rise in the Fed’s rate in October was 88% on Monday, up from 48% on Friday, Darda said.
Bond investors now have to figure out what’s a fair yield to accept if the Fed really is leaning toward tightening credit.
Investors who bought U.S. Treasury bonds in the last few weeks are having a bad case of buyer's remorse: Yields in that market keep rising and this week crossed some important thresholds.
The yield on the 10-year T-note, for example, has jumped above 4% for the first time since the beginning of January. It reached 4.08% on Thursday, up from 3.33% in late March. That's a big move for a 10-week span. Today the yield eased to 4.05%.
Wall Street, however, isn't quite sure how worried it should be about the turnabout in bond rates. Some part of the rebound is a welcome return to normalcy after the financial-system-meltdown scare of mid-March (the Bear Stearns debacle), when investors rushed into Treasuries for safety.
But there also is a gnawing fear among bond market pros that the Treasury market is playing the coal-mine canary role on inflation: meaning, investors are demanding higher fixed yields on Treasuries to compensate for their concern that inflation will contine to rise and ultimately force the Federal Reserve to begin tightening credit.
Given $130-a-barrel oil, "I think the notion of inflation taking root now is a global concern," said T.J. Marta, fixed-income strategist at RBC Capital Markets in New York.
Global indeed: Government bond yields in Europe and Japan also have shot up in recent weeks. The 10-year German government bond yield hit 4.43% on Thursday, the highest since last fall.
At the same time, though, yields on riskier bonds -- such as U.S. corporate junk issues -- have risen only modestly this month. The yield on an index of 100 junk issues tracked by KDP Investment Advisors was 9.30% on Thursday, up from 9.12% on May 1 and down from 10.16% in mid-March.
That suggests that some investors who have exited Treasuries have moved their money into riskier securities. That's exactly what the Fed has been hoping to see, as a sign of faith in the wobbly economy. Meanwhile, mortgage rates have edged up as Treasury yields have climbed, but at 6.08% this week the average 30-year home loan rate remains below its mid-March level of 6.13%, according to mortgage giant Freddie Mac.
With the Fed holding its benchmark short-term interest rate at 2% some bond market analysts say Treasury yields have backed up enough for now. "I think the market has hit levels where it's attracting buyers," said Brian Edmonds, head of interest rates at bond dealer Cantor Fitzgerald in New York. A rush of money came into the market when the two-year T-note yield reached 2.75% on Thursday, he said. Today the two-year T-note slipped to 2.64%. It was 2.24% three weeks ago.
Still, if the core inflation rate (the one that excludes food and energy) begins to bust out from the current 2% range, Treasury yields at these levels would look mighty paltry. That could mean we ain't seen nothin' yet in terms of how quickly investors might seek to unload Uncle Sam's paper.
A few items of note from around the markets:
--Worse even than March, and March was bad: The list of financial-company stocks falling to new multiyear lows is getting longer. On Wednesday it included insurer American International Group, Bank of America Corp., Wachovia Corp., Downey Financial Corp., KeyCorp. and bond insurer MBIA Inc. As this earlier post notes, the BKX index of 24 major bank stocks now is a hair’s width away from a new low.
As I noted last week, many investors have been hoping that the stock market’s March lows marked the worst of the selling brought on by the housing crash and its fallout. Broad market indexes still are above their March nadirs. But if investors’ faith is ebbing again in the health of big financial companies, it implies that the Federal Reserve hasn’t done enough, after all, to rescue the financial system from its own excesses.
--As if the Fed doesn’t have enough troubles: Bernanke & Co. want the markets to believe that the jump in inflation caused by higher energy and food prices will be damped sooner than later. Doesn’t sound that way from Dow Chemical Co.’s announcement Wednesday that it will raise prices up to 20% because of "rising energy, feedstock and transportation costs." And when you sell $54 billion a year in chemicals, plastics and other products, your double-digit price increases are going to be felt in a lot of places on this planet.
--Sticking with bonds over stocks: The stock market rallied briskly in April, but U.S. investors’ favorite mutual fund last month was a bond fund -- the Newport Beach-based Pimco Total Return fund, which sports a 2.7% gain year to date. The fund took in a net $2.5 billion in fresh cash (new sales minus redemptions) in April, according to Financial Research Corp. The Pimco fund, with $128 billion in assets now, also took in the most cash of any fund in the first four months of the year ($11.6 billion). In other words, many investors continue to stress relative safety of principal over the chance to catch an upward turn in stocks. By contrast, the five most popular funds in the first four months of 2007 all were big-name stock funds, while Pimco Total Return ranked 16th in that period.
--Goodbye IHOP, hello . . . say what? Glendale-based IHOP Corp. is changing its name to DineEquity Inc. effective Monday, the company announced Wednesday. IHOP, parent of International House of Pancakes, last year bought the Applebee's chain. So IHOP alone no longer cuts it for a corporate moniker, CEO Julia Stewart said. "Our name change to DineEquity reflects the promise of our newly combined company," she said. Well, it does at least roll off the tongue a little easier than IHOP. The company's stock ticker symbol also will change, to DIN.
Anyone who believes that the government lies, or at least fibs, about the real inflation rate will enjoy the latest commentary by the Pimco funds’ bond guru, Bill Gross.
How, he wonders, can the U.S. have an annualized inflation rate around 4% while global inflation indexes say prices are rising at about a 7% rate?
 "Somebody’s been foolin’, perhaps foolin’ themselves," Gross writes from Newport Beach.
He goes on: "The correct measure of inflation matters in a number of areas, not the least of which are Social Security payments and wage-bargaining adjustments. There is no doubt that an artificially low number favors government and corporations as opposed to ordinary citizens."
If you can’t make it through Gross’ discussion of why the real U.S. inflation rate is higher than Uncle Sam’s stats say it is, go right to the end, where he spells out the investment implications:
"1) Treasury bonds are obviously not to be favored because of their negative (unreal) real yields. 2) U.S. TIPS [Treasury Inflation-Protected Securities], while affording headline CPI protection, risk the delusion of an artificially low inflation number as well. 3) On the other hand, commodity-based assets as well as foreign equities whose price-to-earnings ratios are better grounded with local CPI and nominal bond yield comparisons should be excellent candidates. 4) These assets should in turn be denominated in currencies that demonstrate authentic real growth and inflation rates, that while high, at least are credible. 5) Developing, BRIC-like economies [Brazil, Russia, India, China] are obvious choices for investment dollars."
Read the full commentary here.
Photo: Bill Gross of Pimco. Andrew Harrer/Bloomberg News
Looks like we’ve found the perfect brew to give Wall Street bulls a bad case of nausea: Take $133-a-barrel oil and salt in a strong reminder that the Federal Reserve really wants to be finished with interest-rate cuts.
Stocks were doing badly enough for a second straight session today as oil continued to spike. But the bottom fell out about 11 a.m. PDT, after the Fed released the minutes of its April 29-30 meeting.
The quarter-point cut in the Fed’s key rate at that meeting (to 2%) was termed "a close call" in the minutes, which in turn "reinforces the sense that policy is on hold now," said Marc Chandler, currency strategist at Brown Bros. Harriman in New York.
 Maybe investors already had figured as much, but it still was no help on a day like today, as oil surged again. The Dow Jones industrial average lost 227.49 points, or 1.8%, to 12,601.19. That brings the two-day decline to 3.3%, and trims the Dow’s advance from its March low to 7.3%.
Although the minutes showed the Fed remained concerned about the struggling economy, policymakers also revised up their 2008 inflation forecast to a range of 3.1% to 3.4%, a full percentage point higher on both ends versus their January forecast. And with oil already up $20 a barrel since April 30, the Fed is likely to be more worried about inflation now than it was then.
If, because of inflation fears, the Fed can’t or won’t ease credit further to help the economy, that removes a key element of support for the stock market’s rebound. "Now you’ve got some concern there," said Dan McMahon, head trader at Raymond James & Associates.
And if short-term interest rates aren’t going lower, that doesn’t help the picture for the bond market, either. Unlike most days when stocks sell off, investors didn't rush into Treasury securities today; instead, they sold them, too. The two-year T-note yield jumped to 2.41% from 2.31% on Tuesday.
Oh yeah -- and that spring rebound in the dollar? May have to cancel that idea, with stocks and bonds both under heavy selling pressure. The euro surged to $1.579 today, the highest since April 23 and up from $1.567 on Tuesday.
When it rains, it pours.
Photo: The Fed's headquarters building in Washington. Brendan Smialowski
The Senate hearing today on commodities -- and whether investors/speculators are responsible for driving prices to heights unwarranted by fundamental demand -- had at least the standard dose of demagoguery, near as I could tell from 3,000 miles away.
"We may need to limit the opportunity people have to maximize their profits because a lot of the rest of us are paying through the nose, including some who can’t afford it," said Sen. Joe Lieberman, (I-Conn.), whose Homeland Security and Governmental Affairs Committee called the hearing, which I previewed here.
 At least for today, Lieberman’s threats didn’t appear to frighten many investors/speculators out of the oil market: Crude futures jumped to yet another record high, gaining $2.02 to $129.07 a barrel in New York. (Perfect backdrop for the hearing.)
Jeffrey Harris, chief economist for the Commodity Futures Trading Commission, testified for the fundamentalists, presenting a load of charts to support the CFTC’s case that you can’t blame speculators for what’s happened with raw materials prices. "The economic data show that overall commodity price levels, including agriculture commodity and energy futures prices, are being driven by powerful fundamental economic forces and the laws of supply and demand," he said.
CFTC data show that "the level of speculation in agriculture commodity and the crude oil markets has remained relatively constant in percentage terms as prices have risen," Harris said.
But back in Lieberman’s home state, consulting firm Greenwich Associates put out a report today that took more of a middle ground: "While the long-term fundamentals of global energy and other commodities markets are being driven by increasing demand, there is little doubt that, in the immediate term, speculative investors are driving up both trading volumes and prices," wrote Greenwich analyst Andrew Awad.
His study found that more than a third of the hedge funds, pension funds and other big investors now active in commodities have been playing in these markets for less than three years.
Let’s see, oil was $50 a barrel three years ago. Now we’re at $129, a 158% jump. We know that global oil consumption hasn’t risen by that amount in three years. (And I’m not suggesting the relationship would be linear, but you get the point.)
Here’s the bottom line: If oil and grain prices keep rising, you won’t be able to keep Washington from interfering in commodity markets -- even if there are good arguments that the imposition of restrictions on investors or speculators could make matters worse.
So if there is a cabal out there that’s manipulating commodity prices, this would be a good time for it to engineer a spectacular sell-off.
Photo: Sen. Joe Lieberman. Matt Campbell/EPA
Institutional investors that once stuck with stocks and bonds in their mega-portfolios have taken a shine to commodities in the last few years, seeking to cash in on the rocketing prices of raw materials.
But does that "investing" really just amount to more speculation that is stoking the inflated prices of oil and other commodities?
The issue, which has been fueling widespread debate on Wall Street, will be taken up this morning at a hearing of the U.S. Senate Committee on Homeland Security and Governmental Affairs chaired by Sen. Joe Lieberman (I-Conn.). The witness list is here.
Crude oil futures reached another record closing high Monday, rising 76 cents to $127.05 a barrel. As the price keeps climbing big investors including the California Public Employees' Retirement System are likely to face more questions about their commodity-market investment programs.
James Hamilton, an economics professor at UC San Diego, offers some perspective on his blog, here, on the possible role of speculation in the oil market’s surge. It’s not a simple read but you'll come away with some good insights.
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