Treasury Bulls Battle Bernanke's Hawks

Wednesday, the government will release its revised estimate of third-quarter GDP growth. The initial estimate put growth at 1.6%.

A weaker-than-expected reading of consumer confidence and the largest price drop in existing-home sales on record contributed to the bond market's rally. Some noted, however, that embedded in the existing home sales data, are signs of a housing market bottom. Inventories are stabilizing and overall sales rose amid the price drop. "Isn't that the definition of a bottom?" quips Bianco. "When the prices drop far enough to find their floor and sales go up?"

Hopes for a housing market bottom were part of what gave the stock market bulls the upper hand Tuesday, as buyers jumped into the market after the home sales data came out at about 10 a.m. The Dow Jones Industrial Average added 0.1% to close at 12,136.45, while the S&P 500 gained 0.4% to close at 1286.72. The Nasdaq Composite gained 0.3% to close at 2412.61.

Major averages were aided by Cisco Systems (CSCO Quote), which rebounded from Monday's shellacking, and Exxon Mobil (XOM Quote), which rallied in concert with crude prices. Notable laggards included Palm (PALM Quote), which tumbled 7.7% after slashing its second-quarter forecast.

Housing bottom or not, if Bernanke is all about inflation and the bond market is all about growth, investors can continue to misunderstand without damage only as long as the Fed remains on pause. The risks, therefore, are that inflation surprises to the upside, and the market suddenly realizes that the Fed really meant it when it took a tightening bias.