Stocks Yin to Bonds' Yang

Chief financial officers are more optimistic than they were last quarter. Federal Reserve officials remain relatively unconcerned about the subprime mortgage market or a credit crunch. U.S. Treasury Secretary Henry Paulson says the economy is "solid."

It almost feels like thou doth protest too much kind of theatrics.

"Financial markets have been volatile, which imparts more uncertainty to the outlook," as Chicago Fed President Michael Moskow said in a speech Wednesday to the Jewish United Fund Luncheon in Chicago.

For stock traders, previously devotees to the so-called Goldilocks economy, the volatility and mixed economic data fill them with insecurity about where the market and the economy are headed. But for the bond market, the recent volatility and economic concern have refueled an already-pessimistic penchant for pricing in a Fed easing cycle.

Without solid assurance one way or the other, trading sessions are unpredictable and vacillating. The Dow Jones Industrial Average gained as much as 48 points intraday Wednesday, but finished in the red by 0.1% to close at 12,192.45. The S&P 500 closed down 0.3% at 1391.97, and the Nasdaq Composite closed down 0.4% to close at 2374.64.

The bond market rallied Wednesday, sending the yield on the benchmark 10-year Treasury note up 8/32 to yield 4.49% vs. 4.53% on Tuesday.

Justified or not, the fixed-income traders really can't get more pessimistic at this point, says T.J. Marta, fixed-income strategist at RBC Capital Markets. "The eurodollar futures contracts have priced in a full easing cycle -- 75 basis points of rate cuts by next June," he says. "We're only at 5.25% [fed funds rate]. Unless you're talking about a recession like 2000 with a strong dollar, the Sept. 11, 2001, terrorist attacks, and Enron and WorldCom bankruptcies thrown in, how can you get much more than 75 basis points?"