What a Week: Stressed Out

Bernanke was forceful in his attempt to clarify that the Fed's policy stance has not moved to neutral despite confusion last week over the Federal Open Market Committee's removal of its boilerplate "tightening bias."

Perhaps the chairman was responding to skeptics, or vigilantes, in the bond market, who continued to trade out of long-term Treasury bonds and into short-term notes -- steepening the yield curve.

The two-year Treasury note yield fell to 4.58% from 4.61% last Friday, as the 10-year yield jumped to 4.64% from 4.61%, and the yield on the 30-year bond rose to 4.84% from 4.80%.

"Neutral policy is one where risks are weighted equally," said Bernanke in the question-and-answer period of his testimony this week. But he added that in the Fed's view, "inflation risks are predominant," and "we have not shifted away from an inflation bias." In the end, Bernanke summed up, "We're looking for a bit more flexibility given the uncertainties" that have arisen.

One thing is certain: Inflation has not moderated with the slower economy.

Nor has the tight labor market quieted down. Jobless claims were lower in the week, and investors and economists honed in on the connection between business investment, profits and labor -- or, as the Fed refers to it, resource utilization. Bernanke noted in his testimony that if labor costs continue to rise, productivity necessarily has to keep up so that companies don't just pass those costs through to consumer prices. And if consumer demand slips, those costs will quickly eat through profit margins.

"I think we have a productivity problem," says Bruseulas. "If firms are hiring extra workers to meet demand, they can't squeeze more out of that worker without spending to give them the state-of-the-art tools to do so."

Wall Street is already expecting a dramatic slowdown in the pace of corporate profit growth. After 14 quarters of double-digit earnings rises, analysts expect first-quarter profits to grow around 4% to 6%.

First-quarter earnings season doesn't really kick off until April 10, when Alcoa(AA Quote) reports, but warnings are starting to multiply.

Motorola(MOT Quote) and Halliburton(HAL Quote) surprised investors last week, while RF Micro Devices(RFMD Quote), ATMI(ATMI Quote), Lennar(LEN Quote), and Nabors Industries(NBR Quote) provided this week's gloomy reports or guidance.

The cyclical parts of the market fared poorly on the week amid the economic angst. The Dow Jones Transportation Average slipped 3.3%, while the Morgan Stanley Cyclical Index fell 1%. The Standard & Poor's Retail Index declined 2.2%.

Monday brings the Institute for Supply Management's nonmanufacturing index, which analysts expect to come in just north of 50 at 51. If it's lower, that means contraction in that part of the economy, and investors can expect the market to feel the jolt. But next week's biggest data point, March nonfarm payrolls, falls on Good Friday, a stock market holiday. That may be a bit of a relief to traders in this jittery environment.

1 What would best describe your stance heading into the coming week of trading? Bullish Bearish Neutral 2 Which of these sectors do you think is set to move up in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities 3 Which of these sectors do you think is set to move down in the coming week? --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities View the results without voting