Bernanke and Bonds Bothersome to Bulls

On inflation, Bernanke repeated the now-familiar mantra that "although core inflation seems likely to moderate gradually over time, the risks to this forecast remain to the upside."

In particular, "the continuing high rate of resource utilization suggests that the level of final demand may still be high relative to the underlying productive capacity of the economy."

"Resource utilization" is code for the labor market. Indeed, the Fed's persistent reminders that the labor market is too tight to consider any rate cuts has finally not only swayed the Treasury market and fed funds futures traders, but even some of Wall Street's last holdouts on the rate-cut theory.

"Mmhh, crow," writes Jan Hatzius, chief U.S. economist at Goldman Sachs. It's the surprising strength of the labor market amid three quarters of below-trend growth that the economist says he missed.

On Tuesday, Goldman pulled the plug on its forecast for Fed easing in 2007 and increased its estimates for second and third-quarter GDP readings to 3% from 2% and to 2.5% from 2%, respectively.

Similarly, Merrill Lynch's permabear economist David Rosenberg wrote Monday that he now believes the Fed will not cut rates any time this year. Rosenberg writes that he believes the Fed is willing to sacrifice slower growth to get inflation to 1.5% -- the middle of its 1% to 2% comfort zone.

"It is plain to see that only when we either see a major setback in the capital markets or an economic slowdown that precipitates a move to a 5% unemployment rate or a 1.5% core inflation rate, only then will the Fed believe it is in a position to shift its bias, let alone begin to cut rates," writes Rosenberg.

For economists, admitting to a flawed forecast is not easy given that their reputation, not their trades, are what they have to go on.

Now that the permabears and the bond market are in line with the Fed, rates could go even higher. Marta's forecast puts the 10-year at 5.45% by the end of the year. He predicts inflation and inflation expectations may creep higher as the economy rebounds.

As for the stock market, many investors remain optimistic and even encouraged by a down day.

"As prices rise, investors first look for reasons to sell, later to buy," writes Barry James, president and CEO of James Investment Research. He notes that following a long-awaited S&P 500 record, the stock market usually experiences about 11 weeks of gains.

Only three Dow components, Exxon Mobil(XOM), Caterpillar(CAT) and Procter & Gamble(PG) gained ground on the day.

The Dow was hit by more than 1% losses in DuPont(DD), Altria(MO), Home Depot(HD), and Wal-Mart(WMT).

Which stock do you think will jump the most in trading Wednesday, June 6? TGT TASR PALM GE A WFMI

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