Bonds Stabilize After Shocks to the System; PPI Next

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Domino Theory.

Federal Reserve Chairman Alan Greenspan

wobbled the first tile Wednesday, suggesting in his testimony to

Congress

a rate hike may be on the way. His counterparts in Germany followed through on Thursday, raising the key repo rate. Of course, the rest of Europe couldn't be left out of the interest-rate party: France and Austria raised; Switzerland is seen on the way.

If you're looking for inflation -- the normal trigger for a rate hike -- in the U.S., you better have a pretty high-powered optical aid. The

Producer Price Index

, what it costs manufacturers to make the stuff we buy, fell a record seven consecutive months before notching a small gain in August. That's kept a lid on the

Consumer Price Index

, which hasn't put on quite as striking a show, but hasn't bombed, either.

The market gets another look at PPI Friday. But the expected rise, an angstrom-like 0.2%, shouldn't create an inflation-induced frenzy.

Still, Greenspan's very direct grumbling about a shrinking workforce, and the potential for wage-push inflation to percolate up to consumer prices, has got everyone a little nervous. Tensions in the bond market, already heightened by Uncle Al and the

Bundesbank

mob, rose Thursday morning after initial jobless claims fell 5,000 to 304,000 -- less than the 311,000 expected.

By the end of the day, however, the 30-year U.S. Treasury rose 7/32, pushing the yield to 6.36%.

Traders and analysts attributed part of the recovery to

Federal Reserve Vice Chairwoman Alice Rivlin

, who told

CNBC

the Fed chief wasn't suggesting a rate hike in the offing.

"We're all thinking aloud," Rivlin said of the Fed musings on the state of the economy and the increasingly tight labor situation. "There are some pressures on the horizon."

Calm words, indeed.

But the market still has reason to be cautious.

"For the last couple of months, the bet in the market has been whether the bonds will go to 6% or 7% first," says Robin Mesch, who writes

Trading Prophets

, a

Thomson Research

publication. "But with Greenspan insinuating that he may raise rates, those who placed their bet on a continued rally have to be feeling shaky."

Friday's numbers

(all times EDT):

Producer Price Index

for September (8:30 a.m.): Consensus calls for the index to rise 0.2% versus 0.3% the previous month. The core rate, which excludes volatile food and energy prices, is also seen rising 0.2% against 0.1% the previous month.

San Francisco Federal Reserve President Robert Parry speech

(6 p.m.): Parry speaks at a San Francisco Fed-sponsored seminar on the Consumer Price Index. Calculation of the index is set to change in January.