This was supposed to be the year in which bonds tanked because the

Federal Reserve

was raising interest rates. Instead, the economy has weakened more than expected, stocks have struggled and Treasuries have stayed strong.

Tuesday brought a continuation of recent economic trends. Treasuries rallied sharply as three more pieces of data added to the underwhelming picture of economic growth, with reports showing that consumer confidence dropped, retail results declined and manufacturing activity slowed.

Even as major equity indices eked out gains, below the surface it was a split verdict. Consumer cyclical stocks such as retailers, restaurants, advertising agencies and automakers lagged behind.

Federated Department Stores

(FD)

and

Dillard's

(DDS) - Get Report

lost almost 3% each;

Panera Bread

(PNRA)

and

Interpublic Group

(IPG) - Get Report

each dropped 2%.

PC companies and chipmakers also fell on further worries about

Intel's

(INTC) - Get Report

midquarter update on Thursday. Intel fell 1.7% and

Hewlett-Packard

(HPQ) - Get Report

and

Dell

(DELL) - Get Report

each lost about 1%.

Areas of strength included safe-haven utility and energy stocks like

TXU

(TXU)

, up 3%, and

ExxonMobil

(XOM) - Get Report

, which gained 2%.

It wasn't supposed to be this way, according to

Fed

Chairman Alan Greenspan. As recently as mid-June, the Treasury's 10-year note was yielding 4.88%, indicating a lot of Fed tightening ahead or a possible inflation conflagration in the wings.

Then came the summer slowdown, or what Fed officials have been calling a "soft patch" that would prove "short-lived."

The trend started with weaker-than-expected job growth for June and then July, then consumer confidence began slipping, and on it goes, showing no signs of ebbing. Now the entire market is on edge waiting for Friday's payroll reading for August. Economists are all over the map with the consensus sitting at a gain of 150,000 jobs.

"All the numbers seem to be coming out below expectations," says Nuveen bond fund manager Dan Solender, who had been expecting long-term rates to climb this year. Now, he says the "odds are still that rates will go up but it's a question of when." The turn may not arrive for six months or more, he says.

All eyes will be on the payroll report to help sort out what the Fed will do next. "Friday's payrolls are going to be the biggest number," Solender says.

Bonds rallied strongly again on Tuesday as the outlook for Fed rate hikes over the next year diminished. Before settling up 16/32 to yield 4.11%, the yield on the Treasury's 10-year note hit a low of 4.10%, a neighborhood it hadn't seen since the beginning of April.

Bond manager Bill Gross, he of the $73 billion

(PTTAX) - Get Report

Pimco Total Return fund, told

Bloomberg

on Tuesday that the market now expects only one more quarter-point hike from the Fed for the considerable future.

Eurodollar futures, which track about one-quarter point above the fed funds rate, signaled a year-end yield of 2.15% at close on Tuesday. That's down from 2.33% a month ago, signaling diminished expectations of rate hikes.

The bond rally and consumer stock selloff Tuesday came as the Conference Board reported that its consumer confidence index for August slid to 98.2 from 105.7 the previous month. More troubling for the upcoming payroll report, the percentage of people surveyed who said jobs were plentiful declined for the first time in six months to 18.1% from 19.7%. Expectations of future job growth and business conditions also worsened.

Chain-store sales for the week ended Saturday slipped 0.2% from the previous week and sales grew just 2.6% over 12 months, the lowest gain in more than a year. The International Council of Shopping Centers cut its forecast of growth for the month to 1.5% to 2%, from 2% to 2.5% percent.

And finally, the Chicago Purchasing Managers Index lost 7.4 points to 57.3. The index, which measures regional activity at factories, has been up and down all year and remains above 50, indicating growth in the manufacturing sector. Just as importantly, the price paid component of the index rose to 86.6, the highest level of the year, and order backlogs shrunk to 51.6, the lowest of the year.

Asha Bangalore, an economist with Northern Trust in Chicago, suggests that there was one piece of good news in the PMI report. The employment reading came in at 51.1, modestly positive and ending two months of declines. She attributes the increase in prices paid mainly to higher oil prices, which have since come down considerably. Oil was down to $42.15 a barrel at the New York Mercantile Exchange on Tuesday, off 13% from last month's record highs.

The bond rally and stock malaise this week have both come on slender volume with many investors on vacation, which has surely exaggerated movements ahead of Friday's report. Come 8:31 a.m. on Friday, though, expect many more will be paying attention and sending in orders by phone, fax or smoke signal.

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

your feedback.