Hawkish

Fed

-speak expected next week may fall on deaf ears.

After all, inflation remains at the top of the Fed's worry list, but the stock market isn't bothered. The

S&P 500

reached a new record last week as bond yields climbed to their highest levels of the year.

The rising yields were not the result of bond vigilantes fretting over a Fed that's behind the curve on fighting inflation. Rather, the bond market joined the stock market in its rosy assessment of the U.S. economy, as April and May economic data released last week added fuel to optimism that growth is accelerating as core consumer prices moderate.

"We do seem like we're in a bit of a sweet spot," says James Paulsen, chief equities strategist at Wells Capital Management. "Recession fear has dissipated, but not enough to escalate inflation fear."

The stock market's optimism was buoyed by Friday's flood of data, which included better-than-expected reports on new jobs, manufacturing activity and personal spending. The data followed Thursday's downward revision to first-quarter gross domestic product, which was shrugged off amid a higher revision to consumer spending.

Strong earnings last week from retailers

J. Crew

( JCG),

Payless

(PSS)

and

Dress Barn

( DBRN), as well as tech giant

Dell

(DELL) - Get Report

, also helped lift spirits.

Just about everything is moving up but core inflation, which according to Friday's core personal consumption expenditures index, fell to 2% year over year. That's still the top edge of the Fed's so-called comfort zone of 1% to 2%.

But, like any good central banker, Federal Reserve Chairman Ben Bernanke worries not only about the inflation data, but also about what people

expect

when it comes to the prices they pay for goods and services. When he speaks Tuesday at the International Monetary Conference, he is expected to be typically hawkish on inflation.

The uptick in bond yields, as well as high gas and food prices -- along with disappearing odds of Federal Reserve rate cuts this year -- could have the central bank worried about containing inflation expectations.

Expectations can quickly turn into realized inflation as U.S. companies sense they have greater pricing power. Indeed, last May, just ahead of the Federal Reserve's decision to pause in its rate-hike campaign, bond investors drove the 10-year yield to 5.24% on fears that inflation was running up amid high energy prices.

This spring, core inflation has been consistently lower, and conditions are clearer regarding the Fed's position on keeping rates steady. But traders are aware that Bernanke's speech last year at the same conference sank the stock market, says Joe Brusuelas, chief economist at IDEAglobal. The

Dow

tumbled 199 points, or 1.8%, on June 5 on his hawkish talk.

Absent moving the overnight borrowing rate from 5.25%, the Fed's best tool for containing inflation is jawboning, said Brusuelas in an

interview for TheStreet.com TV Friday.

Elsewhere, the typically hawkish Richmond Federal Reserve President Jeffrey Lacker speaks on inflation on Wednesday morning, and St. Louis Fed President Thomas Hoenig speaks later that afternoon.

Data Slows to Trickle

In terms of raw economic data, the calendar is light on market movers following Friday's deluge. Monday brings April's report on factory orders, while Tuesday offers the Institute for Supply Management's report on nonmanufacturing activity, which is expected to remain steady at 56.

On Wednesday, the government will offer its revised estimate of first-quarter productivity, while Thursday's schedule includes data on consumer credit and wholesale inventories. Friday will bring the figures on the April trade deficit, which is expected to show a decline to $63 billion from $63.9 billion in March.

There's also little by way of corporate earnings expected, with

Guess?

(GES) - Get Report

,

National Semiconductor

(NSM)

and

Smithfield Foods

(SFD)

among the few companies reporting.

If Bernanke doesn't rattle any nerves, the stock market could well continue moving up and driving higher the riskier segments of the market, says Paulsen. Indeed, small-cap stocks have started to outperform again since mid-May. The Russell 2000 Index, with 8.3% year-to-date returns, is now on pace with the large-cap S&P 500 after lagging until last week.

"The issue with the stock market is there is no issue," says Paulsen, though he acknowledges that the attitude about inflation could shift quickly.

Indeed, it feels like nothing remains in a "sweet spot" on Wall Street for very long.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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