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Do you believe

Wal-Mart

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or the Commerce Department?

The markets suffered a bit of "deer in the headlights" syndrome Monday as conflicting messages about the consumer and the economy caused some inertia. To listen to the nation's largest retailer is to believe consumers are hurting. To listen to the Commerce Department, consumers have more than enough money to spend.

Monday, Wal-Mart estimated its same-store sales growth for October slowed to 0.5% -- much lower than its original predictions for 2% to 4% increases and just a few days after indicating the comps were tracking closer to September's 1.3% rise.

Separately, the Commerce Department reported Monday that wages and salaries grew at a stronger-than-expected pace, 0.5% in September, or 7.6% on a year-over-year basis. Spending increased only modestly however, at a 0.1% pace in the month or 5.5% year over year; but the slight slowdown was a wash, as August's spending figure was revised up.

The major stock indices were essentially flat Monday, though the stock market's ear leaned toward the Commerce Department as retailers other than Wal-Mart were up on the day. Shares of Wal-Mart fell 2.37%, but the news was contained. Shares of competitors

Target

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and

Costco

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were in the green. The S&P Retail Index gained 0.9%.

The

Dow Jones Industrial Average

TheStreet Recommends

finished the day down 0.03%, at 12,086.50 while the

S&P 500

ended up 0.04% at 1377.93, and the

Nasdaq Composite

finished up 0.6%, to 2363.77.

In addition to Wal-Mart, the Dow was weighed down by

Verizon

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, which lost 3% as traders focused on its line growth and fourth-quarter fiber spending plans vs. its better-than-expected third-quarter results. The Comp outperformed thanks to gains in chip stocks such as

Broadcom

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and

KLA-Tencor

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, as well as a 26% gain in

American Power Conversion

(APCC)

, which received a buyout offer from France's Schneider Electric.

Hawk Spotting

Along with the rise in incomes, the

Federal Reserve's

favorite measure of inflation came out Monday to little fanfare. The core personal consumption expenditures index rose 0.2% in September, which was in line with expectations. Year-over-year core PCE inflation is running at 2.4%, slightly lower than August's 11-year high 2.5% reading, but still well above the Fed's comfort zone of a 1% to 2% pace. The Commerce Department surprised investors slightly by revising August's core PCE rise to 0.3%, from 0.2%.

The news easily could have been bearish for the bond market, but bond investors perhaps listened instead to Wal-Mart, replacing their bet on a hard landing and possible economic recession and rate cuts. The 30-year Treasury bond added 5/32 to yield 4.78%, and the 10-year note gained 1/32 to yield 4.67%. The five-year note was flat on the day.

The FOMC's lone dissenter at its past three policy meetings, Richmond Fed President Jeffrey Lacker, highlighted the inflation problem, but the market wasn't responsive. Lacker is like the far right wing of the Fed these days -- fringy and predictable.

"I'm unhappy with inflation where it is now," Lacker said in a speech on monetary policy and strategy in Baltimore, adding that core PCE coming down slightly didn't give him much hope that inflation will fall further any time soon.

Lacker also weighed in on the consumer, saying that the labor market would have to soften much more to "throw a monkey wrench into consumer spending."

Several economists agree with Lacker that inflation is unwieldy and that the bond market's revelations are somehow misguided. But many are weary of "swimming upstream," writes Lehman Brothers' chief economist Ethan Harris, who believes the Fed is still closer to another rate hike than rate cut. Various "market distortions" may cause a bias in economic forecasts, he says, warning of capitulation among economists to a less bearish outlook on bonds.

"With the market predicting rate cuts, a flat curve signaling recession risks and low inflation breakevens

or inflation expectations giving high marks to the Fed, a fixed income economist must feel under pressure to forecast a lower funds rate," wrote Harris.

The core PCE index would have had to come in much weaker to throw in the towel, says Michael Darda, chief economist at MKM Partners, who also believes the Fed has not yet stamped out the inflation threat.

The mixed messages in the market may be confounding economists, but they seemed to cancel themselves out in the stock market Monday.

"Monday had all the earmarks for a cautious consolidation day after Friday's selloff," writes Marc Pado, chief market analyst at Cantor Fitzgerald. "It probably would have been exactly that kind of day had it not been for that savior of saviors. Yes, it was oil again."

Oil below $60 per barrel is like a miracle ingredient for the market -- it makes everything taste better. The price of oil dropped 3.9% to $2.37 to close at $58.38.

The Commerce Department wins Monday's match, but there is a weary tone in the air as a surprisingly bullish October draws to a close.

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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