Updated from 7:06 a.m. EDT

Easily distracted from strong corporate profits, investors are increasingly wearing their agita on their sleeves, anxious for the longest "eighth inning" in market history to end. Investors nervous over economic data and the

Federal Reserve's

plans face several key signposts this week, beginning with Tuesday's higher-than-expected producer price index report.

PPI rose 0.5% in March, reversing a 1.4% decline in February and higher than economists' consensus estimate for a rise of 0.4%. Stripping out food and energy prices, the so-called core PPI was up just 0.1% vs. expectations for a 0.2% gain.

Meanwhile, the Commerce Department said housing starts came in at an annual pace of 1.96 million units, down 7.8% from February. Building permits also fell, to a rate of 2.059 million. On average, economists had been forecasting starts at 2.025 million and permits at 2.10 million.

Major averages opened with modest gains Tuesday but Monday's market action shows how sensitive traders are to any signs the Fed is more or less likely to tighten beyond a presumptive rate hike on May 10. Stocks rose modestly early on, in part because of the salutary effects of a "dovish" article in

The Wall Street Journal

Friday, when U.S. financial markets were closed in holiday observance.

But major averages stumbled in the afternoon in reaction to comments from Chicago Fed President Michael Moskow. Speaking before a community group in Des Moines, Iowa, Moskow said "Inflation is near the upper end of the stable range" and warned that the Fed must be "vigilant'' in staving off inflationary pressures.

Moskow's comments compounded the inflationary implications of gold and oil hitting high-water marks again. Oil hit $70 per barrel as concerns mounted over political tension with Iran. Gold hit a new 25-year high Monday, surging $18.70, or 3.1%, to $618.80 an ounce, off an intraday high of $619.30.

After trading as high as 11,159.99 prior to Moskow's comments, the

Dow Jones Industrial Average

reversed course and closed down 63.87, or 0.57%, to 11,073.78. The

S&P 500

fell 0.29%, or 3.79, to 1,285.33, and the

Nasdaq Composite

lost 14.95, or 0.64%, to 2.311.16.

Data Torture and the Fed

An increasingly "data-dependent" market now turns its attention to the minutes of the Federal Open Market Committee's March meeting, due later Tuesday, and Wednesday's March consumer price index report, which is forecast to gain 0.4% overall and 0.2% excluding food and energy .

With the Ben Bernanke-led Fed having declared itself to be "data dependent," the inflation reports take on greater-than-normal importance for traders.

But "these are tortured data," says Jeffrey Saut, chief investment strategist at Raymond James & Associates, suggesting that the PPI and CPI data don't adequately report the higher cost of goods. "What they are telling you just doesn't jive with what you see in real life," he says.

According to data from the U.S. Department of Labor Bureau of Labor Statistics, for the 12 months ended at the close of February, energy costs rose 20.1%, transportation rose 5.8%, food rose 2.8%, and medical care rose 4%.

February's 0.7% increase in the CPI points to an 8.4% inflation rate on an annualized basis, notes Saut. If the March CPI inflation comes in is as expected, at 0.4%, that brings the annualized rate to 6.6%. With the fed funds rate at 4.75%, that means we are still in a negative "real" interest rate environment, he continues. "Given the possibility of still 'free money,' no wonder speculation remains rampant in the various markets."

Indeed, prices of so-called speculative-asset classes are near record highs. For example, risk premiums on high-yield bonds are 339 basis points over 10-year Treasuries as of Monday. At the end of 2004, the asset class saw risk premiums 310 and 313 basis points over Treasuries. The all-time low was in September 1997, when spreads hit 274 over Treasuries. Currently, the average price of high-yield debt is 98.3 cents on the dollar, meaning investors are not being paid much to take the risk of owning these so-called junk bonds.

The Fed is expected to raise its base borrowing rate to 5% at the next meeting of the FOMC on May 10. Whether or not it will continue beyond May 10 is anyone's guess, including presumably well-placed members of the financial press. Recent conflicting comments from various Fed speakers reveal internal dissension in the central bank. That the debate is happening in public is a reflection of Bernanke's desire for a more "transparent" Fed. But it also reflects the fact (which is dawning on more traders by the day) that the Fed itself does not yet know when it will stop tightening.

But with surging commodity prices, low unemployment and strong corporate profits, such as from

Citigroup

(C) - Get Report

and

Eaton

(ETN) - Get Report

on Monday, and

Merrill Lynch

(MER)

and

Johnson & Johnson

(JNJ) - Get Report

on Tuesday, it is not hard to imagine it'll keep going after rate hike No. 16 on May 10.

Moreover, liquidity is plentiful.

RealMoney.com

contributor Tony Crescenzi of Miller Tabak noted Thursday that in the first quarter, commercial-paper issuance reached its highest level in more than five years, at $1.712 trillion, up 17% last month from the year before. Commercial and industrial loans last week hit their highest level since May 2001, up 13% compared with a year ago, to $1.085 trillion. Bank credit also reached an all-time high last week, at $7.723 trillion, up 11% vs. one year ago. Finally, M2 increased at a 6.7% pace over the past three months, an acceleration when compared with the 4.7% pace over the past year, Crescenzi reported.

And money is still pouring in from overseas as well. Foreign investors are chomping up U.S. securities to the tune of $86.9 billion in February, as reported by the Treasury International Capital system. February inflows easily trumped the $65.7 billion trade deficit for the month, beat estimates of $61.4 billion and surpassed January's inflows of $69.1 billion.

Furthermore, inflation is not only on the mind of economists and investors.

After kicking off the first-quarter's earnings season with a home run last week, blue-chip aluminum producer

Alcoa's

(AA) - Get Report

chief executive cautioned that, while the company doubled its profits compared with one year ago, it is still "fighting inflationary pressures." And aluminum prices could rise if Aloca employees strike next month when their master contract expires,

The Wall Street Journal

reports.

The stock market will almost certainly react to this week's inflation data, whether it proves better or worse than expectations. But inflationary pressures will likely hit stocks hardest later this year or early in 2007, when the impact of higher rates and higher prices forces the consumer to pull back on spending, says

RealMoney.com

contributor Barry Ritholtz, chief market strategist of Ritholtz Research and Analytics and president of Ritholtz Capital Partners, a New York-based hedge fund.

While signs of a consumer slowdown are scarce for now, Citigroup's otherwise strong first-quarter earnings report Monday showed cracks in the foundation. Citigroup reported a decline its global consumer lending, which includes its credit card business. In the U.S., its consumer segment declined 4%.

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;

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