Amid another broad-based selloff Monday, bulls grew desperate that this week's inflation data can create a bottom in U.S. stock markets. But if stocks do happen to stop falling this week, it probably won't be because of anything revealed in the producer or consumer price indices.

Despite all the attention it gets, U.S. inflation is only one tree in a worldwide financial forest that is characterized by tightening monetary policy and unwinding speculation. As global investors exit trades in currencies, emerging markets and commodities, U.S. stocks have borne only some of the pain. With that kind of retreat under way, what can one little inflation report really do?

Monday's session was the third time in a month that 90% of the volume in U.S. stock markets was to the downside. In that kind of environment, technical analysis suggests that anything might create the elusive "bottom," says Marc Pado, U.S. market strategist at Cantor Fitzgerald.

"You've got plenty of catalysts," he says, adding that if the inflation data is in line with expectations, retail sales and the consumer could take top billing Tuesday. But if the PPI is much lower than expectations, it could spark a rally as well. Consensus puts PPI at a 0.5% increase and core PPI at 0.2% for May. The CPI, which will be released Wednesday, is expected to gain 0.4% in May, while core CPI is expected to grow 0.2%. Retail sales are expected to show a 0.1% rise in May. In April, retail sales grew 0.5%.

Just as emerging markets have taken it on the chin of late, so too have the high "beta" areas of the U.S. stock market. The risk-aversion trend is visible in the

Nasdaq Composite

, which has suffered most out of all the U.S. stock indices this year. The Nasdaq has been testing its August 2004 and October 2005 low level around 2100 for the past few trading days. The index penetrated this mark Monday.

The Nasdaq fell 2.05% Monday to 2091, while the

Dow Jones Industrial Average

lost 0.9% to 10,793, and the

S&P 500

dropped 1.3% to 1236 on Monday.

The weakest areas of Monday's markets included the brokerage firms.

Lehman Brothers'

(LEH)

reported solid earnings Monday, but its stock fell 5.5% on fears that rising rates may hurt financial companies' margins. The Amex Broker Dealer Index fell 3.24% Monday. Other losing sectors Monday included the usual suspects -- technology, materials and energy sectors.

Several strategists believe an "emotional" bottom for U.S. equities has already occurred, and the stock market is struggling to break out of the doldrums. Mary Ann Bartels, technical research analyst at Merrill Lynch, believes the emotional bottom was reached last Thursday when the market sold off throughout most of the day, but rebounded sharply in the last couple of hours. Once done, however, market indices are likely to test previous highs, she says. Thursday's action "indicates an emotional day where sellers may have become exhausted and buyers are beginning to take control," she writes, adding that markets may take several weeks to build a "successful bottom."

Citigroup's chief U.S. equity strategist, Tobias Levkovich, says sentiment readings may indicate markets are close to a bottom. Investor Intelligence survey data shows "bullishness is one standard deviation below its average, close to the bottom in August 2004 and already slightly below the October 2005 correction levels," he writes, noting investors can't get much less enthusiastic.

"The only item left in the typical bottoming sequence is a 'body'... hello Long Term Capital Management!" writes Jeffrey Saut, chief investment strategist at Raymond James. "Hopefully a 'body' will surface this week concurrent with either a successful retest of last week's lows, or even better, lower lows driven by MUCH higher-than-expected inflation figures this week."

Body or no body, investors are starting to get antsy with the length and breadth of this downturn. But the angst may come from markets that have been lulled into a false sense of security by so many years of accommodative monetary policy. Volatility may be here to stay as the environment shifts to one of high global interest rates and risk aversion, where speculative trading drives much of the day-to-day market movement. The Bank of Japan hasn't even raised its interest rates yet. That will be July's soap opera.

The long end of the Treasuries market is clearly responding to a flight-to-quality trade as investors pull away from risk as well. The yield curve remains inverted, with the two-year Treasury note yielding 5.01% and the 10-year yielding 4.97% on Monday. These high short-term rates telegraph expectations for rising rates amid slowing growth. This typically indicates that bond investors are nervous that the Fed will overshoot on its monetary policy and kill growth.

The Fed is in its most dreaded position -- forced to fight inflation while growth slows. In terms of this week's data, the fix is pretty much in. A higher-than expected PPI or CPI reading will only rubber stamp the Fed's expected fed funds rate hike to 5.25% later this month. A lower-than-expected reading may give some peace of mind to the markets about rate hikes later this year, but is unlikely to alter expectations for the upcoming meeting. The fed funds futures market puts the likelihood of a June hike at 86%.

Indeed, markets already may be thinking about rate hikes beyond the June meeting. The Fed's hawkish tone of late has put the possibility of a 5% to 6% fed funds rate legitimately in play, say economists. Only a month ago, those calling for a 6% fed funds rate sounded off the wall. The fed funds futures market puts the odds at 32% the Fed will hike rates to 5.5% by the Aug. 8 FOMC meeting. The odds were 0% before Fed Chairman Ben Bernanke's hawkish comments last Tuesday.

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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