Washington spooked Wall Street on Wednesday, offering up an economic assessment that is at odds with recent perceptions about a rate-reining slowdown. The forecast kept the action tepid as traders awaited


Chairman Alan Greenspan's guidance in congressional testimony Thursday.

The White House Council of Economic Advisers said it still expects GDP growth to be strong in 2005, pegging it at 3.4%, down one-tenth of a percent from its last prediction, due to technical factors. The executive branch's estimate of average monthly payroll growth was revised upward to 178,000 from 175,000 previously. The council also predicted that the 10-year Treasury note will average 4.3% for 2005.

The major indices bounced all day between positive and negative territory before settling in the red. The

Dow Jones Industrial Average

dipped 6.21 points, or 0.06%, to 10,476.86. The

S&P 500

fell 2.59 points, or 0.22%, to 1194.67.


Nasdaq Composite

lost 6.98 points, or 0.34%, to 2060.18. The tech-heavy index, which has led the market's rally from the April lows, has been tired of late. On Wednesday, as on Tuesday, it led the downside.

Donald Selkin, director of equity research at Joseph Stevens and a long-term bull, advised people Tuesday to sell after seeing the Nasdaq underperform the S&P 500. "When the Nasdaq goes, it will drag down everybody else," he says.

Still, the rally is "not going to fizzle away" this summer as long as the yield of the 10-year note remains this low, Selkin says. Of course, that remains the question on everybody's mind.

Answering questions after his speech Monday night, Greenspan sounded blase about the persistently low bond yield, which has defied eight straight fed funds hikes. The low bond yield, he conceded, seems here to stay.

On Wednesday, the benchmark 10-year note fell 9/32 while the yield rose to 3.94%, as caution dominated bond pits, in case the Fed chairman sounds more hawkish in his speech Thursday than he did on Monday.

According to Northern Trust chief economist Paul Kasriel, Greenspan must walk a tightrope in his speech tomorrow. Even if he signals that the economy has slowed enough to suspend hikes in August and September, Greenspan must also make it clear that the central bank will raise rates at the June meeting and resume a tightening campaign later this year.

"I imagine Greenspan will try to indicate that this was just a pause. He wouldn't want to give the market the idea that the Fed is done," Kasriel says.

But as Greenspan himself conceded on Monday, this doesn't necessarily mean that the bond yield will come back above 4%. Excess savings from Asia are chasing the highest yields around the globe. And at 3.9%, the yield of the U.S. 10-year is still above that of its European equivalent.

Meanwhile, the recent demise of the European constitution will probably pressure the European Central Bank to cut rates, while eurozone countries are likely to boost their deficits, as

noted here by Jim Jubak, a contributor to



The dollar has been losing steam this week on rising expectations that U.S. rates are close to peaking and ahead of Friday's U.S. trade deficit figures for April. According to MG Financial currency analyst Ashraf Laidi, "Greenspan's testimony ... and the April trade figures ... carry a 60% chance of pressuring the dollar."

But with Asian central banks now less likely to diversify their foreign currency holdings into euros (for the time being), the dollar likely will remain supported this year, even amid bearish deficit figures, according to Jubak.

If indeed, the yield of the 10-year remains below 4%, the technology sector, and the stock market as a whole, may continue to attract buying interest. And of course, the housing sector will continue booming. That's of course more reason for the Fed to resume rate hikes later this year and into next year.

The Philadelphia housing sector index, along with the tech sector, led the downside Wednesday. But it might turn out this was again profit-taking. The housing index has rallied 11% since late April. Likewise, shares of homebuilder


(HOV) - Get Report

have gained 25% during that period. They fell just 3% Wednesday, just as


(GOOG) - Get Report

shares lost 3.6% on its way to reaching $300.

But according to Northern Trust's Kasriel, Greenspan -- in his last eight months as Fed chief -- wants to avoid bursting the housing bubble and leave on a high note. "Whoever inherits Greenspan's job will be dealt a terrible hand to play. At some point, rates will have to come up aggressively."

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

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