Markets Pull Another 180

Never has the phrase "what a difference a day makes" been more appropriate than in describing recent market action. If the midday trend holds, it will be the ninth consecutive session in which stock proxies reversed the previous day's action.

Confirming

yesterday's hopes for a near-term rally, the

Dow Jones Industrial Average

was lately up 1.7%, the

S&P 500

was higher by 2%, and the

Nasdaq Composite Index

was up 3.1%.

Tuesday's rally may have been preordained by technical factors, a view I plan to address in this evening's piece. But the advance was being widely attributed to fundamental factors, namely positive quarterly reports and/or conference calls by companies such as

Texas Instruments

(TXN) - Get Report

,

General Motors

(GM) - Get Report

,

Johnson & Johnson

(JNJ) - Get Report

and

Novellus Systems

(NVLS)

.

A rebound in recently battered shares of

General Electric

(GE) - Get Report

further catalyzed the advance, as did some constructive economic news.

On the data front, industrial production was reported to have risen 0.7% in March vs. expectations for a 0.5% gain, while capacity utilization, at 75.4%, also exceeded expectations. Separately, the consumer price index rose 0.3% last month and 0.1% excluding food and energy.

Expectations were for a rise of 0.5% for overall CPI and 0.2% in the core. Meanwhile, the Cleveland Fed reported that its median CPI, which doesn't automatically exclude anything, rose 0.3% in March, putting its 12-month increase at 3.8%.

On the downside, housing starts fell to 1.646 million on an annual basis in March, down 7.8% from February and vs. expectations of 1.70 million starts. Permits' fall was also more than expected. Still, with average monthly housing starts of 1.715 million, the first quarter was the strongest since the fourth quarter of 1998. The S&P Homebuilding Index was recently down 1.5%, but the housing sector has held up reasonably well in the face of today's data and the critical cover story in the current issue of

Barron's

.

Equity market participants rejoiced that the stronger-than-expected industrial production/capacity utilization figures combined with the weaker-than-expected suggested recovery without inflation. But fixed-income traders were taking a less optimistic view; the price of the benchmark 10-year Treasury note was recently down 14/32, to 97 18/32, its yield rising to 5.19%.

In addition to the data, Treasuries were weakened by the sudden allure of equities as well as reports of progress in the cease-fire talks being brokered by Secretary of State Colin Powell. Still, crude futures were up 33 cents to $24.90 at midday, although gold had fallen back below the psychologically significant $300-per-ounce level.

Also on the bond market's mind was tomorrow's testimony before the Joint Economic Committee of Congress by

Federal Reserve

Chairman Alan Greenspan.

Waffles, Mr. Greenspan?

Greenspan's testimony is "the dominant issue in the fixed-income market," said Paul McCulley, managing director at Pimco, the giant bond fund manager whose assets exceed $250 billion.

McCulley, who oversees management of Pimco's short-term securities, recalled that Greenspan has given four communiques to the market this year, with starkly different messages.

"January was characterized by him saying

good things for bonds early in the month and

good things for stocks late" in the month, McCulley recalled.

Similarly, in

late February, "at what used to be called Humphrey-Hawkins, he gave a very cautious viewpoint that was bond-friendly," McCulley said. Then in

early March, "after the strong purchasing managers survey, he gave the signal recovery was 'well under way.'"

That comment in the second half of his congressional testimony "really set the foundation for the month of March, where you had full-blown, heavy romancing about a robust recovery," McCulley quipped. That helped equities but had fixed-income markets "battening down the hatches for nefarious tightening."

Thus far in April, the bond market has "unwound those nasty expectations," the Pimco manager said. Greenspan now "has the opportunity if not the duty and responsibility to put a spin on tomorrow's testimony as to whether or not he thinks the fixed-income market has appropriately discounted the most likely scenario for monetary policy."

Early Tuesday morning, the December euro-dollar futures contract was discounting a 3% fed funds rate by the end of the year, or 125 basis points of tightening, which is roughly in line with Pimco's expectations.

Greenspan "will probably indicate that it's not an unreasonable sort of number, but that the risk is

for less tightening, not more," McCulley forecast. "I think he will probably want to put himself in the camp that 3% fed funds at the end of the year is the most

the Fed would consider doing."

Such a development would presumably be greeted warmly by both equity and fixed-income markets. But recent history demonstrates the chairman has found it hard to please all of the traders all the time.

Promotional Message

McCulley's comments about tomorrow's Greenspeak were culled from a wide-ranging interview conducted late Monday and early Tuesday morning before the day's slate of economic data was released. Our intent is to publish the bulk of the interview in a Q&A format Wednesday; be sure to tune in as McCulley speaks openly about (among other things) Greenspan, the economy and GE.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.