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Some earnings agita aside, the stock market was relatively stable Wednesday considering the double whammy of rising bond yields and a possibly more-hawkish

Federal Reserve

.

"Members continued to see a substantial risk that inflation would not decline as anticipated by the Committee," read the minutes of the September FOMC meeting.

In response, the 30-year bond fell 8/32 to yield 4.9%, while the 10-year note fell 5/32 to yield 4.77%, and the five-year note dropped 4/32 to yield 4.74%.

As the Treasury market rallied in September, sending yields tumbling, the question was:

What does the bond market know that the stock market doesn't know?

But now, with bonds in retreat and stocks holding up relatively well, the better question might be:

What does the stock market know that the bond market doesn't know?

"The message of the stock market is that economic reports are going to get better in a few months," says James Paulsen, chief investment strategist at Wells Capital Management. This runs contrary to what has been the fixed-income market's bet over the last few months. Bond traders believed that the economy is skidding off the rails in large part due to a declining housing market and cash-strapped consumer, and that the Fed will soon cut rates.

"This is the fifth time in this economic cycle that stocks have taken off when yields fell," says Paulsen. "I don't buy that the stock market rally has been premised on the Fed being done with rate hikes."

If that argument were true, the leadership would be more defensive, rather than industrials, transports and retailers, which have been strong participants of late. The Dow Jones Transportation Average did fall 1% Wednesday, but it bottomed in early September and is still carving an upward swath.

On Wednesday, the

Dow Jones Industrial Average

dipped below 11,800 in reaction to the Fed minutes and news that a small plane crashed into a Manhattan high-rise apartment building. (The plane was later identified as being registered to New York Yankees pitcher Cory Lidle, who was among the four people reportedly killed in the crash.)

Proving the bulls have not left the playing field, the Dow regained most of those midafternoon losses to end the day down just 15 points, or 0.13% at 11,852.13. The

TheStreet Recommends

S&P 500

fell 0.26% to close at 1349.95, and the

Nasdaq Composite

dropped 0.31% to 2308.27.

While bonds reeled from the FOMC minutes, stocks largely shrugged off a messy start to earnings season.

Alcoa

(AA) - Get Alcoa Corporation Report

and

Legg Mason

(LM) - Get Legg Mason, Inc. Report

gave the market a case of the glass-half-empties regarding earnings season. Like last quarter, double-digit growth is expected, but stocks will only get a boost if they really beat expectations on every front. The negative attitude will mean just about anything will be a disappointment. Shares of Alcoa fell 5.09% on the day, while Legg Mason tumbled 17.2%.

And although

Genentech

( DNA) beat analyst expectations late Tuesday, its shares fell 1.7% Wednesday, as some of its individual drug sales came up short of consensus.

In Wednesday's earnings news,

Monsanto

(MON)

disappointed investors by missing analyst expectations and providing lower fourth-quarter guidance. Its shares fell 5.3% on the day. After the close,

Yum! Brands

(YUM) - Get Yum! Brands, Inc. Report

beat earnings expectations and increased its guidance for the fourth quarter. Its shares fell 0.35% ahead of its announcement and were recently up 1.9% to $55.60 in after-hours trading.

Minding the Minutes

While the FOMC minutes did not veer much from the August FOMC minutes in their overall economic and policy view, traders focused on one major change -- that the Fed believes its forecast for slowing growth dampening inflation may be optimistic. This at least brings back the fear of rate hikes, if not the outright bets on them.

The setup was perfect for the bond market's reaction. A seemingly well-orchestrated build-up put the bond market in a mood to receive the FOMC minutes as more hawkish almost no matter what they said.

"The big story in the bond market is that we got way ahead of ourselves," says William Hornbarger, chief fixed-income strategist at A.G. Edwards. "This is an orderly correction." Hornbarger believes the 10-year note will likely remain in a 15- to 20-basis-point range around 4.75% for the foreseeable future -- until the market gets a whiff that the Fed will move one way or the other.

While not providing that kind of clarity on its next move, Fed-speak over the past several days has been much more hawkish. Starting last week with Vice Chairman Donald Kohn, a steady stream of Fed officials came out heralding the strong economy and the Fed's uncertainty about the direction of interest rate policy. Philadelphia Fed President Charles Plosser, Dallas Fed President Richard Fisher and Richmond Fed President Jeffrey Lacker (who dissented and voted for more rate hikes at the past two FOMC meetings) have shoved the bond market into a less aggressive stance in terms of its expectations for rate cuts and a hard landing in the economy.

In a move likely not part of the orchestration, but certainly a virtuoso performance, ex-Fed chairman Alan Greenspan twice said that the housing market may have bottomed, and that its deceleration will be much less severe in the future.

"The minutes continue to show the FOMC is concerned about the upside risks to inflation," says Michael Darda, chief economist at MKM Partners.

The posturing around that message shows "the Fed is rebuilding the framework to give them the flexibility to hike if they want to," agrees Paulsen. Indeed, odds of a rate cut in January have fallen to about 10% from 50%.

So stocks held up their flag against strong winds Wednesday. The only bright spot for equities was oil, which fell another 1.78% to $57.48 per barrel again even as a 1-million-barrel OPEC production cut comes closer to a reality. Looks like the bulls are still grazing -- at least in the stock market.

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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