Like many of the seasonal trends that have come a bit early, a bit late, or not at all this year, the Santa Claus rally didn't arrive as scheduled.

The

Dow Jones Industrial Average

hit another all-time high Tuesday, but the week before Christmas ended on a down note. A mixed bag of economic data spurred more selling Friday amid light pre-holiday volume.

The Dow fell 0.6% Friday, and 0.8% on the week, while the

S&P 500

closed down 0.5% Friday and 1.1% on the week. The

Nasdaq Composite

had its worst week since July, falling 2.3%, having slipped 0.6% on Friday.

Treasuries slid as well in a shortened trading session, sending yields to their highest levels in five weeks despite benign inflation data. Investors seem concerned that the stock rally has gotten extended, and worried that the

Federal Reserve

is not about to cut rates.

A central bank more inclined to cut rates means that another liquidity safety net is near. But with the economy strong enough to keep the Fed on pause, the markets are on their own, so to speak. And with most eyes turned toward 2007, investors also may be realizing that the rate-setting Federal Open Market Committee is about to get more hawkish.

Friday started with the Fed's preferred measure of consumer inflation, the core personal consumption expenditures deflator, coming in below expectations, which should be bullish for stocks and bonds. Core PCE was flat for November, compared with analysts' predictions for a 0.1% rise. The reading brings year-over-year inflation to 2.2% from 2.4% last month, and it confirmed the flat November core CPI reading that investors rejoiced in last week.

But stock investors had their eyes on the negative, focusing on the economic weakness within the durable goods orders report. The Census Bureau reported that overall durable goods orders rose 1.9% in November, higher than the 1.3% expected by analysts. But orders fell 1.1% excluding transportation equipment, below expectations for a 1% rise. Also, inventories are still accumulating. They rose for the ninth straight month in November, up 0.3%.

The ratio of inventories to shipments rose to 1.41 in November -- the highest level since 2003, notes Peter Kretzmer, senior economist at Banc of America Securities. "With declining orders and shipments,

the data suggests that production cutbacks can be expected as the new year begins," he writes.

Anxiety over inventories and shipments began earlier in the week, when

FedEx

(FDX) - Get Report

reported earnings that were in line with estimates for its second quarter, but offered weaker-than-expected guidance for its third quarter. Simultaneously, the price of copper and other metals fell, putting pressure on related stocks such as

Freeport McMoran Copper & Gold

(FCX) - Get Report

.

The Dow Jones Transportation Average slumped 4.1% this week amid concern about economic slowing. FedEx fell 6.6% on the week while freight delivery services company

CH Robinson Worldwide

(CHRW) - Get Report

shed 3.1% Friday, and 8.2% this week.

In tech, things weren't all bad despite the Nasdaq's slide this week. Shares of

Red Hat

(RHT) - Get Report

jumped 25.1% Friday on strong earnings. Blackberry maker

Research In Motion

(RIMM)

initially gained ground when the company posted strong revenue in its earnings report, but investors sold into the news, leaving the stock down 2.8% Friday.

Elsewhere in the tech space, investors were taking profits this week in names that previously had been big winners. Shares of

Microsoft

(MSFT) - Get Report

fell 1.8% on the week while

Apple

(AAPL) - Get Report

fell 6.2% and

Oracle

(ORCL) - Get Report

fell 3.2% following its lackluster earnings report on Tuesday.

The bond market sold off Friday, but yields were little changed on the week. The 30-year Treasury bond fell 1 2/32, yielding 4.76%, 4 basis points higher than last week's 4.72% yield. The 10-year fell 18/32 Friday to yield 4.62%, up from last week's 4.59% yield. The two-year note's yield was unchanged on the week at 4.72%.

Treasury traders may be bearish about the economy, but they are starting to recognize that the data do not "argue for an easing cycle," says T.J. Marta, fixed-income strategist at RBC Capital Markets.

The Fedspeak this week was relatively hawkish as well, as the lone FOMC dissenter Jeffrey Lacker gave the bond market a bitter warning Thursday.

"The risk that core inflation surges again, or does not subside as desired, clearly remains the predominant macroeconomic policy risk," said Lacker. "The longer core inflation persists above 2%, the greater the danger of inflation becoming entrenched at too high a rate."

Lacker's words still have weight, but his formal dissent with the Fed's decision to stop raising the fed funds rate will have less meaning come January. The FOMC turns over four voting positions.

Three of the new voting members are hawkish, but economists think a new formal dissenter is unlikely. Nonetheless, the new voting members are among the Fed's most hawkish, including Chicago's Michael Moskow, St. Louis' William Poole, and Kansas City's Thomas Hoenig. Boston's Cathy Minehan will join as well. The FOMC loses votes from dovish San Francisco's Janet Yellen and Cleveland's Sandra Pianalto, as well as Atlanta's Jack Guynn, who has retired.

Voter shuffle aside, the FOMC goes into 2007 looking quite sharp -- the economy is slowing and inflation has been tamed, as per their summer forecast. If inflation remains low, Bernanke will have to overcome a rough start to cement a great first year as Fed chairman.

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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