After rallying sharply for the past five weeks, Wall Street is suffering from an embarrassment of riches, or more to the point, a surplus of good news.

Stocks hugged the flatline Friday morning, and weakened into midday, despite a strong November employment report. "Equity investors should like this report," wrote Joel Naroff, president of Naroff Economic Advisors, in a research note.

The fact that not everyone did signals again there are some market participants are increasingly concerned that the economy's quick recovery after Hurricane Katrina will allow the Federal Reserve to continue lifting interest rates well into 2006.

According to the Labor Department, the economy added 215,000 jobs in November, almost right in line with Wall Street's expectations for 210,000 new positions. The report also revealed mounting inflationary pressure. Average hourly earnings increased 0.2% in November, which was in line with forecasts. October earnings, however, were revised upward to a 0.6% gain from an already strong 0.5% increase.

That didn't go unnoticed in bonds pits. In recent action, the benchmark 10-year Treasury was down 5/32, while its yield, which moves inversely to the price, rose to 4.54%.

"Trend-like employment growth plus rising wages growth suggests that the Fed has the green light to raise rates," says John Sylvia, chief economist at Wachovia.

Rising bond yields put pressure on equities. Stocks were also confronting another increase in oil prices as a cold weather pattern moves into the Northeastern U.S. Crude oil for January delivery was recently up 28 cents to $58.75 a barrel.

The Dow Jones Industrial Average was recently down 42.57 points, or 0.4%, at 10,870. General Motors ( GM) was the biggest drag on the Dow, losing 2.8%.

The S&P 500 was faring only a little better, thanks to gains in energy shares. The broad index was losing 2.04 points, or 0.2%, to 1262.63.

The Nasdaq Composite was off 4.05 points, or 0.2% to 2263.12. Some Nasdaq stocks rising included OmniVision ( OVTI), whose earnings flew past estimates, and Starbucks ( SBUX), which posted better-than-expected November sales.

The dollar, meanwhile, was bolstered by the jobs report and the perspective that the Fed will continue to hike rates, keeping rate differentials tilted in favor of investments into the U.S.

In recent action, the euro was trading at $1.1669, down from $1.1738 on Thursday. The greenback was also rising against the Japanese currency, trading at 121 yen compared with 120.6 Thursday.

Dollar bulls could take heart from remarks by Fed Chairman Alan Greenspan about the ever-widening U.S. current account deficit. The deficit, which remains financed by foreign flows into U.S. assets, may be more the result of long-term "secular" forces in the global economy than a cyclical problem, and "thus is largely benign," Greenspan said.

Of course, Greenspan also repeated previous warnings that down the line, "deficits that accumulate to ever-increasing net external debt, with its attendant rise in servicing costs, cannot persist indefinitely."

Foreign investors will eventually feel the need to diversify their holdings, the Fed chairman said. Still, in the shorter-term, foreign exchange strategists maintain that the dollar will remain supported as long as the U.S. central bank keeps an upward bias on interest rates.

Greenspan also warned about the widening budget deficit and spoke of the need to curb fiscal spending, but one thing he didn't mention directly is the spending that's attributed to reconstruction plans in the Gulf Coast region.

According to the Heritage Foundation, the conservative think tank, the federal deficit was projected to be $331 billion this year before Katrina hit. Now it's expected to rise to $500 billion in 2008 and $873 billion in 2015, largely because of hurricane relief and reconstruction, together with spending on the war efforts in Iraq and Afghanistan.

What this likely means is that inflationary pressures will build in the U.S. economy next year. At the same time, Naroff says the November jobs gain, which showed that the economy had recovered from the temporary disruptions caused by Katrina, were also bolstered by rebuilding projects.

"Undoubtedly, the recovery efforts in the Gulf are helping out as construction was up strongly," Naroff wrote in his research note. "Clearing the mess and rebuilding roads takes lots of people."

Bottom line, it seems that the bond and stock markets are again anticipating inflation down the road.