Major averages were in a state of paralysis Monday as traders awaited some resolution to the conflict in the Middle East. Meanwhile, another conflict remains unresolved -- that between the Federal Reserve and inflation. The Fed said Monday that industrial production rebounded in June by more than most economists had expected. The 0.8% rise in June does not suggest a Fed pause, especially given the past three months of higher-than-comfortable CPI reports. Tuesday brings the producer price index, and Wednesday, the consumer price index and Ben Bernanke's semiannual monetary policy report to Congress. The fed funds futures market shows a 70% likelihood the Fed will raise rates again on Aug. 8. But the market is clearly concerned that the economy might fall into recession if the Fed keeps tightening. The fed funds futures market's recent reactions to the price of oil reveal that those investors believe the Fed has the same concerns about overshooting. They are banking that the Fed might sacrifice a bit more inflation to keep consumers above water. "The decline in the price of oil has boosted rate odds today, on the view that it would help the consumer to recover from recent strains," writes Tony Crescenzi, chief fixed income analyst at Miller Tabak and RealMoney.com contributor. The price of crude oil fell 2.1% to $75.39 per barrel Monday.
A supply manager at a large mining company says manufacturers are raising prices 10% to 12% on equipment and tires with a one-year lead time for orders, and 50% with a two-year lead time on items like drills, draglines and shovels. "A 'black market' has appeared to prey on the shortages," he writes. The black market is full of "opportunists living the American dream," and finding materials from warehouses and obsolete stocks, and charging five times the price to meet the immediate demand, he writes. The supply manager declined to be named. Indeed, Goodyear Tire & Rubber's ( GT) stock, for example, is near the bottom of its 52-week trading range, and has been down all year despite the supposed intense demand for tires from miners and other industrial companies. Another source who requested anonymity -- the CEO of a fund that invests in private small- and mid-cap companies -- says the companies he works with are raising prices to cope with raw materials costs and that revenue per unit is not going up. The market isn't so impressed with the public earnings and revenue posted for the second quarter so far either, but the focus hasn't been on inflationary pressures. The market is reeling from the notion that the economic cycle is peaking and earnings probably can't get much better. The stock market punished the banking stocks Monday on the heels of Citigroup's ( C) less-than-expected earnings report. Citigroup fell 2.35% on the day, dragging down competitors Deutsche Bank ( DB) and JPMorgan Chase ( JPM) most notably. The overall stock market was mixed Monday, restrained by geopolitical strife and earnings disappointment. Only the S&P 500 ended the day in the red -- down 0.14% to close at 1234.49. The Dow Jones Industrial Average rose 0.07% to close at 10,747.36, while the Nasdaq Composite finished the day up 0.02% at 2037.72.
Both the Dow and Comp finished well below their best levels of the day, reached in early trading. The failed morning rally suggests there may be disappointment in store for those hoping last week's gnarly declines would lead to a relief rally. Indeed, technical factors show the S&P 500 may be the next major index to plow to new lows. The Dow and the S&P 500 remain above their June 13 lows of 1223.69 and 10,706.14, respectively. But the S&P 500's 50-day moving average is falling, and close to crossing its 200-day moving average -- a bearish "golden cross" (or "death cross") signal, writes RealMoney columnist Alan Farley. The Nasdaq Composite's 50-day moving average passed through its 200-day average at the end of June, and the index has performed poorly ever since. The Treasury bond market has been absorbing some of the flight-to-quality trades, including by bond market guru Bill Gross. The chief investment officer at Pacific Investment Management put his money where his mouth is and upped his investment in Treasury and U.S. agency bonds in Pimco's ( PTTAX) Total Return fund to 8% in June, from 6% in May, according to Bloomberg. The fund's 6% allocation to Treasury and agency debt in May was its lowest since April 2002, according to the report. Gross said on television two weeks ago that the bear market for bonds is over. The 10-year Treasury note was flat in trading Monday to yield 5.07%. As for Bernanke, we don't know where he puts his money any more than we know where his mouth might be this week on the topics of inflation, the economy, or the Middle East and oil prices. But his words likely will generate some trading if the past is prologue. "He must be long volatility," quips one source, suggesting Monday's relative quiet isn't likely to persist through the week.