It was too good to last
The summer doldrums are fast approaching. Economic indicators were sparse and Friday brought a long holiday weekend. It shouldn't be a surprise then that profit taking permeated the equity market. The Dow hit its recent high on Monday and the Nasdaq did its best on Tuesday, but it was downhill from there. When equity investors finally did see some economic information, it was not friendly. First quarter GDP was revised down and corporate profits fell on both a quarterly and yearly basis. The outlook for profits wasn't improved by Greenspan's emphasis Thursday night that the economy still faces a heightened risk of weakness ahead.

Treasury market in turmoil
Chairman Greenspan and Governor Meyer duked it out in the bond market. For the past couple of weeks, bond investors have grown more concerned that inflationary pressures will build. That's why bond yields rose even as the Fed cut rates last week. From time to time (in a daily and weekly framework), bond investors are reassured that inflation may not be a problem after all. On Thursday afternoon, Meyer complained about inflation and rattled the markets. Last night, Greenspan indicated that inflation was not a problem. Bond prices did rise in overnight trading because of Greenspan's remarks, but by Friday morning Meyer's comments were back at the forefront.

Consequently, bond investors are certainly glad that economic figures are anemic. This helps to hold down yields on the short end of the market. At the same time, they are worried about inflation. This boosts yields at the long end.