Perhaps an equity market reversal?
Greenspan was good for the equity markets this week. Forget the caution, equity investors focused on words having to do with "economic growth" and "recovery." But after thinking about Greenspan's comments for 24 hours, they realized he also mentioned that the recovery was likely to be gradual and not robust. Nevertheless, strong economic data support the recovery outlook. In particular, equity investors were heartened by the ISM manufacturing index, which surpassed the 50 percent mark ("green light"), in addition to the GDP revision, robust housing activity, and strong motor vehicle sales for February.

Economic numbers offset Greenspan's reassuring words
Bond investors have long been worried that economic recovery would lead to a rapid tightening cycle by the Fed in 2002. Market players had assumed there would be a strong recovery until Uncle Alan's cautiousness before the House Financial Services Committee on Wednesday. Indeed, the market rallied on his commentary because he indicated that economic weakness was still a very real risk in coming months. But by Friday Greenspan's words were forgotten when economic reports came in higher than expected. Treasury prices fell - and yields rose - because signs of a rebound in manufacturing came to the forefront.

It is very true that the economic news was favorable this past week but again it's too soon to call a trend. Greenspan may even have had preliminary figures on the ISM index (he's been known to have access to some private data in the past). Nevertheless, Greenspan indicated that weakness remains a risk. Without some calming words from Fed officials in the next week (including Greenspan's repeat performance for the Senate), or a negative economic indicator to throw cold water on the fire, bond investors may go on another binge where Treasury yields rise and prices fall.