Rate cut gives market a mini-boost
The week ended on a higher note than when it began. Market players were initially disappointed with the Fed's 25 basis point rate cut coupled with its analysis that the economy, and corporate profits, remains weak. But spirits eventually recovered. The Nasdaq composite index posted the largest rise this past week, followed closely by the Russell 2000. Incidentally, the Russell index tends to be skewed this time of year because of its annual makeover on July 1. In any case, this index of small cap stocks has outperformed all the other major indices this year. It is the only one that is higher than at year-end. It has also posted the largest gain since March 30th, followed closely by the Nasdaq composite index.

Bad earnings reports will still have the power to squash gains in the next few months. However, the market as a whole will benefit if indicators start showing that the economy is improving and that corporate profits will eventually turn around. .

Treasuries yields jump on economic news
Over the long run, an accommodative monetary policy is associated with declining market rates. You wouldn't know it by the jump in Treasury yields over the past week. While market players anticipated that the Fed would drop rates only 25 basis points, there was always the hope that they would do more. Reality can be cruel for traders and speculators. In addition to the Fed action, bond investors were bombarded with economic indicators that came in above expectations this week. Worries are emerging that strong economic figures will keep the Fed from easing rates - or will trigger inflationary pressures - or both. Moreover, the minutes of the May 15 meeting suggested that not all Fed governors and district presidents agree with their leader, Alan Greenspan. According to a Market News International report, traders are beginning to worry that Greenspan may have lost some control in reining in his colleagues.

The chart above depicts the Treasury yield curve compared to three months ago. Notice how drastically it has steepened during this period. The shape of the yield curve corresponds more closely with an expanding economy than a depressed one. Perhaps it is telling us that economic conditions are on the mend. .