The producer and consumer price indices — both measures of inflation — were released over the last two days,  showing greater pricing pressures than had been expected, both at the core and non-core levels.  And yet, it is also clear that the housing and banking industries are in a crisis situation which is weighing on the credit markets and the ease with which money flows to support day to day commerce.

While the Fed cut rates on Tuesday as expected, the stock market’s ugly reaction to the news clearly suggests it doesn’t like their body language, which implies that they may be as much concerned about the risks of recession as they are inflation.  The past two days of inflation data only adds to the conundrum, at least if you’re accustomed to living in an ivory tower.  While we would argue that the current inflation readings are backward looking and believe that the Fed would agree, it doesn’t appear that their convictions are high enough to place a significant wager.   

Short term treasury bill yields remain a good deal below the Fed Funds rate, suggesting that there is still a significant gap between how the Fed and the markets are perceiving the current economic situation.  The markets believe things are much worse than the Fed does, at least if you’re into body language.   

What does it all mean?  It continues to suggest that companies which can maintain their growth regardless of the economy or the Fed, will likely outperform.  But only to a point.  If the Fed falls too far behind the curve, the risk of recession rises.  And in a recession, all stocks tend to fall, at least for a short period of time.  

We’re not there yet, but that’s what the market’s own body language suggests.