A speech by Fed chief Bernanke and a higher than expected increase in February's core PPI seemed to re-ignite fears of more aggressive Fed tightening. Market breadth was once again very poor, with advancers-decliners on the NYSE at -1484. Small caps, biotechs, homebuilders, and precious metal stocks were among the day's worst performers.

There was no point in Bernanke's speech where a reader could go "Aha! 5% Fed funds rate by June is a done deal." The speech was a rather dry analysis of the yield curve, with Bernanke re-iterating his view that a fall in longer term yields resulting from a decline in the term premium could signal strength in the economy and the need for a firm monetary policy, while a decline that resulted from a belief in prospective economic weakness would require a much different course of monetary policy.

Bernanke's view of what the flat yield curve is presaging:

"I would not interpret the currently very flat yield curve as indicating a significant economic slowdown to come, for several reasons. First, in previous episodes when an inverted yield curve was followed by recession, the level of interest rates was quite high, consistent with considerable financial restraint. This time, both short- and long-term interest rates--in nominal and real terms--are relatively low by historical standards. Second, as I have already discussed, to the extent that the flattening or inversion of the yield curve is the result of a smaller term premium, the implications for future economic activity are positive rather than negative. Finally, the yield curve is only one of the financial indicators that researchers have found useful in predicting swings in economic activity. Other indicators that have had empirical success in the past, including corporate risk spreads, would seem to be consistent with continuing solid economic growth. In that regard, the fact that actual and implied volatilities of most financial prices remain subdued suggests that market participants do not harbor significant reservations about the economic outlook."

As for the dichotomy between headline and core PPI, we've previously pointed out the historically wide spread between core and headline inflation, so that they should begin to converge should come as no surprise.