Ten-year Treasury yields are bouncing close to 5 percent, holding mortgages in familiar terrain just above 6.5 percent. Stocks worldwide have had a horrible month, all commodities except oil have cracked (gold the leader, today $614 vs. last month’s $728 high), and odds are improving that interest rates have topped.

Watching the immediate impact of news on markets told a very different story this week than the media did.

The week opened with a speech by Federal Reserve Chair Ben Bernanke, who at last discovered the Fed Phrasebook. Three pages of price stability, price stability, price stability as the absolute priority and prerequisite for successful economic management wrapped around a predecessor-style key paragraph: “Core inflation has reached a level that, if sustained, would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability. These are unwelcome developments.” The 10-year T-note instantly fell from 5.1 percent to 5 percent where it has remained since, and the Fed-funds futures market doubled the probability of 5.25 percent on June 29, close to 80 percent.

The news media interpreted the speech as a shift to tougher policy by Bernanke, and the media are wrong. The Monday speech and the half-dozen Fed speakers afterward were in full jawbone, nothing more. Every bond trader knows that the key clause in Bernanke’s speech was “…if sustained…” and knows that the Fed-funds futures market is an opinion poll, not a predictor. That’s why there was no bond-market follow-through — neither deeper rate-drop in expectation of a Fed about to over-do and cause a recession, nor pricing up to a hike to 5.25 percent.

Bernanke got .1 percent in improved confidence in price stability, and nothing else. He deserves credit for speaking properly, discarding the ditsy thinking-out-loud about economic tinkering and angst about overshoot, but his stark failure to consider leadership in the half-year after nomination stands, inconceivable.

The stock market had a bad day on Monday after the speech, but it has had several; it did not really come unglued until Thursday, the day after the night in which the central banks of Europe, Denmark, India, South Korea and South Africa simultaneously raised interest rates. Japan is still at zero, but draining cash fast.

Other threads came together on Thursday, and again –says here — were misunderstood in the media. Al-Qaida leader Abu Musab Al-Zarqawi got snuffed; Iraq got interior and security ministers; Iran agreed to talks — and oil did nothing. The markets may be correct that the snuffing and ministers don’t mean much in the Iraq mess, but the Iran reduction in tension should have undercut oil — if that tension had anything to do with $70 oil in the first place. Oil has been there because demand has been there, not because of all this geo-political fright-mongering.

Connect the dots…the Fed is reacting, leading only in its insistent forecast of economic slowdown ahead, a forecast joined by everyone, if only because every central bank on the planet is working to make it so. One scare story in the bond market has held that foreign rate hikes would drive up U.S. rates; didn’t happen on Thursday, maybe because frightened stock money went to bonds, more likely because the whole world economy is topping out.

One of the most disciplined investment managers, Brad Bickham (Sergeant Bickham Lagudis) I think is on the trail of the right question, now: how slow will the slowdown be? Forget whether, and count on a reduction in inflation pressure. Bickham is looking for a soft landing (really hardly any landing at all), and his corporate earnings case is a good one. However, the behavior of stocks and commodities make me uneasy, especially about the deeply underpriced risk of credit default as central banks conclude four years of the easiest money any of us has ever seen.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

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