Risks favor: Cautiously Floating Ahead of Fed Rate Decision

Current Price of FNMA 6.0% Bond: $100.88, -9bp

Today is Fed day. At 2:15pm ET, the Fed will release it’s monetary policy decision and statement.

Meantime, Bond prices are trading a little lower on some hotter than expected economic news. Third quarter GDP was reported at a beefy 3.9% annual growth rate in the face of one of the worst housing slumps in decades - this is good news for the economy, but bad news for Bonds. The increase caught economists by surprise as their consensus estimate called for a 3.1% growth rate. It appears to us that the softer Dollar has added quite a boost to the economy because our goods and services are more attractive to foreigners. Additionally, US residents may shy away from purchasing foreign goods because they require more Dollars to obtain them.

Also applying a little selling pressure to Bonds is a stronger than expected ADP report, which showed 106,000 private sector jobs created in October. After adding a three month average of 23,000 new government jobs, the ADP Report predicts a total of 129,000 new jobs for October, a significantly greater number than the current consensus estimate of 80,000 new jobs. ADP has been more accurate of late as a tool to forecast the official Jobs number. Tomorrow, we will be laying out our Jobs Report strategy heading into Friday’s report.

Chicago Purchasing Managers Index (PMI) was reported at 49.7, which was less than expectations of 53.0. Readings above 50 indicate economic growth while those below 50 indicate contraction. Bonds had little reaction to this weaker than expected report.

This morning's strong GDP did catch the market by surprise and many are saying the Fed will not cut rates this afternoon. We disagree and believe the Fed will cut rates by .25% today. It will be important to hear what the Fed has to say in their statement. For now, we will cautiously float as the Bond trades just above a floor of support heading into today’s important announcement.