Market Update June 28, 2007

Current Price of FNMA 6.0% Bond: $98.78, -3bp

The market is rolling along this morning, singing..."I'm not waiting on a lady, I'm just waiting on the Fed". Yep, just like that classic Stones tune, the market is on the edge of its seat, waiting on the Fed statement to arrive at 2:15pm ET this afternoon, and hoping it brings a friendly word on inflation.

In this morning's news, First Quarter GDP was finalized at 0.7%, below expectations of a final 0.8% read. So while First quarter did finish somewhat weakly, we are expecting that Second Quarter will come in a bit stronger. On the labor scene, Initial Jobless Claims was reported at 313,000, in line with expectations and suggesting the labor market remains tight. But today - we are just waiting on the Fed.

The Fed announcement this afternoon should be very interesting. While there is no chance the Fed will change the current Fed Funds rate of 5.25% last set on June 29, 2006, the market will be carefully analyzing the wording that the Fed uses to describe its present view on inflation and monetary policy. Stocks and Bonds alike would enjoy hearing some soothing words about inflation, and will be hoping to read between the lines as to signs of a rate cut by the Fed, and when it might happen. If Traders believe the Policy Statement signals the possibility for a rate cut anytime in the near future, we could see a nice rally to the upside in bond prices. But should the Fed's words indicate a continued concern about inflation, Bond prices will likely move lower in response.

Technically, the squeeze is on...as Bonds currently trade between a Falling Resistance Line overhead, presently at $98.82 and a floor of support at $98.28. This afternoon's Fed meeting may determine the Bond's next move in the squeeze play - so stay tuned as we all wait on the Fed.