27 May Locking bias going into the long weekend
The second look at first quarter 2016 GDP showed a growth rate of 0.8%. Although hotter than the initial read of just 0.5%, it was below the markets’ expectations of 0.9%. Clearly, this is not a strong report and does not show sufficient growth in the US economy to justify a Fed rate hike. However, when you combine the tremendous job growth we have experienced the past couple of years, along with the prospect of higher inflation, the likelihood is that we will see a rate hike at the next Fed Open Market Committee meeting that includes a live statement from Fed President Janet Yellen. However, because that will also depend upon further substantiated growth in the US economy, that is not a preset conclusion.
Since the GDP report came in right near expectations, the reaction in the bond market has so far been muted. Since most economists are expecting a reading of greater than 2.5% for the current cycle in which we are now in, the anemic report from today is somewhat discounted. As we approach the strong economic times of summer, we can almost be certain of increased chatter of an imminent rate hike in the coming months, which could cause continued volatility in both the stock and bond markets. For now, we remain trapped between a floor of support provided by the 100 day moving average and a ceiling of resistance by the 50 DMA. Since both levels are considered to be strong, we may need to wait for a bit before bonds can decide on which direction to take in the near term. Continued chatter of a Fed rate hike could strengthen the US dollar and pressure oil prices lower. This would help support lower rates and could drive the US stock market a bit lower.
Given that so far today we are seeing “more of the same” in the bond market, there appears to be very little incentive to float. Therefore, we will maintain our locking bias.