A New Fed Chair Helping Bonds

Both stocks and bonds are celebrating this morning, following President Trump’s announcement that he has narrowed his search for the next Federal Reserve Chair to Jerome Powell and John Taylor. However, he is leaning towards the more dovish choice, Jerome Powell.  Having a “dovish” Fed Chair means they will be less likely to push interest rates up too fast or too high.  With the prospect of having the accommodation of low rates around longer, both stocks and bonds have good reason to be higher on the day’s trading.  The fear was that Trump would announce a hawkish Fed Chair, which would have raised the odds of having higher interest rates in the near term.  Given that Trump has said many times that rates should be higher, this move comes as a surprise to many.

This morning we received the first look at 3rd Quarter Gross Domestic Product (GDP), which came in at a respectable 3%. This was much higher than the 2.5% anticipated, bit a slight drop from the most recent release of 3.1% from the end of the 2nd Quarter.  It’s important to note that the true annual rate is much lower than 3%.  This only reflects the annualized rate over the 3rd Quarter.  The actual annual rate is lower due to a very slow rate of growth reported in the 1st Quarter, which is driving the overall rate lower.

The government could not say how much the hurricanes in Texas and Florida impacted the report. However, there will be a significant bump to construction spending, furniture and automobiles as a result of the damage.

Mortgage bonds are now at the very top of the sharp downward trading channel. Given that markets are ignoring the strong GDP and placing their moves based on the release of the Fed Chair, it’s difficult to say if this rally will push bonds outside of the channel.  With bonds continuing to improve this morning, they may have the strength to do so.  If you are a risk taker, you can carefully float to see if bonds improve.  However, the rule would be to lock while at the top of the channel.  So, if do float, carefully watch the markets.  The energy could wain as the day wears on.