Data Could Trump FOMC

RBC Capital Market's chief fixed-income strategist T.J. Marta says the Treasury market may have a "sell the rumor, buy the news" reaction to the Fed's statement Wednesday. Last week, Treasury yields rose sharply as traders removed the "oh my God, we're doing down view" from the table, he says. Rumors of a report in the market claiming inside information about a more hawkish FOMC statement means the market has already priced in the more aggressive statement, he adds.

The 10-year Treasury note ended the day up 5/32 to yield 4.87%. The 30-year bond rose 10/32 to yield 4.97%. Bond prices move inversely to yields.

Indeed, the Fed is still likely to reference worries about the housing market to justify its pause, even as it acknowledges some stabilization. Fears of what higher interest rates and adjustable-rate mortgage resets might do to the overall economy are still good enough reason for the Fed to tolerate a strong economy and slightly higher inflation.

"The Fed is on hold for the year," says James Bianco, president of Bianco Research.

Housing and manufacturing were the weakest spots in the economy, and Bernanke and the Fed sees signs of stabilization in both.

The minutes from the Dec. 12 Fed meeting acknowledged that "there were some indications that home sales might be starting to stabilize," and that "the adjustment of activity and prices in the housing market did not appear to have spilled over significantly to consumer spending." Also, the only thing Bernanke said about the economy when he testified before the Senate Budget Committee earlier this month was that manufacturing is not hollowing out, particularly given the most recent industrial production data.

Fed officials of late have repeatedly mentioned the heightened threat of wage inflation, with unemployment at 4.50% and showing no signs of slipping. As San Francisco Fed President Janet Yellen says, the labor market is "gangbusters."

The FOMC statement Wednesday afternoon is likely to reflect these revelations, but the morning's data are really where the potential surprises lie.