GDP Report Clips Doves

Raising the hawkish rhetoric may have more weight for the markets with the stronger-than-expected GDP number in hand. At 2:15 p.m. the FOMC will release its statement.

As it stands, the investors are not contemplating any move by the Fed through most of 2007. Just a month ago, traders were debating whether the Fed would cut rates in March or May. As of late Tuesday, the fed funds futures market prices in less than 50% odds of a single rate cut by the end of the year, according to Miller Tabak. Even minor odds of a rate hike -- 4% in May -- have crept into the market to really confuse things.

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.

Ahead of the Fed's statement, Treasury bonds initially sold off, but then rallied on a weaker than expected Chicago PMI report for January at 10:00 a.m. EST. A read on manufacturing activity in the region, the report came in at 48.8, the lowest since April 2003. Likewise, construction spending fell 0.4% in the month, lower than consensus expectations for a flat reading.