Last week proved to be tough for mortgage backed securities.  Many mortgage professionals and consumers alike cheered as rates opened Monday at 4.875%, the first time below 5% in over a month.   However, that same crowd was booing as the week progressed as Friday saw rates open at 5.25%.  It seems that investor sentiment has shifted yet again back to a quicker economic recovery scenario.  Driving the change in sentiment were several companies from Bank of America to Google that reported better than expected earnings and a couple economic reports that came in better than expected.  This shift is pulling money out of the safety of fixed income and into the riskier but potentially higher returning stock market.  Throughout the upcoming week we still have some other key earnings reports with companies from Wells Fargo to Coca Cola yet to report.   Strong earnings reports can have the potential to continue the current sentiment of a quick economic recovery which will make it difficult for MBS to post any gains which could result in lower mortgage rates.   Overnight, stock markets around the globe posted strong gains which continue to apply pressure on fixed income.  At the open this morning, MBS continued their recent trend of moving lower in price which moves rates higher, but have since stabilized near Friday’s last levels.

As far as data to drive the markets today, not much coming all week.  The only piece of data today is the Leading Indicators  which is a composite index of ten economic indicators that speak to overall economic activity.   Both May’s and June’s report came in higher than expected suggesting that the economy might be turning.  Economists surveyed for this month’s report expected to see a reading of 0.5% but the actual release came in slightly higher at 0.7%.    Following the release, stocks moved higher while MBS remain unchanged at the lows of the day.  At 1:30 eastern, Atlanta Federal Reserve Bank President Dennis Lockhart will be giving a speech on the economic outlook.  Since he is a voting member of the FOMC, investors will be listening to what he has to say and his speech can have an effect on the flow of investor money.


-          Federal Reserve Chairman Ben Bernanke will begin testimony on semi-annual monetary policy to the House Financial Services Committee.  He is expected to outline the Fed’s exit strategy from the biggest monetary expansion in history and how he expects to foster economic growth without creating runaway inflation.   His words can always have a major impact on the markets.  I suspect that will be the case this time as the market is waiting to hear what his exit strategy might be.  AQ and Matt will cover his testimony in detail on the MBS Commentary blog.


-          At 7am eastern, the Mortgage Bankers’ Association Weekly Applications index will be released which tracks the month over month change in purchase and refinance activity at major lenders.   An increasing trend in purchase activity would be a positive sign for our economy for 2 major reasons.  First, you would have to feel pretty good about your own financial position and job security to buy a new home and secondly new home purchases lead to many other major purchase such as flooring, furniture, appliances, etc…  Last week’s report indicated that purchase activity fell 9.4% indicating further trouble in the housing sector.  The refinance activity posted strong gains as a result of the recent decline of mortgage rates.  This data set will take a back seat to Mr. Bernanke.

-          Ben Bernanke delivers his second day of testimony to the House Financial Services Committee.  Matt and AQ will cover this topic in detail.


-          The U.S. Department of Labor releases the weekly jobless claims at 8:30am eastern.  This data set totals the number of Americans that filed for first time unemployment benefits for the prior week.   Last week’s report showed that initial claims fell 47,000 to 522,000 and expectations call for this week’s report to show 560,000 new claims.  The continuing claims, which totals the number of Americans that continue to file due to lack of finding a new job fell sharply by 642,000 to 6.273 million.  The Labor Department did warn that the results were affected by prior layoffs and seasonal layoffs that occurred earlier  than usual.  This warning is probably going to add more significance to this week’s report.  MBS usually benefit with a worse than expected reading.

-          At 10 am Eastern, the National Association of Realtors will release the Existing Home sales report which totals the number of existing (not new construction) homes that closed during the previous month.   Last month’s report showed that existing home sales improved by 2.4% to a annualized pace of 4.77 million.  Economists surveyed expect further improvement to an annualized pace of 4.85 million.   MBS would typically benefit with a  lower than expected reading.

-          The U.S. Treasury Department will announce next week’s auction schedule.  It is expected that they will announce $101billion up for grabs in the form of 2 year, 5 year and 7 year notes.  The added supply of treasuries on the market will apply pressure on treasury yields to move higher which can and usually does have a negative impact on mortgage rates.   The last round of auctions was received very well with high demand from foreign accounts indicating they still have appetite for our Country’s debt.


-          The Reuter’s/University of Michigan’s Consumer Sentiment index will be released at 9:55am eastern.   This is a survey of 500 households on their personal financial conditions and attitudes about the economy.  A pessimistic consumer is more likely to save while an optimistic consumer is more likely to spend.  Since our economy is driven by consumer spending, this report can have an impact on the markets.  Fixed income, of which MBS is a part, tend to carry higher prices (better rates) when the economy is slower so a lower than expected reading could be beneficial.   Last month’s report surprised many by coming in 6 points lower than the previous month at 64.6.  Economists surveyed for this month’s report expect to see a reading of 65.0.

AQ informs me that volatility in stocks (VIX) is rather low, hinting a correction may be near.  The equities market has rallied 5 days in a row and is currently up over ½ percent in morning trading.  With equities moving higher it will be difficult for MBS to gain any traction.  If the stock market decides to move lower today, we should see some of the money flow into MBS and treasuries.  Currently the benchmark 10 year note is trading at a yield of 3.65 and MBS are unchanged this morning.   

Early reports from fellow mortgage professionals are showing consumer borrowing costs higher today than Friday.  The par 30 year conventional rate mortgage is in the 5.25% to 5.50% range for the best qualified consumers.  In order to qualify, you must have a FICO credit score of 740 or higher, a loan to value of 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee.   If you are planning on accessing home equity, you should expect higher costs or a higher interest rate.