The “flight-to-quality” trade is unwinding a bit in the financial markets today.  Stronger than expected earnings reported by European banks is cultivating some confidence in the equity markets.  As a result we’re seeing yields move modestly higher so far today.

10 year treasury yields have broken through technical resistance while the S & P 500 pierced through it’s 200-day moving average.  From a technical perspective this could mark a trend reversal which has me concerned.

Standard & Poors released the Case-Shiller Home Price Index report for May.  It showed positive growth but must be taken with a grain of salt since the first-time homebuyer tax credit was still in effect.

Due to the technical trading patterns I am going to shift to a locking stance.

Current outlook: locking

In yesterday’s ‘rate update’ video I reported that foreign participation in the US Treasury auctions were relatively light through Wednesday.  This is a bad sign for mortgage rates because if foreign investors don’t buy our bonds the US is forced to raise the yields on the notes to attract buyers.

In yesterday’s auction of 7-year notes foreign buyers showed up easing concerns in the marketplace.  As a result mortgage-backed bond prices rallied and recovered the losses incurred over the past 24 hours.

The Commerce Department reported better than expected GDP numbers this morning for the 2nd-quarter.  Good economic news is often bad for mortgage rates but a closer look into the GDP report shows troubling signs.  Consumer spending retracted in the 2nd-quarter after growing in the 1st and 1st-quarter GDP was revised lower.

For now we’re going to shift into a neutral position.

Current Outlook: neutral

As I explained in yesterday’s ‘rate update’ we are closely watching the level of foreign participation in this week’s US Treasury auctions.  Today there will be $42 billion in US T-bills sold to the market.  We wouldn’t surprised to see mortgage rates increase due to the additional supply of bonds on the market.

S & P released their monthly Case-Shiller real estate report.  Many experts consider this report to be the most accurate measure of home prices (click here to understand why).  The report showed that home prices declined on a year-over-year basis at the slowest pace in 12 months.  Many analysts are interrupting this as more evidence that the housing market is at or near bottom.

If you haven’t yet read about the new federal mortgage rules which take effect July 30 and could delay real estate closings you can do so by clicking this link.

Current Outlook: bias towards locking on short-term transactions with additional supply of treasury bills.

The chart below shows mortgage rates ticking higher after hitting a low:

Stocks are rallying on a flurry of positive earnings data from Ford Motor Co., AT&T, and 3M.

However, stocks are also benefiting from National Association of Realtors report which showed that existing home sales rose for the 3rd straight month in June.  The same report also showed that inventories fell to 9.4 months vs. 9.8 the month before.  This is great news to share with homebuyers who are concerned about the housing market.

There is significant technical support for mortgage-backed bonds at present levels but we still think locking is the best play if you haven’t already.

Current Outlook: locking

We pointed out earlier in the month the importance of the financial sector in this 2nd-quarter earnings season.  This morning Morgan Stanley & Wells Fargo reported earnings.  Morgan Stanley reported a 3rd straight quarterly loss and Wells Fargo provided weak guidance for the second half of the year.  These two reports are weighing on stocks which should help mortgage rates.

Given that mortgage-backed bonds rallied sharply yesterday we may see traders pull profits off the table which would cause rates to reverse back higher.  For now mortgage rates are extremely attractive but we could see them go a touch lower.  We are shifting to a neutral position.

Current Outlook: neutral

Watch today’s you tube video for details on what he said.

Click this link to view Fed Chairman Bernanke’s Op-ed piece in this morning’s WSJ.

Current Outlook: floating

Working against mortgage rates this morning is news out of the WSJ that CIT group has temporarily secured funding to keep them out of bankruptcy.  Later today the index of Leading Economic Indicators will be released.  Should this report be better than expected rates would likely move higher.

Later in the week we get Wells Fargo earnings on Wednesday & existing home sales on Thursday.  The momentum in the market suggests that locking is the best policy right now.

Other notable earnings reports due out this week:
*Dupont
*Catepillar
*UnitedHealth
*Apple
*Microsoft
*McDonald’s
*American Express

Current Outlook: bias towards locking

The Commerce Department reported this morning that housing starts in the month of June increased by 3.6% which is much higher than expectations.  With historically low interest rates & lower house prices some analysts believe that this morning’s report signals a “bottom” in the housing market.  Ironically, this news is helping to pressure mortgage rates higher in the near-term.

In another sign of stabilization Google announced today that they were beginning to see demand for advertising firm.  Their encouraging message is also supporting stocks which is hurting mortgage rates.

Not all the news is positive this morning.  Financial bellwethers Citigroup & Bank of America posted mediocre 2nd-quarter earnings.  Furthermore, CIT, which we covered in yesterday’s ‘rate update’ is still scrambling to avoid bankruptcy.

It does look like rates will be higher this afternoon so we recommend locking in at current levels.

Current Outlook: locking

For the last week we’ve been stressing the importance of the financial sector during this 2nd-quarter earnings season.  On Tuesday Goldman Sachs reported better than expected earnings which pushed rates higher.  This morning JP Morgan reported better than expected earnings but also warned against larger loan losses in the second half of the year.  These comments are hurting financial stocks which is part of the reason mortgage rates recovered from yesterday afternoon’s increase.  Tomorrow Citigroup and Bank of America report earnings.

In other financial news lender CIT has announced that unless it can raise $2 billion in additional capital it will be forced to file for bankruptcy in the next 24 hours.  If this were to happen it would be another blow to the economy as CIT is a major lender to thousands of small businesses across the nation.  It is unclear whether the market fully understands the impact of this announcement.

With the poor outlook given by JP Morgan and the CIT news we are going to shift into a floating position.  I believe Citi & B of A will also warn against upcoming loan losses which will dampen the outlook for stocks; helping to push mortgage rates lower.

Current Outlook: floating