Mortgage Rates Awaiting "Stress" Tests, July 23, 2010

Mortgage Rate Trend Direction:     Neutral

Economic Reports/Rate Impact:    No official economic reports today

Key News:                                          US companies earnings, European Bank Stress Tests

Summary

After a big rally yesterday in the stock market, we are expecting today to start neutral to yesterday's close. Two factors will drive mortgage rates today: US companies earnings and the midday release of the European bank stress test results. The mortgage-backed securities market moved lower late yesterday and most lenders did not issue new rate sheets.  The associated pricing increases from this late move will likely be reflected on rate sheets released this morning (9:45 AM ET-10:15 AM ET).

Impact of economic reports

No official economic reports are released today, but a string of positive earnings reports from US companies after the market close yesterday, and in pre-opening this morning, will likely lead stocks higher at today's open. Key firms reporting better than expected earnings included Ford, Microsoft, McDonal's, Honeywell and Verizon.

Impact of international or political events

Around noon (ET) the results of the "stress tests" on 91 European banks will be released by the Committee of European Bank Supervisors.  The tests examined the financial strength of the banks under hyothetical "stress" from the effects of economic downturns of varying severity.  Analysts will of course be looking at the results for individual banks, but more importantly, they will be assessing the strength of the overall banking sector in Europe and the potential for failures there to impact the world economy. 

Also, important will be the so-called "transparency" of the tests or the criteria used to evaluate the banks.  One concern in this regard is whether the criteria were applied the same way to banks in the various countries since each nation's own bank supervisor was responsible for conducting the tests on indigenous banks. Results and interpretations of this report may move mortgage rates.

Will the newly passed financial reform legislation raise mortgage rates?  Check back this afternoon for my take on this important issue.