Wednesday’s bond market opened in negative territory following the release of the CPI, but has since staged a rally to move into positive ground. The stock markets are showing significant gains with the Dow up 155 points and the Nasdaq up 27 points. The bond market is currently up 12/32, but this morning’s mortgage rates will still be higher by approximately .2 50 of a discount point due to weakness late yesterday. However, if the bond market can hold this morning’s gains, we should see afternoon improvements to mortgage rates of approximately .125 of a discount point.

This morning’s key economic report was June’s Consumer Price Index (CPI). The Labor Department reported that the overall reading rose 0.2%, as expected. The bad news was the core data reading that rose 0.3% compared to forecasts of a 0.2% rise. This indicates that core prices rose more than expected, which is bad news for the bond market. It led to the early weakness in bonds this morning.

Also released this morning was June’s Housing Starts report. This data gives us an indication of housing sector strength, but is not considered to be of high importance. It showed a much larger drop in new starts than was expected, but has had no impact on this morning’s mortgage rates.

The good news came from Fed Chairman Bernanke himself during his testim ony to the Senate Banking Committee. In his speech, he indicated that inflation was still a concern in the economy, but that economic weakness could ease those pressures. That, with other comments made, was construed to mean that the Fed might be ending its rate hike campaign in the near future. This helped rally stocks and bonds and led to reversal in the bond market this morning.

The markets are taking his words as quite favorable, which is somewhat justified. However, we have seen before where the translation was thought to indicate that the rate hikes were ending only to see bonds fall again once another theory became prominent in the market. My point is that today’s rally is based more on speculation than factual data. Therefore, we need to be very careful because rates will move higher quicker than they come down. It will take only a single statement by the right person, particularly a Fed member, to reverse this morning’s gains. Accordingly, I am holdin g the current lock/float recommendations. There is a decent possibility of seeing a slight improvement to mortgage rates this afternoon, but in my opinion not enough to justify floating and exposing yourself to overnight conditions and tomorrow’s possible pricing.

The only other report of any relevance scheduled for this week is June’s Leading Economic Indicators (LEI) at 10:00 AM tomorrow. This Conference Board index attempts to measure economic activity over the next three to six months. While it is not a factual report, it still is considered to be of relative importance to the bond market. It is expected to show a 0.2% increase, meaning that we may see a slight increase in economic activity over the next few months. A decline in the index would be good news for the bond and mortgage markets.

Also worth noting is tomorrow’s release of the minutes from the last FOMC meeting. There is a possibility of the markets reacting to them following th eir 2:00 PM ET release, especially if they show some divisiveness by its members when voting for the last increase to key short-term interest rates.

If I were considering financing/refinancing a home, I would…. Lock if my closing was taking place within 7 days… Lock if my closing was taking place between 8 and 20 days… Float if my closing was taking place between 21 and 60 days… Float if my closing was taking place over 60 days from now… This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

a la mode

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