Equities sold off sharply yesterday on worries about the increasing probability of a double-dip recession in the US. While the Senate and the President signed off on a deal to increase the debt ceiling, negative news on manufacturing growth spooked investors, leading to one of the biggest one-day declines in stocks in 2011, as all major indices declined by more than 2%. The debt deal did inspire confidence in one area: money flowed freely into fixed income including US Treasuries and mortgage-backed securities, pushing rates down for the third consecutive session. Pricing has now improved nearly 200 basis points since Thursday, one of the largest one-week improvements in recent history.  The temporary premium that had been baked into Treasury bill pricing was erased, with yields falling back to recent lows below .05%.

This morning we get the first look at the three significant employment reports due this week. Payroll and human resources firm ADP released its monthly report on employment on private payrolls, stating that private firms had added 114,000 jobs in the month of July. This was slightly above economist expectations for 86,000 jobs added, but not so much so that it is likely to have a significant effect on pricing. ADP also removed 12,000 jobs from its estimate for June, revising that number down to 145,000. The ADP report has lost some of its luster in recent months due to significant discrepancies from the results of the Bureau of Labor Statistics report, so it is not as influential as the other report, especially when the difference from expectations is as small as this one. Tomorrow’s unemployment claims report could have a somewhat greater effect, but markets have much more on their plates right now than just reviewing economic data.

The debt deal is still under analysis, and the ongoing assessment is that the deal will have almost no effect on government spending in 2011, and very little effect in 2012. Of course, we don’t know what the deficit committee is going to present later this year, but with the late timing of those proposals, it is unlikely that any significant change in this year’s spending will occur. Analysis continues.

Other economic news this morning was mixed, but essentially in line with expectations. The ISM Services index showed a fractional decline in service sector growth, and factory orders were lower, but less then expected, and actually showed gains when transportation orders are excluded.

The next few weeks will be spent looking for direction in the economic numbers, especially employment and manufacturing. For today, pricing appears to be relatively stable, but that could change based on the stock lever, in the event that there is a shift in stock markets. Stocks are at a pivotal turning point, with the S&P 500 index hovering just above its key support level at 1250. The index has stayed above that point all of 2011, bouncing higher each time it fell to that point. If the index falls below 1250, it has quite a long way to fall before hitting the next support level, and that could mean very bad things for 401ks, but good things for mortgage rates. There doesn’t appear to be any reason to rush to lock loans today, but it is important to be mindful of the next two days’ significant employment numbers.

Rate lock recommendations, by days to loan funding:

<15 days: lock

15-30 days: consider floating

30+ days: float

Just as positive news about a resolution to the debt limit debate was about to pressure mortgage rates, very weak news from the manufacturing sector sent stocks reeling and moved the bias towards bonds again. Mortgage pricing improved by about 30 basis points for most loans, almost enough to improve interest rates by .125% for many borrowers. Yesterday afternoon, the House of Representatives passed a compromise plan that will raise the debt limit over several stages by enough to get the country into 2013 and past the 2012 elections. This will involve a second series of budget cuts yet to be negotiated which are due by November. If agreement isn’t reached by that time, a strict, broad package of cuts to defense and domestic spending would be enacted. The Senate will vote around noon today on the measure, which is expected to pass easily and make its way to the White House.

The cost of the debate has already hit the US government’s budget. The yield on short term Treasury obligations, T-bills, which come in 1-, 3- and 6-month varieties, has increased significantly in the past two weeks. CNN has inaccurately reported that cost at $1.7 billion. The actual increase since the prior auction is about $46 million. The source of CNN’s error is unclear – the total interest cost of yesterday’s $27 billion 3-month bill auction is $7.8 million, and the total cost on the $24 billion in 6-month bills auctioned is $18 million over their half-year life.

This morning, we have two minor data points. The most significant is consumer spending and incomes, reported by the Commerce Department a few minutes ago. While incomes increased by 0.1%, spending fell by 0.2%, the first decline in nearly 2 years. This has traders worried, as consumer spending is such a large part of economic activity. A major contributing factor to this is believed to be a decline in auto sales, which are expected to have fallen by 2.8% in July, and will be reported this afternoon at 2:00 PM. Contributing factors to this fall include high levels of unemployment and weak consumer confidence. Vehicle prices have also been elevated by supply disruptions that were caused by the March earthquake in Japan.

Mortgage pricing is off to a better start this morning in the wake of this weak consumer spending data. The 10-year Treasury, which closed at its lowest yield of 2011 yesterday at 2.74%, is down to 2.70% in early trading. The 3.5% Fannie Mae security, which hasn’t been liquid since November, is suddenly back in fashion, and some lenders are quoting 30-year fixed mortgage rates as low as 4.00% for borrowers willing to pay points. For homeowners who missed some of the recent refinance opportunities, this appears to be a 2^nd chance. It is not likely to be long-lived though, as more economic problems are needed to sustain current low rate levels. I would recommend looking very closely at rate lock options before this Friday’s employment report.

Rate lock recommendations, by time to loan funding:

<15 days: lock

15-30 days: consider locking

30+ days: consider floating

Mortgage rates dove on Friday as the shocking GDP report revealed that the US economy is much worse off than anyone expected. The economy’s growth has barely kept up with population growth over the last two quarters, and, factoring in inflation is practically moving backwards. While the headline 1.3% annual growth in the 2^nd quarter was bad, even worse was the revision to the 1^st quarter’s figures, which brought that quarter from 1.9% growth to a scant 0.4% growth. Describing this growth as anemic would be an understatement. The resulting surprise drove down stocks and caused Treasury rates to break through recent lows. The 10-year Treasury ended the week yielding just over 2.80%, it’s lowest in over 8 months. Stocks ended their worst week in a long time off over 5% on the week. Meanwhile, Congress and the White House failed again to agree on a plan to raise the debt ceiling.

This week will be exceedingly busy with significant economic news releases and with the debt limit battle coming to a head today. After weeks of bickering, it appears that a plan was reached late Sunday which would cut $2.2 trillion in current and future spending, and would allow the debt ceiling to increase by $2.1 trillion. The plan is expected to be enacted just in time to allow the US Treasury to keep the country from defaulting on its obligations. The high deficit in the current budget is still expected to cause ratings agencies to downgrade US debt at some point in the not too distant future.

This week’s data started this morning with two important reports, both at 10:00. Construction spending in June was marginally higher, improving by 0.2%. Meanwhile, the Institute for Supply Management’s manufacturing survey was sharply lower, coming in at 50.9 versus expectations of 54.0. A level of 50.0 is considered to mean neither growth nor contraction. This has caused a lot of concerns on Wall Street. Indexes were as much as 1% higher at market open due to the budget agreement, but have since reversed those gains, and are currently in the red. Mortgage and Treasury prices had been slightly worse, and have turned sharply higher.

Later this week, we will see significant data that will again influence pricing. Here’s what to expect:

Tuesday: Personal Income and Outlays

Wednesday: ADP Employment Report, Factory Orders, ISM Non-manufacturing index

Thursday: Weekly Unemployment Claims

Friday: Employment Situation Report

Clearly, this week is about as busy as it could be for economic data, and we could see significant volatility in pricing. Employment expectations are not as high as they have been in recent months, so it will take a poor report to cause significant improvement; that said, we haven’t seen an employment report with a positive surprise recently. It’s tough to call at this point. The risk of floating loans already in process prior to last Monday is pretty low at this time, but there is a lot of risk at the lowest end of the rate spectrum. For months, we’ve been writing loans that were mostly destined for the Fannie Mae 4.0% and 4.5% securities, but the recent improvement has brought the 3.5% security, which contains loans with rates from 3.75% to 4.125%, back into positive territory. These lowest rates are most subject to volatility and could easily disappear from rate sheets if floated.

Rate lock recommendations by time to loan funding:

<15 days: lock

15-30 days: consider floating

30+ days: float

There was no progress at all in Washington yesterday; if anything the results could actually be described as a backslide. Markets didn’t really care, as pricing on most assets, including mortgages and Treasuries, improved, essentially erasing Monday’s loses. Housing data and a rise in consumer confidence, which would have ordinarily pressured rates were largely ignored. The auction of 2-year notes went remarkably well, considering the status of the debt debate.

 This morning, our lone significant data point was durable goods orders, which surprised markets by falling 2.1% versus a predicted rise. While this report is often of little impact, the size and direction of the miss was not ignored. Rates had been trending higher, prior to the report, and this relieved significant pressure. Later this afternoon, the Fed will release its Beige Book, so called for the color of paper used on its cover. This release contains anecdotal information about the state of the economy from the Fed’s 12 regional banks. At 1:00 PM Treasury will issue $35 billion in new 5-year notes, which could test markets, but is likely to go smoothly unless news comes from Washington prior.

 The focal point of the divide between the Republicans in Congress and the White House is the size of the debt limit increase. The President doesn’t want to have to deal with bumping against that limit again until after the election. House Republicans want precisely that outcome, as they believe it will be beneficial to them in the campaign. The probability that the battle will result in a downgrade of the US’ credit rating has now risen to 60%. Several proposals have been floated and tabled in the last few days, and the most recent offer from Speaker Boehner was just returned to sender by the Congressional Budget Office, which pointed out that the proposed savings didn’t meet expectations, as the plan would only save $850 billion in future spending, versus the $1.2 trillion the speaker had professed. The plan would have increased the debt limit by $900 billion, which means that the plan didn’t meet with Boehner’s own promise to cut spending at least as much as the limit was increased.

 Some are discussing the impact of a US debt downgrade, saying that the rating may already be artificially high, and also that a decline in the rating would also cause agencies to reexamine ratings on debt from Germany, France and the UK. Some are wondering if a downgrade to the debt would even meaningfully move yields. I suspect we’ll find out soon. While the downgrade might not do much, a default certainly would. With 5 days to go before the government runs out of money, there isn’t long to wait.

Rate lock recommendations, by time to loan funding:

 <15 days: lock

15-30 days: lock

30-45 days: consider locking

45+ days: consider floating

The risk of a US Government default increased yesterday, as weekend talks between the President and Congress failed to produce any tangible results. This finally translated into changes in mortgage and Treasury pricing, with the 10-year note increasing .04% in yield and mortgages roughly 30 basis points less valuable. With little other news to move them markets started down, an ended there.

This morning we have a little news already, in the form of the Case-Schiller / S&P home-price index, which showed that prices improved slightly in May, compared to April. While this is a slight positive for markets, the Case-Schiller index is widely ignored by the housing industry due to the trailing nature of its information. Later this morning, we’ll see the more relevant New Home Sales figure, which is expected to show annualized sales of about 321,000. During the boom years, over a million new homes were put into service each year. One encouraging data point for new home sales lately has been the dearth of inventory, with only 166,000 new homes on the market as of the most recent survey.

Also at 10:00, we’ll see the consumer confidence survey from the Conference Board, which is expected to have declined slightly as consumers worry more about the impasse in Washington. Elsewhere, yesterday, the Moody’s ratings agency raised its expectation for a Greek default to 100%, which helped to prevent more money from flowing out of the US. I don’t know how it could become more apparent that the European Currency Union isn’t any better off than the US, albeit for somewhat different reasons, but with this news yesterday it appears that did occur.

Trading today has started with a slight improvement in mortgage pricing. After yesterday’s speeches from the President and Majority Leader Boehner, it doesn’t appear the two sides are any closer to agreement. Both essentially lambasted each other for failure to listen to the American people and compromise on the debt issue. Ultimately, it appears that when something is passed, it will not meet the aspirations that either side had, but the president will be forced to sign it, or own the US default. This ultimately depends on the House and Senate agreeing on some package, a challenging feat considering that different parties control each body. There is still significant risk this debate could get worse before a solution materializes. This thing is an out-of-control train. It’s time to get out of its way.

Rate lock recommendations, by time to loan funding:

<15 days: lock

15-30 days: lock

30+ days: consider locking

After a significant amount of volatility last week, mortgage pricing only worsened by 16 basis points on the week. This can be attributed to significant uncertainty regarding the US Government’s ability to reach agreement on a plan to extend the debt ceiling weakening US asset prices, while continued worries about European assets gave investors few options. The week’s news, what little there was, reflected slightly positively on the US housing market.

This week, while there are several news releases coming, most attention will be focused on the debate in Washington. It’s crunch time, and an answer needs to come about within the next day or so to allow the normal process to run its course in time for Treasury to borrow what it needs prior to next Tuesday’s drop dead day. Any later than that, and the parties will also need to find a means of accelerating the process. In the meantime, the possibility that the ratings agencies may decrease the US Government’s credit rating is rising. Any cut in that rating would have a significant impact on Treasury and mortgage rates almost instantly.

There are also several significant events occurring this week in the economic sphere that could also affect pricing. Here’s a rundown of the week’s events:

Today: no significant events

Tuesday: Consumer Confidence, New Home Sales, 2-year note auction

Wednesday: Durable Goods Orders, 5-year note auction, Beige Book

Thursday: Unemployment Claims, Pending Home Sales, 7-year note auction

Friday: 2^nd quarter Advance GDP reading, Chicago Purchasing Managers’ Index, Consumer Sentiment

The most watched report of the week is decidedly the GDP announcement. This will be markets’ first opportunity to see the results of some decidedly mixed economic news over the past few months. At present, predictions are somewhat mixed, but indicate belief that the economy did grow, but very slowly, in the second quarter. Estimates range from +1.0% to +2.1% with 1.9% the most likely figure. I suspect that we may see market disappointment on this factor, as the economic news has been worse than in the 1^st quarter when the economy grew by 1.9%, with many indicators suggesting contraction.  Unemployment claims will also be monitored closely, as last week was the week in which the Bureau of Labor Statistics conducted its survey of employment for the upcoming July employment situation report due August 5^th.

Mortgage pricing is off sharply to start the morning, principally due to the debt ceiling debate’s failure to advance. It is unlikely this situation will improve today, unless a debt ceiling deal is announced. All eyes will be on CNN and other services today for news from Washington, as well as watching newswires for threatened downgrades to the US debt rating. I can’t sanction floating at the moment for all but short sales and other deals with similar issues. While the risk isn’t profound, the consequences of failure to reach a deal would be, as rates would likely increase by 0.5% in the hours following announcement of that failure.

Rate lock recommendations, by days to funding:

<15 days: lock

15-30 days: lock

30+ days: consider locking

Mortgage pricing deteriorated yesterday on two principal stories: Europe’s agreement to bail out the essentially bankrupt Greek state, and the failure of the US government to arrive at any sort of agreement concerning deficit reduction and an increase to the debt ceiling. Yesterday’s economic news was mostly neutral, with the leading economic indicators in-line with expectations showing a slight improvement in conditions, and the Philadelphia Fed index slightly above expectations and also suggesting economic growth is in store.

There is no economic news today, so I’m going to use this space instead to explain a couple of concepts that I frequently mention here. The first is a flight to safety. There are numerous currencies and issuers of sovereign debt in the world, and, as we have seen all too often of late, sometimes we get economic news that threatens the security of investments in one of them, but not in others. A fine example is the current debt crisis in Europe. The crisis makes European assets less attractive to investors because of the risk that default would seriously erode the value of those assets. As a result, the investors move into less risky assets, for example, US Treasury obligations. This event is called a Flight to Safety. Of late, we have benefitted from the flight to safety induced by the European debt crisis, as investors have moved money into US assets. In the event that our government fails to resolve the debt limit debate, that would trigger a flight to another country’s debt, or, more likely, several countries’ debts, as the volume of money in US sovereign debt is huge. Possible candidates include Canada, Brazil, Australia, China, and India, among others. The impact on US Treasury rates and the budget deficit would be catastrophic.

The second concept for today is “Buy the rumor, sell the news”. This concept will explain why we often see mortgage rates move before an event that would be expected to affect them actually takes place. On Wall Street, money is rarely made by purchasing an asset after a significant news event affects its price. Rather, the biggest benefit comes from owning the asset before the news hits. As a result, traders will tend to make their move in anticipation of the news, knowing that after it little can be gained. This is why mortgage pricing fell yesterday, as markets looked at the news out of Europe and the potential that a deal would be reached to stabilize Greece. Today, that deal has yet to be finalized, so pricing is gaining back those losses.

While pricing remains volatile, the volatility surrounds a very narrow range. The result has been relative stability over the last 2 weeks, during which we’ve seen some gains and losses, but pricing has remained within ½ point of its current level. How long that will remain depends on the results of the ongoing European summit and debt limit debate. I believe that the EU will eventually reach some kind of agreement to stabilize its struggling countries, and that the US government will find a way to avoid default. When that happens, the two events will likely cancel each other – Europe’s solution will end the flight to safety, while the US deal will restore luster to government bonds. We do risk some loss over the weekend with the possibility that Europe reaches a compromise, but not enough to lock any by the tightest deals.

Rate lock recommendations, by time to funding

<15 days: consider locking

15-30 days: float

30+ days: float

Mortgage pricing wavered throughout the day yesterday, moving with the ebb and flow of rumor and debate on the debt ceiling. With only 13 days before the apocalypse, progress has been spotty, at best. If a solution isn’t found by midnight, will the cost of US debt pumpkin into the double digits as Greek borrowing costs have? Only time will tell, but the consensus is that a default would be catastrophic. Ultimately, rates closed marginally higher than on the prior day.

This morning, we have several important economic reports. Already out is the report on weekly unemployment claims, which indicates that more Americans went on the dole last week than did so in the prior. 418,000 filed new claims, up 10,000 from last week’s number. In the wider scheme of things, this fluctuation is relatively minor, and the initial reaction on Wall Street recognizes just that. With the other economic news coming today, and other related news, this is far from earth shattering.

Later this morning, at 10:00, we’ll see two key reports. The most significant is the Philadelphia Federal Reserve Bank Index, a measure of growth or contraction in manufacturing activity in Delaware, Eastern Pennsylvania and Southern New Jersey. In recent months, this report has received a lot of attention, especially after it turned negative this spring. Expectations are for it to reestablish in positive territory. Also at 10:00 we’ll get the index of leading economic indicators, a measure which aggregates a number of different measures of economic activity, and is believed to represent where the economy is headed. Expectations are for this to increase by 0.3%, suggesting an uptick in growth.

The biggest news today is the Debt Summit in Brussels, where leaders of many European countries have sat down to discuss continuance of the bailout measures that are supporting that area’s weakest economies. It is widely expected that the summit will result in an agreement to provide further financial support (aka bailouts) to Greece, Ireland and Portugal, along with possible future aid to Spain and Italy. The main reason rates are moving higher is that summit, and its expected results – a key component to current low rates is the flight to safety caused by concerns about a possible Greek default, so with the likelihood that situation may be resolved, at least temporarily, a part of the move to safer US assets is being unwound.

Mortgage pricing is slightly worse this morning, and will move somewhat after 10:00 following the news releases. It is unlikely we will have a major shift in pricing today, but the Greek summit could possibly cause something to happen. Still, I believe the risks of floating are not too high to continue that strategy at the moment.

Rate lock recommendations by days until loan funding:

<15 days: consider locking

15-30 days: float

30+ days: float

Fixed-income markets started weak yesterday on persistent doubts regarding whether the government will arrive at a deal to prevent a default on the US national debt in August. Positive economic news from home builders, who boosted housing construction starts by 14% from May to June, also helped, resulting in stock markets opening as much as 1% higher. At 1:30, President Obama made a statement indicating his opinion that congress appears to be moving in the right direction on deficit reduction and debt ceiling increase package. A group of 6 Senators across both parties is gaining momentum with a plan that closely mirrors the President’s own $4 trillion deficit reduction package announced over a week ago.

This morning, we’ll hear from the housing market again, as we get the Realtors® report on existing home sales. This could impact markets if it shows a sharp jump in closings, although there is some sentiment baked into current pricing that home sales likely increased to some degree in the prior month. The question is, how much. It will take a far greater than expected jump to move mortgage pricing significantly.

Elsewhere today, markets will also focus on Real Estate, as the website Zillow.com will make its IPO on stock markets today. This isn’t expected to move mortgage pricing, but will get a lot more attention than is usually merited by a $500 million event in multi-trillion-dollar markets. In Europe, it’s crunch time, with the summit on debt kicking off tomorrow. The new proposal, from Greek Prime Minister George Papandreou is for the central government of Europe to issue debt, and then relend that money to embattled countries. With a 2-year note yield that crossed 40% yesterday, Greece is shut out right now. Spain issued 12 month bills yesterday at a yield fully 1% higher than the last time it issued that instrument a month ago. Much attention will be focused on the summit tomorrow.

In the US, the government is basically out of time for a new proposal. The plan to escape default will have to come from one of the plans on the table, and the “Group of 6 (now 7)” plan appears most likely. This plan would cut sharply into many services, including cuts to Medicare and Social Security, while adding revenue through tax increases principally on those earning more than $250,000, but would eliminate the Alternative Minimum Tax. The net result would be $4 Trillion less new borrowing over the next 10 years. Or at least it would be until the next time we need to spend more than we are right now. . . . Mortgage pricing will likely not move too much today, but anything could happen tomorrow, as we have all manner of reports on unemployment, housing, and more. I don’t see enough happening to seriously impact pricing, though.

Rate Lock Advice:

<15 days: consider locking

15-30 days: float

30 days or more: float