The Day Ahead: Stocks and Bonds Both Up Ahead of Bernanke Testimony

The stock market is looking to build upon yesterday’s gain, which were partially driven by rumors that the Federal Reserve was considering the idea of lowering the rate they pay banks on reserves held in the Fed's vaults. This would spur on bank lending and push money into the economy. 

The futures market is higher this morning after strong earnings reports, particularly from Apple, Wells Fargo, and Morgan Stanley. Investors now await comments from Fed chairman Ben Bernanke.

One hour before the opening bell, Dow futures are trading 29 points higher to 10,207 and S&P 500 futures are up 5.25 points to 1,085.25.

Meanwhile, interest rates are largely unchanged. The 2-year Treasury note is UNCH at 100-02 yielding 0.584%. The benchmark 10-year note is +0-01 at 104-20 yielding 2.953%. Both rates are less than 1bp lower. 

The September delivery FNCL 4.0 is +0-03 at 101-08. The FNCL 4.5 is +0-02 at 103-15. The secondary market current coupon is less than 1bp lower at 3.784%.

While markets are on up earnings news, economists at BMO point out that 64% of S&P 500 companies have beaten revenue expectations. However, more than a third have missed.  “Additionally, revenue guidance for the rest of the year seems to be on the low side of consensus in many cases, suggesting that the correction in equity market expectations is ongoing at this stage,” the economists said.

Key Events Today: 

7:00 ― The MBA Mortgage Applications Index, just released,  indicated that mortgage loan application volume increased 7.6% on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 19.5%.

“As rates on 30- and 15-year fixed-rate mortgages declined to the lowest levels recorded in the survey, refinance activity increased last week.  The refinance index is up almost 30 percent over the past 4 weeks, but is still well below the peak seen last spring,” said Michael Fratantoni, MBA’s vice president of research and economics.  “Refinance borrowers, aiming for the lowest possible rate, are getting conventional loans.  The strength in purchase applications comes from government loans, likely indicating that prospective buyers are drawn by the lower downpayment requirements.”

2:00 ― Ben Bernanke, chairman of the Federal Reserve, gives the semi-annual “Humphrey-Hawkins” testimony before the Senate Committee on Banking, Housing, and Urban Affairs.

“The recent minutes from the June 22-23 FOMC meeting already provide a window on what will be contained in the Chairman's prepared testimony,” said economists at IHS Global Insight. “The Fed is maintaining its very accommodative position on policy in view of weak near-term growth prospects, huge resource slack and the virtual absence of any inflationary pressures. However, the question and answer will likely zero in on what more the Fed could do at this juncture, given the downside risks to the outlook that were flagged in the minutes, downside risks that have become more salient since the FOMC met at the end of June. This part of the testimony will definitely be worth tuning in to.”