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In early trading equity futures were indicating a higher opening and MBS prices were down about 5/32 (.16 bp). The futures were trading higher on good earnings out from Caterpillar, UPS, and 3M. In addition to positive earnings in the US, the Eurozone reported that industrial new orders rose in May to their fastest annual rate in 10 years. Also, the UK reported that June retail sales were stronger than estimates. European bank stress tests are due any day now which is also adding to strength in the European markets as expectations are that most banks will pass the tests. At the opening of the equity markets, MBS prices were close to flat and treasuries were still under slight pressure. The DJIA was up as expected +117+.

Like yesterday, earnings are for the most part beating estimates but there is grave concern over top line results and how companies are going to grow their revenue in the coming quarters. The markets are flip flopping on the one hand with better earnings and on the other hand with the underlying weakness in fundamentals. This is where the comments from Bernanke make sense. When he discussed ways that the Fed could continue to help the economy, he was careful to say that they are not prepared to do anything yet as they are still examining the current recovery. The equity markets nose dived during Bernanke's testimony before the Senate yesterday and sank further after he said that the "economic outlook remains unusually uncertain." The 10-year note yield fell to its lowest level since April 2009 after the testimony.

At 8:30am weekly jobless claims came in +37K to 464K for the week ended 7/17/10. Continuing claims were lower than expected 4.487M vs. 4.710M. The week of July 10th, claims were revised slightly lower to 427K from 429K. After the release of the report futures initially pared their earlier gains but then bounced back and MBS prices turned positive and then returned back to down about 3/32 (.09 bp) but held steady.

At 10:00am June existing home sales fell -5.1% versus a fall 0f 2.2% in May or 5.37M units versus 5.66M units in May. Analysts expected sales to be down about 9.0%. There is now an 8.9 months supply of homes for sale, the highest level since August 2009. After the report MBS prices fell about 3/32 (.09 bp) and the DJIA jumped up about 20 points.

Also at 10:00am June leading indicators were down 0.2% following a revised rise of 0.5% in May. Expectations were for a decline of 0.3%.

Bernanke heads back to Capitol Hill today to testify in front of the House Financial Services Committee on monetary policy as he did yesterday in front of the Senate Banking Committee. The markets reacted very negatively to his comments although what said is much of the same of what has been said of late. His testimony will be the same as yesterday. The big difference is that he will begin earlier today. The market spook was his candid comments about our economic outlook and how "unusually uncertain" it looks. This uncertainty is what is fueling the strength in the bond and mortgage markets on safe haven investments. That being said, investors are essentially waiting on the sidelines with boat loads of cash.

The Treasury Department will announce next week's 2, 5, and 7-year note auctions today. Expectations are for a total of $105B, the lowest since June 2009.

The volatility in the markets has us taking a more conservative approach. The intraday movements in the markets are great for traders but make it tenuous for everyone else. We missed yesterday's big move in the debt markets and are still reluctant to jump on the bandwagon. Technical readings are approaching overbought levels. The positive news in Europe and the good earnings here will likely keep equities up and put pressure on MBS prices.

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