With little economic data in the US this week, events in Europe were the primary influence on mortgage rates. During the week, shifting sentiment about the risk posed by Italy caused a high degree of volatility. By the end of the week, though, mortgage rates were little changed from last week.
Italy was the center of attention this week. While an important budget vote passed, Prime Minister Berlusconi failed to gain the support of a majority in Parliament. As a result, he agreed to resign. Italy will either hold special elections or will be ruled by a national unity government, a temporary coalition. Investors believe that a national unity government might be better able to implement politically unpopular austerity measures. The rapidly shifting events in Italy have had a significant impact on global financial markets and likely will continue to do so.
In Greece, an agreement was reached to form a coalition government, which is expected to accept the terms of the European Union bailout package. The Greek Prime Minister voluntarily resigned, and a new leader was named.
Bigger picture, the fundamental questions in Europe remain the same. Will the weaker countries make the sacrifices necessary to cut spending and will the stronger countries be willing to pay the cost of the bailout? As perceptions change for the likelihood of the spread of the European debt troubles, investors will continue to shift funds between relatively risky assets and safer assets. US government guaranteed mortgage-backed securities (MBS) are considered to be less risky assets, and changing demand for MBS will keep mortgage rates on the move.
The most significant economic data next week will be the monthly inflation reports. The Producer Price Index (PPI) focuses on the increase in prices of “intermediate” goods used by companies to produce finished products and will come out on Tuesday. The Consumer Price Index (CPI), the most closely watched monthly inflation report, will come out on Wednesday. CPI looks at the price change for those finished goods which are sold to consumers. In addition, Retail Sales will be released on Tuesday. Retail Sales account for about 70% of economic activity. Industrial Production, another important indicator of economic growth, will come out on Wednesday. Housing Starts and Philly Fed will be released on Thursday.
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