Increased optimism that a Greek bailout package will be approved today is causing investors to shift to riskier assets, which was negative for mortgage rates. Mixed US growth and inflation data had little net impact. Mortgage rates ended the week a little higher.
After several weeks of uncertainty, it appears that European officials are close to reaching agreement on a much-needed bailout package for Greece. Despite strong public opposition, Greek leaders took a big step by passing a budget with new austerity measures. Comments from euro zone leaders expressed broad support for providing additional aid, which Greece needs to avoid a default on debt maturing on March 20. Prior to this week, it appeared that the option to let Greece default and possibly leave the European Union was under serious consideration, but investors now believe that European leaders will not let this happen. An important meeting is scheduled for today, Monday, 02/20/2012, and investors expect a deal to be announced. In anticipation, investors shifted to riskier assets, and relatively safer assets such as mortgage-backed securities (MBS) dropped in price, pushing mortgage rates higher.
The inflation data released last week showed that core inflation rates (which exclude food and energy) have continued to rise. Core CPI inflation was 2.3% higher than one year ago, which was the highest annual rate since September 2008. Fed officials forecast that core inflation levels will moderate later in the year. If it unexpectedly continues to move higher, however, the impact could be large. Higher inflation is negative for mortgage rates. In addition, it would be more difficult for the Fed to maintain its current loose monetary policy. Investors will be closely watching core inflation levels in coming months to see if the Fed’s forecast proves correct.
Today’s meeting between Greek and euro zone officials will be the most highly anticipated economic event this week. Investors expect that a deal will be reached to provide additional aid to Greece. This week will be a light week for US economic data. Existing Home Sales will be released on Wednesday. New Home Sales and Consumer Sentiment will come out on Friday. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday. Mortgage markets will be closed today in observance of Presidents Day.
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