Mortgage Rates

The week ahead is all about the debt crisis in Europe and the threat of a further contagion. We already know that Italy is under the microscope and that the EU must deal with restructuring its debt. However, many analysts are of the belief that Portugal and Ireland, not to mention Greece, are still larger problems than Italy.

We will also hear all week the continued debate about the US debt ceiling. We would like to put everyone that doubts that the ceiling will be raised to rest as cooler heads will prevail and no one in Congress is willing to allow US sovereign debt to be downgraded by the ratings agencies.

The rate markets will follow the equity markets and their reaction to the issues in Europe. It may take a few days of media attention to the problems in Italy before the markets settle on any new levels. The key will be for the 10-year note yield to remain around or below the 3.0% level for us to change our near-term view that rates will likely increase slightly with the 10-year note yield at about the 3.25% level.

Tuesday, Wednesday, and Thursday we will see $66B in new 3s, reopened 10s, and reopened 30s. The last auctions we not well received so expect close attention paid to these new auctions.

We will see more inflation information on Thursday with the June Producer Price Index and on Friday with the Consumer Price Index. Expectations are for a both reads to be negative. Also important will be Thursday’s report on retail Sales for June. Consensus is expecting sales to be down but to what level is what will be the focus. We know that the consumer is trying very hard to pay down their personal debt and in doing so it will effect spending. 70% of our GDP is attributed to consumer spending.

On Friday we get a look at manufacturing in the New York region with the Empire State Index fro July. Expectations are calling for a slight increase after the index turned negative in June. Also we will get a read on Industrial Production for June expected to be up slightly and Capacity Utilization for June expected to be a hair higher than in May.

We expect a significant amount of intraday volatility as the media spins the crisis in Europe and the debt ceiling debate in the US.