Mortgage Rates Play Cards with Monti, November 14, 2011

We open the work week with changes in Italy and Greece that will have definite impacts on mortgage rates in the US.  Both nations have new leadership who face difficult tasks to deal with the debt crises that are at critical points.  In Greece, New Prime Minister Lucas Papedemos, a non-politician has to get all parties to accept a deal already developed.  In Italy, likely new Prime Minister Mario Monti has a far more difficult, and consequential task—convincing markets quickly that it can grow the Italian economy.  While markets today will be considering the next chapter in Europe, beginning tomorrow the focus will revert to the US when an onslaught of economic data and the approaching deadline for spending cuts from the Congressional Super-Committee take precedence.

Former Chairman of the European Competitiveness Commission Marion Monti has been nominated to be the next Prime Minister of Italy.  He faces the challenge of developing a plan to cut spending, grow the economy and keep the people of Italy supporting the move.  Moreover, he does not have a great deal of time.  Italian bond yields peaked over 7% last week and have fallen just under that level today.  According to analysts, Italy cannot afford to pay this level of interest on its debt without facing default down the road.  Consequently, a workable plan must be passed soon to change the trajectory of the debt.

In the US this week we will get both producer price and consumer price data that is expected to indicate that inflation is increasing but at a sustainable level.  Additionally, on Tuesday the retail sales figures are expected to be very strong.  Wednesday is the day for industrial production figures.  If positive results here are combined with a third weekly jobless claims report below 400,000 on Thursday, then the stage could be set for a major stock market rally.  This news would likely push mortgage rates higher.

Finally, the pressure is on the Congressional Super-Committee to reach a deal before November 23 to cut at least $1.2 trillion from the US government budget over the next ten years.  The Super-Committee has wisely kept its negotiations among its members, but leaks indicate real difficulty in finding common ground.  As the week unfolds news on the progress or lack of progress toward a deal will have a major impact on rates.  If a deal gets done, expect rates to rise.  If no deal can be reached expect rates to fall.