Reduced concerns about Europe caused investors to shift to riskier assets such as stocks, hurting bonds. Weaker than expected US economic data and potential Fed action helped to limit the losses in bond markets, however. After several weeks of improvement, mortgage rates ended the week a little higher.

Early in the week, a stream of bad news emerged from Europe. Spanish and Italian bond yields climbed to unsustainable levels. It was reported that Greece may not meet the terms required to receive its next round of aid, causing speculation that Greece will default on its debt. In response to the deteriorating situation in Europe, the President of the European Central Bank (ECB) declared on Thursday that the ECB will do “whatever it takes” to preserve the European Union (EU). Investors expect that the ECB will announce additional stimulus programs in the near future, resulting in a significant decline in bond yields in troubled European countries and strong rallies in global stock markets.

During the week, investor expectations that the US Fed will add further stimulus to boost the economy increased as well. Nearly all of the recent US data has indicated that the economy is growing more slowly than average. The most powerful tool for the Fed would be a third round of quantitative easing (QE3), which would likely involve Fed purchases of mortgage-backed securities (MBS). The possibility of increased Fed demand for MBS has helped keep mortgage rates low.

Next week will be packed with important economic news. Wednesday’s Fed announcement will be the primary focus. Investors will be looking for further easing or indications that it will take place in the near future. There will be an ECB meeting on Thursday. The biggest US economic report next week will be the important Employment data on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Before the employment data, Core PCE inflation and Chicago PMI will come out on Tuesday. ISM Manufacturing and Construction Spending will be released on Wednesday. ISM Services will also come out on Friday. Personal Income, Consumer Confidence, and Factory Orders will round out the busy schedule.

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