The market’s bid to break its 6-week string of
losses is back to square one. The EU promised to have a solution
for
Greece hammered out this month. It’s clear now that
Greece is going to
do a polite default. That is, its debt will be restructured so that
current bond holders take a haircut and receive new debt designed to
give
Greece a
little breathing room.

But so far, they can’t agree on how to structure
the deal.

That’s creating uncertainty for
Greece, but also for
the other European countries with debt problems. Will
Ireland and Spain be allowed to restructure
debt as well?
Europe says “no”, even though it is setting a precedent with
Greece.

*****More important for the U.S. stock market, the Empire
State Manufacturing Index came in much weaker than expected. Expectations
were for a 12, and the Index came in at -7, the worst reading since
November, shortly after the Fed started QE2.

Clearly, this index shows that manufacturing has
weakened, and underscores the fear that the economic recovery is not
exactly surging ahead.

*****It’s not all gloom out there. The Mortgage
Bankers Association (MBA) says that mortgage loan applications rose 13%
last week. Most of the gain was for refi’s, not outright purchases, but
this is still a positive as lending has been a drag.

Of course, the gain is for just one week. And the
fact that refi’s accounted for the majority of the improvement can be
directly credited to the steady decline of low interest rates. 30-year
mortgage rates fell to 4.51% last week.

It would be much better if there was evidence of
rising demand for homes, but alas, that will have to wait.

*****There is a direct link between housing and
the Consumer Price Index (
CPI). It’s not often mentioned,
but the continued decline for home prices has helped keep a lid on
inflation as measured by the
CPI.

And the recent decline in gas prices also helped
the
CPI come
in at a 6-month low of 0.2%. Food costs rose 0.4% and clothing rose 1.4%,
while energy prices fell 1%.

So, we are seeing inflation for necessities while
the overall inflation number is being deflated by housing. This is
something to pay attention to, because a rebound for housing prices will
be our first indication that inflation measures like the

CPI will start
moving above the Fed’s target level of 2%, and rate hikes may be
coming.

Don’t miss the irony here: interest rates and
mortgage rates will stay low so long as housing demand is weak, thereby
supporting the recovery. But the minute there is actual demand for
mortgage loans, rates will rise.

(And of course, it is continued mortgage issues
and the potential for an even weaker housing market that is weighing on
the financial sector right now.)

Robert Shiller, Yale professor and co-creator of
the Case-Shiller home price index, says that housing prices could fall
another 10%-25%. But he also acknowledges that such forecasts are very
difficult to make.

The one thing we do know is that home prices
aren’t improving anytime soon.

*****QE2 officially ends in 5 days. And it appears
that investors have largely positioned themselves as we expected they
might: selling stock and buying Treasuries.

From the start, QE2 was designed to push investors
into the stock market. And now that it’s ending, investors have been
leaving the stock market. The question now is: will that continue after
QE2 officially ends? Or might June 20 be the end of the current
correction?

We’ll see, soon enough…

*****As always, feel free to write me anytime:
[email protected]

Published by Wyatt Investment Research at