Europe continues to dominate financial markets; Greece came to an agreement with a sufficient number of its private creditors to reduce its debt, and the provision of extra funds by the European Central Bank (ECB) staved off a credit crunch within the European banking system and created an air of optimism within global markets. This has recently started to fade as the positive effects of the liquidity provision wear off and Europe’s underlying problems come into focus again.

Interest Rates

Swap rates from which fixed rate mortgages are priced are trading near the lows seen at the end of 2011. The Bank of England’s Monetary Policy Committee (MPC) has kept interest rates at 0.5% and is likely to do so for some considerable time to come but whether any further Quantative Easing will be issued remains unknown.

Inflation

The CPI (Consumer Price Index) had continued to fall from its peak of 5.2% last September, down to 3.4% in February but nudged upwards to 3.5% in March. With the rate of decline stalling, the MPC forecast of a return to target in Q4 2012 is threatened, with a rebound in oil prices being the major factor.

Mortgage Lending

The stronger activity levels reported by the Council of Mortgage Lenders (CML) at the close of 2011 have not been maintained into 2012. Mortgage Approval data for Feb 2012 was the lowest in eight months despite a surge in mortgage lending ahead of the end of the stamp duty holiday, targeted at first time buyers, that ended in March.

Housing Market

House prices show little signs of varying from their current position and are expected to remain relatively stable at current levels. Halifax are reporting a year on year decrease of 0.6% and Nationwide a decrease of 0.9%.

Growth

Final Q4 GDP (Gross Domestic product) data showed growth at -0.3% compared to Q3 and -0.5% year on year. The first estimate of Q1 GDP announced on 25 April showed growth at -0.2% which marks a technical recession (two consecutive quarters of negative growth). The MPC are of the view that the economy is performing better than the GDP data suggests and admitted to being “perplexed”, in particular with the construction data which was a major contributor to the poor GDP number. Nevertheless it is not expected that future revisions will take Q1 growth into positive territory and a renewed crisis in the eurozone would pose further negative impetus to the UK’s recovery.

Europe and the Eurozone crisis has continued to dominate the financial news in recent months, with Greece and Spain’s debt providing the headlines most recently.

Without the continued support of the other EU members Greece will not be able to pay its debts. Those that have lent money to the country include French and German banks, failure to pay the debts by Greece could result in further bank failures and lead to the kind of recession seen in 2008 and 2009.

Because of this the current events are so much dictated by international politics this is making it very hard to predict what will happen in the future.

Interest Rates

The Bank of England’s Monetary Policy Committee (MPC) has kept interest rates at 0.5% and is likely to do so for some considerable time. The MPC did respond to further signs of a weakening economy by issuing an additional round of quantitative easing. Longer term swap rates (used to price fixed rate retail products) have recently fallen to historic lows.

Inflation

The Consumer prices Index (CPI) measure of inflation targeted by the MPC is now at 5.2%, a level last seen in August 2008. It has been above its 2% target since Dec 2009.

The view of the MPC is that inflation is topping out and will “fall back through 2012 and into 2013″

Mortgage Lending

The Council of Mortgage Lenders estimated that gross lending for the third quarter of 2011 was £38.6 billion, a 15% increase from the second quarter of this year.

Housing Market

Survey evidence points to a continued weakening of house prices.

Halifax reported a 1.7% decrease and Nationwide a 0.5% decrease so far this quarter.

Growth

The Confederation of British Industry (CBI) forecast the economy to grow at a sluggish rate in 2011 and pick up only modestly in 2012. This is in line with a number of other forecasters who continue to downgrade estimates for growth going forward. The most recent official estimate showed predicated growth of 0.5% year on year.

Friday mornings early market action saw the European stock market rising slowly but broadly. This raised hopes that the Eurozone debt crisis may still be contained. For the second day running the Italian bond yields fell after investors got the news that Mario Monti, a technocrat, may become the Italian Premier.

Volatile Markets

Earlier in the week, Italy’s 10 year benchmark bond yield rose higher than the 7% threshold. This trigged panic on the global markets. But after two days of the yields falling 26 basis points it is currently sitting at 6.59% and looking set to be lower by the end of the day.

The FTSE Eurofist 300 index rose 0.5% early this morning but it will still be down for the week 3.75%. This was after the signs that Italy’s large bonds market was being sucked into the Eurozone crisis. All the markets throughout Europe gained with Italy’s FTSE MIB gauge gaining 1.4% being the most prominent of them.

The French and German bond yields are going in separate directions as the German bonds have risen to 1.79%, up 2 basis points. The French bonds, on the other hand have declined 7 basis points to 3.37%.

Asian Markets Growth

Amidst the Eurozone debt crisis the Asian markets are regaining some of their footing too. With the good news from the US with regards to the jobless claims falling, added to the successful bonds sale by Italy midweek and Greece appointing a new Prime Minister the MSCI Asia Pacific index rose.

Japan’s Nikkei didn’t alter as they are focusing on Olympus as the company is plummeting down the market.

Eurozone Crisis Recovery

Will the Eurozone crisis be brought under control with the new measures that have been put in place? The new Prime Minister in Greece will surely want to regain support from everyone and bring the countries debts under control.

Italy on the other hand have sold the bonds during the week easing the debt that they are facing and as such the replacement for Silvio Berlusconi will be an important decision for the country.