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Germany and France have a difficult balancing act ahead of them.

Last week was marked with dramatic drops in Mortgage Backed Securities (MBS) prices. As prices fall, the cost of borrowing increases for the consumer. By Thursday, MBS climbed back after investors pulled back on stocks. Friday was another normal atypical day that we have become accustom to seeing. Strong results in consumer spending would normally result in stock surges, but they declined. Investors were concerned with another report indicating that consumer confidence did not relect the same positive sentiment as did their spending.

The big cloud hanging over investors remains the financial trouble in Greece. It appeared that Greece could default on its debt obligations which would have a ripple effect across the global economy. Germany and France now stand poised to step in if necessary and keep Greece afloat. Investors are still leery of the plan, as details have yet to emerge. This will be a delicate balancing act for the European countries. Any plan will likely require Greece to make significant cutbacks in spending. However, there is a growing public sentiment that the cutbacks may be too severe and strikes may further complicate the issue. The dilemma for Germany and France is to offer enough aid that Greece can pull out of this without social upheaval; at the same time, the aid cannot be so supportive that it would lead other potentially faltering countries, Portugal, Spain and Italy, to avoid necessary financial cutbacks in the expectation that they too would be bailed out.

This week, we will be watching the details of the proposed aid package. Also, the Fed Open Market Committee minutes will be released on Wednesday. Analysts will be scouring them for any indication of how the Fed intends to move forward with inflation prevention and interest rate hikes. Friday will bring the release of key consumer pricing indexes, giving us another glimpse into the likelihood of inflation.

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