May 19th, 2008 9:14 PM

Below I am going to first paste the market update from our site posted this morning and then Larry Baer's Daily Commentary again in its entirety because I think it really captures the tension that exists in the market right now with regards to whether the market is going to improve to lower rates or whether or a correction to higher rates is coming. Please note that after deteriorating mid day the bond market recovered at the end of the day so that we only had one rate sheet today.

Iron Harbor's update from this morning:

The bond market opened slightly up but is now weakening as a result of a an April Leading Indicators report which had a slightly positive # vs the expected slightly negative #. Tomorrow the April Producer Price Index report will be released which tracks inflation at the wholesale level. Wednesday the Federal Reserve will release the minutes from their April 30 meeting which investors hope will provide insight into whether additional Fed rate cuts are possible. In order to see mortgage rates move lower we probably would need a sell off in the stock market combined with an abatement in the steady increase in the price of oil which continues to stoke concerns about inflation.

Larry Baer's Commentary:

Daily Commentary

By Larry Baer, Market Alert

SHORT-TERM TREND (20 days or less) Tilted in favor of lower note rates and higher investor prices but very vulnerable to a sudden shift in direction.

SUGGESTED PIPELINE STRATEGY: Be prepared to convert any "floating" loan is this category to "locked" should the price of the Fannie Mae 5.5% mortgage-backed security fall below 100.406 on a closing basis.

LONG-TERM TREND (21 days or more) Hovering at a transition point - currently tilted ever so slightly in favor of lower note rates and higher investor prices.

SUGGESTED PIPELINE STRATEGY: Avoid initiating new "floating" loans in this category until/unless the price of the Fannie Mae 30-year fixed-rate mortgage-backed security can manage to close above 100.406.

Commentary: April Leading Indicators (a compilation of statistical economic data designed by a private organization to generate forward looking trend forecasts for the economy) suggests we'll probably sidestep a recession. According to Ken Goldstein, a labor economist at the group, ". the small increases in the Leading Index in both March and again in April could be a signal that the economy may not weaken further." While not exactly a ringing endorsement of the dawn of an economic recovery, it is certainly a vast improvement from the bleak projections that were the norm just a few weeks ago, when many analysts were bracing for an economic Armageddon.

As I mentioned in this week's edition of my weekly newsletter "Viewpoint," the trend trajectory of mortgage interest rates during this run-up to the three-day Memorial Day Holiday will likely be most influenced by crude oil prices, the value of the dollar on global currency exchanges and domestic stock market price action.

I have heard a number of "talking heads" suggest that record setting crude oil prices are not inflationary because rising prices at the pump restrain customer spending - slowing economic growth - and therefore supporting the prospects for steady to lower mortgage interest rates. I don't know about you - but I sure see the higher price for energy reflected in far more items I consume than simply what I pay to fill my gas tank. While last week's consumer sentiment index certainly indicated that the 300 households contained in the survey were "bummed" by higher gasoline prices - last week Tuesday's Retail Sales report indicated those same consumers were not boycotting the mall and other retail outlets. The price of the goods and services these consumers are purchasing all show increases supported, in part, or in total by "fuel surcharges." It has always been my understanding that the definition of inflation involves the rise in the general level of prices at the consumer and wholesale level over time. If that definition is still valid - I find it very difficult to buy-off on the idea that rising energy prices are not inflationary. Don't bet against mortgage investors taking a similar view.

In my opinion it will be difficult if not impossible for mortgage interest rates to make any significant move to lower levels this week without the support of horrifically weak exiting homes sales data on Friday, a dramatic decline in both the headline and core producer index on Tuesday and/or Fed minutes on Wednesday that give unequivocal evidence that the Fed remains concerned about too much slowing versus accelerating inflation pressures. While any one or combination of these three outcomes is possible - none are highly probable.

Approach your pipeline risk management this week as through you are ice fishing in the spring - don't go very far from shore, don't drive your pick-up out there, and at the first sound of cracking ice pull in your line and get the heck out of there.

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