Wednesday, August 21, 2002

10:30 A.M. Central Time

By Larry Baer, Market Alert Inc.

SHORT-TERM TREND (20 days or less) Neutral but with a bias to higher rates and lower prices.

LONG-TERM TREND (21 days or more): Lower rates and higher prices

The mortgage market opened on a sour note this morning as investors reacted to a speech by Philadelphia Fed Governor Anthony Santomero. Santomero, a voting member of the Open Market Committee said, "I expect the pace of economic activity to gradually accelerate through the rest of the 2002, setting the stage for sustained expansion and healthy growth in 2003 and beyond.

Santomero’s comments suggest that the Fed doesn’t feel any urgency right now to lower interest rates. Barring any other developments, odds favor the prospect that the Fed will leave short-term interest rates unchanged when they next meet on September 24^th. That’s extremely disappointing news to many investors -- and they’ve registered their disappointment by pushing mortgage interest rates a touch higher.

Market participants will have no economic news to chew on for the balance of the week. Look for the direction of mortgage interest rates to be determined by changes in stock prices. If stock prices rise mortgage interest rates will likely creep a bit higher while lower stock prices will probably produce marginally lower mortgage interest rates.

In my judgment the market will demonstrate increased volatility over the coming weeks. Emotions are running high among buyers and sellers making "cause and effect" analysis of price movement extremely difficult. My recommendation is that we continue to manage pipeline risk by the numbers – not by economic forecast.

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