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Investors Wake up and Smell the Data
After a week in which equity markets held strong and were able to maintain their highest level in over five years, or at levels reached before the recession hit, this week appears to be off to a rather shaky start as investors are now well beyond the quantitative easing euphoria and are paying more attention to actual macroeconomic drivers. And as we have pointed out in the recent past, the economic fundamentals are not supporting the rise in equities we have been experiencing. Equities have been propped by global efforts to provide liquidity, and now investors have to sit and wait to see these efforts work their way through, but the economic data still continues to indicate slowing growth everywhere.
Here at home, we saw on Monday that data from Federal Reserve Bank of Dallas showed that manufacturing in the region continued to decline this month. The Dallas Fed index fell to minus 0.9 in September, after dropping to minus 2.7 in the prior month. The result came in worse than economists estimate of 0.5, and expectations regarding future business conditions were more optimistic in September. The index of future general business activity rose sharply from minus 5.1 to 5.5, registering its first positive reading in three months. We should note that last week we also saw a negative manufacturing result for the manufacturing activity in the Philadelphia region, which shrank for a fifth straight month in September, reinforcing signs the industry will offer less support to the U.S. economy. We expect this trend to continue for other major regions in the U.S.
Over in Germany, businesses are losing confidence as the sovereign debt crisis continues to cloud the nation's economic outlook. According to the Ifo institute in Germany, its business climate index dropped for a fifth straight month to 101.4 from 102.3 in August, landing below economists' estimates of 102.5 and reaching the lowest level since February 2010. We should note that while the German economy is still in growth mode, that growth is slowing; and we should also point out that the debt crisis is still a threat that has pushed at least five of the 17 countries in the euro zone into a recession. Certainly, deteriorating business confidence in Germany is demoralizing for the euro zone as a whole.
All these resurging worries about true economic fundamentals are also putting pressure on the price of crude, which has more than offset concerns over supply disruptions coming from the Middle East. These slowing global growth concerns will likely continue to drag the price of crude lower in the short term.
In all, things could be worse, as the Dow Jones Industrial Average is down just 20 points, or about 0.15 percent on Monday. This week we will be looking at more economic data points including new home sales, Chicago PMI, and Michigan Sentiment for signs of economic life.
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