Markets yo-yoed this week on news of Europe’s progress and lack of it in addressing their increasing debt concerns. Domestic economic news, both good and bad had little impact indicating that Europe’s problems may ours for months to come.

The New York Fed reported that business conditions contracted for the fifth month in a row. The Empire State index for October showed only slight improvement from minus 8.82 to minus 8.48. Later in the week we heard from the Philly Fed which showed the Mid-Atlantic region’s manufacturing sector stabilizing and improving. The business conditions index ended two months of contraction with a reading of 8.7 compared to minus readings of 17.5 in September and minus 30.7 in August. The Richmond Fed reports next Tuesday on the conditions of the Southeast.

Nationally, industrial production continues to sustain the economy. It improved 0.2% in September following no increase in August. Manufacturing improved 0.4% during the month compared to a 0.3% rise in August. On a seasonally adjusted year-on-year basis, overall industrial production was up 3.2 percent in September, compared to 3.3 percent in August.

The Federal Reserve’s Beige Book is released two weeks before the next Federal Open Market Committee meets. The next one is scheduled for November 1&2. The report indicates that the twelve District Banks found that overall economic activity continued to expand in September, though many tempered their optimism describing growth as “modest” or “slight.” Contacts described their outlooks as weakening due to uncertainty and weak business conditions.

Manufacturing and transportation activity were strongest, with some improvements noted in construction and real estate activity. Little change was reported in labor conditions in September. But it was noted that firms in manufacturing, transportation, and energy were hiring more broadly. Most Districts reported that wage pressures remained subdued.

But the PPI showed that prices at the producer level surged in September by 0.8%. The core rate which removes food and energy was up more than expected as well at 0.2%. ON an annual basis, the overall PPI rose to 7.0%, compared to 6.5% in August (seasonally adjusted). The core rate in September held steady at 2.5%.

Inflation at the consumer lever was also higher than comfortable at 0.3%, but a milder 0.1% when food and energy are removed. Year-on-year the CPI increased from 3.8% in August to 3.9% (seasonally adjusted). The core rate held steady at 2%. On Wednesday, the government announced that Social Security payments will be increased by approximately 3.5% in January.

Homeowners living in our area interested in selling their homes got a bit of good news on Wednesday. The Triangle housing market sales were up 17% over the same period a year ago. A total of 4,471 homes were sold in Durham, Johnston, Orange and Wake counties, according to MLS data. Pending sales for the quarter were up 27%, and showings increased 7%. But at least some of the increases are the result of comparisons to a stalled market same time a year ago when the federal homebuyer tax credits expired.

On a national basis, existing home sales dropped 3% in September. Supply on the market rose a bit to 8.5 months while prices fell by 3.4% at the median to $165,400 and a 3.1% decline for the average to $212,700. Foreclosures continue to weigh on the market adding to supply. But new homes showed refreshingly better in September. Housing starts in September jumped 15% after declining 7% in August. Strength was centered in the multi-family component with a 51.3% surge, while single family homes rose by a more modest 1.7%.

Reasons to expect higher stock markets

  • It’s  earnings season and analysts’ estimates for corporate earnings have      consistently trailed actual results since the recovery began in 2009.
  • Since bottoming October 3rd, the Dow has jumped more than 8%, the S&P 500 is up more than 10%, and the MSCI Total US Market is up more than 11%.
  • During the same period investor demand for  safe-haven US Treasuries has declined substantially. The Barclay’s 20-year  plus US Treasury index is down 7.7% and the Barclay’s 7-10 year US Treasury index is down 2.8%.
  • Commodity markets expecting stronger US demand are also up. Crude-oil      prices have risen 15% and copper is up more than 8%, and the euro rose      almost 4% against the dollar last week.
  • Leading Indicators report rose 0.2% primarily by the Fed’s loose money policy. The Fed is pondering further measures to support the struggling economy. DON’T  FIGHT THE FED.

Reasons to expect lower stock markets

Tom Lauricella of the Wall Street Journal provides the following reasons to temper exuberance.

  • On October 23 European officials are expected to officially advance a  proposal to bolster the balance sheets of their battered banks. The plan may once again fall short of investors’ hopes as happened in July and  ugust as they struggled to deal decisively with Greece’s debt problems.  Big rallies in the US markets have come on European unity. Lack of unity  can have the opposite impact.
  • If  Europe’s plan leans heavily on government money, it could fuel worries      about cash-strapped Italy and Spain and deepen concern that France could      lose its triple-A credit rating.
  • If European banks are left to fend for  themselves, financial market volatility would increase and bank lending might evaporate at a time when Europe is already flirting with recession.
  • Remember the secret US Congressional  super-committee? Their deadline for finding a mere $1.5 trillion in budget  savings is up November 23rd. If they come up short or are not  convincing, the US’ credit rating may be in danger of further downgrade.
  • Many of the big market gains have come on days of low trading volume,      suggesting little buying from big institutional investors that would  reflect greater confidence in the rally.

The inevitable conclusion remains one of continued uncertainty. But taken together the odds of a worsening global economy added to the odds of an improving one are still considerably smaller than the odds of a stagnating global economy. Governments and policymakers of developed nations must abandon their useless, reactionary remedies and offer bold new initiatives aimed at addressing both the staggering debt and the debilitating trend toward government dependence.

The Occupy Wall Street crowd incorrectly focuses their energies on one narrow component of the sub-prime debt crisis. The debt crisis was going to happen eventually anyway; greed and corruption aside. It was a bubble caused by excessively low interest rates at the hand of the Federal Reserve, dangerously relaxed lending policies mandated by Congress 30 years ago, Congressional repeal of the Glass-Steagall Act in 1999 which barred banks from securitizing and selling their assets, rating agency duplicity, and yes, Wall Street greed.

If the OWS group is truly not the creation of Democratic political operatives designed to “deflect attention from Mr. Obama’s failed economic policies” as presidential hopeful Herman Cain claims, they would gain much broader and powerful support from the American public if they would simply aim their protest at the real problems facing them and their futures squarely in the face: BIG GOVERNMENT AND BIG DEBT.