Economic Front

There has been quite a lot of interesting events on the economic front of late. The latest bit is the release of the Philadelphia Manufacturing Index which was realesed a half an hour ago. The significance of the Philly Index is that it is the first of the regional indices to be released. It is considered the second most important of the regional indices next to Chicago's.

Analysts called for a modest 14.8 reading. Instead it came in at -0.4. This is the first contraction seen in over 3 years. We will see in less than two weeks if the national ISM index reflects this contraction.

The Dow had been flirting with new all time highs and is down 50 points immediately on the news. The dollar has lost just over half a cent, but dollar bears look to be energized so the damage is likely to continue (although I doubt the Euro will be able to break 1.30 anyway: just more see-saw action).

Earlier in the week some interesting things came up. Capital flows to the U.S. declined from over 47 billion in July to just over 12 billion in August. This could have affected the dollar adversely but at about the same time it was noted that the Chinese National Bank had increased its dollar holdings by over 12%. These two bits of data essentially canceled each other out. The decrease in capital flows was due mostly to private investors not repatriating as much. Considering the fact that wealth (as measured by the amount of money available for investment in equities) grew world wide by about 8% in 2005, but by 23% in Europe, it is not that surprising. Why repatirate your earnings when the prospects in Europe and elsewhere are so much better than at home? People talk about the sluggish Eurozone, but if you get past the fantasy numbers in the U.S. that largely reflect mergers and aquisitions (of late) you will see that real growth is occuring in the Eurozone and Asia more that anywhere in the world (despite the GDP numbers).

Housing data once again disappointed. I can't remember one time in the last 3 months when housing data came in close to what was expected. It has been a long string of disappointments and the squakers are starting to say that the housing market is not just hurt, but it is broken. They don't think the cheaper markets will get hit too hard but California, New York and especially the condos in south Florida are all at risk of losing something like 20% according to analysts.

The good news is that the PPI (Producer Price Index) data came in lower than expected indicating that inflation may indeed be under control. Core PPI (which excludes the volatile food and energy sectors) came in at -0.4% which is the first negative inflation reading I've seen for a very long time. Predictably, the Fed chose to keep rates on hold at 5.25%. It looks like they have screwed the bolts down sufficiently to keep inflation in check. Interest rate expectations point to a rate cut in 2007.

Some have argued that the Fed has already gone to far and that the effects on the economy will be devastating. We will see.

Last but not least, oil continues to drop on news of increased inventories and decreased global instability (yea right). All of those who predicted a rapid drop in oil before the election are being proven right. The technical barries have been removed and a slide to below 50 before election time is in the cards. I can't help but to wonder if some big money players are dumping their oil futures in some kind of coordinated event.

I've come to realize that the bombing of Iran most certainly will not take place before the election as that would cause the price of oil to spike. There is still time before Christmas though! Maybe the neo-cons will get what they always wanted for Christmas this year: the end of the world.