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Economic Update for the Week of 10/5/2012

In big news this week, the headline unemployment rate dropped to 7.8%. This number suggests that 450,000 more people are working this month compared to last however the report only showed that 114,000 jobs were created. Hmmmm. Part of the report which is the household survey showed 456,000 more workers which caused the 0.3% drop however it also showed 800,000 more people working part-time due to economic reasons. In other words, these people want full-time work but can't find it so they take what they can get. While the number looks positive, it really doesn't instill much confidence just yet. 

US manufacturing showed a slight increase at 51.1 and the non-manufacturing at 55.1. This data is not consistent with the recent and steady flow of negative news from corporate america, so it is a bit suspect. Meanwhile foreign manufacturing continues to slow. China posted 49.8, the Euro zone at 46.1, Germany at 47.4, and France at 42.7. Anything below 50 indicates contraction. 

Mortgage wholesale rates dropped dramatically which was not unexpected given the recent announcement by The Fed to purchase mortgage backed securities which had the effect of rising prices and falling yields hence the lower rates. The 30-year rate on these types of instruments is at all time lows. Meanwhile mortgage rates to homebuyers only fell slightly to 3.39%. Another gift to the banks! The spread between the wholesale financing and mortgage rates has widened to a near all-time high of 1.6%. The supposed reason for QE3 is to lower the cost of buying a home to spur economic growth and while rates are dropping a bit, it is the banks that are getting most of the benefits because they are not passing along this huge drop in rates to the home buyers. 

In the Middle East, the Iranian currency, the Rial, fell by another 30% against the US Dollar due to international financial sanctions which have cut off their access to foreign held reserves and some of their ability to sell oil. Iranian oil sales are about half what they were last year which is one reason for the stubbornly high oil prices. 

With the recent announcement of QE3 and the upcoming election, I wouldn't expect much in the financial markets however I would still remain cautions until the next trend emerges. Earnings season starts next week and that should prove to be interesting given the anecdotal reports of weak earnings.

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