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Economic and Market Review schieffer

By: Mark Schieffer, CFA
EVP Chief Investment Officer

The oxygen masks aren’t dropping from the ceiling just yet, but the U.S. economy is stalling at the moment. The June employment figures were soft and disappointing for the fourth consecutive month. Non-farm payrolls grew by just 80 thousand, compared to economist estimates of 100 thousand. The unemployment rate remains stubbornly high at 8.2%. The ISM manufacturing index fell below a 50 reading (indicating a contracting economy) for the first time in 3 years. In an effort to help, the Federal Reserve extended and expanded monetary stimulus last month further by moving Operation Twist’s expiration date to December 31 and marginally increasing the size of planned government security purchases.

Oil and gas prices continue to move materially lower. Gas prices are down 56 cents per gallon (14%) in the last 3 months and this is helping to relieve some pressure on consumers. However, drought conditions are pushing up corn prices, which should cause higher food and ethanol prices down the road.

On the home front: New home sales surprised to the upside in May (+7.6%). Home builders are starting to ramp up new construction to take advantage of the continuing increase in rent rates.

The U.S. political season is in full swing and I expect it will be very bloody for the remainder of the 3+ months left. There are stark differences in the problem solving approaches laid out by the Obama and Romney camps. With Democrats and Republicans firmly in opposing camps, it will be the independents who decide the near term direction of the country.

The European mess continues to weigh on the daily headlines. Daily summaries from the attempts to wrangle the 17 current Euro currency members into producing something workable and promising might read something like this: muddle, muddle, muddle, lurch, radical headline with not much substance, react to market reaction to radical headline, muddle, repeat. The latest proposal is to fashion a tourniquet in the form of a centralized European bank regulator. The patient may be deceased by the time anything with any teeth is up and “functioning”, but in the meantime the idea is a silvery, flashy item for Euro politicians and bureacrats to wave about.

The 2-year T-note yield is down 3 basis points in the last month to a current yield of .26%. Over the last nine months, this bellwether short-term safe investment has traded within a range of less than 20 basis points. However, the 10-year T-note yield fell another 10 basis points in the last month to 1.51% currently, nearing historical lows again of 1.45%. Just four months ago, the 10-year T-note yield was 2.38% (87 bps higher). U.S. stock prices have been roughly flat in the last month.

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