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Stocks have made steady gains in recent days as some of the more exaggerated Europe-centric fears have started easing. There is also a growing realization that the U.S. economy may be able to muddle through without slipping into another recession.
Everybody understands that Europe is dealing with serious issues that have the potential of dragging down the global economy. Favorable statements from European leaders in recent days about Greece's place in the union were helpful in improving sentiment. And the concerted action by global central banks on Thursday to prop up the dollar liquidity of European banks helped soothe concerns about the health of the financial institutions.
None of these address the core underlying problems facing the common currency union. But they nevertheless provide enough reassurance that another Lehman-like situation will not come to pass.
With respect to the U.S. economy, the picture remains mixed. There are no clear areas of improvement, but the situation does not appear to be deteriorating either.
In terms of data points, there appears to be this divergence between survey/sentiment reports and measures of actual output. This distinction is particularly notable in the manufacturing sector readings, where regional manufacturing surveys show weakness that goes uncorroborated by the national ISM report. And the Industrial Production report shows more resilience than the ISM reading.
We saw this trend play out again in Thursday's set of data, with the Empire State and Philly Fed manufacturing surveys maintaining their weak run of the last few months. In contrast, the Industrial Production report came in better than expected, showing broad-based gains despite some drag from the utilities side.
To be fair, the Philly Fed and Empire State surveys were for September, while the Industrial Production report was for August. But the divergence is nevertheless there if you compare yesterday's factory output report with the August regional manufacturing surveys.
The key point is that sentiment surveys and readings of the actual economy appear to be diverging. I gave the example above of the manufacturing sector, but you can as easily extend that analogy to the consumer sector. Measures of consumption, be they chain-store sales or monthly retail sales, have held up relatively better than could be explained by consumer confidence surveys.
All the negative headlines about leadership dysfunction and policy paralysis, both here in the U.S. as well as in Europe, and the related market turmoil are affecting confidence measures. We have to keep in mind, though, that robust feedback loops keep sentiment and actual measures closely linked to each other. As such, the likelihood of current downbeat sentiment surveys turning into something self-fulfilling is not so far fetched.
In corporate news, we had weaker-than-expected results from Research In Motion (RIMM) after the close on Thursday. Texas Instruments ( TXN - Analyst Report ) raised its quarterly dividend by 31% to 17 cents a share. We also have a solid EPS and revenue beat from Diamond Foods ( DMND - Analyst Report ) .
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