DFS Discover Financial Services

Thursday, September 22, 2011

The Fed came through as expected, but the markets seemed unimpressed. In fact, the markets appear to have been spooked by the Fed's action. Overnight reports about manufacturing weakness in China and Europe add to concerns about the U.S. growth outlook from the Fed statement. 



The fear is that all the major global economies are slowing down in a synchronized fashion. Having spent pretty much all of its firepower already, there is little that Fed could do in the face of such a development. 



The Fed announcement turned out to be somewhat more aggressive than was expected. The announcement of $400 billion in long-term treasury bond purchases over the next 9 months was bigger than what I wrote about the day before. This will extend the duration of the Fed holdings by almost 2 years to 8 years.

They also came out with more support for the mortgage market than was expected. The Fed came across sanguine on the inflation question, but its discussion of the growth outlook appeared to show a further downgrade from the last time around.

And it is this growth question that has the U.S. and global markets worried. The fact that we have weak reports about China and Europe today doesn't help the picture at all. China's September purchasing-mangers index (PMI), comparable to the U.S. manufacturing ISM report, fell below the prior month's level to 49.4. We also got a sub-50 PMI reading from the Euro-zone for the first time in almost two years. 



In the U.S., we got a sub-par outlook from economic bellwether FedEx (FDX) and kind of an inline Jobless Claims reading. Weekly Jobless Claims dropped by a greater than expected 9K for the week to 423K 428K. The prior-week's tally was revised upwards to 432K from 428K. The relatively more stable 4-week average increased by 0.5K last week to 421K.

The Jobless Claims numbers were not bad. But I don't think the market will be able to read anything into them. The focus will remain on the global economic slowdown, which gets an unhelpful helping hand from this morning's FedEx earnings report. FedEx met earnings expectations on a modest top-line beat, but provided weak guidance, citing slowing global economic growth.

In other corporate news, Discover Financial (DFS) came out with better-than-expected results. Hewlett-Packard's (HPQ) board is reportedly contemplating booting out the company's CEO, Leo Apotheker, following a series of mis-steps in his short 9 months at the job. We will have earnings reports from Nike (NKE) after the close today.

Sheraz Mian
Director of Research
 
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