Markets declined in Asia on Wednesday. Shaken by taper talk in the United States, Japan’s Nikkei fell 4 percent to 13,824.90 and the yen strengthened to 97.1895 against the dollar. In Hong Kong, the Hang Seng fell 1.53 percent to 21,588.80, and in Australia, the S&P/ASX 200 fell 1.85 percent to 5,011.30.
European markets were mixed in midday trading, although London’s FTSE 100, down 0.76 percent, was worse for the wear after an announcement by the Bank of England. Germany’s DAX was off 0.32 percent, although the STOXX 50 index was up 0.26 percent. U.S. stock futures were lower ahead of the opening bell.
U.S. futures at 8:20 a.m.: DJIA: -0.30%, S&P 500: -0.31%, NASDAQ: -0.18%
Here are three stories to keep an eye on.
1. Taper Talk Takes the Spotlight: If the hype is to be believed, the Federal Open Market Committee could begin reining in its $85 billion bond-buying program as early as September. This prospect — that the bandwidth for easy money could be reduced — has haunted Mr. Market for months and has catalyzed bouts of volatility in equity markets anytime a Fed official indicates that the time for a policy shift is approaching.
On Tuesday, two Fed officials — Chicago Fed President Charles Evans and Atlanta Fed President Dennis Lockhart — did just that. The impact on Mr. Market’s mood has been visceral, and the bad mojo seems to have spread around to global markets. The FOMC won’t meet again until September, but with the U.S. economy on the upswing and concerns about the size of the Fed’s balance sheet growing, every allusion to the tapering of purchases is taken seriously.
Fed Chairman Ben Bernanke suggested in his last testimony before Congress that if economic conditions improve in line with forecasts, tapering could begin sometime in the second half of 2013. Dallas Fed President Richard Fisher echoed this sentiment on Monday, saying, “Should the economy continue to improve along the lines then envisioned by Committee, the market could anticipate our slowing the rate of purchases later this year, with an eye toward curtailing new purchases as the unemployment rate broaches 7 percent and prospects for solid job gains remain promising.”
2. BoE Adopts Forward Guidance: The Bank of England announced Wednesday that its board “voted to provide some explicit guidance regarding the future conduct of monetary policy.” Or to use the language of the U.S. Federal Reserve: the BoE adopted a policy of forward guidance in an attempt to provide additional easing while the benchmark Bank Rate remains near zero, at 0.5 percent.
“The MPC stands ready to undertake further asset purchases while the unemployment rate remains above 7% if it judges that additional monetary stimulus is warranted. But until the unemployment threshold is reached, and subject to the conditions below, the MPC intends not to reduce the stock of asset purchases financed by the issuance of central bank reserves and, consistent with that, intends to reinvest the cash flows associated with all maturing gilts held in the Asset Purchase Facility.”
Instead of what the U.S. Fed established as “thresholds,” the BoE outlined a few “knockouts” that would break the guidance. Those knockouts are: if inflation, as measured by the consumer price index, is projected to exceed 2.5 percent 18 to 24 months ahead; if medium-term inflation expectations get out of hand; and if ongoing monetary accommodation becomes a risk to financial stability.
The BoE also released its August inflation report.
3. Are Restaurants Still Recovering from the Great Recession? The strength of the U.S. economy is one of the most debated topics in finance. Economic reports continue to show that growth is sluggish at best, while the labor market remains weak despite a declining unemployment rate. Adding to the debate, the restaurant industry is providing mixed signals for those trying to get a reading on consumers.
The Great Recession placed many budgets on a strict diet, but Americans appear to be busting out their wallets and waistlines once again — to some extent. The National Restaurant Association’s latest Restaurant Performance Index, which tracks the health and outlook for the industry, edged lower to 101.3 in June compared to 101.8 in May… (Read more.)