Wednesday Morning Cheat Sheet: 3 Stories Moving Markets

Source: http://www.flickr.com/photos/dlajholt/

Source: http://www.flickr.com/photos/dlajholt/

It’s Wednesday, November 20, and U.S. stock futures advanced ahead of the opening bell on Wall Street. At 8:35 a.m., Dow futures were up 0.13 percent, S&P 500 futures were up 0.13 percent, and Nasdaq futures were up 0.27 percent.

Here are three stories to keep an eye on.

1. U.S. inflation

The seasonally adjusted Consumer Price Index for All Urban Consumers, or CPI-U, fell 0.1 percent in October, according to the Bureau of Labor Statistics. This is below economist expectations for no month-to-month movement in the price index and is down from 0.2 percent growth in September. In the past 12-month period, the unadjusted headline index is up 1 percent.

The core consumer price index, which excludes food and energy prices, increased 0.1 percent on the month in October, below economist expectations for a 0.2 percent increase. In the past 12-month period, the unadjusted core index is up 2 percent.

Food prices have climbed 1.9 percent over the past year, according to the index, while energy prices have fallen 4.8 percent. Gas prices are down 10.1 percent on the year.

2. U.S. monetary policy

Outside of the uncertain direction of fiscal policy in the United States, the big question on the mind of most traders, investors, and economists has to do with monetary policy. Through its ongoing program of quantitative easing, in which it is purchasing $85 billion worth of agency mortgage-backed securities and longer-term securities each month, the U.S. Federal Reserve is pouring liquidity into the market in the form of low-cost credit. The target federal funds rate has been trapped at the zero bound since late 2008.

The stimulus can’t last forever — apparently, just for a long time — and every market participant wants to know when the flow rate will be reduced. When will $85 billion in monthly purchases turn into $75 billion, and when will the target fed funds rate increase? These changes will have a significant impact on the economy in the U.S. and abroad, and an understanding of this timeline is necessary to navigate the transition smoothly.

“The public’s expectations about future monetary policy actions matter today because those expectations have important effects on current financial conditions, which in turn affect output, employment, and inflation over time,” said Fed Chair Ben Bernanke in a speech he delivered at the annual National Economists Club dinner on Tuesday. During his tenure, Bernanke has expanded the Fed’s communication policy through the use of a tool known as forward guidance.

“Indeed, expectations matter so much that a central bank may be able to help make policy more effective by working to shape those expectations,” he continued. Last December, when QE3 evolved into its current form, the Fed outlined its best answer to date to the question of when there will be a change in policy: “The committee announced for the first time that no increase in the federal funds rate target should be anticipated so long as unemployment remained above 6.5 percent and inflation and inflation expectations remained stable and near target.”

2. British monetary policy

At a policy meeting earlier this month, the monetary policy board of the Bank of England once again unanimously voted to keep the bank rate unchanged at 0.5 percent and to leave the stock of asset purchases unchanged. The BoE released the minutes from that meeting on Wednesday. Like the U.S. Fed, the BoE has targeted an unemployment threshold packed with certain conditions.

Specifically, policy will remain accomodative “at least until the LFS headline unemployment rate had fallen to a threshold of 7%, subject to three ‘knockout’ conditions, relating to: the judged likelihood that inflation would not exceed 2.5% 18 to 24 months ahead; whether measures of medium-term inflation expectations remained sufficiently well anchored; and the impact of the stance of monetary policy on financial stability as judged by the Bank’s Financial Policy Committee.”

The committee’s latest projections show the unemployment rate hitting 7 percent by the end of 2014 (it’s currently at 7.7 percent), with inflation expectations well grounded at just under 2 percent.

Turning to the U.S., the BoE commented: “The data this month had on balance been disappointing but nonetheless pointed to growth of around 1% over the second half of the year. Non-farm payrolls had risen by just under 150,000 in September, in line with recent trends and well below the rates seen in previous recoveries. Consumer confidence had also fallen sharply in October, although it was likely that this had been due to the government shutdown and uncertainty over the outlook for fiscal policy. With a short-term agreement to raise the federal debt ceiling in place, confidence might well bounce back. Industrial production had risen in September and there had been increases in the October manufacturing and non-manufacturing PMIs. Growth was likely to pick up in 2014 as the impact of fiscal tightening lessened. But the weak tone of data outturns, together with the residual uncertainty over fiscal policy, meant the downside risks had become more evident.”

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