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Fresh COVID-19 fears fuelled by a new variant rip through markets as we head toward year-end. Data points could provide the spark that reignites bond market ructions and a blowout U.S. jobs print and above-forecast European inflation may offer fodder to those arguing central banks need to hurry up with unwinding stimulus.

DOVES, HAWKS & COVID

European Union flags fly in front of the European Central Bank headquarters in Frankfurt, Germany, Dec. 3, 2015.Ralph Orlowski/Reuters

COVID-19 fears and inflation data are looming large over policy makers who have to decide the fate of two ECB bond-buying schemes in just three weeks.

Tuesday brings November flash euro zone inflation. October’s print was 4.1 per cent and many see it staying above the ECB’s 2-per-cent target next year. German, Spanish and French CPI data are out Monday and Tuesday.

As inflation surges, ECB hawks warn against keeping monetary policy too loose for too long. A new German government meanwhile could raise the minimum wage by around 25 per cent.

Their message has resonated with edgy markets. But resurgent COVID-19 strengthens the ECB doves as Europe battles a fresh surge and news of new virus variant spreading across South Africa triggers alarm.

Renewed economic uncertainty means investors are again scaling back rate-hike bets for the U.S., euro area and Britain. The doves, it appears, have fresh ammunition to push back against those clamouring for an early end to stimulus.

JOBS FOR ALL

Federal Reserve Chairman Jerome Powell testifies during a House Financial Services Committee hearing on Sept. 30 on Capitol Hill in Washington.SARAH SILBIGER/The Associated Press

With the Federal Reserve’s taper under way, a strong November employment report could bolster the case for those arguing its US$120-billion-a-month bond-buying should be unwound faster.

While the Fed projects the unwinding to be complete in mid-2022, robust economic growth and inflation running at more than twice the 2 per cent flexible average goal have sparked bets on a faster unwind and earlier rate rises.

Payroll expectations were boosted by weekly data showing jobless benefits claims at the lowest since 1969. Employers are forecast to have added 563,000 jobs, and any figure more than that could revive recent bond market ructions and mean another leg higher for the dollar.

TURKEY TANTRUM

Turkish lira banknotes are seen in this illustration taken in Istanbul, Turkey Nov. 23.MURAD SEZER/Reuters

Turkey just served up (another) reminder that prudent monetary policy matters – all the more so in emerging markets during times of high inflation. President Recep Tayyip Erdogan has doubled down on his view that double-digit inflation can be tamed by cutting interest rates. The lira has responded with a 15-per-cent plunge on Tuesday that’s left it in unchartered waters.

The currency has partly recovered but the central bank may deliver another rate cut at its Dec. 16 meeting.

Monetary policy worries are stirring in Mexico, too. The peso has taken a hit after the President unexpectedly ditched his nominee for central bank governor, instead nominating a deputy finance minister.

A strengthening dollar, rising inflation and a Fed in taper mode leaves emerging market central banks precious little room for error.

MORE OIL OR LESS

A maze of crude oil pipes and valves is pictured during a tour by the Department of Energy at the Strategic Petroleum Reserve in Freeport, Texas on June 9, 2016.Richard Carson/Reuters

The OPEC+ oil producers’ group has stuck to monthly output increases of 400,000 barrels a day (b/d) since August, defying consumer nations’ pleas for more oil to cool US$80-plus prices. Its Dec. 1-2 meeting will come just after the U.S. decision to release 50 million barrels of oil from strategic reserves.

The prospect of extra oil hasn’t fazed oil markets Goldman Sachs called it a “a drop in the ocean.” Yet an OPEC+ source said the oil release by the United States and several other countries, while smaller than anticipated, would complicate its calculations.

OPEC+ production cuts will amount to 3.8 million b/d by end-December, about 4 per cent of global consumption. Sources say there are no discussions yet about responding to the U.S. move by pausing output increases. But the group has warned the move could cause an oil glut next year.

SLOW BUT STEADYING?

Visitors look at the e-CNY, a digital version of the Chinese Yuan, displayed during a trade fair in Beijing on Sept. 5.Ng Han Guan/The Associated Press

New mortgage growth is underpinning hopes the trough might be in for Chinese credit, and that the economic drag from a feared real estate calamity is starting to fade.

There are signs of a drift toward policy easing. While benchmark rates have not changed, banks are being prodded to lend to developers, authorities are seeking to cut funding costs for small business and have moved to buttress yuan stability.

Tuesday’s Purchasing Managers’ Indexes could show if the tide is indeed turning. But keep an eye on Dalian, where COVID-19 is on the rise.

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