How disruptive will the Omicron COVID variant prove to be for the world economy. That’s a question markets are grappling with.
The Federal Reserve’s Jerome Powell no longer reckons “transitory” is the right word to describe surging price pressures -- upcoming inflation numbers may prove him right.
China weighs in with data of its own, and Germany gets ready to move on from the Merkel era. Here’s your week ahead in markets:
ADIOS TRANSITORY
Federal Reserve Board Chairman Jerome Powell testifies during a hearing before House Financial Services Committee on Capitol Hill Dec. 1 in Washington.Alex Wong/Getty Images
A hawkish shift from the Federal Reserve and concern over Omicron heightens the focus on Friday’s U.S. inflation data.
Fed chief Jerome Powell reckons “transitory” is no longer accurate to describe high inflation and that the Fed could in December debate speeding up its bond buying taper.
Another strong inflation print could bolster expectations of a more aggressive Fed, weighing on markets already spooked by Omicron.
U.S. consumer prices accelerated 6.2% in October - their biggest annual gain in 31 years - and could stay uncomfortably high into 2022 due to snarled supply chains.
The Fed’s latest “Beige Book” survey shows firms grappling with rising inflation and scrambling to fill jobs amid labor shortages. No surprise then that the Fed’s tone is shifting.
WHERE’S SANTA?
Trader Sal Suarino works on the floor of the New York Stock Exchange, Thursday, Dec. 2.Richard Drew/The Associated Press
Stock market traders often enjoy a ‘Santa rally’ in December as investors load up on treats for the new year, but this one doesn’t look so promising.
The emergence of Omicron and a Fed now clearly inching to raise U.S. rates are dampening festive spirits.
Wall Street’s S&P 500 has notched a positive return in December 74% of the time since 1928 data shows, more than in any other month. But for now it and MSCI’s 50-country world index are both frozen flat.
That just leaves the VIX volatility index - the so-called ‘fear gauge’ of world markets - doing any rallying.
ROLLING THE DICE
Chinese President Xi Jinping stands in front of national flags of China and Republic of Congo during a meeting with visting Congolese dignitaries at the Great Hall of the People in Beijing, China, Tuesday, July 5, 2016.Ng Han Guan/The Associated Press
A conservative economic growth target that pushes President Xi Jinping’s ‘common prosperity’ agenda is what most China watchers expect in 2022 and the coming data dump may not surprise them.
Inflation is benign, affording Beijing space to pursue targeted monetary easing, even as other major economies look to tighten. Exports continue to show strength and could be even stronger if Omicron disrupts supply chains and increases global demand for electronics.
Focus is also turning to key Communist Party meetings in mid-December that set growth and policy targets that won’t be released until next year. Policy advisers expect the growth target to be a modest 5%-5.5% - versus the near-8% pace in 2021.
Rolling the dice on the economy is proving easier than on regulation, where more property developer defaults loom, Macau’s casinos are under siege and there’s little sense of who’s next in the firing line.
THE DOLLAR PROBLEM
A currency exchange broker prepares a transaction at a brokerage in the capital Khartoum on Jan. 21, 2020.ASHRAF SHAZLY/AFP/Getty Images
To paraphrase a former Treasury secretary, the dollar is the U.S. currency but can become the world’s problem.
The dollar’s 7% year-to-date gain turned 2021 into another ‘annus horribilis’ for emerging markets -- tightening financial conditions and raising costs for commodity importers.
As U.S. rate-rise bets pull ahead of most developed peers, the dollar’s flexed its muscles again. A comparison between U.S. and German “real” - or inflation-adjusted - 10-year yields shows the former’s premium at the highest since last March.
Foreign entities with dollar liabilities have started their December greenback rush, boosting the currency’s premium in swaps markets. That may continue until year-end.
If the Fed raises rates next year, the dollar may weaken as it often does as a tightening cycle begins. But given the dollar’s potential to surprise, bearish forecasts are remarkably few.
BAPTISM OF FIRE
German Chancellor Angela Merkel arrives to address together with her designated successor Olaf Scholz at a press conference following a meeting with the heads of government of Germany's federal states at the Chancellery in Berlin on Dec. 2.JOHN MACDOUGALL/AFP/Getty Images
Olaf Scholz officially takes over as German chancellor in days to come, ending Angela Merkel’s 16 years in charge of Europe’s biggest economy. He steps straight into fire fighting mode.
Germany is battling soaring COVID infections in a fourth wave, inflation is running at record high levels, Europe faces an energy crunch and a Russian troop build-up near the Ukraine border has triggered alarm in the West.
Scholz, who heads a three-party coalition, will oversee the introduction of tougher COVID-19 fighting measures as the Omicron discovery escalates concerns.
Meanwhile who Scholz nominates as the next Bundesbank President will also be watched closely as the ECB’s hawks and doves battle it out. According to one press report, Joachim Nagel, a top BIS official has moved into pole position.
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