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US Omicron case deflates markets

Another day, another massive swing in direction driven by an omicron headline, this time its arrival in the United States aboard a vaccinated traveller from South Africa. An incipient recovery in stock markets was quickly wiped out. The US dollar also staged an uneven rally, even as the US yield curve flattened once again. The process may have been helped along with another round of powerful US data releases, with ISM and Markit Manufacturing PMIs remaining robust, Construction Spending rising, upward revisions in US GDP forecasts and Federal Reserve Cleveland President Mester on the wires in full hawkish mode.

That follows UK CPI hitting 10-year highs in October, with Nationwide House Prices rising by 0.90% in November, far higher than expected. That comes after Eurozone Flash Inflation for November hit 4.90% on Tuesday, the highest since 1991. The inflationary noise continues to rise in volume, and I rather suspect that even without omicron, growth stocks (especially tech), would be enduring some rather wild price swings anyway. For now, inflationary expectations in the US are being reflected in rising short-dated yields with long-dated yields falling. The five-year forward-forward inflation break evens continue to price in very little long0-term inflationary stress, which goes some way to explaining the curve flattening. You wonder how long it will last.

Omicron aside, the upcoming FOMC, Bank of England and European Central Bank meetings will be interesting this morning. The rhetoric from Powell & Co suggests they have not had an omicron blink this time and will announce a faster taper. The BOE has led markets to water before on rate hikes and could do so again this month. That’s a 50/50 in my mind. The European Central Government Debt Monetizer Bank will have some tougher questions to answer. Keeping European government and banking balance sheets afloat has turned into a multi-decade job, and with virus cases surging already over the continent, more movement restrictions, winter energy prices, and now omicron, I am expecting a euro-fudge disguised as no real action. That leaves me to believe that Q1 will still be the quarter of the US dollar, although I acknowledge that the evolution of omicron may make the US dollar rally uneven and throw a few banana skins out there.

In Asia today, South Korean GDP growth eased back to mid-2020 levels with QoQ Q3 climbing just 0.30%, led by a fall in services and domestic consumption. Inflation accelerated though to 3.70% YoY for November, well above the 3.10% expected. The next Bank of Korea meeting will be a live one, but a dusting of stagflation definitions in South Korea won’t be necessary today, with local markets likely to be fixated on noise that more government social restrictions are on the way.

The Bank of Japan’s Suzuki was upbeat in his forecasts for Japan next year, even suggesting that the BoJ had to be alert to accumulating side-effects of monetary policy easing. I’m guessing he means inflation. Who said the BoJ doesn’t have a sense of humour? I’m not sure his concerns will be necessary though as Japan has shut itself off from the world, with only Japanese citizens now allowed to book flights home, assuming there are any flights now.

Down in the lucky country, Retail Sales in October grew by a robust 4.90% while the Trade Balance held steady at AUD 11.22 billion. That disguised falls in both import and export volumes reflecting lower China demand and lower domestic demand due to lockdowns. However, with China’s energy crunch easing, and Australian states reopening despite the fence going up at the international border, I expect the lucky country to stay lucky and get luckier into the end of the year and Q1 2022.

New Zealand’s Export and Import Prices both rose sharply by 4.60% and 3.80% QoQ for Q3. New Zealand has an inflation problem and the RBNZ is well behind the curve with supply chain bottlenecks and rising prices looking ever less “transitory.” As a kiwi homeowner getting some landscaping done, today’s image is a case in point. Work has only just resumed on my retaining walls after New Zealand ran out of the special screws required. The whole country. Today’s image was my overjoyed builder sending me good news. The wall I am building wouldn’t keep Trump happy, but its cost has escalated by 50% in over a year which is about how long you will wait for tradespeople back home. Maybe Bilbo and Frodo were onto something building underground?

Eurozone PPI this afternoon is likely to give the ECB more headaches and food for thought. US markets will be focused on Initial Jobless Claims after ADP Employment overnight gained 534,000 jobs. Another sub 200k number may give some life to the Fed taper trade again, and tomorrow’s Non-Farm Payrolls will if it prints well North of 550k. We also have four Fed speakers tonight as well, all of whom may be in a hawkish mood. Of course, all this is caveated by which omicron headline is on the menu in the “specials of the day” section.

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