MarketPulse | Dec 05, 2021 12:12AM ET
The past week has been dominated by Omicron news as we all try to piece together the limited information we have and determine what it all means for the coming months. So much is still unknown and so the volatility and seesaw action we’ve seen this week may continue until we get a better idea of the threat posed by the new variant.
The RBA and BoC both hold meetings next week and will likely be armed with little more information than OPEC+ had on Thursday, which makes the job of providing reliable guidance extremely challenging. Even the Fed, ECB and BoE the week after will find life difficult and two of them were expected to announce tightening measures prior to the news of the Omicron variant.
And this is at a time when central banks have an incredibly tough job on their hands. They’re already being forced to tighten monetary policy before they would like to and may soon have to make much tougher choices if the Omicron news isn’t good.
The US economy is adding jobs at a slower pace as employers are starting to have success luring people back to the labor force. If wages continue to rise, that will be the key for companies to reach their hiring targets.
The November employment report showed US employers added 210,000 jobs, a miss of the 550,000 consensus estimate and well below the upwardly revised prior reading of 546,000 jobs. A headline miss with the nonfarm payroll report may be mostly attributed to seasonal factors. The underlying components make this a solid labor market report as people are coming back to the labor force, with the participation rate improving from 61.6% to 61.8%.
Wage pressures may be slowing as average hourly earnings dipped in November from 0.4% to 0.3%, but some of that could be attributed to the weakness in lower-paying hospitality jobs.
The Fed may view this as a positive employment report as minority unemployment improved significantly and the participation rate is now only 1.5 percentage points lower than in February 2020. Fed rate hike expectations are settling around two rate hikes next year. The headline jobs miss takes away momentum from accelerated tapering but allows them to increase the taper pace by $5-10billion.
A relatively quiet week ahead for the euro area, with much of the headline data being revisions and ZEW figures the only notable releases. The focus is on the ECB the week after, although that will be heavily influenced by the scientific data on the new Omicron strain which will determine how the next six months will look.
Much like in Europe, the UK next week sees a number of low-level economic data releases, with GDP numbers on Friday the only outlier. Meanwhile, Deputy Governor of the Bank of England, Ben Broadbent, will appear on Monday. The BoE meeting the week after is still a live one although the odds of a rate hike have slipped significantly as a result of the Omicron variant.
Russian data next week is a little thin, with CPI on Wednesday the only release.
The focus will remain on the buildup of forces on the border, with tensions rising in recent weeks and a resolution not looking close. Talks between Biden and Putin could take place in the coming weeks although no date has been set.
Omicron cases are rising rapidly, with the rate of transmission believed to be faster than that of Delta. Early evidence appears to suggest that symptoms are mild although the sample size is small and contains a lot of younger people that reportedly make up a large number of the country's unvaccinated. Time will tell whether that trend continues.
On the economy, we have a few notable releases next week including GDP data for the third quarter on Tuesday.
Coming off the back of another eventful week that’s seen the Finance Minister—a vocal opponent of recent rate cuts—replaced and multiple unsuccessful FX interventions by the CBRT, there should be plenty to look forward to. Currency markets are far from stable, with the lira hitting fresh lows at the end of the week and remaining under severe pressure.
Next week offers unemployment data on Friday, although this will naturally fall well down the pecking order below the rants of President Erdogan and the actions of the central bank. More volatility in the FX markets and intervention to stabilize them appear likely.
China releases its trade balance, CPI, and PPI inflation data this week. Of the three, the market focus will be on exports and PPI for evidence of slowing growth and/or rising inflationary pressures.
Data aside, it is China’s property sector that poses the most risk in the coming week. Both Kaisa (HK:1638) and Evergrande (HK:3333) face final payment deadlines and in the case of Kaisa, an official default is increasingly likely. Hong Kong equities are particularly vulnerable in this case, and will likely continue to face delisting nerves in the US from dual-listed Chinese giants.
A firm Non-Farm Payrolls number would have turned up the heat on emerging market currencies in the week ahead as monetary policy remains out of sync with the US. The Reserve Bank of India can alleviate some of that stress in the future by finally indicating that tighter monetary policy is on the way in 2022, even if it does not move at its policy meeting on Wednesday.
India releases manufacturing, industrial production, and inflation data on Friday. A high inflation print will elevate the return of stagflationary pressures if the RBI is dovish mid-week, leaving the currency and equities vulnerable.
The Australian dollar is wallowing at 2021 lows as Fed taper nerves and Omicron concerns sap risk sentiment of which the AUD is a major barometer.
The Reserve Bank of Australia has its policy meeting on Tuesday with its ultra-dovish mantra suffering credibility issues. No change in tone from the statement will deepen pressure on the currency, although local equities will continue chasing their tails in line with Wall Street volatility.
The NZD/USD, a risk sentiment barometer for global markets like AUD/USD, is also testing 2021 lows and remains vulnerable to stronger US data increasing Fed-taper nerves, as well as risk aversion flows via NZD/JPY on Omicron.
Friday’s Business PMI could negatively impact the currency if it is higher than forecast, increasing the noise that the RBNZ is falling further behind New Zealand’s rapidly escalating inflation problem.
New Zealand’s government has eased COVID-19 restrictions in Auckland and brought in a new system of freedoms/restrictions across the country. A large spike in Delta cases (the prevailing variant) could negatively impact the currency and stock market.
The Japanese yen has rallied 250 points this week versus the US dollar on Omicron haven flows, also recording impressive gains via the yen crosses. Yen’s rally is entirely based on Omicron, and an easing of those tensions and firmer US data could see USD/JPY’s rally resume.
Japanese equities continue to show a high correlation to NASDAQ moves and we expect volatile, but directionless trading to continue as the NASDAQ and Nikkei bounce around on Omicron headlines. No significant data.
Greek PM Mitsotakis visits Russia to meet President Putin.
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