Too Soon to Know the Impact of Omicron

US

Key Points

• With the omicron variant front page news, the Fed is now unlikely to pick up the pace of taper
• I will be looking for Senate majority leader Schumer to take the first steps to raise the debt ceiling through reconciliation

Fed

With the omicron variant now front page news I expect the Fed to hold off on a faster taper announcement at the December FOMC meeting and keep with the current pace until more news become available on the likely economic impact.  On Friday Atlanta Fed president Bostic stated that he remained open to faster taper and one or two hikes in 2022, which I think is still possible if omicron turns out to have a limited economic impact.  For now, I can’t see the Fed changing its policy. 

The risks to my view are tilted to easier policies if for instance markets sold off by a large amount and there were signs of public panic in the 2 weeks leading to the December 15^th meeting.  I will be monitoring Nick Timiraos articles in the WSJ as he has often been an unofficial “voice of the Fed” when the FOMC wants to communicate with markets during the pre-meeting blackout.

The Fed will release the Beige book on Wednesday, and I will be looking for signs that the supply bottlenecks are easing.  Otherwise, I expect message continuity i.e. steady growth, difficulties in hiring workers and price pressures.

This week is the last week before the pre-meeting blackout. Speakers include Williams, Powell, Hassan, Bowman, Clarida, Bostic, Quarles, Daly, Bullard.

Data

Last week’s data confirmed that a consumption led rebound is underway, on the back of a falling savings rate.

The COVID data confirmed the increase in hospitalizations, cases and tests hit rates.  This could reflect seasonality or the impact of the omicron variant, which the WHO declared a variant of concern on November 26^th, or both.  It is too early to tell if the omicron variant has the potential to derail the recovery.

The most important data this week will be NFP, where I expect a downside surprise to the consensus, largely because as the economy gets closer to full employment, employment growth is more likely to slow than accelerate, as implied by consensus.  I also expect no increase in participation, unlike the consensus that expects a 10 bp increase. 

Other key data will include:

• PMIS, Dallas and Chicago Feds surveys: the consensus expects an increase in the Dallas Fed survey, likely in the back of higher oil prices, which seems reasonable to me.
• Real estate data, unemployment claims, construction spending and factory orders.

Events/Political Developments

Congress will be back from Thanksgiving recess this week and I will be looking for either Senate majority leader Schumer to initiate the first step of an increase in the debt ceiling through reconciliation or for signs of a bipartisan deal.

Links to New York Fed POMOs/TOMOs:  Repos, Treasury, MBS, CMBS

G20

The ECB Villeroy, the RBA Debelle,  and BoE Mann and Bailey are speaking this week..

Key data this week include CPI in Germany,  France, Italy, the Euro area,  and PMIs in China, Italy, and Canada.

Links to BOJ Rinban , BOE OMO

COVID-19 Monitoring

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)