The typically placid Thanksgiving holiday in the US was rudely interrupted by a financial market sell-off, as traders reacted to the new, mutation-rich Omicron variant of the COVID virus discovered in South Africa.
Ordinarily, the key data releases focusing markets attention this week would be the flash Eurozone inflation report for November on Tuesday and the US October payrolls report. However, the uncertainty over the new Omicron variant and the little information available so far on its virulence means that markets are likely to react sharply in either direction to news from health authorities. We expect last week’s correlation between risk aversion and the euro, US dollar and emerging markets to stay until said uncertainty dissipates.
GBP
Mixed data (soft PMIs of activity versus strong industrial orders) and noncommittal communications from the Bank of England Governor and its chief economist made for some soggy trading in cable. Somewhat surprisingly, Friday’s bout of risk aversion was actually a positive for the pound, which ended the week almost unchanged against the US dollar and the euro.
News from the UK this week will be light. We hope for MPC member Catherine Mann, a hawk, to shed some light on the state of the Bank of England debates on when to start tightening on Tuesday, and of course any news on the new COVID variant.
EUR
Last week’s newsflow from the Eurozone started to take a turn for the better. The key PMIs of business activity for November were a clear surprise to the upside. Covid cases are still worrisome, but it seems the economic impact of this wave is smaller. The PMI news helped stabilise the euro, which rose sharply amid the market sell-off on Friday, as short euro bets were hastily unwound.
This week’s inflation report has some disruptive potential. The headline rate could easily print closer to 5% than to 4%, the highest level in decades. The core level is also likely to come in well above the ECB’s theoretical target. How this data will be squared with the ECB continued dovishness is an issue that we expect to come to the fore between now and the critical December meeting.
USD
The minutes from the Federal Reserve’s November meeting were more hawkish than expected, which put the dollar on a solid footing going into the US Thanksgiving holidays. The sell-off impact on the dollar was mixed. On the one hand, it benefitted partly from safe-haven flows. On the other, it suffered as markets pushed back expectations for interest rate increases during 2022.
The US payrolls report for October is expected to be strong, with another drop in the unemployment rate, solid job creation, and higher wages, though not quite high enough to keep up with inflation. However, we expect that the news from the Omicron variant of COVID will overwhelm the impact from scheduled data releases and monetary policy news.