Week Ahead: Who cares about inflation when there is an Omicron Covid variant?

“Early indications show this variant may be more transmittable than the Delta variant, and current vaccines may be less effective against it”.

Trader 1

Last week began with worries about inflation and concerns that the Fed would taper more quickly than Powell led markets to believe at the last FOMC meeting.  The week ended with the discovery of a new variant of the coronavirus (Omicron) that sent markets into a freefall.  As of the time of this writing, there are still many unknowns, and markets remain fearful!  We’ll get additional information this week on interest rate expectations, as Powell and Yellen testify to the Senate Banking Committee.  By the way, Powell was reappointed as Fed Chairman last week! In addition, several countries released oil from their Reserves.  With the extra oil and the fears of lack of demand, OPEC+ will be challenged as to whether they should cut supply!  Also, with December approaching, watch end of month data and the US Non-Farm Payrolls report on Friday!

The new variant of the coronavirus (called Omicron) has the markets scared! The Omicron variant was first discovered in Hong Kong via South Africa last week.  As a result, the UK, Singapore, countries in the EU, Canada, and the US have halted flights there.  However, more cases of the variant are being discovered by the hour.  The Omicron variant has recently shown up in Belgium as well.  What is different about this variant of the virus?  I’m not a virologist, but “the variant has an unusually large number of mutations” according to UK Health Secretary Sajid Javid.  In addition, he said that “Early indications show this variant may be more transmittable than the Delta variant, and current vaccines may be less effective against it”. Markets will be watching headlines this weekend to see:

  1. How many more cases will be identified?
  2. How transmittable is this variant than the Delta variant?
  3. Are current vaccines really less effective against the Omicron variant?

Pfizer has already said that they can produce a vaccine to combat the Omicron variant in about 100 Days.  However, thus far, that doesn’t seem like enough to satisfy the markets!  This story will be in the headlines all this week!

What does the Omicron variant mean for monetary policy?  The ECB has already been on their heels downplaying any chance of a rate hike in 2022 and suggesting the possibility of more bond purchases beyond March 2022.  The RBA has been trying to talk down interest rate expectations as well. However, the RBNZ, BOE, BOC, and Fed have all be in tapering/hiking mode.  What happens now?  Will central banks be forced to postpone future rate hikes because of the coronavirus?  Or will inflation be too much, thus central banks will have to hike?  Watch for clues this week.

What is inflation?

One of the first places to look will be at Tuesday’s testimony by Fed Chairman Powell and Treasury Secretary Janet Yellen in front of the Senate Banking Committee.  Powell has just been re-appointed. Will he been looking to lay out an agenda for years to come? Maybe.   But more importantly, markets will be watching to see how he feels about inflation and how likely is it to affect tapering of bond purchases through the first half of 2022.  Will tapering increase as Bullard, Daly, Waller, Bostic, and Clarida have hinted?  Or will this new variant throw a wrench in the plans and force the Fed to keep tapering “as is" until the coronavirus situation is under control.  Don’t forget,  US just passed a giant stimulus plan, which will add to inflation.  Yellen to be forced to defend this decision.

With the increase in coronavirus cases in Europe, new social restrictions and even lockdowns have been put back into place.  (With the sudden spike in cases, one must consider that these may be from the Omicron virus.)  With fears running rampant because of the new virus, expectations for demand for oil have decreased significantly.  That, along with the release of oil from reserves from China, Japan, India, South Korea, the UK, and the US, will leave OPEC+ with big decision to make when they meet on Thursday.  Currently, OPEC+ is increasing supply at a rate of 400,000 bpd.  Will these new variables since their last meeting cause members to halt supply increases until the coronavirus situation is resolved? 

What factors move the price of oil?

End of month means end of month data.  And although we already had many releases ahead of time for the US due to the Thanksgiving holiday, markets will be focused on the November CPI data from the EU and China’s PMI data.  It’s also the beginning of the month, and although markets aren’t quiet as focused on jobs numbers right now, they will be watching the Average Hourly Earnings component of the Non-Farms Payroll data to make sure pay is increasing along with inflation.  Some of the more important economic data to be released this week is as follows:

Monday

  • Japan: Retail Sales (OCT)
  • Australia: Business Inventories (Q3)
  • UK: BOE Consumer Credit (OCT)
  • UK: Mortgage Lending (OCT)
  • EU: Economic Sentiment (NOV)
  • EU: Consumer Confidence Final(NOC)
  • EU: Consumer Inflation Expectations (NOV)
  • Germany: CPI Prel (NOV)
  • Canada: PPI Final (OCT)
  • US: Pending Home Sales (OCT)

Tuesday

  • Japan: Unemployment Rate (OCT)
  • Japan: Industrial Production Prel (OCT)
  • New Zealand: ANZ Business Confidence (NOV)
  • Australia: Building Permits (OCT)
  • China: NBS Manufacturing PMI (NOV)
  • China: Non-Manufacturing PMI (NOV)
  • Japan: Housing Starts (OCT)
  • EU: Flash CPI (NOV)
  • Canada: GDP Growth Rate (Q3)
  • US:Fed Chairman Powell and Treasury Secretory Yellen testify before Senate Banking Committee
  • US: S&P Case-Schiller Home Price (SEP)
  • US: Chicago PMI (NOV)
  • US: CB Consumer Confidence (NOV)

 

Wednesday

  • Global: Manufacturing Final PMI (NOV)
  • Australia: Ai Group Manufacturing Index (NOV)
  • New Zealand: Building Permits (OCT)
  • Australia: GDP Growth Rate (Q3)
  • China: Caixin Manufacturing PMI (NOV)
  • US: ADP Employment Change (NOV)
  • Canada: Building Permits (OCT)
  • US: ISM Manufacturing PMI (NOV)
  • US: Construction Spending (NOV)
  • Crude Inventories

Thursday

  • OPEC+ Meeting
  • Australia: Trade Balance (OCT)
  • Australia: Home Loans (OCT)
  • Australia: Retail Sales Final (OCT)
  • Japan: Consumer Confidence (NOV)
  • EU: Unemployment Rate (OCT)
  • EU: PPI (OCT)

Friday

  • Global: Services PMI Final (NOV)
  • China: Caixin Services PMI (NOV)
  • Turkey: CPI (NOV)
  • EU: Retail Sales (OCT)
  • Canada: Employment Change (NOV)
  • US: Non-Farm Payrolls (NOV)
  • US: Factory Orders (OCT)
  • US: ISM Non-Manufacturing PMI (NOV)

 

Chart of the Week: Daily WTI Crude

wti daily ci

Source: Tradingview, Stone X

WTI Crude oil had been selling off aggressively since November 10th, when price was near yearly highs at 85.15.  As increases in the number of coronavirus cases began to aggressively increase in Europe, worries of a lack of demand for oil began to creep into the markets.  In addition, US President Joe Biden began working the phones trying to needle other countries to get on board with releasing oil from their reserves. On November 19th,  price moved to support at the bottom trendline of the upward sloping channel (red), which the commodity has been in since April 2020.   WTI bounced from there, but it only lasted 4 trading days.  On Friday, WTI oil broke below the bottom line of the uptrend, horizontal support, and the 38.2%, 50%, and 61.8% Fibonacci retracements from the August 24th lows to the October 25th highs.  Price finally closed at 68.70, down 12.64% ON THE DAY!  There is a band of support at the lows, which dates back to the first half of 2018, along with support at the September 1st lows of 67.29.  The bottom of the support zone is near 66.50.  Resistance is tough to come by here:  Horizontal levels above are at 69.75, 73.19, and 75.95.

By the way, one other thing to watch this weekend:  Black Friday and Cyber Monday sales numbers! 

This upcoming week will most likely be extremely volatile!  Not only will we have the usual month end flows but add in jobs data (from US and Canada), testimony from Powell and Yellen, and a new variant of the coronavirus, and this week could be explosive!

However, remember that as long as you manage your risk, you can trade any market!

Have a great weekend and please remember to always wash your hands.

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