Fed may face worse trade off after Omicron

Market movers today

We get flash November inflation figures out of the euro area today. With another marked increase observed in the German and Spanish inflation figures, we could see euro area HICP inflation printing at yet another record high in excess of 4.5%.

We also have a few Fed speakers on the wire today. We will look specifically for signals on increased tapering pace.

Overnight, Chinese Caixin PMIs are released. Here we expect another weak print.

The 60 second overview

Oil: Lots of OPEC+ comments out yesterday ahead of OPEC+ meeting on Thursday speculating on how OPEC+ might respond after the news of a new variant. Oil prices made a brief comeback after the big plunge on Friday, but trades close to Friday's low this morning.

US: Powell's take on omicron: Fed Chair Jerome Powell talked about the economic situation yesterday, including his initial take on risks associated with the new omicron variant. Powell argued that the recent rise in new cases in the US and the new omicron variant "pose downside risks to employment and economic activity and increased uncertainty for inflation". Powell added that outbreaks may "reduce people's willingness to work, which would slow progress in the labour market and intensify supply-chain disruptions". As we have been arguing for quite some time, we believe COVID-19 shocks are inflationary in nature because it prolongs the period with high goods demand and reduces the economy's production potential. In that sense, a new wave (and increased concerns about the omicron variant) makes the trade-off between growth/employment and inflation even worse from a central bank perspective, putting more pressure on Fed to tighten monetary policy sooner and faster. The jobs report on Friday and the next CPI inflation print are key for the Fed's decision on whether to increase the tapering pace at the December meeting or not. For now we stick to our view that the Fed will keep the tapering pace unchanged, but as we argued already after the November meeting, risks are definitely skewed towards a faster pace.

Equities: Equities rebounded on Monday after the knee-jerk sell-off on Friday. While it is still too early for any firm conclusions, equity sentiment was helped by South Africa saying that there is still no indication of more severe symptoms. So, although hospitalization has drifted higher, that is still not the case for severe cases. Long duration cyclicals took the lead in the US session, with tech and consumer discretionary at the top. Friday's losers, financials and industrials, continued to lag, so markets are still positioning for the possibility of new lockdowns. S&P500 closed up 1.3%, Dow 0.7% and Nasdaq surged 1.9% while small cap Russell 2000 dropped -0.1%. VIX drifted lower, albeit still north of 20. The rebound is still absent in Asian markets, where equities are mostly lower this morning. US futures have dipped into red as well.

FI: After the rather panicky market reaction on Friday with the strong rally, markets sentiment was more muted yesterday on speculation on the new COVID-variant may not be as severe as the previous mutations. Core EGBs sold off around 2bp, as spreads tightened marginally. Ireland underperformed a bit from the early trading as their S&P rating on Friday was left unchanged despite some speculation for a change to positive, however, the underperformance was reversed at the end of the day, leaving IRISH to show similar performance as peers.

FX: Markets zig-zag continued Monday where much of the negativity from Friday faded and the moves seen Friday also reversed across FX.

Credit: Following Friday's fierce sell-off, sentiment in credit markets stabilized yesterday though Xover was the main beneficiary (tightening 10bp) while Main tightened a more modest 1.8bp. Cash bonds were even less upbeat, with HY bonds more or less closing unchanged and IG 1.5bp tighter.

Nordic macro

Sweden. Riksbank vice governor Henry Ohlsson participates in a panel discussion about liquidity (or lack thereof?) in the Swedish bond market (10:45). We cannot recall that he has ever had any in-depth thoughts about this very important issue. Maybe he will refer to their own financial market survey, where 75% of the respondents said that the Riksbank's QE has had a negative or very negative impact on the market.