Omicron volatility continues, as Powell reiterates hawkish tapering stance

Jerome Powell has provided a surprisingly hawkish stance, with the Fed chairman stating that he could see the tapering process speed up if the current Omicron fears prove ill-founded.  Meanwhile, eurozone inflation has spiked into multi-year highs, with core CPI finally breaching the 2% target. 

• Moderna CEO spooks markets 
• Eurozone inflation jumps to multiyear highs 
• Powell lays out continued hawkish stance, although Omicron brings period of uncertainty 

Stocks throughout Europe and the US are staging a bounce-back today, with early declines being bought up into the European close. While the Moderna CEO may have whipped up fears over weak vaccine protection against the Omicron variant, he offered little new data to justify the sharp European losses this morning. While data remains thin on the ground given the relative infancy of this strain, markets are likely to remain highly volatile and unpredictable as they react to any news that could guide our expectations over how this will play out. The Gauteng province appears to be the epicentre of this Omicron breakout, and early data seems to show the risk of another delta-shaped rise in hospitalisations taking hold variant spreads throughout the region. With Oxford scientists stating that they believe the vaccines will provide some protection, the fact that less than 30% of Gauteng has been vaccinated does provide some hope for a more subdued hospitalisation curve in regions with greater protection.  

Eurozone inflation data provided a timely reminder of the difficulties faced by central banks, with both headline and core CPI surging into a multi-year highs. While headline inflation has been characterised as transitory by many at the ECB, today’s push up through the 2% target in core CPI put greater pressure on that narrative. Nonetheless, another bout of commentary from Jerome Powell over the economic and inflation risks posed by this latest Covid strain highlight how the bank still remains in position to tighten policy further if necessary. Ultimately, we remain within a phase of uncertainty, with the Fed expected to adjust or reiterate their policy stance once the scientists provide greater clarity over this strain. Just as eurozone inflation heads upwards, Powell has cast aside the ‘transitory’ phrase as he lays out expectations of further inflation strength through much of 2022. With Powell seeing it reasonable to consider a move to speed up the tapering process, we are seeing a rebound for the dollar as downside for the price of gold.