Welcome to your weekly macroeconomic round-up, where we spotlight a few of the most significant events in the last week.
New COVID-19 variant of concern – Omicron – casts doubt over monetary policy trajectory
South African health officials announced on Thursday that they had discovered a new variant of COVID-19, which may be the most transmissible yet. Designated Omicron, the variant was first discovered in southern African nations but has since been confirmed in Hong Kong, Belgium, UK and others. Multiple significant mutations mean the variant is likely to be more transmissible than the previously dominant Delta variant but also heightens the chances that it will be able to evade immune responses provided by vaccinations.
Beyond the first order economic effects, such as travel restrictions and social distancing restrictions, Omicron has significant implications for monetary policy. With inflation in most developed economies at multi-decade highs, central banks are on the path to removing asset purchases and lifting interest rates. If this variant is as transmissible as currently feared then this could not only dampen economic activity but also price pressures, which may delay further central bank action. Markets responded to this on Friday, as equity markets fell by the greatest extent in over 12 months and previous expectations for central bank rate hikes were pushed back. The price of oil (Brent Crude) fell by more than 10%.
US weekly jobless claims falls to lowest since 1969 but consumer sentiment falls once again
Prior to COVID-19 news, US labour market data painted a positive picture as the weekly data on initial jobless claims showed that only 199,000 people were made unemployed in the week, compared to expectations of 260,000. This represents the lowest level since 1969 and the first-time jobless claims have been meaningfully below their pre-pandemic level.
However, consumer data showed that sentiment fell further to a decade low of 67.4 on the University of Michigan’s Consumer Sentiment Index. Perhaps this is best explained by recent price increases which have resulted in long-term inflation expectations rising to 3.0%, the joint highest reading since 2013. No doubt, news of a new COVID variant will compound this poor consumer sentiment.
US President Biden keeps on Jay Powell for a second term as Federal Reserve chair
There has been some speculation over the past few months that President Biden might elect a more politically aligned Federal Reserve chair rather than sticking with Republican Powell for a second term. Lael Brainard was the major contender and perceived to be marginally more dovish than Powell, although more likely to take a harder stance on regulation. Ultimately, Biden decided to take the less politically fraught route and re-elect Powell as Fed chair, with Brainard taking the role of vice chair. Markets reacted and the recent strength in the Treasury market reverted, with US yields rising while US growth stocks and the NASDAQ suffered. These moves were overshadowed by COVID news at the end of the week.
As mentioned, news of the Omicron variant spread through markets on Friday with all major equity indices selling off. Within equities, financials and energy companies were the worst hit as government yields fell and the oil price fell dramatically. Safe haven assets, particularly government debt and the Japanese Yen, were the major beneficiary of the risk.
Look out for next week’s update, where we’ll be focusing on the US jobs report and Chinese manufacturing data.
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