The new omicron Covid-variant continues to be a major concern for the markets and central banks. The variant seems to be spreading rapidly in South Africa, but it will likely be a few weeks before reliable evidence on transmissibility, severity of symptoms and vaccine evasion. This uncertainty and the potential economic impact have increased volatility. Equities, oil prices and bond yields are all lower. The market now sees less chance of a December rate hike which has seen the pound fall further against the US dollar.
The key economic data this week is the official October GDP figure. The PMI surveys point to a pickup in momentum at the start of the quarter. The composite index rose to 57.8 in October from 54.9. Markets expect a solid start to the quarter with a monthly rise of 0.7%. The November PMI survey suggests continued expansion, though we may see a dip in December depending on the new variant. Construction PMI this week was also positive at 55.5, showing a rise from 54.2
Bank of England member Broadbent will give a speech on “the outlook for growth and monetary policy”. Broadbent was one of the majority that voted for no rate rise last month. He is a more ‘neutral’ member of the Committee, and any change relating to the new variant will be closely watched. Last week, Saunders, who is more hawkish, said that, “there could be particular advantages in waiting to see more evidence on its possible effects on public health outcomes and hence on the economy”.
GBPEUR – 1.1723
GBPUSD – 1.3224
Europe continues to see Covid cases rise, with the potential for further increases in restrictions. German factory orders fell by nearly 7% which doesn’t bode well for the ZEW survey and other European data. The German ZEW survey will likely show falls in both the current situation and expectations components. There are no ECB speakers this week ahead of the policy announcement on 16 December. With Eurozone headline CPI inflation jumping up to 4.9% in November, Central bank policy will be more complicated if the virus lowers economic activity but drives up costs.
EURUSD – 1.1280
EURGBP – 0.8530
Last week, US Federal Reserve Chair Powell commented that the new Covid variant “pose downside risks to employment and economic activity, and increased uncertainty for inflation”. Powell has since said it is probably a good time to retire the word ‘transitory’ and indicated that the pace of tapering may be increased despite Covid virus risks. Cleveland Fed President Mester, noted that the new variant, could exacerbate upward price pressures from supply chains and labour shortages. This would further complicate central bank policy which already faces a difficult trade-off between supporting the economy and tackling inflation.
This week, all eyes will be on the November CPI inflation release. Markets expect an increase in October to 6.7% from 6.2%, which would be the highest since 1982. Core inflation, excluding food and energy, is expected to rise to 4.8% from 4.6%.The increase has mostly been from commodity prices and goods affected by supply chain disruptions. However, last month’s report indicated that price rises may be broadening to services. This will add pressure on policymakers to reduce monetary support. The University of Michigan consumer sentiment survey will be watched for signs of any impact of omicron on confidence. This comes after November unemployment fell more than expected to 4.2% though payrolls rose less than expected by 210,000.
GBPUSD – 1.3224
EURUSD – 1.1280
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*Interbank rates correct at 7 am on the date of publishing.