Markets endured another night of high drama overnight thanks to the latest omicron return of serve by the CEO of Moderna, and Jerome Powell shifting to what can only be interpreted as a hawkish stance in testimony on the Hill. The Moderna CEO raised questions about the efficacy of present vaccines and omicron late in Asia yesterday, which stopped the recovery rally in its tracks. Equities tumbled in late Asia, Europe and the US, while investors poured cash into Bunds and US Treasuries, flattening the US curve, and the haven yen and Swiss franc jumped. Oil prices, perhaps the most schizophrenic market out there at the moment, collapsed once again, and we haven’t even got to OPEC+ yet.
Powell ditches ‘transitory’ label for inflation
Jerome Powell, testifying on the Hill yesterday, added to the tumult, retiring the word “transitory” as his favourite pronoun for inflation, and suggesting that the Federal Reserve could unwind monetary stimulus faster than previously announced. The abrupt change of direction caught markets off guard and deepened the malaise in equity markets, while short-dated US yields rose as long-dated ones were falling on omicron-haven inflow, the yield curve flattening substantially overnight.
Treasury Secretary Yellen, also testifying, pleaded with Congress to extend the debt ceiling, saying a recession could follow and that the government would run out of money around the middle of the month. This story has been off the news front pages for a while now and had little impact once again overnight. Markets clearly believe some sort of bipartisan deal will still occur once the chest-puffing is over.
The Powell comments would have had a far greater impact, I believe, if the Moderna omicron story had not done some of the work for markets already. In the case of bond markets, haven buyers of long-dated US yields overwhelmed any inclination by investors to sell treasuries and steepen the yield curve once again. That was also evident in European markets, where Eurozone inflation exploded higher to 4.90% but Bund yields fell. It was left to currency markets to take the strain, with the US dollar falling across the board and the euro rallying along with the haven currencies. Perhaps the most confusing move was the US dollar falling versus the EM space. I am taking the EM FX rally overnight with a massive grain of salt, and I can only surmise that month-end flows played their part.
I warned yesterday that the only winner in December was likely to be volatility as the street sells everything on any negative omicron headline, and then buys everything back on any hint that the new variant isn’t as serious as we all thought. Despite the awful New York session, the fallout in Asia and Europe may not be so bad thanks to a story out of Israel released by Italy 24 News, no less. The story quotes the Israeli health minister as saying three doses of vaccine (in Israel it is Pfizer), protects from omicron and there is no need to panic. When a politician says, “no need to panic,” I always get nervous, but, financial markets now have their hope is eternal, straw of the day, to grasp at now. Tomorrow is another day though, and I have no doubt that another headline will have the mindless herd we call the financial markets, stampeding the other way.
If we can strip out the noise, I would grasp two themes from overnight. Firstly, European inflation has joined the inflation bonfire and markets are now starting to price that the world’s government debt monetiser-and-chief, the ECB, may have to respond, hence the rally in the euro overnight. I think that is a false hope. Secondly, Chairman Powell’s comments were a decidedly hawkish change of direction and the mid-month FOMC meeting will be live for a faster taper. Distortions from omicron pushed aside, the US yield curve should steepen, and the US dollar rally will return in Q1 2022.
Back in the real world, we have had quite a bit of data out of Asia today. Australian Ai Group Manufacturing Index for November jumped to 54.8 and Markit Manufacturing PMI to 59.2. Australian Q3 GDP QoQ contracted by just -1.90%, far better than the -2.70% forecast. The data suggests that the lucky country weathered the Q3 lockdowns better than expected and is recovering in Q4 at a vigorous pace. House prices even went up in Brisbane more than they did in Sydney.
Elsewhere, November PMIs across Asia were positive. Japan’s Jibun Bank Manufacturing PMI rose to 54.5, while South Korea’s Markit Manufacturing PMI climbed to 50.9 and its trade data showed a wider surplus and rising exports and imports. Regional Markit Manufacturing PMIs from ASEAN and Taiwan showed impressive improvements into expansionary territory, with Taiwan holding steady at 53.9. Only Indonesia retreated, falling to 53.9 from 57.2, but still expansionary.
Perhaps the only blot on the copybook today has been China’s Caixin Manufacturing PMI which retreated from 50.6 in October to 49.9 in November. The fallout should be minimal as the official PMI climbed to 50.1 yesterday. It still suggests that China faces challenges regarding input costs, and energy, although the squeeze in the latter has eased somewhat. The trade surplus remains very healthy though, and the overall picture from Asia is that its post-delta recovery continues to gain momentum despite supply chain challenges. Obviously, omicron could change that picture, but it is far too soon to draw conclusions.
A number of heavyweight Markit Manufacturing PMIs, including Germany and France, are also released today, as well as the ISM Manufacturing PMI. They should hold steady in expansionary territory whilst revealing supply chain and material cost challenges under the bonnet. With omicron dominating market direction, their impact will be minimal. US ADP Employment could print above 500,000 jobs added tonight, giving weight to a stronger Non-Farm release on Friday and perhaps increasing the Fed tapering noise.
