There is still a lot of focus on omicron, as global new cases have moved sharply higher, explained by the fact that the variant is better able to evade immunity, both vaccine-induced and from previous infections. More studies are supporting the hypothesis that omicron is milder (not only because of existing immunity) and investors are buying into the narrative. Still, risk is that there are so many new cases that it dominates the lower individual restrictions forcing governments to implement tougher restrictions. We discussed what we know about omicron in further details in COVID-19 Update: Omicron primer v2 – more studies support “milder but more infectious“, 4 January.
The big waves mean that goods consumption is likely to remain elevated, while the production side of the economy will continue struggling due to a still lower labour force, more sick days and the still strict zero-COVID policy in China. Most recently, China implemented a partial lockdown in Ningbo affecting operations at the world’s largest port, see Global News. The combination of all these factors means that bottlenecks are unlikely to ease much near-term (and may even get worse), which also means higher inflation pressure, all else equal.
The biggest market mover this week was the FOMC minutes from the December meeting. The minutes indicated that the Fed may already hike in March when tapering ends, which then opens the door for a total of four rate hikes this year. The Fed also hinted that it would like to start shrinking the balance sheet earlier and faster than last time, suggesting that “quantitative tightening” may start already at some point in the second half of the year. US 10yr government bond yields moved above 1.70% and stock markets took a big hit.
Looking ahead to next week, several interesting data are due out in the US. The most important one is the CPI inflation data for December due out on Thursday. Price increases (both for headline and core) have generally surprised to the upside, so do not be surprised if CPI headline and CPI core exceed 7% and 5% y/y, respectively. Besides that we also get retail sales in December (Friday). Also keep an eye on consumer confidence from University of Michigan (Friday) and the NFIB Small Business survey (Tuesday), which will shed more light on how tight labour market is and whether underlying inflation pressure continues to increase.
In China, the main release is credit data. Credit growth is one of the best leading indicator for the Chinese economy and hence also for the world economy. Credit growth has picked up over the past months from quite negative territory and we expect the trend of higher credit growth will continue here in Q1 driven by policy stimulus.
In the UK, monthly GDP in November is due out on Friday.
In the euro area, focus is on the sharp rise in new omicron cases and development in energy prices. Also focus on whether Mario Draghi plans to run in Italy’s Presidential election and whether Macron is finally launching his official re-election bid in France.
In the Scandi, CPI data are due out for Denmark, Norwegian and Sweden. Also monthly GDP is due out in Sweden and Norway.
