A small Greek letter changes the perception of the whole month of November. The emergence of the new SARS-CoV-2 Omicron virus variant has caused an upheaval in the areas of concern for the coming months. Previously, concerns were focused on production struggling to keep up with the demand of cashed up consumers as they came out of lockdowns. With Omicron, we are back to worries about the evolution of growth, to which the variant could put a new brake. However, this does not completely erase the concerns about inflation, which is reaching levels not seen for a long time, both in the US and in Europe.
Sometimes very strong reactions
However, Omicron came too late to be included in the usual indicators such as the PMI indices, which had already fallen, but rather because of the still rising costs. Sectors such as tourism experienced immediate reactions due to new travel restrictions to stem the spread of the variant and cancelled bookings. The reaction of the bond markets, developments in the foreign exchange markets, as well as the prices of many commodities, not to mention transport costs, can give an idea of these macro changes.
On the bond markets, 10-year Treasury bonds were clearly on the rise, in anticipation of monetary tightening by the Fed next year. Their yield had reached 1.62%. But with the appearance of Omicron, it lost nearly 20 basis points in two days, obviously also reflecting the search for safe havens! The euro came under pressure: the ECB still shows no sign of a less accommodating monetary policy, which caused the single currency to fall against the dollar. On the other hand, classic safe havens such as the Swiss franc were preferred.
Inflation at record levels
Driven in particular by energy prices, inflation in the euro area reached a record high in November, at 4.9% over one year. The risk is that it will reach a level that deteriorates consumer confidence. They would then postpone major investments – a new car or a house, for example. In the US, already at a 30-year high, price appreciation could exceed 7% over a year. Even Fed officials, including Chairman Jerome Powell, have had to admit that inflation may not be as transitory as they have claimed so far. However, the November employment data released on 3 December, with fewer jobs created than expected, indicates that there is little reason to accelerate the tapering of debt. It is rather up to the ECB to change its rhetoric and approach, if it does not want to provoke inflationary pressures through a mistaken policy. However, there is still room for optimism. The growth outlook has hardly deteriorated. The negative consequences of Omicron should prove to be temporary.
Omicron drove oil down
The Omicron mutant has also caused a $10 drop in crude oil to below $70 a barrel. This is a welcome breath of fresh air for US President Joe Biden in the face of accusations that his stimulus packages are likely to inflame an already high inflation. Natural gas has returned to its September level in the US. In Europe, on the other hand, dependence on Russia supported very high gas prices. The Baltic Dry shipping index also showed some easing, with the value halving during November from its peak the previous month. Even before Omicron, the supply chain had begun to smooth out.
A welcome easing of demand
In short, a temporary deterioration in the health situation is not necessarily all bad for the economy. It limits the excess demand that leads to longer delivery times and higher prices, and can thus dampen inflation somewhat. This gives hope that consumer confidence, which is crucial for the recovery, can be maintained.
