The Daily Update: The Week Ahead

We started the week with Stéphane Bancel, the chief executive of Moderna, warned in an interview with the Financial Times that existing vaccines will be much less effective at tackling the Omicron variant of Covid-19 than earlier strains. He believes it would take months before pharmaceutical companies can manufacture new variant-specific jabs at scale. Bancel said the high number of Omicron mutations on the spike protein, which the virus uses to infect human cells, and the rapid spread of the variant in South Africa, suggested the current crop of vaccines may need to be modified next year. We also had Pfizer Inc.’s top executive Albert Bourla telling Bloomberg TV that his company will know within two to three weeks how well its Covid-19 vaccine holds up against the new omicron variant.

After the warning, markets have very much been in a risk-off mode. European bourses opened with a sea of red following those in Asia. Treasuries went bid and WTI is trading nearly $16 off its high earlier this month. Swap markets are now signalling around two quarter-point Fed hikes for 2022, down from the three seen before the omicron flared up.

Fed Chair Powell gave his prepared statement before the Senate Banking Committee, with the big news with regards to inflation being that Powell thinks it a good time to retire the word ‘transitory’. After months of telling all and sundry that the spike in inflation was largely due to ‘transitory’ forces, he now believes it’s ‘probably a good time to retire that word’.

With regards to inflation, he acknowledged ‘notable price increases in some areas’, but reiterated, ‘Most forecasters, including at the Fed, continue to expect that inflation will move down significantly over the next year as supply and demand imbalances abate’ he noted. However, ‘Supply chain problems have made it difficult for producers to meet strong demand, particularly for goods.

So now we go from one T, transitory to another, tapering. On this, Powell expects the December FOMC meeting later this month to discuss the speed at which they wrap up bond purchases. ‘At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner’ he said, adding ‘I expect that we will discuss that at our upcoming meeting’.

November’s Beige Book survey reported that while the US economy continued to expand at a reasonable pace, companies were raising prices at a rate of knots across a broad swath of the economy. The report, released eight times a year, surveys the 12 regional banks within the Fed’s system, and was more bullish in its outlook than the previous release in October.

Across the pond, the UK, according to the OECD, will enjoy the fastest growth among the G7 over the next couple of years. The Organisation for Economic Co-operation and Development (OECD) predicts Britain is on track for output to jump by 6.9% in 2021, with growth of 4.7% in 2022, then lower to 2.1% in 2023. In September, the predictions were for 6.7% this year, and 5.2% in 2022.

On Thursday we had several Fed speakers on the tapes suggesting they may be supportive of faster tapering and rate rises. Bostic said he would like to get the Federal Reserve in position to raise its short-term interest rate early next year if inflation pressures don't subside from current levels. To get there, the Fed should accelerate the pace of its tapering, he said. ‘The data, as it has come in over the last several months, suggests that we might, it may be appropriate for us to pull forward a lift off’. Quarles, in his final public appearance before he leaves the central bank, said it was reasonable for the Fed to have held back from removing support for much of the year on the anticipation that inflation was being driven primarily by idiosyncratic price increases related to the reopening of the economy.

Barkin also said he would support faster tapering of bond buying saying that he ‘does take seriously actual inflation and its impact. That’s why I’m supportive of normalizing policy as we do it’.

Daly added that stronger-than-expected inflation means she supports looking at faster tapering of asset purchases and perhaps even early planning around raising record low interest rates.

We also had the last Non-Farm Payrolls of the year. The release on the surface disappointed with just 210k of jobs added, estimates before the release was for 550k jobs, however, with the extra two-month revision of 82k the rolling three-month figure was at 378k still robust. Other data was also strong with ISM, Factory orders and Durable goods all beating expectations.

This week the highlight will be the CPI report in the US heading into the FOMC meeting the following week, and with the Fed on blackout little other top-grade news is expected. There is however 3-year, 10-year and 30-year US Treasury supply. In the UK we have monthly GDP with calls at 0.4% MoM, IP and Manufacturing Production for October and in Eurozone German and EC ZEW survey, EC employment and the usual various inflation releases.

Have a great week.