Health experts around the world are worried about Omicron but investors are not, at least that’s what the 2% rally in stocks and rebound in the US dollar suggests, says Kathy Lien of BKForex.com.
Everyone knew that the first cases of Omicron in the US was only a matter of time. Having lived through the original strain along with three variants this year—Iota, Alpha and Delta—investors don’t see Omicron derailing the global recovery. There’s no doubt that consumer spending and growth will slow, especially if more countries announce restrictions, but vaccination rates are high and politicians in the US have little appetite for lockdowns. It may be weeks before we know just how bad Omicron is (or is not) and until the danger becomes clear, investors will focus on the certainties; which is that the US market is strong, and the Federal Reserve is worried about inflation and ready to reduce stimulus at a faster pace in response.
The November non-farm payrolls report is scheduled for release today and all signs point to another good jobs report. Not only did jobless claims rise less than expected for the week ending on November 27, but the four week moving average dropped to its lowest level since March 2020. Continuing claims also fell below two million for the first time since the pandemic. Layoffs are at their lowest level in 28 years with employers struggling to find workers. Economists are looking for non-farm payrolls to rise from 531K to 550K and if job growth meets or beats expectations, the US dollar will rise. A tight labor market is one of the main reasons why the Fed is worried about inflation, because higher wage demand can stoke inflation. While it can be argued that Omicron could ease demand, there’s evidence that the Delta variant made supply chain problems worse, not better.
A good jobs report also reinforces the Federal Reserve’s plans to accelerate the pace of tapering at their December 14-5 policy meeting. With both Powell and Yellen saying it is time to retire the word transitory this week, inflation projections are likely to be increased, and the dot plot should show policymakers in favor of an earlier rate hike. All of this is positive for the greenback. Hawkish central banks, like the Reserve Bank of New Zealand, don’t see Omicron changing their economic outlook.
If we are wrong and Omicron proves to be more deadly than the other variants, foreign nations will lock down activity quicker than the US, which will drive those currencies lower initially. The US dollar sold off sharply on the initial Omicron news, but other currencies have also struggled to rally with some heading back towards multi-month lows.
Canada also releases labor market numbers today. Like the US, job growth is expected to improve but only moderately. USD/CAD rose to two-month highs today on the back of US dollar demand. The recent decline in oil prices had also weighed heavily on the loonie.
Next to the US dollar, the best-performing currency today was sterling, with the worst being euro and the Australian dollar. Eurozone data was better than expected with producer prices rising sharply in October and the unemployment rate falling. Unfortunately, Omicron is ripping across Europe, and European nations are far more likely to respond with tight restrictions. Weaker Australian trade data and an unexpected decline in home loans drove AUD lower against all of the major currencies. NZD, in contrast, held steady after the RBNZ said Omicron isn’t likely to change their outlook.
To learn more about Kathy Lien visit BKForex.com.