December 2, 2021

Markets Today: WHO offers a shot in the arm for markets

The US CDC has just identified the first case of Omicron in the United States – joining the UK, Switzerland and Brazil overnight – at a time when US infection rates of the delta variant had already started creeping back up.

Todays podcast

Overview Dancing in the Dark

  • Strong APAC session risk recovery falters, US stocks slip into negative terrain
  • US reporting its first case of Omicron one driver.
  • ADP Employment underwhelms, may say something about participation
  • US Manufacturing ISM stays very strong, supply chain bottlenecks easing?
  • Fed Beige Book notes wide-ranging input cost increases
  • AUD loses all of its post-GDP/risk rally shine
  • Slim picking on the events calendar today

You can’t start a fire worrying about your little world falling apart, This gun’s for hire, Even if we’re just dancing in the dark – Bruce Spingsteen


Coming into the last hour of power on Wall Street, US stocks have lost a good chunk of the futures market gains we witnessed during the APAC session, following a strong showing in Europe (Eurostoxx 50 +2.9%). The USD is now slightly up on the day and AUD/USD lower, so giving back all of the roughly 0.5% gains we saw in our time zone yesterday, nd then some. Treasuries are also little changed on 24 hours ago. The ADP Employment report has scotched hopes for blockbuster US payrolls report tomorrow night, while the ISM Manufacturing index shows the sector to still be in rude health. The just-released Fed Beige Book says price hikes were widespread across the regions.

Prior to the news in the last hour that the U.S. has detected its first case of Omicron , news flow has generally been seen as positive, though the truth is we are less than a week into the 2-3 week time-frame that anyone worth listening to (epidemiologists, not market analysts) say is necessary before an informed judgement can be made with respect both to the seriousness of this COVID-19 variant and the efficacy of existing vaccines. That said, the chief scientist from the WHO has been out saying that “we still need to find out if there’s any loss of protection, but we think vaccines will still protect against severe disease as they have against the other variants”.

The one thing this scribe is willing to say with confidence is that Omicron will show the same disrespect for country borders as the variants that have come before it, in which respect the US CDC has just identified the first case in the United States – joining the UK, Switzerland and Brazil overnight – at a time when US infection rates of the delta variant had already started creeping back up after encouraging falls in late October and early November.

Three key pieces of the current US economic jigsaw worth noting overnight are, firstly, the ADP employment report. Never a very reliable guide to the Friday non-farm payrolls report, the 534k outcome nevertheless dampens the hopes of some that we would finally see another blockbuster payrolls number (i.e. close to a million) and which would then become the new trend. The number instead bolsters the consensus view for payrolls to print near 550k tomorrow night.

A NFP number such as this (or lower) in the face of the record number of job openings and which remain well in excess of current registered unemployed persons, will keep attention on the participation rate – expected to lift only marginally, to 65.4% from 65.3%. If it fails to rise more materially in coming months, it will play to fears that maximum employment could be a lower than pre-pandemic highs, in doing so adding to risks that wage cost will be further supporting Tuesday’s retiring of the ‘transitory’ adjective in regards to inflation by Fed chair Powell. Incidentally, Powell had nothing fresh or market moving to say in his repeat testament to the House, which if nothing else tells you he is not in the least unhappy about how markets have interpreted what he said earlier.

The ISM Manufacturing index rose to 61.1 from 60.8, in line with the 61.2 consensus. Though back from the mid-60s in March this year, levels above 60 nevertheless remain very strong in an historical context and suggest the sector is still expanding very strongly. Production and news orders sub-components both rose and are largely responsible for the uptick, while supplier deliveries fell back – a sign that supply chain bottlenecks may be starting to ease, a potential positive for goods price inflation. Also In this respect, the prices paid component slipped, to 82.4 from 85.7 (on a literal interpretation, meaning prices are still rising quite fast, but at a slower rate than in October – in June at its peak, the number was 92.1).

Thirdly, the Fed’s Beige Book released in front of the December 16 FOMC decisions, reports that “Prices rose at a moderate to robust pace, with price hikes widespread across sectors of the economy,” and that “There were wide-ranging input cost increases stemming from strong demand for raw materials, logistical challenges, and labor-market tightness.”

US equities lost further ground in the immediate aftermath of the Beige Book – though the ‘Omicron in the US’ headlines looks to have done the damage here. The S&P had just turned negative on the day. Slippage here post-dates the European session where we saw strong gains in France and Germany culminating into a 2.9% rise for the Eurostoxx 50.

In bond markets, the curve flattening  we saw on Tuesday after Fed chair Powell ‘retired’ the word transitory as a descriptor for current high inflation  has very slightly extended, 2s currently +0.2bp on the night and 10s -0.8bp.  Earlier, European yields were uniformly higher but mostly in a curve flattening fashion (e.g. 2-year German benchmarks +2.4bps and the 10-year Bund a lesser 0.5bp).

FX looks very different from where our market left it yesterday evening when AUD/USD was top of the G10 leader board, up 0.6% with some assist coming from the less bad than expected 1.9% fall in Q3 GDP. Commodity linked currencies are all now lower on Tuesday’s New York closing levels, led by a 0.7% loss for the NOK (oil price are very slightly lower) and the AUD turning that 0.6% gain into a 0.3% loss, currently at 0.7105. The DXY index is now slightly higher, led by a 0.2% fall in EUR/USD, and the safe-haven JPY 0.3% stronger.

Coming Up

  • Light calendar today after the excitement of the last couple of days. US jobless claims the only notable US release, and which follow last week’s record low of 199k (Consensus 240k).
  • Australia has October trade figures, expected to show a surplus of A$11.15bn after 12.24bn in September. Also October Home Loans, for which NAB forecasts approvals +2.0% on the month, boosted by the easing of lockdown restrictions).

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