Weekly Focus – Team Dovish or Hawkish to Prevail?

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The concern about omicron has been declining over the past week, as vaccines have been considered effective against the variant with enhancing shock.. A previous analysis by the European Health Agency suggests that the symptoms are milder than in previous variants. In addition, a new study shows that a third shot of the Pfizer vaccine could neutralize the omicron virus. The news boosted risk sentiment over the past week with equities markets rebounding along with yields, where 10Y Treasuries moved above 1.50%, and Bunds tested -30bp as the spread between Italian and German yields widened in anticipation of tighter monetary policy in the euro- belt. If omicron fears actually subside, we think that a focus on the markets should go back to monetary policy and to what extent they will move in a sharper direction or remain accommodative.

The Fed meeting next week is likely to confirm Powell’s more vague message that inflation is more steady and therefore that monetary policy may need to be normalized faster than previously thought.. We have changed our Fed view accordingly, seeing that QE will be phased out by April (instead of June) and three rises in 2021 (June, September and December) instead of two followed by a four-year rise in 2022. The US labor market appears to be very much up. tense with unemployment claims this week hitting the lowest level since 1969. In our view, the relatively weak non-farm payroll report last Friday, was more due to labor supply constraints than demand problems. The unemployment rate fell significantly to 4.2% from 4.6%, as employment in the household survey was extremely strong. On another positive note, the labor force has risen by nearly 600K, which is very important to avoid the need for a premature tightening of the Fed if wages rise faster.

A difficult communication exercise awaits the ECB with regard to the inflation outlook amid growing divisions in the Governing Council over pro-inflation risks and a stuttering economy.. We expect new forecasts to show a considerable upward revision in the near-term inflation outlook, but with HICP inflation falling below 2% in 2023 and 2024, supporting the ECB’s communication on patient access to tariffs. That said, to calm the “hawks”, a first step towards political normalization is likely to be made by issuing the PEPP program as planned in March 2022, see. ECB Preview – Baby Steps to Normalization, 10 December.

Meanwhile, China’s central bank eased monetary policy this week by lowering reserve requirements and thus enabling more credit to enter the financial system. The stimulus in our view will support a modest rebound in the Chinese economy in early 2022. There is an upcoming call for the Bank of Japan to extend its pandemic measures, which will run out in March at its meeting next week. Very few newly infected, high consumption of vaccine and a decent looking Q4 bounce paved the way, but the Omicron variant adds uncertainty.

The concern about omicron has been declining over the past week, as vaccines have been considered effective against the variant with enhancing shock.. A previous analysis by the European Health Agency suggests that the symptoms are milder than in previous variants. In addition, a new study shows that a third shot of the Pfizer vaccine could neutralize the omicron virus. The news boosted risk sentiment over the past week with equities markets rebounding along with yields, where 10Y Treasuries moved above 1.50%, and Bunds tested -30bp as the spread between Italian and German yields widened in anticipation of tighter monetary policy in the euro- belt. If omicron fears actually subside, we think that a focus on the markets should go back to monetary policy and to what extent they will move in a sharper direction or remain accommodative.

The Fed meeting next week is likely to confirm Powell’s more vague message that inflation is more steady and therefore that monetary policy may need to be normalized faster than previously thought.. We have changed our Fed view accordingly, seeing that QE will be phased out by April (instead of June) and three rises in 2021 (June, September and December) instead of two followed by a four-year rise in 2022. The US labor market appears to be very much up. tense with unemployment claims this week hitting the lowest level since 1969. In our view, the relatively weak non-farm payroll report last Friday, was more due to labor supply constraints than demand problems. The unemployment rate fell significantly to 4.2% from 4.6%, as employment in the household survey was extremely strong. On another positive note, the labor force has risen by nearly 600K, which is very important to avoid the need for a premature tightening of the Fed if wages rise faster.

A difficult communication exercise awaits the ECB with regard to the inflation outlook amid growing divisions in the Governing Council over pro-inflation risks and a stuttering economy.. We expect new forecasts to show a considerable upward revision in the near-term inflation outlook, but with HICP inflation falling below 2% in 2023 and 2024, supporting the ECB’s communication on patient access to tariffs. That said, to calm the “hawks”, a first step towards political normalization is likely to be made by issuing the PEPP program as planned in March 2022, see. ECB Preview – Baby Steps to Normalization, 10 December.

Meanwhile, China’s central bank eased monetary policy this week by lowering reserve requirements and thus enabling more credit to enter the financial system. The stimulus in our view will support a modest rebound in the Chinese economy in early 2022. There is an upcoming call for the Bank of Japan to extend its pandemic measures, which will run out in March at its meeting next week. Very few newly infected, high consumption of vaccine and a decent looking Q4 bounce paved the way, but the Omicron variant adds uncertainty.

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