New Covid-19 variant may overshadow NFP

Even before Friday’s wild moves due to the discovery of the Omicron variant, traders had been on watch as Covid cases began to soar in Europe and rise sharply in the mid-west of America. With little information to go on into the new week, markets may struggle to find a bid amid a few brave bargain hunters who see opportunities after holiday-thinned price action.

It seems reasonable that a cloud will hang over the festive season until we get answers to how transmissible the new variant is and whether existing vaccines remain effective. That said, the unfolding events may add to the case against vaccine complacency in the meantime. We will also leave discussions about foreign aid programs helping poorer countries with vaccine rollouts to another time.

Marketwise, the new strain may complicate the Fed’s outlook on how aggressively to taper and raise rates. This has been the recent narrative and may be on hold as the S&P500 gives back some of its 20%+ gains year-to-date. It’s worth keeping an eye on the Vix, Wall Street’s fear gauge. This measure of volatility spiked to multi-month highs above 28 and well above its long-term average.

The key data report this week will be the US jobs release. A sizeable increase in payrolls is expected, even if demand continues to outstrip worker supply. This should keep upside pressure on wages, and on policymakers as we look to central bank meetings in mid-December.

 Risk Event Calendar

Tuesday 30: Eurozone flash inflation readingscould rise to their highest since 1991. The headline is forecast to increase to 4.4% y/y as the core pushes toward 2.2% y/y from the prior 2%. Markets will also watch Fed Chair Powell and US Treasury Secretary Yellen’s appearance before Congress to discuss the government’s Covid response.

Wednesday 01: The US ISM manufacturing and service sector reports should confirm the ongoing strength in the economy. Consensus expects a small rise in the headline figure to 61.6. The details of the report may also highlight the intensity of price pressures in the economy.

Thursday 02: All eyes will be on OPEC+ ministers who meet to set production policy. The new variant throws a huge potential spanner in the works for demand going forward. Current mobility restrictions in Europe were already encouraging the group to stay on hold and not increase output by 400k barrels per day in January.

Friday 03: Analystsforecast a headline figure of 515k jobs for NFP and unemployment to fall one tenth to 4.5%. Momentum in US employment growth is set to persist, pushing the jobless rate lower. Wage growth is expected to stay steady given the tight labour market. Canada employment may see a lighter gain after a few bumper months.