Burn The Playbook: Omicron Forces Rethink As December Dawns
The playbook for the new week should have been simple enough.
US payrolls are on deck, and with the Fed widely expected to accelerate the pace of the taper in order to "get clear of it" and pave the way for liftoff, too much good news on the data front could be bad news for markets to the extent it argues for policy urgency.
Consensus is looking for 500,000 on the headline NFP print (figure below), a solid encore from October's "Goldilocks" report.
Wage growth needs to be warm enough to su
Could we see a reflexive bounce on Monday? Was the major down move on Friday a result of the humans not minding their algobots? Or is the variant concern leading to a meaningful (5+%) down move?
That’s what I’m pondering at the moment.
And how soon will dip buyers start accumulating cyclicals on weakness in anticipation of New Vaccine Headline 2.0 ?
Great article that left me with similar thoughts, but one thing to keep in mind is that the reduced liquidity during the holiday/short session also meant that price action may have less bearing long-term than it would otherwise, i.e. if it were to occur during a regular session. With liquidity likely returning next week AND the above macro headlines, we might begin to see less correlated behavior across equities (unlike friday, where equities across sectors decided to seppuku simultaneously, excluding a handful with positive cashflows during lockdowns).
Simultaneously, the lack of concrete data increases the possibility of reflexive bounces in several sectors. (putting on my virologist cap) The Omicron data that precipitated friday’s selloff generalized an n=100 sample size across a handful of discrete points in time. General data, particularly on vaccine efficacy will not come out for another several days, although data on international travelers seems to indicate vaccination still works towards preventing hospitalization and symptom severity, but not effectively against carrying the virus.
In this case, transmissibility can likely be slowed with existing measures and will not necessitate a lockdown in most developed nations, i.e. cash flows will continue to grow and valuations will continue to exist at their levels, fundamentals notwithstanding. Yet, while this discounts the possibility of a March 2020-esque crash, this does NOT discount the possibility of a correction across hypervalued (read: indices) equities which may VERY well be triggered by macro data indicating hawkish CB actions (no YCC, good job data indicating rollback of measures, yada yada, etc.). Might be opportunities in selling risk/vol but unfortunately… more data is needed before anyone can reach concrete conclusions.
Great article as always!
The prudent risk management move by the fed is to wait now to see how the variant shakes out. That is a one meeting delay. They can stick to the original plan now. Is it going to kill them to wait to accelerate the taper? Nope. Sorry Mr el ‘erian’.. you are in error now.
@RIA agreed, and again we see the perils of policy by pompous punditry. Were they placed in Powell’s position of profound responsibility with partial information, the ElErians and Summers would be hedging their bets just as he has been.