WaveLength

It’s a four-day week for equities in the US. Three and three quarters for bonds.

In all likelihood, COVID headlines will comprise the majority of the news flow. The White House will apparently unveil some manner of “Winter Plan” (capitalized) to cope with an expected Omicron wave. New York state logged a record number of cases late last week. Hospitalizations and deaths are nowhere near pandemic highs, though.

In the UK, the situation is arguably worse, although again, even the most cautious experts generally describe advanced nations as much better prepared than they were during the early days of the crisis. “This is not March of 2020,” is a common refrain.

Deaths are still very low in the UK compared to prior waves (figure above), but some scientists now suggest new daily cases could be between 600,000 and 2 million by the end of the month barring swift intervention. Even if the variant is far less likely to cause severe disease and death, an exponential rise in cases to levels that are multiples of previous peaks could still push the health care system to the brink.

Already, surging case loads are affecting daily life. New containment measures and protocols designed to slow the spread could serve as a drag on growth across advanced economies.

Perhaps more importantly in the US context, new curbs could also delay normalization in high-contact sectors of the labor market. Recall that spending and hiring flatlined in restaurants and bars during last year’s winter wave and again in August, when Delta hit the US (figure below).

The Fed has made clear that its focus is now inflation. Ongoing labor market frictions have the potential to move the country closer to a wage-price spiral.

Speaking of inflation, this week’s data includes November PCE. At this point, the debate is settled as far as the near-term path of monetary policy is concerned. Even if the Fed still believes “transitory” (as economists define the term) still applies, you won’t hear officials using that word anymore. And, as Christopher Waller made clear on Friday, March is “live” for a rate hike, especially if projections for a slow abatement of the dynamic illustrated in the simple figure (below) turn out to be wishful thinking.

“The technicals will become increasingly relevant as a collective hawkish bias has now emerged from global monetary policymakers and will be on autopilot into 2022,” BMO’s Ian Lyngen and Ben Jeffery remarked. (Don’t say “autopilot” in December, guys!)

They went on to note that “the rent/OER component of core inflation will continue to provide a pillar for the data series to deliver solid monthly gains even if travel-related components suffer from Omicron.” The familiar figure (below) is always worth highlighting.

It’s entirely possible that inflation gets worse before it gets better. Indeed, that’s become the base case for many banks. That assumption is starting to find its way into calls for liftoff in March, as soon as the taper ends.

Also on deck in pre-Christmas trading: New and existing home sales, consumer confidence and jobless claims.

“The holiday-shortened week creates the perfect environment for choppy price action exacerbated by volume and balance sheet constraints,” BMO’s Lyngen went on to say. “In short, happy holidays.”