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COVID Fears Persist, Powell Testifies, Eurozone CPIs And U.S. NFPs Due This Week

By JFD TeamMarket OverviewNov 29, 2021 03:38AM ET
www.investing.com/analysis/covid-fears-persist-powell-testifies-eurozone-cpis-and-us-nfps-due-this-week-200609791
COVID Fears Persist, Powell Testifies, Eurozone CPIs And U.S. NFPs Due This Week
By JFD Team   |  Nov 29, 2021 03:38AM ET
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Last Thursday, a new coronavirus variant was detected, which is said to probably be vaccine resistant, which sparked panic among market participants. European shares experienced their worst day in 17 months on Friday, while Wall Street also tumbled in a half-day session.

This week, Fed Chief Powell testifies before Congress, and it will be interesting to see whether the detection of the new variant will affect the Fed's monetary policy plans. On the data front, we get Eurozone's preliminary inflation data for November and the US and Canadian employment reports for the month.

On Monday, the economic calendar looks very light in terms of data releases. Thus, we see the case for market participants to keep their gaze locked on headlines and developments surrounding the coronavirus pandemic. On Thursday, news over detecting a new and possibly vaccine-resistant COVID variant hit the wires, resulting in a sharp selloff in equities.

European indices tumbled on average 4.47% each Friday, suffering their worst day in 17 months, while Wall Street followed with a 2.34% average fall. Let's not forget that Wall Street closed early on Friday after it stayed closed the day before due to the Thanksgiving celebrations.

Major global stock indices performance.
Major global stock indices performance.

A lot is unknown about the new variant, which was detected in South Africa, but scientists are worried that it may be able to evade immune responses and be more transmissible. Several nations in Europe have already announced new restrictions, even before detecting the new variant called Omicron, due to rapidly increasing infections. 

Now, with the new mutation, more nations around the globe may start considering further measures, something that could add to concerns over the global economy's performance. Even oil prices plunged on Friday, falling more than 10%, on worries that the new variant could hurt demand.

So, with all that in mind and still more to discover over the new variant, we believe that market appetite will stay subdued for a while more. The only release worth mentioning on Monday's schedule is Germany's preliminary CPIs for November.

Both the CPI and HICP rates are expected to have risen further, to +5.0% YoY and +5.5% YoY, from 4.5% and 4.6%, respectively, which means that inflation in Eurozone may accelerate as well. We get data for the bloc as whole tomorrow.

On Tuesday, as we just mentioned, we have Eurozone's preliminary CPIs for November. The headline rate is forecast to have risen to +4.4% YoY from +4.1%, while the HICP excluding energy and food rate is expected to have just ticked up to +2.2% YoY from +2.1%.

Yes, the acceleration in headline inflation could mean that the latest surge in inflation around the globe may, after all, not be transitory. However, with Europe adopting new restrictions due to the fast-spreading coronavirus, we don't expect ECB officials to start thinking about tightening monetary policy anytime soon.

After all, underlying inflation is just slightly above the bank's objective of 2%. At the same time, President Lagarde has repeatedly highlighted that tightening monetary policy now to rein in inflation could choke off the euro zone's recovery. Therefore, even if the euro extends Friday's recovery, we will not call for a bullish reversal. We will class this as a corrective bounce.

Germany vs Eurozone CPIs YoY.
Germany vs Eurozone CPIs YoY.

Later in the day, Fed Chair Jerome Powell and Treasury Secretary Janet Yellen will testify before the Senate Banking Committee on the CARES Act, the Fed's pandemic-era stimulus program. They will present the same testimony before the House Financial Committee on Wednesday.

After Powell was reappointed as the Head of the Federal Reserve Bank, market participants increased their bets over a potential rate increase in the middle of next year, and perhaps one more by its end. Even after the headlines over a new COVID variant, investors maintained their bets.

According to the Fed funds futures, the timing of the first 25 bps rate increase was pushed slightly back to August from July, while expectations over another hike by the end of the year remained well anchored. Thus, with all that in mind, it will be interesting to see whether Powell remains confident that a rate increase could still be appropriate after the tapering is over.

If so, the US dollar is likely to resume its latest uptrend. Still, a more profound decline could be possible if Powell appears worried about the new COVID variant and suggests that he and his colleagues adopt a more cautious stance moving forward. 

We will get to hear from several other Fed officials as well during the week, including Vice Chair Richard Clarida, and we are eager to find out whether they have changed their minds or not.

Fed funds futures market expectations over US interest rates.
Fed funds futures market expectations over US interest rates.

As for the rest of Tuesday's events, during the Asian session, Japan's employment report and the nation's preliminary industrial production, both for October, are due to be released. The unemployment rate is forecast to have held steady at 2.8%, while industrial production is expected to have rebounded 1.8% MoM after contracting 5.4% in September.

We also get China's manufacturing and non-manufacturing PMIs for November. The manufacturing PMI is expected to have increased slightly but to have stayed in contractionary territory, while no forecast is available for the non-manufacturing index. Below-50 readings will confirm that the world's second-largest economy is in a tough spot, and the new variant could make things even worse.

From Canada, we have GDP data for Q3. Expectations are for the QoQ annualized rate to have rebounded to +3.0% from -1.1%, which, combined with a decent employment report on Friday, may increase speculation for a rate hike by the BoC soon.

Remember that Canadian policymakers unexpectedly ended their QE program at their latest gathering, maintaining an optimistic stance. Having said all that, though, it remains to be seen whether the Omicron variant will be a reason for changing plans. In that respect, we will have a chance of getting an updated view from BoC Governor Tiff Macklem today.

Canada GDP QoQ annualized rate.
Canada GDP QoQ annualized rate.

On Wednesday, during the Asian session, Australia releases its GDP data for Q3, with the forecasts pointing to a 2.7% QoQ contraction after a 0.7% expansion the previous quarter. Despite market participants anticipating around three rate hikes next year, the RBA has been adamant that the timing suggested by market pricing is not the appropriate one. 

Therefore, a negative GDP rate would add more credence to the Bank's view that the earliest year for hiking rates may be 2023, and thereby add more pressure to the Aussie, which, as a risk-linked currency, we also expect to feel the heat of deteriorating broader market sentiment.

ASX 30-day interbank cash rate futures yield curve.
ASX 30-day interbank cash rate futures yield curve.

Later in the day, we get the final Markit manufacturing PMIs for November from the Eurozone, the UK, and the US, but as it is usually the case, most indices are expected to confirm their preliminary estimates.

The ISM manufacturing index for the month is also coming, and it is expected to have inched up to 61.0 from 60.8. What's more, as we already noted, Fed Chief Powell and Treasury Secretary Yellen will present their testimony before the House Financial Committee.

On Thursday, after meeting Wednesday on its own, OPEC will sit down with its non-OPEC allies to discuss oil production. Despite the failed attempt by the US and other governments to release oil from strategic reserves in a bid to lower gasoline prices, both WTI and Brent collapsed on Friday due to concerns that the new COVID variant will have a severe impact on demand. 

Therefore, with that in mind, we don't expect the cartel to proceed with any bold decisions at this gathering. We expect producers to stick to monthly output increases of 400,000 BPD. That said, it would be interesting to see their updated forecasts.

Will they reflect concerns over diminishing demand? If indeed this is the case, another round of oil selling could be possible, despite members refraining from increasing production instantly. As for Thursday’s data, the only releases worth mentioning are Australia’s retail sales, trade balance, and home loans, all for October.

Retail sales are expected to have accelerated notably, but the trade surplus is forecast to have decreased by nearly a billion Aussies. No forecast is available for the home loans. Finally, on Friday, the highlights may be the US and Canadian employment reports for November.

Getting the ball rolling with the US one, nonfarm payrolls are expected to have accelerated to 550,000 from 531,000, with the unemployment rate anticipated to have ticked down to 4.5% from 4.6%. Average hourly earnings are forecast to have grown at the same monthly pace as in October, something that will take the YoY rate up to 5.0% from 4.9%.

In our view, under normal circumstances, another decent report could have had added more credence to the idea over a potential rate increase by the Fed as soon as tapering is over. However, with the new Omicron COVID variant, we don't know yet how policymakers will respond.

We prefer to listen to Powell's and other officials' opinions ahead of the employment report before arriving at more precise conclusions about how the market will react to this data set.

US unemployment rate chart.
US unemployment rate chart.

The same logic applies to the Canadian report, which is expected to come in better than the previous one. After all, we believe that this week, the Loonie is likely to stay more sensitive to oil price movements rather than economic data.

As for the rest of the releases, we get the final services and composite Markit PMIs for November from the Eurozone, the UK, and the US, and as with the manufacturing indices, they are mostly expected to confirm their preliminary estimates. The ISM non-manufacturing PMI for November is also coming out, and the forecast points to a decline to 65.0 from 66.7.

COVID Fears Persist, Powell Testifies, Eurozone CPIs And U.S. NFPs Due This Week
 

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COVID Fears Persist, Powell Testifies, Eurozone CPIs And U.S. NFPs Due This Week

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