Last Week in World Economy

So Omicron is Not a Cryptocurrency ?

The latest COVID-19 variant, Omicron, has spread throughout the western world. But should we fear it? It appears that the new variant is more transmissible but less severe than previous COVID-19 iterations. However, Moderna president Stephen Hoge warned there might be a risk that the efficacy of existing vaccines may not be effective in combating Omicron.
Suppose this new variant plays out like previous waves. In that case, investors holding low-yield bonds or excess cash could invest in the stock market by buying the dip/rebalancing their portfolio on a risk-adjusted basis. This is because previous waves of COVID infections have had positive returns in certain sectors in the stock market, such as healthcare and technology. (Figure 1)

While the latest wave of COVID-19 is still developing, it is important to understand its implications given the current state of the economy. The U.S has been recovering from the pandemic, with the Fed looking to accelerate the speed of taper due to sticky inflation. However, suppose the U.S government imposes a lockdown or tighter restrictions. In that case, this may stall workers’ return into the labor force, thus deteriorating the labor shortage and causing upward pressure on wage rates. In some perspective, this could imply longer-term inflation as changes to wage rates are sticky

After testifying in the Senate, Fed Chair Powell has officially retired the term “transitory” as he sees inflation lasting for a while. Changing his stance provides the Fed more flexibility to consider ending the taper early and start hiking the Fed Fund Rates by the end of next year if needed.

The move beyond transitory comes when inflation is at an all-time high, with supply-chain playing a crucial part in contributing to this phenomenon. Besides, the Fed has also overestimated the American labor force as we currently see record numbers of unfilled jobs and wage increases.

The next Fed meeting would be on 14–15 December, where we may hear changes on the pace of bond purchase tapering and hints for rate hikes in 2022

The ambiguous employment figures in the past week have created uncertainties in the market. Each month, the U.S. releases two employment surveys. The establishment survey showed that nonfarm payrolls increased by 210,000 in November — the smallest gain in 2021. In contrast, U.S. participation rate increased to 61.8%, which is the highest since March 2020. (Figure 2)

Last Friday, the equities market saw a huge selloff, particularly in the technology sector. The drawdown in the stock market comes at a time where mixed employment figures, omicron, and the increasingly Fed’s hawkish stance could affect the pace of the global economy reopening. Mega cap such as Tesla contracted about 6.5%, and Meta sank 19.7%.

On top of that, news of the Chinese ride-hailing app, DiDi, was ordered by the Chinese government to delist on the NYSE barely five months from its IPO citing concerns over national security. The news also caused a selloff of other Chinese companies listed in the U.S.

As for the treasuries, the U.S two-year treasury note yield reached its highest level of the year after the U.S employment figures were released. (Figure 3) This can be explained by the market factoring in labor performance and news for a quicker taper. However, the 10-and 30-year Treasury yields have become flatter, indicating the Fed rate hikes in 2022 would hamper inflationary pressures and slow down the economy.

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