Fears of the Omicron virus variant pulled ahead and telescoped the stock market decline that risked unfolding in H1 of December in anticipation of faster Fed tapering at the December 14-15 FOMC Meeting. The markets' reactions may have been overdone on Friday, however, since news reports say /1/ drug companies are already testing vaccines against the new virus and /2/ the symptoms seem to be mild for vaccinated/healthy people. But, if these mitigating factors are seen as significant, a decision to speed up tapering at the December meeting can reassert itself as a downside risk. So, the stock market could stay under pressure until then, particularly given expectations of strong November Employment and CPI reports and the need to raise the debt ceiling.
At this point, because of the emergence of the Omicron virus, the probability of an increase in Fed tapering at the next meeting has receded. By then, the Fed may not yet have a handle on the effectiveness of vaccines against this mutation, since a sense of the latter is expected to take several weeks to develop. Moreover, from the Fed's perspective, the mutation underscores the downside risk to the its economic forecast, mentioned in the FOMC Minutes. Along with the sharp market reactions, this downside risk may persuade the Fed not to change the pace of tapering. Even if the November Employment and CPI reports are strong, Fed officials could agree to be patient and wait to see what effects the Omicron virus might have and if its baseline forecast of a moderation in inflation bears out.
However, this week's testimony by Fed Chair Powell and speech by Vice Chair Clarida (both on Tuesday) will probably keep open the door for a faster pace of tapering at the December meeting. They could mention the Omicron virus as a downside risk to the outlook, but likely balance it with the risk that inflation may not slow as quickly as desired. A policy shift most likely needs to await a full consensus of members at the FOMC Meeting.
The drop in oil prices, nonetheless, supports an expectation of slower inflation ahead, even if some of the plunge reverses in the next week or so. This is because the oil price drop may not fully reverse -- it could reflect more than the possibility of a renewed virus-related slowdown in global economic growth. OPEC officials are reported saying the release of oil reserves by the US and other countries will result in a global oil glut early next year (and suggests this week's OPEC meeting will not result in any significant production increase). Moreover, US domestic oil production continues to climb. The Baker-Hughes Oil Rig Count rose again the latest week. Lower oil prices will feed through to non-oil prices that are impacted by fuel costs.
Besides the possibility of continuing virus and tapering fears, fear of a debt ceiling crisis in mid December could weigh on stocks in the next few weeks. This latter fear is typically overdone, however. While there tends to be a lot of noise and blame out of Washington ahead of a debt ceiling deadline (December 15), an extension almost always is approved by Congress. A short-term extension will likely be the compromise again. A longer extension, if at all, likely will await resolution of the spending/tax bill.
This week's November Employment Report should be strong, but the consensus Payroll estimate may be too high. Consensus looks for +550k m/m Payrolls, versus +531k in October. Some evidence, however, such as Unemployment Claims, points to a smaller jobs increase in November than in October (although to a further decline in the Unemployment Rate, as well). One possible reason for a larger November increase, however, is a surge in holiday-related retail, warehousing and delivery jobs. Seasonals look to offset such increases, to be sure. But, if they don't fully do so, a compositional shift toward lower-paid workers could push down Average Hourly Earnings below the consensus (and near-term trend) of 0.4% m/m. A low AHE print could soften the market impact of a large Payroll gain.
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