The Market Today

Omicron Brings Uncertainty

by Craig Dismuke, Dudley Carter

CORONAVIRUS UPDATE  Vining Sparks Coronavirus Chartbook and Vining Sparks Coronavirus State Charts

Omicron Remains a Focus: The weekend news cycle was dominated by discussions of the new COVID-19 variant, Omicron. For now, there remains a high level of uncertainty about how much of an impact the strain could have on the economy.  More countries identified cases of the new variant and more countries have moved to temporarily restrict travel to and from the region and for others that had recently visited the region; the U.S. ban on entry began today. Health officials around the world have said it could take a couple of weeks to determine whether the new strain is more severe than other variants. Vaccine makers have said modified vaccines, if necessary, could be ready early in 2022.


Pending Home Sales and Fedspeak: A week after the new and existing home sales data for October were mixed, the Pending Home Sales report (9:00 a.m. CT) is expected to show sales gained 0.8% MoM. The November Dallas Fed Manufacturing Activity index is expected to improve further.  Three Fed officials are scheduled to speak: New York’s Williams (2:00 p.m.), Chair Powell (2:05 p.m.), and Governor Bowman (4:05 p.m.).  Today’s OPEC+ meeting has been rescheduled to Wednesday to allow participants to digest the recent price volatility.


ICYMI – November 26, 2021 Weekly Market Recap: Last week’s trading themes split around the Thanksgiving holiday. Yields rose early after President Biden announced he had decided to give Fed Chair Powell a second term and promote Governor Brainard, considered more dovish on policy, to Vice Chair. As market positions for a Brainard-led Fed were unwound, rates moved up. Higher rates persisted up to and through a flood of data on Wednesday. Included in the rush of reports, new jobless claims fell to a 50-year low, personal income and spending remained strong in October, and the Fed’s preferred core inflation measure matched expectations at the quickest rate in 30 years. While shorter yields held those higher levels, longer yields fell back on speculation that a more aggressive Fed posture may be necessary and could weigh on growth. The Fed’s November Minutes showed officials, even before the latest firm inflation readings, had discussed the possibility that policy may need to be tightened more quickly than expected if inflation pressures don’t moderate soon. The market’s focus, however, quickly shifted to reports on Thursday from South Africa that health officials there had identified a new COVID-19 variant with a significant number of mutations. Markets responded severely Friday on speculation the variant’s structure may allow it to evade immunity and spread more quickly, fears that led countries to begin cutting off travel to the region. The S&P 500 tumbled 2.3%, its worst day since February. U.S. WTI crude prices plunged more than 13% to around $68 per barrel, the worst sell-off since a 25% decline in April 2020, when oil was trading below $13. Treasury yields fell rapidly and expectations for Fed tightening were hit hard. Fed funds futures implied an effective rate of 0.56% for the end of 2022, sharply lower than the 0.72% rate from Wednesday. The 2-year yield sank 14.2 bps to 0.50%. The 5-year yield slid 18.3 bps to 1.16%, a low since October’s CPI printed hotter than expected. The 10-year yield tumbled 16.1 bps to 1.48%, a post-CPI low. Click here to view the full recap.


Markets Recover Portion of Friday’s Vicious Swings: Considering the severity of the market’s response on Friday to the early reports related to the Omicron variant, the partial reversal of those moves overnight in global trading Monday is not surprising. As investors await additional meaningful news about the significance of the new strain, a process that could take a couple of weeks, Europe’s Stoxx 600 was 0.9% higher following its 3.7% slump Friday. S&P 500 futures recovered 0.7% after the index notched its worst daily performance since February. U.S. WTI crude rose by more than 4% on the heels of a 13% plunge, still trading at levels last seen in mid-September. And the Treasury curve was higher and steeper. On the back of a small recovery higher in the fed funds futures implied rates curve, the 2-year yield was up 4.5 bps at 6:45 a.m. CT to 0.54%. The 5-year yield had added 6.9 bps to 1.23% and the 10-year yield was 7.3 bps higher at 1.55%.

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