Daily Report 01/12/2021

Bank of England MPC member Mann stated that Omicron will trigger question marks over consumer confidence and could undermine demand for services. She also noted that inflation pressures could intensify, especially if there are renewed supply-chain issues. Mann added, however, that it is premature to talk about rate hikes let alone the magnitude of any rate increase which certainly did not suggest support for a near-term move to raise rates. Given the uncertainty surrounding the Omicron variant, there was further speculation that the Bank of England would decide against a rate increase at the December policy meeting which limited Sterling support. The currency did gain brief support from a recovery in risk appetite, but equities tumbled again following Powell’s comments. The firmer tone in risk appetite helped underpin Sterling on Wednesday with further very choppy trading continuing while the fresh push for aggressive vaccination also provided an element of relief.

Key Data

AM Andrew Bailey Speech

German unemployment declined 34,000 for November after 39,000 the previous month and larger than the expected decline of 25,000 with the labour market tight. The Euro-zone headline CPI inflation rate increased to a record high of 4.9% for November from 4.1% previously and well above consensus forecasts of 4.5%. The underlying rate increased to 2.6% from 2.0%, above expectations of 2.3%, and the highest reading since February 2008. The data provided an element of Euro support, although markets were still expecting that the ECB would push back against any pressure to raise interest rates. The Euro strengthened to 10-day highs ahead of the New York open.

Key Data

7.00 German Retail Sales Act. -2.9% Exp. -2% Prev. -0.6%

In testimony to Congress, Fed Chair Powell stated that the Fed’s inflation test has been clearly met and that the possibility of higher inflation has increased. He added that it is a good time to retire the term transitory in relation to inflation and that the Fed will use all the tools to make sure higher inflation does not become entrenched. As far as monetary policy is concerned, Powell commented that it was reasonable to consider wrapping up tapering a few months earlier and the Fed will talk about speeding up the taper at the December meeting. On coronavirus, Powell stated that more would be known about the Omicron risks in the next week to 10 days. The overall rhetoric was significantly more hawkish than expected, especially as markets had expected a more cautious tone given the Omicron uncertainties.

Key Data

13.15 ADP Employment Change (Nov) Exp. 525k Prev. 571K
15.00 Jerome Powell Testifies
15.00 ISM Manufacturing PMI (Nov) Exp. 61 Prev. 60.8