US equity markets closed higher for the second day in a row on Tuesday. The positive risk tone continued into the Asian trading session, with the Nikkei for example up by close to 1.5%. There appeared to be cautious optimism in markets about the Omicron variant, especially after the US chief medical advisor Anthony Fauci said the new variant almost certainly is not more severe than delta.
With limited economic data and events in today’s calendar, the focus will remain on the Omicron variant, particularly how serious it will be in terms of its impact on health outcomes and the global economic outlook. The indications are that it is highly transmissible, although there are anecdotal reports of mild symptoms. Scientists caution, however, that it is too early to be confident about its health impact.
One interesting aspect of the new variant is its potential impact on central bank policy. For the US central bank, the indications are that it is currently attaching more weight to inflation risks than Omicron, especially with headline CPI this Friday set to show a jump up close to 7%.
The Fed is expected to announce a quicker pace of tapering at its policy meeting next week, with the process potentially to be completed by March rather than June. That would provide room for the Fed to start increasing interest rates earlier, if necessary. In contrast, the likelihood of a Bank of England rate hike as early as next week has fallen as policymakers await further information on Omicron.
Next week, the European Central Bank, the Fed, and the BoE will also provide a policy update. With Eurozone inflation gapping up to 4.9%, there looks likely to be lively debate among Governing Council members on whether the current rate of bond-buying is appropriate and on what should replace the Pandemic Emergency Purchase Programme (PEPP) next March. President Lagarde and VP Guindos speak today, but their comments may focus more on financial risks than on monetary policy.
The Bank of Canada is expected to leave interest rates unchanged at 0.25% today. Having ended asset purchases, the BoC has indicated that interest rates are likely to rise next year, possibly in the first half. The more positive risk environment led the US 10-year Treasury yield to rise near to 1.50% yesterday, although it is slightly lower overnight. The US dollar has broadly softened, despite quicker-tapering expectations. Oil prices are up, with the Brent crude price moving above $75 a barrel.