Weekly review: Inflation versus the Omicron Variant – which way will central banks jump?

No less than 20 central banks meet this week and big policy changes are on the agenda for many, including the Bank of England and the US Federal Reserve. We try to guess what will happen and how markets are likely to react.

As far as the US Federal Reserve (Fed) is concerned, the market expects them to accelerate the pace of bond tapering, opening up the way for a hike in the Fed funds rate next spring. That’s still too late in my view. We will also be looking closely at their ‘dot plots’, which map out where individual members of the rate setting committee think official US interest rates are heading and their forecasts for inflation. The Fed has a news blackout period before they meet, so we have no clue as to how the recent news on the Omicron variant has affected their thinking. We’ll get some idea from the statement that accompanies the meeting.

As for the Bank of England, they have fumbled their communication of late so we can’t be confident of what they will do. Base rate rises are coming but they may delay pulling the trigger until early next spring. But they will almost certainly end their bond buying programme; no taper for the Bank of England.

The early evidence on Omicron strongly suggests that it is much more transmissible than Delta. It is likely to dominate in a few weeks, as it already has in South Africa. Two doses of the vaccine or prior infection with Covid apparently provide limited protection. And that’s a worry. But boosters give high protection, just a little lower than against Delta. Omicron also seems to be less likely to put people in hospital, and this is important because it’s pressure on health services that forces governments to tighten restrictions.

So, with key central banks set to tighten the screws and the Omicron variant sweeping the world, are equities in trouble? We are naturally cautious given the uncertainties, but the world is learning to live with Covid. Vaccines are already being tweaked to work better against Omicron, there are some very promising anti-viral treatments due to be rolled out early next year, and we reckon the world economy is set to grow further in 2022 as supply pressures ease; pent-up supply meets pent-up demand. Continued economic growth translates into better corporate earnings and should mean the bull market continues.

There’ll be more detail and many charts in my webinar tomorrow at 11am UK time. There’ll be plenty of time for you to ask questions so I’m keeping it short this week.